Module 5: Economic Evaluation

The crux of an economics-based examination of health care as a market, commodity, and institution is to ask if limited resources are being used effectively and appropriately according to their costs. Technically defined, economic evaluation is “the quantitative analysis of the relative desirability to the whole community of investing in alternative projects or programs.”(1) It is a process with implications in management, policy, and outcomes, and involves different types of considerations based on costs and the positive or negative consequences of decisions.

Two concepts at the heart of mainstream economics are efficiency and equity. Applied to the health care sector, these terms assess whether programs or interventions are being implemented appropriately and fairly.


If resources are being used appropriately, the idea of effectiveness should be distinguished from efficiency. Effectiveness concerns only the technical transformation of input to output (best measured in terms of outcomes). Increasing effectiveness attempts to minimize wasted resources in order to reach a certain goal, whereas efficiency uses the processes of identifying, measuring, and valuing costs and consequences to determine how the costs of production compare to the value of the outcomes.(2)

Economic efficiency provides a worthwhile solution to the evaluation of health care interventions and programs. In economics, the argument for efficiency is based on the Pareto criteria, which state that “a change in the allocation of inputs (natural resources, labor, and capital) or outputs (intermediate products and final goods and services) can be said to make society better off if it leaves at least one person better off without making someone else worse off.”(3) When no more changes can benefit someone without making someone else “worse off,” we have reached the point of efficiency. However, health does not operate in isolation, and full efficiency of health care requires a comparison of health services across all other things valued in a society. As such, any evaluation process will face limitations in information and analysis, and different techniques will vary in the level of appropriateness to the study.

Case Study: Healthcare in Singapore

Singapore has been used as an example of model healthcare throughout much of the world including in the United States. The government in Singapore spends only 4% of the gross domestic product (GDP) on healthcare, compared to 14% in the United States. Though there is an emphasis on individual spending for healthcare in Singapore, this is supplemented by government hospitals, government-mandated healthcare provided by employers, and affordable doctors trained in general practices rather than in specialty fields. These reforms allow Singapore to be more efficient and equitable than many other national healthcare programs throughout the world.(4)    


While measures of efficiency are primarily based on outcomes, equity can serve as a target for various components of the health care model. From the equitable distribution of health and health services to the achievement of equitable health outcomes for all members of society, the concept of equity is sought on the grounds of social justice and the belief that fair allocation will improve total welfare. However, as the multifaceted determinants of health indicate, resources and risk factors are not equally allocated among groups. The social and economic inequalities that persist across populations contribute to health differentials. Since the “strict equality” of shares is likely “not possible for health services”, we can instead seek “equity [and] fair shares for all obtained through the avoidance of inequalities which are not necessary or socially acceptable.”(5)

Numerous studies have attempted to identify sources of inequality and target efforts to increase the fair distribution of health services. For instance, a study analyzing health determinants found an association between health inequality and subgroups of retired females over 70, as well as with low-income groups.(6) In addition to these socioeconomic contributors, health-related aspects like the level of “sexual activity, usual activities, mental function, [and] breathing and mobility” have similarly been linked to health inequality.(7) Such findings aid in targeting public health initiatives that will increase equitable distribution of health services and consequently decrease the disparities in health outcomes.

Although the health sector continues to be under the influence of both market and non-market forces, critics have argued that the market itself does not create favorable conditions for equity. As suggested by the correlation between health determinants and inequality, existing disparities in health determinants are only reinforced by the market, according to the allocation of goods to those who are able to pay. The “invisible hand” of the market that has been celebrated as the instigator of market competition actually weakens the health of the poorest individuals, perpetuating their existing vulnerability. In a similar manner, when health care costs are high compared to income, the deterioration of health limits the ability to earn more income, and individuals become trapped in a cycle of poverty and illness.(8)

Case Study: National Health Service in the United Kingdom

The National Health Service (NHS) in the United Kingdom illustrates the attempt at balance between equity and efficiency. Its structure favors equity, but inequalities are harder to stamp out in practice. Many in the Western world want their countrymen to have access to basic healthcare, some proposing a universal medical care system. Equity and efficiency in healthcare are often thought to be negatively correlated, meaning that when one increases the other decreases. This can sometimes be the case. However, if the government and related private agencies are able to provide universal coverage without over-spending, (though the level of care may have to be uniformly reduced,) this could introduce progressive change in both equity and efficiency.

