Health economics is the study of medical procedures, drugs, or devices, in terms of cost and outcomes. Although there are many approaches, the most common is cost effectiveness (CE). In this kind of study, the introduction of a medical procedure, drug, or device is examined in terms of its added cost in relation to an existing procedure, drug, or device. Where possible the “gold standard” or accepted standard is utilized. Likewise, the outcomes are compared between the new and old. The cost of the “new” procedure, drug, or device can be less or more than the accepted standard and outcomes can be better or worse. A variation of cost-effectiveness is cost-benefit, in which the benefit is spelled out in terms of some unit. For example, 30-day mortality could be an outcome and the benefit could be lives saved every year. In wound care, cost per ulcer-free month is a common cost benefit analysis. Cost benefit can also examine just costs. Cost utility avoids awkward units and allows health economic studies to be compared to each other in terms of cost per QALY (quality adjusted life years) or other units. The chief disadvantage of cost utility is that for patients with multiple comorbidities in which one is studying a change in one of them it can be difficult to estimate the change in utility, where utility is a scale of 0 (death) to 1 (perfect health).


In health economics one seeks to look at the change in costs and outcomes/benefits/utilities to make a policy decision. Any time one has less cost and better outcomes this is very desirable situation, and it is called dominant. Likewise, more cost and worse benefits are easy to evaluate as undesirable (dominated). However, in cases of more cost but better benefits or lower cost but less benefits, these results must be evaluated by policy makers in the context of many other issues.

Learn more from the National Information Center on Health Services Research and Health Care Technology (NICHSR)

We can perform…

  • Consulting (for example, is there evidence to perform a credible HE study?)
  • Helping you decide the type of study (cost-minimization, cost-effectiveness, cost-utility, cost-benefit, cost consequence)
  • Obtaining data input
  • Carrying out simple cost effectiveness calculations
  • Carrying out discrete events modeling
  • Carrying out Markov modeling.
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