Cost-effectiveness analysis (CEA) is a form of
economic analysis that compares the relative expenditure (costs) and outcomes (effects) of two or more courses of action. Cost-effectiveness analysis is often used where a full cost-benefit analysis is inappropriate e.g. the problem is to determine how best to comply with a legal requirement. Typically the CEA is expressed in terms of a ratio where the denominator is a gain in health from a measure (years of life, premature births averted, sight-years gained) and the numerator is the cost of the health gain.
[1] The most commonly used outcome measure is
quality-adjusted life years (QALY).
[2] Cost-utility analysis is similar to cost-effectiveness analysis.
Cost-effectiveness analysis is generally not equivalent to cost-benefit analysis (CBA).[2]
Cost-effectiveness analysis is commonly used in Infrastructure Asset Management instead of a full cost-benefit analysis where the objective is to sustain the existing standard of service. The replacement or refurbishment of an existing Infrastructure Asset is a good example of this. In effect, the benefits side of the equation is held constant at some pre-determined standard of service, and various options for providing that standard of service are then compared, with the least-cost method identified as the preferred option.
The use of CEA is supported by the benefits identified in the Asset Management Plan where the whole-life cost is also detailed. As such, an indicative benefit-cost ratio is contained within the Asset Management Plan - allowing individual assets to be justified as part of a system of assets. This provides a framework for the safe use of CEA for individual assets.
