Journal of Medical Economics 2007; 10: 325337
Economic evaluation in health: saving money
or improving care?
Dan Chisholm PhD1, David B Evans PhD1
Summary
Economic evaluation, most commonly in
the form of cost-effectiveness analysis, has
now become an established tool of overall
health financing policy. However, health
policy makers choose to use or ignore the
accumulated body of economic evidence
for a variety of reasons. This policy review
takes a step back and looks objectively
at the appropriate role and use of
cost-effectiveness analysis within the
broader context of health system financing,
and also discusses a series of technical
limitations (and potential solutions) that
impact on the generation of a genuinely
comparable economic evidence base in
Keywords: cost-effectiveness analysis, economic evaluation, health systems
1
Department of Health Systems Financing, World Health Organization, Geneva, Switzerland
Address for correspondence: Dr Dan Chisholm, Department of Health Systems Financing, World Health Organization, 1211 Geneva, Switzerland.
E-mail: chisholmd@who.int
10.3111/13696990701605235 2007 Informa UK Ltd
health at the population level. While the
explicit purpose of economic evaluation is
to address the health financing objective of
efficiency, the authors conclude that its
application can be usefully extended to
other health system goals, including
financial protection (specification of core
public healthcare packages for universal
insurance) and equity in financing
(assessment of intervention costs and effects
by stakeholder or socioeconomic group).
In order to contribute to these broader
objectives, a sectoral or population-based
approach to cost-effectiveness analysis
is needed.
325
 Economic evaluation in health: saving money or improving care?

health interventions, with the underlying

Introduction
objective of maximising population health
for the available resources. There are now
Economic considerations have assumed an
many thousands of completed evaluations
increasingly prominent role in the
that have identified how and where
planning, management and evaluation of
efficiency improvements could be
health systems, ranging from the design of
made1119. Many are clinical and most
ways to pay providers or to improve access
focus on ways to address a particular
to care for households, to the definition of
disease or health problem, but a few
essential packages for insurance, to
have considered how the efficiency
decisions about whether or not to include
of the health sector as a whole
new medicines on hospital, state or national
could be improved4,5,20.
formularies15. Increased attention to issues
of cost and efficiency have been prompted
In some countries, the use of
by the pervasive scarcity of resources
cost-effectiveness analysis has been
relative to health needs and demands,
institutionalised for decision making,
driven by factors such as the HIV
most commonly to address the question of
pandemic, ageing populations, the
public subsidies for the purchase of
development of innovative but often
medicines1,3,21. In other settings, the
expensive technologies and also by the
influence of this accumulated body of
heightened knowledge and expectations
economic evidence on decision making and
of healthcare consumers. These classical
resource allocation is harder to detect2225.
forces of supply and demand on the
In part, this is due to the fact that it can be
market for healthcare have given rise
difficult to attribute changes in policy or
to the need for sophisticated methods
resource allocation to the presence of an
of quantitative analysis, including
economic evidence base when economic
modelling of disease processes and
evidence is but one of the factors that is
outcomes, econometric modelling for
typically considered when households,
population-based resource allocation
firms or governments make such decisions.
exercises, macro-level modelling of the
However, it is also the case that decision
impact of (ill-)health on wealth (and vice
makers find the evidence difficult to
versa), and multi-state decision analytic
interpret and apply because of
models that assess the technical efficiency
methodological heterogeneity and
of health interventions610.
inconsistency, which limits the
As part of this process, economic comparability and generalisability of
evaluation, often using cost-effectiveness different results3,4,21.
analysis (here the term is used to include
cost-utility analysis), has become a This policy review takes a step back and
commonly used tool to inform health policy looks objectively at the role and use of
as well as to guide clinical decisions. It cost-effectiveness analysis at the population
establishes the relative costs and impacts of level within the broader context of health

