Difference between revisions of "Cost-effectiveness Analysis"

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'''Cost-effectiveness Analysis''' is the economic analysis of the costs and benefits of an impact evaluation project.  
<onlyinclude>
A cost-effectiveness analysis (CEA) compares the cost and effectiveness per unit of a given program to determine whether the value of an intervention justifies its cost. CEA provides the metrics to rank or compare similar interventions or projects that result in the same effect. </onlyinclude>
== Read First ==
== Read First ==


*Cost-effectiveness analysis should be included in project design to compare alternative projects.
*A CEA should be included in the project design in order to compare alternative projects.
*While a CEA calculates the cost per unit of effect, a CBA calculates the ratio of all costs to all benefits of a program.
*CEAs require careful calculation. Since CEAs are sensitive to place, scale, and errors in estimates, it may be difficult to precisely compare programs.


== Guidelines ==
==Overview==
===What is Cost-effective Analysis (CEA)?===


CEA summarizes the results of complex program as ratio of costs to effects. It measures the cost for a given level of effectiveness, for example the cost to increase skilled birth attendance by 50 percent or vice versa, for example the percentage gain in skilled birth attendance induced by spending $100. The analysis must accurately reflect the program based on costs and impacts actually observed. It is useful for comparing multiple interventions with common outcome(s) if the costs and benefits are computed using similar methodology for all programs. It is useful for policymakers to compare programs when they are primarily concerned about one outcome of interest (e.g. increasing skilled birth attendance, not maternal and child health broadly)
A CEA measures the cost per unit of effect (i.e. the cost to increase skilled birth attendance by 50 percent) or visa versa (i.e the percentage gain in skilled birth attendance induced by spending $100). The analysis must accurately reflect the program based on costs and impacts actually observed.  


====Difference between Cost-effective Analysis (CEA) and Cost-benefit Analysis (CBA)====
A CEA is useful for policymakers looking to compare programs when they are primarily concerned about one outcome of interest (i.e. increasing skilled birth attendance rather than maternal and child health broadly). It can be used to compare multiple interventions with common outcome(s) if the costs and benefits are computed using similar methodology for all programs.


CBA compares the monetary value of benefits against costs and hence calculates the ratio of all benefits to the costs of a program. CBA can be useful to determine whether a program is worth the investment. It can also allow comparison across vastly different interventions, for example education versus agriculture. However, CBA requires a number of strong assumptions about the monetary value of all the different benefits, including the lifetime benefits of an intervention.
== Cost-effectiveness analysis (CEA) vs. cost-benefit analysis (CBA)==


[[File:CBA Formula.jpg]]
CBA calculates the monetary ratio of all costs to all benefits of a program. CBA can help to determine whether a program is worth the investment. It can also allow comparison across vastly different interventions (i.e. education versus agriculture). However, CBA requires a number of strong assumptions about the monetary value of all the different benefits, including the lifetime benefits of an intervention. In contrast, CEA is a transparent, simple, and objective measurement that enables comparison of programs with common outcome(s) of interest. However, the implicit assumption is a common post-intervention trajectory.


CEA is transparent, simple, objective and enables comparison of programs with common outcome(s) of interest. However, the implicit assumption is a common post-intervention trajectory.
{| class="wikitable"  style="margin-left: 0px; margin-right: auto; border: none;"
|-
! CBA Formula
! CEA Formula
|-
|[[File:CBA Formula.jpg]]
| [[File:CEA Formula.jpg]]
|}


====Use of Cost-effective Analysis in Impact Evaluations====
== Considerations for cost calculations ==  
There are very few papers that have undertaken comparative cost‐effectiveness of different programs.
Most studies don’t conduct cost analysis. Of the 77 RCTs, 56% reported zero data on incremental costs (McEwan 2014).


Studies that have incorporated CEA include:
*Use program financial records. Typically, begin calculating costs by referring to program budgets, which provide a list of all relevant activities involved in implementing the program. Consider, however, that budgets are forward-looking estimates of true costs. Thus, it’s better to use actual program financial records on expenditures for calculations. However, this is not commonly done.
–Kremer, Miguel and Thornton (2005): Incentives to learn
–Banerjee, Cole, Duflo, Linden (2007): Remedial education vs computer-assisted learning
However, these were done for the same country / organization


===Quantifying Impacts===
*Interview program and field staff to get key information including unit cost data like allocation of staff time across activities and wages for staff at various levels of implementation team. Note that using average wages makes calculations less sensitive.


