Costing in Economic Evaluations – Key Terms (Video Notes)
What is a cost?
Cost = price of something / expenditure spent on something
Distinguish between:
Financial cost: the total monetary expenses paid or required
Economic cost (opportunity cost): what must be sacrificed to achieve a goal; the value of resources in their next best use
Key idea: if you do A, you cannot do B; the cost of doing A is the foregone value of B
Example framing: in immunisation study costing, line items can differ depending on whether you include opportunity costs or actual expenditures
Labour costs of new staff hired vs time of existing staff involved
Salaried labour vs volunteer labour
Economic value included vs excluded: transportation costs etc.
Economic value of vaccines utilized vs financial cost of purchased vaccines
Economic costs reflect inputs required to produce an intervention
Four economic inputs (factors) of production:
Labour (time/effort of doctors, admin, therapists, etc.)
Capital (buildings, equipment, vehicles, etc.)
Consumables (drugs, educational materials, heating, etc.)
Land (more relevant to agriculture and farming)
Marginal vs incremental (often used interchangeably but with nuance):
Marginal cost: cost of producing one extra unit or the next logical batch (e.g., expanding screening from high-risk to whole population)
Incremental cost: the difference in cost between two or more programs being compared; used in incremental cost analysis
Costs & Cost Consequences
Costs in the intervention stage (resources saved or increased)
Costs in downstream stage (resources saved or increased)
Out-of-pocket costs for patients/family (travel, equipment, carer time, waiting, treatments)
Productivity losses (premature mortality, absenteeism, presenteeism)
Health sector (program costs)
Other sectors (education, housing and services, police and courts, social services)
The costing process
Three steps to cost an intervention:
1) Identification of appropriate costs to include (based on perspective)
2) Measurement of quantity of resources used or saved (in appropriate units)
3) Valuation of resources in appropriate prices per unit (local vs international currency)2.1 Identify the viewpoint or perspective:
Societal: all costs to whomsoever they accrue
Health Sector: costs to government and private health sub-sector
Government (Commonwealth and/or State/Territory)
Third Party Funder (public or private insurers)
Healthcare Provider (hospital, GP)
Patients/Carers (out-of-pocket, travel, waiting time)
Other sectors in society (Social Services, Justice, etc.)
Societal perspective is ideal
Policy makers often want a narrower perspective due to fixed budgets and incentives to shift costs
Cost shifting examples:
Centralising cancer services: consider increased patient/family travel costs
GP co-payments (federal) affecting ED/hospital admissions (state)
identifying resources-
intervention costs
downstream costs: uncertainty associated
Non health costs - reduce productivity at work
human capital approach
friction cost approach
absenteism and presenteism, a way to consider
production losses has greater contribution to overall results.
informal carer time- rarely used approach, but it adds complexity of identifying carers.
2.2 Measuring resources:
Identify key cost drivers; avoid chasing small costs unless justified
structure of costs
fixed costs: accured regardless of the scale of the program
variable costs: rise the bigger the program
Use routinely collected data wherever possible (PBS/MBS linkage, hospital data, patient postcodes for travel time, etc.)
Possible data sources:
PBS, MBS records (Australia)
Linked hospital data for hospitalisations
Patient diaries, follow-up interviews
Instruments/questionnaires to collect resource use:
Patient medical records, hospital databases, case report forms, follow-up interviews, patient self-admin questionnaires, patient diaries
DIRUM: Database of Instruments for Resource Use Measurement (open-access instrument database) to standardize questions where possible to make it comparable between the different intervention.
2.3 Valuing resources:
After estimating quantity, assign a value to each resource used
Example valuation questions:
What is the value of 1 hour of a GP’s time?
What is the value of 1 hour in an operating theatre?
What is the value of 1 hour of a volunteer’s time?
This include wage s, overhead costs, and the opportunity costs associated with each role, which can vary significantly depending on the setting and the specific healthcare system.