326 2007 Informa UK Ltd


system financing, commenting in particular
on the extent to which it can be used
to address key financing challenges.
A series of technical limitations are also
discussed that reduce the value of the
current information base to decision
makers and suggest possible solutions.
A discussion on the role of economic
information in resource allocation decisions
concludes the review.
Health system
financing: key
challenges
The changing landscape of disease
and injury
Globally, great improvements in
health have been observed over the
last few decades, as evidenced by increased
life expectancy and reduced child
mortality in the vast majority of countries.
Such improvements can be attributed
partly to increased living standards,
improvements in the availability of
environmental conditions such as water
and sanitation, and more recently, to
advances in medical technologies
and services26,27.
But of late there have also been some
notable and significant reverses. For
example, average life expectancy in a
worrying number of countries in
Sub-Saharan Africa has actually declined
since 1990 while adult male mortality rates
have increased in parts of the former
Soviet Union including Russia2629. These
developments have different causes;
2007 Informa UK Ltd
Chisholm, Evans
economic decline and increases
in HIV in Africa28,30, alcohol abuse and
associated chronic disease in Russia27,29.
However, in all regions of the world,
non-communicable diseases are becoming
increasingly important, leaving poor
countries with the double burden of
financing high burdens of infectious
diseases while at the same time tackling
the escalating toll of cancer, cardiovascular
disease, diabetes and road traffic
injuries31. Now that treatment is
substantially prolonging life, the
lifestyle-related non-communicable
diseases, plus HIV, require relatively
expensive, long-term care, increasing the
need to find more resources for health.
This is exacerbated by the need to
develop effective early warning systems
to detect the emergence of new
infectious diseases such as SARS and
avian influenza.
Health spending: inefficient
or insufficient?
From an economic perspective, it is always
tempting to point out that if resources
were more carefully targeted towards the
priority health needs of the population,
more benefit could be obtained from
existing levels of expenditure. While the
search for such improvements is certainly
needed, it is important to distinguish
between the relative efficiency with which
resources are allocated versus the absolute
quantity of resources available in the first
place. Of the 192 countries that are
members of the World Health Organization
(WHO), and for which data are available,
39 spent <US$25 per capita on health in
2004, and 60 spent <US$5032. This includes
327
 Economic evaluation in health: saving money or improving care?
funding from all sources; external and
national donors, governments, firms and
household out-of-pocket contributions.
This level of funding is not sufficient to
ensure universal access to even a minimum
level of basic health services, estimated to
cost somewhere between US$35 and $50
depending on the country33,34.
In most countries, health expenditures have
been rising more rapidly than national
income, to the extent that the worlds
richest countries are finding that in spite of
cost containment measures, some are now
devoting well in excess of 10% of their
entire production to pay for health-related
services and goods32. Tax- or social health
insurance-funded systems have been
unable to find the funds required to
ensure universal access to all the
interventions that have the possibility to
improve health or extend life, resulting in
apparent resource scarcity even in rich
countries. The first key issue of health
financing policy, therefore, is to raise
sufficient funds for health, an issue that is
important in all countries but critical in the
poorest parts of the world.
Composition of health spending
Raising funds is important, but not
sufficient. The two other questions relate to
how the funds are raised and how they are
used. In terms of the former, out-of-pocket
payments made by households directly to
providers are a regressive form of health
financing; they penalise those least able to
afford care and ensure that some people
who need services do not seek them.
Moreover, they lead in many cases to
health spending levels that have been
328
labelled catastrophic because they cause
households to reallocate their budgets
away from other essential needs such as
education, food and housing. In some cases
the simple act of seeking care can even
push households under the poverty line
because of the need to pay for services.
Every year an estimated 44 million
households worldwide face catastrophic
health expenditures; defined as spending
more than 40% of their non-subsistence
income on healthcare payments, and
about 25 million are pushed into
poverty35,36. Catastrophic health
expenditures are not only a threat to
household economic security in low- and
middle-income countries, they also effect
households in virtually all high-income
countries. For example, in the US
out-of-pocket health payments are
reported to be a leading cause of
household indebtedness37.
To protect people against the financial risks
involved in falling ill and seeking care,
there is now solid agreement that it is
important to increase the extent to which
most low- and middle-income countries
rely on pre-payment mechanisms to
finance health, via insurance, taxation or a
mix, rather than relying on user charges.
Pooled funds can then be used to allow
people to access services when they need
them, spreading the financial risks of ill
health across the population. How this is
acheived when many people work in the
informal sector (which makes it hard to
collect both taxes or health insurance
premia) is a major issue capturing the
attention of both the countries and the
international community38,39.
2007 Informa UK Ltd