Prioritizing efficiency, on the other hand, can lead to market abuse of the healthcare sector, with doctors over and under-prescribing to make a profit; a focus on equity is a more empathetic and wide-reaching approach. Of course, universal healthcare programs still carry many complications and potential drawbacks. One article the treatment of sickle-cell disease in the UK, for instance. The NHS has suggested universal screening for the disease, but as it is almost exclusively found in certain ethnic minorities, many feel that mass screening is an unnecessary and expensive endeavor in the name of equity. Other procedures carried out by the NHS still need to be made universal, such as kidney transplants, which are prioritized based upon age; the elderly are denied treatment until the younger patients have gone through the procedures. This prioritization denies patients equal access to care, contradicting the tenants of the NHS.(9)(10)      


Due to complexities in the health care market, few planning methods are able to achieve optima in both efficiency and equity. As such, seeking the maximization of either objective becomes a question of social ideology. Among the different views of social arrangement and the intersection of free market and government, several prominent ideologies are highlighted:

Libertarian: Libertarians are primarily concerned with preserving individual freedom as it pertains to “political liberty, free speech and economic freedom.”(11) This ideology contends that the free market is the most effective way to produce and distribute goods, as any government intervention would not only infringe on personal rights but would also diminish social welfare. Market forces are thus impersonal, determined simply by the actions of individual participants. Government intervention, whether through taxation or subsidies, would undermine this personal freedom.(12) In terms of healthcare, libertarians often believe that the government will “pick up the tab” if healthcare is redistributed and made universal. Proponents of universal healthcare believe that it could be achieved by increasing spending by way of taxes and government regulations, strategies that libertarians are generally opposed to. The government would monopolize the healthcare economy under universal healthcare, and would be able to set the prices of medical treatments and medications, disrupting the free market economy, Libertarians promote a healthcare system that enables free choice without mandates and regulations; these ideas have been promoted by libertarian Friedrich Hayek.(13)(14)  

Liberal: Like the libertarian opinion, the liberal viewpoint prioritizes individual liberty. However, with an emphasis on economic security, liberals believe that government intervention is acceptable when the market fails to secure the welfare of all in society, as the market tends to favor those with property rights and wealth. Despite the acceptance of policies that redistribute income and resources to all subgroups, there is an acknowledged trade-off between efficiency and equity. Within liberal theory, perspectives may lean more towards the objective of efficiency, as the aim is to maximize the total welfare of society (even if this comes at the cost of the least well-off), or towards the objective of equity, as the aim is to maximize the welfare of the worst-off in society.(15) Still, both approaches legitimize the government’s role in the market. A liberal would want increased government involvement in the healthcare sector, funded by individual, corporate, and public taxes, creating a model similar to universal healthcare.

Collectivist: Valuing equality above all else, collectivists reject the free market for its enforcement of existing distributions of wealth and its failure to improve socioeconomic inequalities. As a result, collectivists approve government intervention for enabling equal opportunities for all, be it through modifications to the market or an entire replacement of the system. For healthcare, collectivists would focus on a holistic approach that provides all-encompassing, equal access to the system by prioritizing the community rather than certain individuals.

The different ideologies provide a spectrum of valuation between efficiency and equity. Libertarians can be found closer to the efficiency objective, as greater concern is placed on individual freedom and welfare. However, liberals and collectivists fall closer to equity principles and demonstrate altruistic behavior intended to increase welfare for the poorest members of society.