Value of preventing an adverse event in ER (A&E)
Value of reducing treatment time by 1 hour
Value of reducing travel time for family and friends by 2 hours
Most prices approximate opportunity costs, but not always (e.g., volunteer time, travel time valued by patient preferences)
Consider whether to include informal carer time (depends on setting and perspective)
Examples of data sources for costs:
Independent Hospital Pricing Authority (IHPA)
DoHA PBAC cost manuals
Victorian hospital cost information (activity-based funding, cost weights)
Other data sources: WHO-CHOICE costs (global) and country-region-specific unit costs
2.4 Comparing costs over time & between countries:
Costs can be translated across time and space using inflation and currency adjustments
Inflation concepts: nominal vs real values; adjust past costs to current values to remove inflation distortion, based on current value
Currency conversions:
Exchange rate: AUD per USD; use to convert between currencies
Purchasing Power Parity (PPP): conversion factor reflecting relative price levels; useful for cross-country comparisons
Example approaches:
Real cost in AUD = Nominal cost in AUD adjusted for inflation using CPI
If costing in USD, convert to AUD using exchange rate or PPP
Costs terminology & approaches
Transfer payments are excluded from cost accounting (pensions, social transfers) as they do not reflect resource consumption
Types of costing approaches:
Micro costing (bottom-up): detailed ingredients method (tests, visits, minutes, doses). e.g how many of each thing can be measured or valued (more accurate, costly)
Macro costing (top-down): average per day, DRG cost weight, MBS/PBS fees; less granular but cheaper to collect
Capital outlays (buildings/equipment/training): annuitize over asset’s useful life; use Equivalent Annual Cost (EAC)
Overheads: central services costs allocated to programs using a rational apportioning rule (e.g., by activity level)
Inflation, currency, and discounting
Inflation: adjust past costs to current prices to compare in real terms
Formula example: pastcost × (CPIcurrent / CPI_past)
Present value concept requires all costs to be in current price terms for fair comparison
Currency conversion:
Exchange rate: CAUD = CUSD × ER (AUD per USD)
PPP: CAUD ≈ CUSD × PPP (relative price level adjustment)
Discounting (present value):
Purpose: bring future costs to present value to compare options
Core formula: PV = rac{FC}{(1 + r)^n}
FC = future cost in year n
r = discount rate per year
n = number of years in the future
Rationale for discounting:
1) Opportunity cost of spending now; money available can earn returns
2) Expected growth in society’s wealth (time preference)
3) Future uncertainty about costs
4) Short-sightedness concerns; though policy often uses discountingPresent value example progression:
Year 0: PV = FC
Year 1: PV = FC/(1+r)
Year 2: PV = FC/(1+r)^2, etc.
Discount rate examples show large effects on long horizons
Discount rate comparison: 5% vs 3.5% yields different present values for future savings
Discount factors:
Discount factor for year n with rate r: ext{DF}(n) = rac{1}{(1 + r)^n}
Example: for r = 0.05, DF(5) ≈ 0.784
Use DF to compute PV of future costs: PV = FutureCost × DF(n)
Tables and annexes:
Annex with Discount Tables (Present value of $1 for various years and rates)
Use tables to quickly identify present value factors
Time preference and discount rates
Time preference experiments show different preferences for choosing earlier vs later outcomes
Real-world examples illustrate how choices (e.g., immediate vs delayed treatment) influence observed time preferences
The choice of discount rate (e.g., 3.5% UK vs 5% AUS) affects long-horizon cost-effectiveness decisions
Measuring and valuing resources in practice
Measuring resources:
Focus on key cost drivers; document which costs are excluded and why
Leverage routinely collected data; use patient-level data when possible
Link to clinical and administrative data sources to estimate hospitalisations and service use
Valuing resources:
Assign values to resources (e.g., 1 hour GP time, 1 hour operating theatre time, volunteer time, etc.)
Consider opportunity costs for volunteers and for patient travel time
Decide whether to include productivity costs (absenteeism, presenteeism) and caregiver costs; debate is stronger in cost-of-illness studies
Example data sources:
IHPA, DoHA PBAC, Victorian cost weights
WHO-CHOICE datasets for cross-country comparisons
Measuring and valuing resources (DIRUM and case examples)
DIRUM instruments provide standardized questions for resource-use measurement
Example DIRUM hip replacement module (illustrative items):
M1a: Has patient used non-Southmead NHS services since discharge? (GP visits, home visits, advice calls, repeat prescriptions, etc.)
M1b: If yes, complete details by service type (GP visits, home visits, practice nurse visits, occupational/physiotherapy visits, etc.)
M4a–M5d: Home care visits, meals on wheels, and associated costs, weekly frequencies, and payments
Beyond health care, DIRUM captures social services usage (homes, meals, etc.)
Analysing costs
Distribution of costs is often skewed:
A small number of patients account for a large share of total costs
The mean total cost can be higher than the median due to heavy tails
In cost-effectiveness analysis, the mean is often used because it reflects budgetary impact for decision-makers
Capturing uncertainty:
Cost estimates are uncertain; this matters for budgeting and for assessing cost-effectiveness
Sensitivity analyses are essential
Sensitivity analyses (example prompts):
What if fewer/more patients are seen than expected?