Health system
financing and the
role of economic
evaluation
Two fundamental questions for health
financing, therefore, are how to raise
sufficient funding for health and how to
generate resources in an equitable manner
that protects households from financial
catastrophe and impoverishment. How can
this be done?
Health financing functions and
objectives
All health financing systems, however
organised, share three key functions33,40:
revenue collection (i.e. how financial
contributions are collected from different
sources, and via what mechanism (tax,
insurance etc)); pooling (i.e. how financial
contributions are pooled together so that
the risk of having to pay for healthcare is
not borne by each contributor individually);
and purchasing/provision (i.e. how
contributions are used to purchase or
provide health services).
There are many different ways of
undertaking these functions. Revenues
might be collected by using taxes, insurance
contributions or direct payments by
households. A mix of all three in the same
country is commonly found. Insurance
contributions might be income based or
independent of income. Funds can be
assembled into one large pool, many
competing pools, or at the extreme, where
countries rely largely on out-of-pocket
2007 Informa UK Ltd
Chisholm, Evans
payments, not pooled at all. Services of
health providers are purchased using a
variety of mechanisms including salaries,
fee for service payments, capitation or a
mix. It is the combination of decisions made
on all of these aspects that determines the
overall ability of the system to raise
adequate funds and to protect people from
financial catastrophe and impoverishment.
Figure 1 provides a conceptual framework
that shows how these health financing
functions are linked to the attainment of
overall health system goals. On the left are
the four functions of health systems that
are included in WHOs health system
framework; financing, revenue generation,
service delivery and stewardship or
governance33,40. The desired health system
outcomes are on the right. The
fundamental goal is to improve population
health, but systems also seek to reduce
health inequalities, improve health system
responsiveness and provide risk protection
against the financial consequences of
illness. Reducing the incidence of financial
catastrophe is a goal in itself, linked to the
concept of fairness in financial
contributions. However, it also helps to
improve health and reduce inequalities by
removing financial barriers to access.
Raising adequate funds for health, the first
question discussed above, is key to
improving health, reducing inequalities
and developing responsive systems of care.
The figure also shows that a number of
intermediate outcomes facilitate the process
of turning resources into the outcomes
people care about. They are listed
as transparency and accountability,
329
 Economic evaluation in health: saving money or improving care?

Figure 1. Health system financing and goal attainment.

(Intermediate) objectives Health system

Health system functions
of health finance policy goals

Resource
generation Equity in utilisation
and resource Health gain
distribution

Health financing
system Equity in health
Quality
Revenue
Stewardship

collection
Financial risk
protection
Pooling

Efficiency
Purchasing Responsiveness

Transparency and
accountability
Service delivery

the equitable distribution of and access to Economic evaluation provides a set of

resources (generally measured in terms of
coverage of key interventions), and the
quality and efficiency of services. It is the
last of these strategic objectives, efficiency,
that represents the focus of economic
evaluation in health. Greater efficiency is
akin to having more resources. It allows the
system to move closer to its chosen goals.
Principles and practice of
economic evaluation
Efficiency is concerned with maximising
the use of limited resources for health, and
can be framed in terms of two basic
questions of interest to policy makers:
Do the resources currently devoted to
health achieve as much as they could?
How best to use additional resources if
they become available?
analytical principles and techniques that
can be usefully employed to directly
address these questions, which it does by
systematically comparing the relative costs
and consequences of different health
intervention strategies. Analysis of these
costs and consequences may be, and
usually is, directed at marginal efficiency
gains for a particular intervention or
disease entity (technical efficiency), or
alternatively it may be concerned with
establishing an optimal mix of interventions
across the health sector as a whole
(allocative efficiency).
Economic analysis geared towards
assessment of technical efficiency is now
regularly undertaken as a way of
determining whether new health
technologies or strategies aimed at a