The discussion of government intervention as a fortification or even replacement of market mechanisms has been a hot topic of political debate. In particular, the phrase “socialized health care” has fueled contentions over the benefits and drawbacks of health care financed by government revenue. Compared to market forces, government involvement would not enforce existing income distribution patterns, and could thus make strides toward greater equity. However, the ideal version of socialized systems that would best meet equity standards does not exist in practice. In addition to bureaucratic limitations, there are barriers inhibiting the full “socialization” of health care, including market-run components of other sectors in the economy, existing private financing mechanisms, and institutionalized planning systems outside the state.(16)

In the process of weighing market forces and socialized systems, it is important to recognize that policy relies on practice, and the best way to direct policy decisions on objectives like efficiency and equity is to evaluate the current state of health care systems, from individual programs to large-scale interventions.

Case Study: Public/Private Healthcare in France

France utilizes a combination of public and private healthcare, by employing private doctors but using public hospitals. This creates room for individual decisions while ensuring all-inclusive coverage for French citizens and residents, Private hospitals supplement public care, and patients can opt for independent or specialized medical support. Government regulation and public care are balanced by profit-generating private facilities and insurance.(17)

Case Study: Socialized Healthcare in Canada

In Canada, the government provides healthcare through socialized benefits and coverage. Offered to all residents, financed by the Canadian government, and managed on a provincial level, healthcare is uniformly accessible to Canadians regardless of previous medical history or socioeconomic background. Proponents of this system cite the relatively long life span of Canadians as evidence of this policy’s success, due to its focus on access to hospitals and preemptive tests. Healthcare services are made available to all Canadians equally, and they are funded by a combination of private company, individual, and federal taxes. Though Canadian healthcare universally covers residents, the country only allots 9.5% of its gross domestic product (GDP) to health services, which is significantly less than other developed countries.(18)     

Evaluation Techniques

Evaluation techniques that strive to answer the right questions with accurate information can take many forms. Cost-benefit analysis, for instance, gives costs and benefits of an intervention in monetary values, evaluating the ratio of cost to benefit to a standard of one to see if a particular objective is worthwhile. Cost-effectiveness analysis compares costs to desired effects among different interventions to identify the option that achieves the greatest effect at the lowest cost. Cost-minimization specifically asks for what option will have the lowest cost, and cost-utility measures the effects according to utility (i.e. Quality Adjusted Life Years, in health terms).(19)

As demonstrated here, all economic evaluation techniques involve some examination of costs and consequences. For the appropriate evaluation of health care interventions, studies suggest a three-step process: Identify, Measure, and Valuate.




(Direct) Organizing  and operating costs: health care providers’ time, equipment, capital
(Direct) Patient costs: out-of-pocket expenditures, treatment
(Indirect) Patient costs: productivity loss, psychosocial effects
External costs to the health care sector

(Direct) Change in resource use for organizing and operating services
(Direct) Change in resource use relating to patient expenditures or leisure time
(Indirect) Change in resource use relating to patient productivity loss
Physical, social, emotional changes
Change in human quality of life


Following the identification of costs and consequences, terms of measurement have been difficult without routine or consistent data collection systems and organization. Costs of health interventions have best been measured by assessing the physical inputs used; however, even this process of accounting can be costly, troublesome, and complicated due to shared costs among different countries, internal agencies, or sectors. Measuring consequences has proven to be even more challenging. This is because health itself is multidimensional, and any attempt to measure the effects or benefits of interventions has typically focused on singular dimensions or specific indicators.(21)

