Health Economics - Where to Begin?
October 25, 2022

Health Economics - Where to Begin?

Reimbursement Strategy

Abbas Al-Murrani of Health Economics Consulting NZ discusses the fundamentals of health economics and some of the frameworks used for demonstrating value in healthcare.

Capture, Translate & Understand Economic Value In Healthcare

In a world with finite resources and tighter healthcare budgets, coupled with unlimited patient wants and needs (scarcity), decisions on how to best allocate resources must be made (choices). Using resources on one healthcare activity inevitably means sacrificing activity somewhere else (opportunity cost). To make consistent, reliable, and transparent assessments, a framework for evaluation and decision-making is required.

Economic Evaluations: Framework For Decision-Making

Economic evaluations allow for the systematic and simultaneous consideration of costs and outcomes between standard practice and a newly proposed course of action, investment, or intervention. New interventions come in many forms including medications, applications, and medical devices.

There are several types of economic evaluations. All types measure costs in monetary terms and tend to differ in what they count (perspective*) and how they measure outcomes. 

*Perspective: Societal (includes elements like time off work) vs. Health System (includes elements like rehabilitation and bed-days).

Cost Effectiveness Analysis

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Cost Effectiveness Analysis  aims to compare incremental costs and outcomes, where outcomes are measured in ‘natural’ units. Natural units are intervention-specific i.e. number of heart attacks prevented or number of falls avoided. Cost Effectiveness Analyses are limited in their approach given the difficulty in making comparisons between interventions targeting different areas of health and conditions (heart attacks vs falls).

Cost Benefit Analysis

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Cost Benefit Analysis  aims to compare incremental costs and outcomes, where both costs and outcomes are measured in monetary terms. Cost Benefit Analyses have several limitations and tend to raise ethical concerns when putting a monetary value on a human life.

Cost Utility Analysis

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Cost Utility Analysis aims to compare incremental costs and outcomes, where outcomes are measured in a common currency that combines changes in quantity and quality of life into one composite measure known as a Quality-Adjusted Life Year (QALY). Usually, Cost Utility Analysis is the preferred standard for economic evaluations and is readily used by numerous international  government funding/assessment agencies including the Pharmaceutical Management Agency (Pharmac, New Zealand) and the National Institute for Health and Care Excellence (NICE, United Kingdom).

Common Scenario: Walk-Through Considerations

A newly developed medical device helps quickly and more accurately identify difficult-to-diagnose gut conditions. Before this medical device existed, patients would often bounce back-and-forth in the healthcare system, accumulating diagnostic and treatment costs. Additionally, patients would suffer a reduced quality-of-life as a result of their current experience and a portion of patients who remain undiagnosed suffer premature mortality. 

Relevant Touch Points

There are three primary touch points to consider when thinking of economic evaluations.

1. Patient Pathways

Does the newly developed medical device impact how patients navigate the healthcare system? If so, to what extent and are there new clinical and non-clinical processes?

2. Costs

Does the newly developed medical device shift, reduce or increase costs to the individual or the healthcare system? Are these immediate such as the cost of the intervention itself or are there downstream effects such as avoided hospitalisation and medication requirements?

3. Outcomes

Does the newly developed medical device improve quality of life through added mobility and reduced anxiety? Are there any adverse events or invasive procedures that cause a reduction in quality of life? Does the intervention extend life years? 


Economic evaluations need to select the most relevant comparator(s) for the analysis. Relevant comparators are determined by what is already funded or the most utilised treatment to-date. Sometimes, however, the intervention is a world-first and in situations like this, the evaluation takes place with ‘do-nothing’ as the comparator.

Value: Determine & Categorise

Selecting Cost Utility Analysis as the type of economic evaluation and accounting for the above touch points (patient pathways, costs, and outcomes), an Incremental Cost Effectiveness Ratio (ICER) can be calculated.

An ICER displays the incremental cost versus the incremental outcome as a ratio, for the newly proposed intervention (‘New’) versus standard practice (‘Current’). 

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The four values (Cost-new, Cost-current, QALY-new, QALY-current) generate four potential quadrants for interpretation. 

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North-West (Red)

Worst-case scenario for the proposed intervention. The intervention costs the health system more yet generates less outcomes for patients, compared to standard treatment.

South-East (Green)

Best-case scenario for the proposed intervention. The intervention costs the health system less yet generates more outcomes for patients, compared to the standard treatment.

North-East & South-West (Blue)

These are known as trade-off quadrants. The majority of interventions tend to be in the North-East quadrant as we typically expect to pay more in order to generate more outcomes for patients, compared to the standard treatment.


Factors Beyond Value

Economic evaluations are merely one of many tools needed to inform decision-making. Health systems must consider other factors when determining investment decisions. These include the interventions’ ability to systematically address unjust differences between groups in the population (equity) and the degree of impact on the overall budget should the intervention be successfully adopted by the healthcare system (budget impact). 

Advanced Topics

More advanced topics that build on these ideas include Sensitivity Analysis (used for taking into account model and parameter uncertainty), Willingness-To-Pay (used to determine how health systems value trade-offs), and how and where to collect data (standard questionnaires such as EQ5D and costing data).


Pharmaceutical Management Agency (PHARMAC) - Prescription for Pharmacoeconomic Analysis

Edlin et al 2014 - Cost Effectiveness Modelling For Health Technology Assessment 

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