330 2007 Informa UK Ltd


particular disease, risk factor or health
problem are cost effective. A variety of
meanings, however, are attached to this
term in practice. In the event that the new
intervention is both less costly and more (or
equally as) effective than the alternative, or
more costly (or equal cost) and less
effective, the answer is clear. In the former
case, it can save resources as well as
improve overall levels of health, while in
the latter case it would not be considered. It
is more common, however, that a new
intervention both costs more than existing
options and produces more health. In such
cases the question is whether it is better
value for money than other uses of scarce
resources, new or existing.
The only way to answer this question
properly is to have information on a
large number of alternative ways of
using the resources. This requires what
has been called a sectoral approach to
cost-effectiveness analysis, which asks the
question of how to achieve the highest
possible overall level of population health
for the available resources. A new
intervention that is more effective yet more
costly than existing practice is only cost
effective if, for the required resource
investment, it will attain greater health
than all possible alternatives.
A full sectoral analysis requires much more
data and effort to compile a comparable
and comprehensive database of costs and
effects for a wide range of interventions.
As a result, there have been relatively few
attempts to do this and often cut points
based on some assessment of what a
society seems to have been willing to
2007 Informa UK Ltd
Chisholm, Evans
pay to gain a quality-adjusted life year,
disability-adjusted life year or year of life
have been used instead. Early examples of
full sectoral analyses include the work of
the Oregon Health Services Commission,
the World Bank Health Sector Priorities
Review and the Harvard Life Saving
Project5,41,42. Only the World Bank
attempted to undertake a global analysis
and inform decision making across a
range of countries and disease areas,
but its value was limited by the fact that
cost-effectiveness ratios, and the policy
conclusions drawn from them, were
derived from analyses which relied on
differing methods or assumptions and
which were undertaken in very different
epidemiological and cost settings43.
More recently, a second edition of Disease
Control Priorities in Developing Countries
(DCP2) has been published20, which
updated and expanded on the earlier
analyses5, and sought to implement
common standards for economic analysis
and reporting (for example, results are
provided for six geographically determined
low- and middle-income regions of the
world). Despite the attempt to standardise,
there nevertheless remains a level of
analytical heterogeneity and inconsistency
that impinges on the ability to make
strict comparisons of cost effectiveness
across a broad range of disease
intervention areas.
The other recent development is the
WHO-CHOICE project44, which, like DCP2,
set out to generate comparable databases of
intervention cost effectiveness for all
leading contributors to disease burden in a
331
 Economic evaluation in health: saving money or improving care?
number of world regions. In fact, the DCP
project draws on some of the work of
CHOICE. A suite of standardised analytical
tools and guidelines, together with tight
quality control, have produced a high
degree of comparability across specific
disease analyses. In contrast to
conventional practice in economic
evaluation, in which analysis is undertaken
in order to inform a specific decision maker
with a known budget and other constraints,
CHOICE implements a generalised
approach to cost-effectiveness analysis45,
which enables the efficiency of current
practice to be evaluated at the same time as
the efficiency of new interventions (should
additional resources become available).
This has been a problem with traditional
cost-effectiveness analysis; even in the
event that a new intervention proves to be
less costly and more effective than current
practice, the question of whether current
practice should have been done in the first
place is rarely asked.
Further key contributions of CHOICE
include the evaluation of interventions at
different levels of coverage, in order to
observe economies and diseconomies of
scale, as well as the evaluation of
interactions that exist when individual
interventions are combined, as happens in
reality, to incorporate economies or
diseconomies of scope. For example,
the health effects of population screening
and treatment for high cholesterol will
depend on whether there is already
screening and treatment for high blood
pressure in the same population, something
that is rarely considered in traditional
cost-effectiveness analysis.
332
The objective of cost-effectiveness analysis
is not to save money per se, but to improve
efficiency, to gain more health for the
available resources or to increase health
to the greatest possible extent using
new resources. It will sometimes be
possible to release resources for other
health-improving activities by replacing a
less efficient intervention with one that is
more efficient, but this is not the objective
of the exercise. Moreover, cost-effectiveness
analysis is not about money per se, but
about the value of the resources consumed,
or opportunity costs. For example, a new
intervention might reduce the time a
health provider must spend in a particular
activity. While this releases a scarce
resource, health provider time, there may
well be no money savings that result
because providers reallocate that time to
other health-improving interventions. They
can now achieve more with their allotted
time, which is beneficial to society, but
there are no financial savings.
Uses of cost-effectiveness analysis
In the preceding sections, two fundamental
questions of health financing policy have
been asked: raising sufficient resources for
health; and raising them in a way that
provides financial risk protection for the
population. To facilitate these objectives,
the question of efficiency becomes
fundamental. Ensuring that scarce
resources are used efficiently reduces the
need to find additional resources, and gets
the country closer to its chosen objectives.
It has also been emphasised that the
objective of economic evaluation is not to
save money, but to ensure that resources
are used efficiently.
2007 Informa UK Ltd

