8.1 Concepts of cost-effectiveness and cost-benefit analysis

Cost-effectiveness and cost-benefit analyses are crucial tools in impact evaluation. They help policymakers and program managers make informed decisions by comparing the costs and outcomes of different interventions.

These analyses provide a systematic way to assess which programs offer the best value for money. By quantifying economic value, they enhance accountability and support evidence-based policymaking, especially when resources are limited.

Cost-effectiveness analysis in impact evaluation

Defining cost-effectiveness analysis

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• Cost-effectiveness analysis (CEA) systematically compares relative costs and outcomes of different interventions or programs
• CEA measures cost per unit of outcome achieved expressed as a cost-effectiveness ratio (CER)
• CEA allows comparison of programs with similar objectives but different scales or contexts
• CEA complements other impact evaluation methods by adding economic dimension to assessment of program effectiveness

Role of CEA in impact evaluation

• Informs resource allocation decisions for policymakers and program managers
• Determines which interventions provide best value for money
• Improves program efficiency by identifying most cost-effective approaches
• Enhances accountability by quantifying economic value of program outcomes
• Supports evidence-based policymaking through rigorous economic analysis
• Facilitates prioritization of interventions with limited budgets

Calculating and interpreting CEA results

• Cost-effectiveness ratio (CER) calculated by dividing total program costs by total outcomes achieved
• Lower CER indicates greater cost-effectiveness (more outcomes per dollar spent)
• Incremental cost-effectiveness ratio (ICER) compares difference in costs to difference in outcomes between two interventions
• Sensitivity analysis assesses robustness of CEA results to changes in key assumptions
• Results often presented as cost per life saved, cost per additional year of schooling, etc.
• Benchmarks (WHO-CHOICE thresholds) help interpret if intervention is cost-effective

Cost-effectiveness vs cost-benefit analysis

Key differences in methodology

• CEA measures outcomes in natural units (lives saved, test scores improved) while CBA converts all outcomes to monetary values
• CEA compares interventions with similar outcomes whereas CBA compares programs with different types of outcomes
• CBA calculates net benefits (benefits minus costs) while CEA focuses on cost per unit of outcome achieved
• CEA avoids monetizing intangible outcomes making it easier to conduct for some social or health interventions
• CBA provides more comprehensive economic assessment but faces challenges in valuing non-market goods

Strengths and limitations

• CEA typically easier to conduct and communicate due to use of natural outcome units
• CBA allows comparison across diverse sectors by converting all impacts to monetary terms
• CEA limited to comparing interventions with similar outcomes while CBA can compare any interventions
• CBA results (net present value, benefit-cost ratio) more intuitive for some decision-makers
• CEA avoids ethical concerns of monetizing certain outcomes (value of human life)
• CBA results more sensitive to assumptions about monetary valuation of outcomes

Choosing between CEA and CBA

• Nature of program outcomes influences choice (easily monetized or not)
• Available data on costs and benefits affects feasibility of each approach
• Decision-making context determines most appropriate analysis (within sector vs across sectors)
• Stakeholder preferences for natural units vs monetary valuation impact choice
• Time and resources available for analysis factor into decision
• Ethical considerations regarding monetization of certain outcomes play a role

Costs and benefits in decision-making

Importance in policy and program decisions

• Enables more informed and rational decision-making in policy and program implementation
• Helps prioritize interventions and allocate limited resources efficiently across competing programs
• Identifies interventions providing greatest net social benefit through cost-benefit analysis
• Promotes transparency and accountability in public spending by quantifying value for money
• Facilitates comparison of diverse policy options to justify program choices to stakeholders
• Consideration of long-term costs and benefits leads to more sustainable and impactful interventions

Types of costs and benefits to consider

• Direct costs (program implementation, staff salaries, materials)
• Indirect costs (overhead, opportunity costs of resources used)
• Tangible benefits (increased income, reduced healthcare expenses)
• Intangible benefits (improved quality of life, enhanced social cohesion)
• Short-term vs long-term costs and benefits
• Private vs social costs and benefits
• Positive and negative externalities of interventions

Challenges in measuring costs and benefits

• Difficulty monetizing intangible outcomes (value of a statistical life)
• Attribution of outcomes to specific interventions in complex environments
• Accounting for opportunity costs of resources used
• Estimating long-term impacts beyond the evaluation period
• Dealing with uncertainty in future costs and benefits
• Addressing equity considerations in cost-benefit calculations
• Accounting for differences in willingness to pay across populations

Conducting cost-effectiveness or cost-benefit analysis

Initial steps and planning

• Define scope and objectives of analysis including perspective (societal, governmental, organizational)
• Identify all relevant costs associated with intervention or program
• Determine appropriate outcome measures or indicators for quantifying impact
• Develop data collection plan for gathering cost and outcome information
• Establish time horizon for analysis considering both short and long-term effects

Data collection and analysis

• Quantify outcomes or impacts of intervention using appropriate metrics
• Measure all direct and indirect costs related to program implementation
• Adjust for timing differences by discounting future costs and benefits to present values
• Calculate cost-effectiveness ratio (for CEA) or net present value (for CBA)
• Conduct sensitivity analysis to assess robustness of results to changes in key assumptions

Interpreting and communicating results

• Compare results with alternative interventions or established benchmarks
• Present findings in clear, accessible formats (tables, graphs, summary statistics)
• Discuss limitations and uncertainties in the analysis
• Provide context for interpreting results (cost-effectiveness thresholds, comparisons to similar programs)
• Offer recommendations based on analysis while acknowledging other decision-making factors
• Tailor communication of results to different stakeholder groups (policymakers, funders, public)