What are economic costs and when should they be used in health economic studies?

Abstract

Economic analyses of healthcare interventions are an important consideration in evidence-based policymaking. A key component of such analyses is the costs of interventions, for which most are familiar with using budgets and expenditures. However, economic theory states that the true value of a good/service is the value of the next best alternative forgone as a result of using the resource and therefore observed prices or charges do not necessarily reflect the true economic value of resources. To address this, economic costs are a fundamental concept within (health) economics. Crucially, they are intended to reflect the resources' opportunity costs (the forgone opportunity to use those resources for another purpose) and they are based on the value of the resource's next-best alternative use that has been forgone. This is a broader conceptualization of a resource's value than its financial cost and recognizes that resources can have a value that may not be fully captured by their market price and that by using a resource it makes it unavailable for productive use elsewhere. Importantly, economic costs are preferred over financial costs for any health economic analyses aimed at informing decisions regarding the optimum allocation of the limited/competing resources available for healthcare (such as health economic evaluations), and they are also important when considering the replicability and sustainability of healthcare interventions. However, despite this, economic costs and the reasons why they are used is an area that can be misunderstood by professionals without an economic background. In this paper, we outline to a broader audience the principles behind economic costs and when and why they should be used within health economic analyses. We highlight that the difference between financial and economic costs and what adjustments are needed within cost calculations will be influenced by the context of the study, the perspective, and the objective.

Keywords: Decision making; Definition; Economic costs; Economic evaluations; Health economics; Opportunity costs; Rationale.

Fig. 1

The difference between the annualized financial and economic cost of a capital resource. As capital resources (such as vehicles) are bought in 1 year but used over several years, their cost needs to be spread over their useful life. This adjustment is known as annualization and it has two potential components; depreciation (the reduction in the value of the asset over time due to wear and tear) and the opportunity cost associated with tying up the funds in purchasing the capital item (as there is a lost opportunity to generate gains from investing that capital). When calculating financial costs the annualization calculation only captures depreciation, by dividing its replacement cost by its useful lifespan. In contrast, when calculating economic costs, the annualization calculation also aims to capture the opportunity cost. This is done by dividing the replacement cost by an annualization factor, which is based on the resource’s expected lifespan and an assumed discount or interest rate. Because the annualization factor is a smaller number than the corresponding resource’s expected lifespan (here 4.58 vs. 5), the annualized economic cost will be higher than the annualized financial cost. See Walker et al. [11] for further details