In terms of the key health financing
challenges, there are a number of logical
inputs that economic evaluation could
focus on by way of a response:
Changing landscape of disease:
economic evaluation is concerned with
how to make the best use of scarce
societal health resources. In order to
make these judgments at the population
level, cost-effectiveness analyses needs
to be undertaken for a broad range of
identified public health priorities as well
as for a wide selection of interventions
ranging from health promotion,
prevention, treatment, rehabilitation and
even intersectoral actions to promote
health. Analysts also need to be
responsive to the changing landscape of
disease; for example, by modelling the
economic costs and effects of tackling
emerging epidemics. Furthermore,
analysts need to recognise that
interventions are rarely undertaken in
isolation; analysis that does not take
into account possible synergies
between interventions that can be
expected to be undertaken together
is not likely to be useful for
decision making.
Current levels of resource use: the few
examples of sectoral analysis suggest
that many countries undertake
interventions that are not very cost
effective, while not fully implementing
some that are cost effective. Yet most
analyses focus only on marginal changes
that require additional resources.
Understanding the extent to which the
current mix of interventions is efficient is
critical in understanding if more could
2007 Informa UK Ltd
Chisholm, Evans
be achieved with the same resources.
It can also be used to assess the cost
and impact of essential packages of
interventions that could be subsidised
by government or included in health
insurance packages.
Composition of health intervention
costs: many economic analyses take a
single agency perspective, whether that
be the government, the health service,
an insurer or an employer. In order to
lay bare the opportunity costs of health
interventions that are faced by
households, governments and other
relevant agents or stakeholders,
economic analysis needs to be
undertaken from a multiple agency
perspective. In addition, analysis of the
costs and effects of intervention for
different socioeconomic groups
(stratified by income, for example)
would contribute to debate concerning
health financing policies aimed at
protecting the poor.
Conclusions
Economic evaluation is sometimes
perceived to be an end in itself rather than
a tool that is part of an approach to overall
health system financing. Accordingly, this
policy review set out a number of central
components of health financing and used
these to consider the role and value of cost
effectiveness in the planning, management
or monitoring of health systems. The two
key roles of health financing systems are to
raise sufficient funds for health and to
do so in a way that allows people to
access services without the risk of
financial catastrophe or impoverishment.
333
 Economic evaluation in health: saving money or improving care?
Reducing costs is not a goal of health
policy. Improving efficiency, however, is
desirable in that it facilitates the ability of
the system to reach these goals, although it
too is not an end in itself.
A number of other issues specific to
cost-effectiveness analysis emerged from
this review. First, although there are now a
large number of completed economic
evaluations1119, the value of this
accumulated body of evidence to policy
makers has been restricted by the
inconsistent methodologies that have been
used, and by the fact that traditional
analysis does not examine either the
efficiency of current interventions or
economies of scale and scope. This limits
the practical value of the results as well as
restricting comparability across studies
and the generalisability of results to
different settings.
Second, there are many potential policy
uses of economic evaluation, ranging from
the specific to the quite general (technical
versus allocative efficiency). In order to
address pressing financing issues facing
health systems worldwide, there are a
number of analytical advantages
associated with a sectoral approach to
cost-effectiveness analysis, especially the
assessment of the extent to which existing
health strategies themselves represent an
efficient use of resources.
Third, while the explicit purpose of
economic evaluation is to address the
health financing facilitating objective of
efficiency, its application can be usefully
extended to other health system goals,
334
including financial protection (specification
of core public healthcare packages for
universal insurance) and equity in
financing (assessment of intervention
costs and effects by stakeholder or
socioeconomic group).
On a final note, economic evaluation
focuses on only one outcome, population
health. There are many other outcomes
people also care about; inequalities in
health outcomes, utilisation of services,
responsiveness and fairness of financing,
for example33,40. Therefore, the results of
economic evaluation cannot be used to set
priorities by themselves but should be
introduced into the policy debate to be
considered along with the impact of
different policy and intervention mixes
on other outcomes. Such multi-criteria
priority setting is usually undertaken in a
strictly qualitative way, for example, with
reference to a series of second-stage
criteria such as strength of evidence,
equity, feasibility and acceptability46.
Recent work has sought to develop
more quantitative methods that
introduce these other goals explicitly into
the cost-effectiveness calculus47,48, but it is
too early to assess the extent to which it
usefully guides the policy-making
process. Whichever approach is adopted,
the conclusion to be drawn is that
there is a clear need to go beyond
cost-effectiveness considerations only, and
that the way to most appropriately
accomplish this is by carefully considering
the priority to be accorded to interventions
from a number of locally determined
perspectives (in isolation and then in
conjunction with each other).
2007 Informa UK Ltd

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