  1. Quantity of life or morbidity: The quantification of life, in terms of either death rate or life expectancy, is frequently used as a health indicator in epidemiology and public policy. However, each indicator provides limited information about public health. For instance, mortality rates do not account for disability, and morbidity rates rely on self-reporting and health-seeking behavior. Barriers that prevent access to health care may result in highly underreported or biased results.
  2. Social function: Measuring health indirectly according to the performance of social roles is an approach that links biological health and wellness to human social function. For example, various health statistics have presented poor health in terms of the number of lost days of productivity. Such methods have given a measure of health impact, albeit with limited information on exactly how individuals arrived at that health state.
  3. Health profiles: The assigning of different health dimensions (and an assessment of how an individual ranks for each) has been used as a method to address the multidimensional components of health. With a larger “database” of health indicators, it is possible to measure health holistically, and how dimensions change over time. It is also possible to select the specific parameters that fit a particular study.
  4. Global health indicator: Because health profiles cannot measure changes in health as they move in opposite directions (or as one dimension of health is replaced with another), experts devised an alternative way to identify dimensions that could be summed into one index. The global health indicator approach selects relevant dimensions for the index, classifies health states along a gradient, and scales the relative value of given states so that “all feasible health outcomes can be valued relative to each other.”(22) This systematically ranks health interventions according to the measured effects along multiple dimensions.
  5. Quality adjusted life year (QALY): The QALY measurement encompasses both quantity (duration) and quality of life, and is defined by the National Institute for Health and Clinical Excellence as “a measure of a person’s length of life weighted by a valuation of their health-related quality of life.”(23) Quality initially appears subjective, as it includes various physical and mental facets of life beyond health status. Therefore, the concept of health utilities has been used to “represent the valuations attached to each health state on a continuum between 0 and 1, where 0 is equivalent to being dead and 1 represents the best possible health state.”(24) The instrument that has been used most frequently to measure health-related quality of life has been the EQ-5D, scoring individuals on mobility, ability for self-care, ability to accomplish usual activities, pain/discomfort, and anxiety/depression.(25) After acquiring a utility score, a time component is incorporated, as the utility score is weighted by the amount of time spent in that health state. If survival information is made available, a graphical representation of weighted quality of life by time can depict the effect of a health intervention on the QALYs gained or lost.(26)


Costs (measured in terms of the physical inputs of health care production) are typically reflected in monetary pricing. Still, there may be inaccuracies from the “economic price” or the value of production if resources are not allocated for other uses. As prices are distorted by foreign exchange, domestic taxes and subsidies, or social costs and benefits of the given program, economists will frequently use shadow pricing to assign more accurate values to health care costs. Shadow prices help create social prices among individual countries’ preferences for or against particular programs.

Just as there are limitations in measuring consequences, the process of defining the economic value of such consequences has proven to be more complex than simply denoting values for program costs. The various consequences that blur the line between quantitative and qualitative outcomes, as well as the physical, economic, and social returns of intervention have led to a range of approaches used in critical analysis.

For instance, a purely quantitative approach (comparable to the measure of life years used in life expectancy or mortality rates) has been to use national indices, such as national income or gross national product. Although this appears to be a direct way of capturing the (monetary) value of program consequences, it has proved inadequate in practice due to a failure to provide a complete picture of health. Financial accounting may omit the nonmonetary, indirect consequences of programs, along with other relevant activities that become fragmented in the process of categorizing expenses. Such aggregated entities may also be inconsistent between institutions, making it difficult to assign standard values of accounting to health-related consequences.

Alternatively, approaches using the valuation of human capital assume that health interventions influence human productivity and well-being. In a sense, this approach attempts to capture the measure of “social function” (as explained above), and has been used in developing countries with estimated values of labor and productivity levels.

Case Study: Cost-Benefit Analysis in Developing Countries

Cost-benefit analysis is a critical tool in determining whether a healthcare investment is sound, and in comparing it to similar endeavors. In developing countries, poverty is augmented by increased illness and a lack of educational opportunities. Since the 1990s, international bodies and relief organizations (such as the World Bank and the International Monetary Fund) have heralded aid in the form of Structural Adjustment Policies (SAPs). Though these measures are meant to pull poor countries out of economic recession, they often lead to a decline in healthcare and education, as steps towards privatization restrict universal access. Critics of SAPs (and the resulting government measures) have argued that in developing countries, education and healthcare usually suffer, while the military sees few funding cuts. These “cures” for ailing economies are internationally imposed and often extreme, leading to increases in the gap between the wealthy and impoverished.(27)  