What if a more effective intervention becomes available?
What if a machine lasts for fewer years than expected?
How do different discount rates affect results?
Reporting costs:
State perspective clearly and justify it
Separate fixed vs variable costs
Break costs down by components (who bears which cost)
Report mean costs with uncertainty (e.g., 95% confidence intervals) and sensitivity analyses
Fixed vs variable costs and scale
Fixed costs: accrue regardless of program size (setup, materials, equipment, etc.)
Variable costs: increase with program size (drug use, clinician time, etc.)
Purpose of distinguishing: to forecast costs for the intended form of the program, not past decisions
Scaling up: fixed costs vs variable costs inform how costs change with scale; importance of separating them for forecasting
Capital outlays and overheads
Capital outlays (buildings, land, equipment, training):
Represent long-term assets; have depreciation and opportunity costs
Annuitize upfront capital over asset life to obtain equivalent annual cost (EAC)
If assets are shared across programs, allocate costs similarly to overheads
EAC estimation is a separate skill; references available in cost accounting resources
Overheads (central services):
Central services costs need apportionment across departments/patients because they vary with activity
Allocation requires reasonable rules and context-specific judgment
Example: allocating lab overhead to ICU based on activity measures (tests vs patient days)
Simple illustrative method: allocate a portion of lab costs to ICU proportional to ICU activity relative to total activity
Example calculation (conceptual): if LabCosts = $10,000 and ICU activity is 1,000 units while total activity is 5,000 tests, ICU allocation would be (1,000/5,000) × $10,000 = $2,000; total ICU cost would be ICU direct costs plus allocated lab costs
The example in slides shows a similar approach yielding total ICU & lab cost; the exact numbers are context-specific
Practical notes on accuracy and decision-making
Accuracy should be balanced with feasibility:
Perfection is not the goal; align rigor with decision-maker needs and available resources
The evaluator’s skill lies in matching methods to the decision context while maintaining transparency
Analysing costs
distribution costs or often skewed
median is often used in skewed data but not a good indicator
focus on mean which is more relevant
capturing uncertainty allows quantification of the risk to budgets and risk of cost effective.
reporting: clearlty stated and justified perspective, state the key assumption on costs. fixed and variable costs reported separately.
Annex and supplementary materials
Discount tables (Annex 4.2) provide precomputed present values for quick reference
Example: 6% and 3.5% discount-rate scenarios illustrate how PV changes with rate and time horizon
Example calculations demonstrate the use of discount factors and the PV formula in practice
DIRUM and real-world data usage (recap)
DIRUM provides standardized questions for resource-use measurement beyond healthcare (e.g., social services)
In hip replacement example, data collected cover:
Healthcare utilization (GP visits, home care, physiotherapy, hospital visits, etc.)
Out-of-pocket costs for services
Changes in service use over time post-discharge
The purpose is to capture costs from both medical and social service perspectives to feed economic evaluations
Quick recap of key formulas and concepts
Present value of a future cost: PV = rac{FC}{(1 + r)^n}
Series present value (general): PV = ext{FC}0 + rac{ ext{FC}1}{(1 + r)^1} + rac{ ext{FC}2}{(1 + r)^2} + rac{ ext{FC}3}{(1 + r)^3} + \, \dots
Inflation adjustment (past to current): C{ ext{current}} = C{ ext{past}} imes rac{CPI{ ext{current}}}{CPI{ ext{past}}}
Currency conversion (USD to AUD): C{ ext{AUD}} = C{ ext{USD}} imes ER where ER is the exchange rate (AUD per USD)
Purchasing Power Parity conversion (cross-country): C{ ext{AUD}} ext{ (adjusted)} ightarrow C{ ext{USD}} imes PPP
Equivalent Annual Cost (EAC) for capital outlays (concept): EAC ext{(for asset)} = rac{r imes C}{1 - (1 + r)^{-n}} where C is initial capital, r is discount rate, n is asset life
Overhead allocation (conceptual): allocate central costs to programs in proportion to activity measures (e.g., tests, patient days)
Glossary of key terms (quick reference)
Opportunity cost: value of the next best alternative foregone
Perspective: viewpoint chosen for costing (societal, health sector, etc.)
Fixed costs: do not vary with program size
Variable costs: scale with program size
Capital outlay: long-term asset expenditure
Annuitize: convert a capital outlay into a series of equal annual costs
Discount rate: rate used to convert future costs to present value
Real vs nominal values: inflation-adjusted vs current prices
Transfer payments: government/charity payments not tied to production costs (excluded from cost side)
Skewness: when a small number of observations carry a large share of total costs