Cost Benefit Analysis (CBA)
what are the disadvantages of a cost benefit analysis (CBA)?
- How does one place a dollar value on human life or other non-monetary outcomes? - No universal agreement on one standard method of assigning monetary value. - Not widely used because of the difficulty of assigning monetary value to outcomes/consequences. - It is least used PE method
what are the advantages of a cost benefit analysis (CBA)?
- Many alternatives can be compared with different outcomes if they can be converted to dollar value. - Many costs and benefits can reduce to a number for easy comparison.
what is a cost benefit analysis (CBA)?
- an economic analysis that can assess whether the outcomes (benefits) of a program outweigh the inputs (costs) - used to help make decisions about public policy and is based on the principal of welfare economics - incorporates individual preferences/choices to improve social welfare by balancing effective use of resources - cost and consequences are both valued in dollars - comparison of alternatives are purely performed on a dollar-to-dollar basis
how do we present cost benefit analysis (CBA) results?
- as net benefit, net cost, benefits to cost ratio, or cost to benefit ratio - if intervention time is 1 year or less, benefits to cost ratio is preferred - adjust all past and future costs if accrued for more than 1 year
what are the components of a cost benefit analysis (CBA)?
- direct benefits (direct medical and non medical cost savings) - indirect benefits (productivity gained, increased earnings, etc. measured by Human capital approach and/or willingness to pay) - intangible benefits (cost savings related to pain and suffering, measured using willingness to pay)
how do we perform step 3 of a cost benefit analysis (CBA)? general only, see notes for details
- identify costs and benefits - direct medical and non medical: monetary value (decrease in ER visits, physician visits, number of labs, transportation, etc.) - indirect: monetary value (increased earnings/productivity because of program/intervention - intangible: monetary value (cost savings from a reduction in suffering related to an intervention or program)
how do we perform step 1 of a cost benefit analysis (CBA)?
- identify type of program/intervention - understand organization goals, needs and constraints
how do we assess a net benefit (NPV)?
- if greater than 0, accept project/intervention with a positive net benefit (NPV) - if two projects have a positive net benefit, the one with the higher net benefit is more cost beneficial
how do we determine the proper way to adjust our results of a cost benefit analysis (CBA)?
- if longer than 1 year in the past, adjust for inflation - if longer than 1 year in the future, use discounting because dollar received today is worth more than a dollar received next year
example: If running a hypertension clinic will cost $1,000 for 3 years each and the cost accrued at the beginning of the year, calculate the NPV? (discount rate= 5%)
1,000 (first year) + 1,000/(1.05)^1 + 1,000/(1.05)^2 = 2,859 less than 3,000 (by 2780 so HTN clinic is cost beneficial
what are the steps to developing a cost benefit analysis (CBA)?
1. identify program/intervention 2. identify alternatives/comparator 3. identify costs and benefits 4. perform costs and benefit analysis 5. perform sensitivity analysis 6. present options 7. develop policy
if a cost benefit analysis (CBA) is reported as, benefit/cost ratio (B/C), what ratio is considered cost beneficial?
B/C greater than 1
if a cost benefit analysis (CBA) is reported as cost/benefit ration (C/B), what ratio is considered cost beneficial?
C/B less than 1
how do we determine net benefit (NPV)?
benefit (net)- cost (net)
Programs/intervention with different outcomes can be compared by _____
converting outcomes into a common outcome measure ($$) and ranking their B/C ratios.
if a cost benefit analysis (CBA) is reported as net benefit= benefit-cost, what net benefit is considered cost beneficial?
greater than 0
how do we perform step 2 of a cost benefit analysis (CBA)?
identify alternatives/comparators, can be: - "do nothing" - implementing a similar program on a smaller or larger scale - implementing a totally different program
when are cost benefit analyses' (CBA) mostly used?
in prevention, health education, screening and diagnostics and making public health policies.
what is step 7 of a cost benefit analysis (CBA)?
inform and help policy makers in developing public policy
if a cost benefit analysis (CBA) is reported as net cost= cost-benefit, what net cost is considered cost beneficial?
less than 0
the bigger the B/C ratio, the ____ cost beneficial
more example 15:1 is more cost beneficial than 2:1
what is step 5 in the cost benefit analysis (CBA)?
perform sensitivity analysis - varying estimate within specific range to study the impact and account for uncertainty - can be a "one-way or two-way sensitivity analysis," the difference would be in verifying one factor or two factors simultaneously
what is step 6 of a cost benefit analysis (CBA)?
present options - provide assessment of different options with their net benefits or benefit to cost ratios by ranking them - develop policy by informing and helping policy makers in developing public policy
what is an internal rate of return (IRR)?
rate of return that equates the NPV of benefits to the NPV of costs - goal: to find out the rate of return that would make the cost and benefit equal - once calculated we compare it to a specified hurdle rate, we accept all projects with an IRR greater than the specified hurdle rate
what is step 4 of a cost benefit analysis (CBA)?
results
what perspective should a cost benefit analysis be conducted from?
societal perspective