Case Study: Quantity versus Quality in the United States Healthcare Sector

The 21st century American healthcare system is arguably centered on “quantity”, in that only those who can pay are provided with tests and medical attention. The Patient Protection and Affordable Care Act of 2010, however, shifts emphasis to “quality”, where medical facilities and providers are judged based on the care they provide, and they are held accountable for their procedures and performance. This act aims to provide more Americans with healthcare and to give long-term health benefits by promoting preventive measures. The United States has long struggled to devise an effective health insurance system; while the country spends more money on healthcare than does any other nation, measures of health (such as life expectancy and obesity levels) are inferior to many of other Western countries. Emphasizing quality over quantity would provide more Americans with higher-quality coverage provided by medical facilities and personnel that are rewarded for positive treatment.(28)


When it comes to evaluating complex health care programs loaded with social and political implications beyond economic effects, the argument arises that “efficient is not sufficient.”(29) Although a representation of optima in economic theory, evaluation of appropriate health care production, distribution, and allocation must allow for considerations such as community acceptability and patient accessibility. When comparing an intervention to other alternatives, it is important to assess whether the options are similar in their objectives, costs and consequences, and relevance to particular populations.

Matters of policy and decision-making involve value judgments (often made by specialists for application to the greater community), which may be influenced by specific objectives, appropriate valuation of terms, and the consideration of preferences. Since much of the process lacks transparency for those who will be most affected by policy changes, it is crucial to clarify assumptions and variables during the course of economic evaluation.(30)

Despite these obstacles, economic analysis provides a framework through which we can evaluate the strengths and weaknesses of health programs and make changes to maximize their impact. With great flexibility in the application of economic analysis, it is possible to identify, measure, and valuate the select costs and consequences in order to facilitate best practices in health care.

Go To Module 6: Primary Players in Healthcare Worldwide>>


(1) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(2) Ibid.

(3) Bishop, R. “Economic efficiency, sustainability, and biodiversity.”Ambio 22.2(1993): 69-73.

(4) Miller, Matt. "What We Can Learn from Singapore's Health-care Model." The Washington Post. N.p., 03 Mar. 2010. Web. 29 Aug. 2012. <>.

(5) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(6) Lauridsen, J., et al. “Decomposition of health inequality by determinants and dimensions.”Health Economics 16(2007): 97-102.

(7) Ibid.

(8) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(9) Sassi, Franco, Julian LeGrand, and Luke Archard. "Equity Versus Efficiency: A Dilemma for the NHS." British Medical Journal 323 (2001): 762-63. US National Library of Medicine National Institutes of Health. BMJ Publishing Group, 06 Oct. 2001. Web. 29 Aug. 2012. <>.

(10) Thoma, Mark. "Equity and Efficiency in Health Care Markets." Web log post. Economist's View. N.p., 28 July 2009. Web. 29 Aug. 2012. <>.

(11) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(12) Ibid.

(13) Angner, Erik. "Health Care Policy Libertarians Go For." Politico. N.p., 25 June 2012. Web. 29 Aug. 2012. <>.

(14) "A Libertarian Health-care Proposal." The Economist. N.p., 22 Jan. 2010. Web. 29 Aug. 2012. <>.

(15) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(16) Ibid.

(17) Brunner, Stephanie. "The French Health Care System." Medical News Today. N.p., 08 June 2009. Web. 31 Aug. 2012. <>.

(18) "Canada Health Act." Canadian Healthcare. N.p., 2004-2007. Web. 31 Aug. 2012. <>.

(19) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(20) Ibid.

(21) Ibid.

(22) Ibid.

(23) Phillips, C. and G. Thompson. “What is a QALY?”What is…? series. Health economics. April 2009. <>.

(24) Ibid.

(25) Ibid.

(26) Ibid.

(27) Bianco, Mabel. "Cost Benefit and Economic Approach Related to Health Care Services System." Women Watch. United Nations, n.d. Web. 31 Aug. 2012. <>.

(28) Szucs, Richard A. "Quality vs. Quantity in Health Care Reform." Richmond Times. N.p., 03 Apr. 2011. Web. 31 Aug. 2012. <>.

(29) Mills, A., Hoare, G., Cumper, G., Roberts, J. Health Economics for Developing Countries: A Survival Kit. Evaluation and Planning Centre for Health Care. Department of Public Health and Policy at the London School of Hygiene and Tropical Medicine. 1998. <>.

(30) Ibid.