Determining Cost-Effectiveness

If I know the cost associated with administering my substance abuse intervention program, how do I determine whether my program was cost-effective? — Signed, Worried about Bottom Line


Dear Worried,

You have done a great deal of the work already. My hope is that you measured the costs of your program consistently with the principles of economics, such as clearly stating the perspective from which costs are measured. As you know, the perspective has implications for which resources to count as costs and the value placed on them. There are three ways to weigh the costs of the intervention relative to the benefits. The first option (requiring the least of your research resources) is a cost-effectiveness analysis (CEA). While noneconomists use this term to refer to the field of economic analysis in general, CEA refers to something pretty specific— the analysis of incremental cost-effectiveness ratios (or some derivative) which are known as ICERs. ICERS involve measures such as the dollars spent per case of substance abuse averted. For this type of analysis, you need only your measures of costs and the program’s benefits. Unfortunately, the problems with ICERs are two fold. First, it is quite likely that you will get different ICERs for different outcome measures. Of course, non-economists also encounter this problem in assessing effectiveness, but it does create ambiguity (Sindelar et al., 2004). Second, it’s difficult at times to know what constitutes a big or small ICER—big is in the eye of the beholder. For example, is $10,000 per case of substance abuse averted big or small? However, ICERs are a good way to rank programs. It’s clear that a program with an ICER of $10,000 is preferred to one with an ICER of $15,000 (see e.g. Drummond & Mcguire, 2001 for more detail). The second possibility involves a true benefit-cost analysis (BCA). Again, many refer to a variety of analyses as BCA, but the meaning in economics is pretty specific—it refers to the costs of the program generally measured from a social perspective measured against society’s willingness to pay for the outcome. A nice feature of BCA is that both the program’s costs and benefits are measured in dollars, so one ends up with a measure of social “profits.” However, measuring society’s willingness to pay for a given outcome can be difficult. The third possibility involves a hybrid of some sort. One example would be an analysis of the impact of a program on public costs. While not a true BCA, such an analysis can assess the impact of an intervention on the costs of an illness. Such an analysis can tell us, for example, whether a portion of the expenditures on better mental health services are recouped by reductions in juvenile justice (Foster et al., 2004). Any of these three choices can provide useful information. Choosing among them will reflect the target audience and your research budget.


Drummond, M.F., & Mcguire, A. (Eds.). (2001). Economic Evaluation in Health Care: Merging Theory with Practice. Oxford: Oxford University Press.

Foster, E.M., Qaseem, A., & Connor, T. (2004). Can better mental health services reduce the risk of juvenile justice system involvement? American Journal of Public Health, 94(5), 859-865.

French, M.T., Salome, H.J., Sindelar, J.L., & McLellan, A.T. (2002). Benefit-cost analysis of addiction treatment: methodological guidelines and empirical application using the DATCAP and ASI. Health Serv Res, 37(2), 433-455.

Sindelar, J. L., Jofre-Bonet, M., French, M.T., & McLellan, A.T. (2004). Cost-effectiveness analysis of addiction treatment: paradoxes of multiple outcomes. Drug Alcohol Depend, 73(1), 41-50.