Cost-Benefit Analysis

CBA Basics - Benefit Balancing Act

• Assesses interventions by valuing both inputs (costs) and outcomes (benefits) in monetary units.
• Objective: Determine if total benefits ($B$) outweigh total costs ($C$).
• Key decision criteria:
  • Net Benefit (NB): $B - C > \textbf{0}$
  • Benefit-Cost Ratio (BCR): $B/C > \textbf{1}$
• Application: Guides resource allocation, aids policy-making by comparing varied programs.

⭐ CBA is unique as it values both costs and benefits in monetary terms, allowing comparison across diverse programs.

CBA Components - Coin Counting Crew

Costs and benefits in CBA are identified, measured, and valued. 📌 Mnemonic: "I DID see the costs/benefits!" (Intangible, Direct Medical, Indirect, Direct Non-Medical).

• Costs: Resources consumed or negative outcomes.
  • Direct Medical: E.g., drugs, hospital fees, lab tests.
  • Direct Non-Medical: E.g., travel for care, special food.
  • Indirect: E.g., lost wages, ↓ productivity.
  • Intangible: E.g., pain, suffering, anxiety.
• Benefits: Gains or positive outcomes from an intervention.
  • Direct Medical: E.g., averted treatment costs.
  • Direct Non-Medical: E.g., saved travel costs.
  • Indirect: E.g., ↑ productivity, earnings gained.
  • Intangible: E.g., improved quality of life, ↓ pain.

⭐ Valuation of intangible costs (e.g., pain, suffering) and benefits (e.g., quality of life improvement in monetary terms) is a major challenge in CBA.

CBA Methodology - Value Valuation Voyage

Assesses monetary value of an intervention versus its costs.

• Key Steps:
  • 1. Identify Program/Alternatives: Define intervention & comparators.
  • 2. Enumerate Costs: Direct (medical, non-medical), indirect (productivity loss), intangible (pain).
  • 3. Enumerate Benefits: Direct (costs averted), indirect (productivity gain), intangible (QoL gain).
  • 4. Monetize: Assign monetary values.
    • Human Capital Approach: Based on earnings.
    • Willingness-To-Pay (WTP): Stated preference.
  • 5. Discounting: Converts future values to present. $PV = FV / (1+r)^n$.
    • Rate: Typically 3-5%.
  • 6. Calculate Results: Net Present Value (NPV), Benefit-Cost Ratio (BCR). Perform Sensitivity Analysis.

⭐ Discounting is crucial in CBA to convert future costs and benefits to their present values, reflecting time preference.

Interpreting CBA - Profit Pointers

• Key project viability metrics:
  • Net Present Value (NPV): $NPV = \sum (B_t - C_t) / (1+r)^t$
    • Project viable if NPV > 0.
    • Project not viable if NPV < 0.
  • Benefit-Cost Ratio (BCR): $BCR = (\sum B_t / (1+r)^t) / (\sum C_t / (1+r)^t)$
    • Project viable if BCR > 1.
    • Project not viable if BCR < 1.

⭐ A project is economically viable if its Net Present Value (NPV) is positive or its Benefit-Cost Ratio (BCR) is greater than 1.

CBA Pros & Cons - Merit & Misgivings

High‑Yield Points - ⚡ Biggest Takeaways

• Cost-Benefit Analysis (CBA) measures both costs and benefits in monetary units.
• Allows comparison of diverse health programs with different types of outcomes.
• Decision criteria: Benefit-Cost Ratio (BCR) > 1 or Net Present Value (NPV) > 0.
• Discounting accounts for the time value of money for future costs and benefits.
• Major challenge: Monetizing health outcomes (e.g., life years gained, QALYs).
• Useful for allocating scarce resources across heterogeneous interventions.
• Results often expressed as Net Benefit, BCR, or Return on Investment (ROI).