===Calculating Costs===
*Model program costs at the margin. You want to capture marginal costs of new activities initiated as part of the interventions. For example, to calculate the costs of a school meals program, you may need the cost of new kitchen, cooks, implements, and food. However, you should not include the cost of school administration or buildings as these would exist whether or not the intervention was implemented.
 
*Consider depreciation. Account for how to value new assets or equipment obtained over the program implementation period.
 
*Consider the cost of user time. Include the costs of participation in program (i.e. using local wages).
 
*Differentiate between pilot costs and scale-up costs.
 
*Include spillover effects on indirect beneficiaries when quantifying impacts
 
==Challenges to conducting CEA==
*It is difficult to get data on program costs, especially from other authors. This is where Field Coordinators come in, as they have an advantage in collecting local costs.
*Since CEAs are sensitive to place, scale, and errors in estimates, it is difficult to compare studies. Exchange rates, inflation rates, discount rates, differing factor endowments, and the efficiency of implementors all affect CEA results and make valid comparisons between studies or programs difficult.
*Because CEA measures cost of obtaining impacts on a single outcome, aggregating cost-effectiveness across multiple outcomes is difficult
 
==Use in impact evaluations==
 
Very few papers have undertaken comparative cost‐effectiveness of different programs.
A [http://academics.wellesley.edu/Economics/mcewan/PDF/meta.pdf meta-analysis] of randomized experiments finds that of the 77 RCTs gathered, 56% don’t report any data on incremental costs. Studies that have incorporated CEA include Kremer, Miguel and Thornton’s [https://dash.harvard.edu/bitstream/handle/1/3716457/kremer_incentiveslearn.pdf?sequence=2 Incentives to Learn] and Banerjee, Cole, Duflo, and Linden’s  [https://economics.mit.edu/files/804 Remedying Education].
 
Many researchers have no incentive to conduct a CEA. There is sometimes a trade-off between exposing program effectiveness and cost-effectiveness. For those that do conduct CEAs, it is unclear how to report insignificant results on outcomes. It is important to think about how insignificant CEA results should be interpreted and presented in such cases.


== Back to Parent ==
== Back to Parent ==
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== Additional Resources ==
== Additional Resources ==


[[Category: Cost-effectiveness_Analysis]]
*JPAL's [https://www.povertyactionlab.org/sites/default/files/resources/Case5_Cost-Effectiveness%20in%20Education.pdf case study] on estimating the cost effectiveness of education programs.
*JPAL's [https://www.povertyactionlab.org/sites/default/files/documents/L8_Cost%20Effectiveness.pdf slides] on CEA and scaling up
*IADB's [https://www.iadb.org/en/topics-effectiveness-improving-lives/effectiveness-improving-lives-2 Cost Benefit and Cost-Effectiveness] page
*McEwan's [http://academics.wellesley.edu/Economics/mcewan/PDF/cea.pdf Cost-Effectiveness Analysis of Education & Health Interventions in Developing Countries]
*Dhaliwal et al.'s [https://economics.mit.edu/files/6959 Comparative Cost-Effectiveness Analysis to Inform Policy in Developing Countries]
*Evans and Popova's [http://documents.worldbank.org/curated/en/969291468340210399/Cost-effectiveness-measurement-in-development-accounting-for-local-costs-and-noisy-impacts Cost-Effectiveness Measurement in Development: Accounting for Local Costs & Noisy Impacts]
*Cost-Effectiveness Analysis: Methods & Applications, by McEwan & Levin (2000)

Latest revision as of 15:10, 13 April 2021

A cost-effectiveness analysis (CEA) compares the cost and effectiveness per unit of a given program to determine whether the value of an intervention justifies its cost. CEA provides the metrics to rank or compare similar interventions or projects that result in the same effect.

Read First

  • A CEA should be included in the project design in order to compare alternative projects.
  • While a CEA calculates the cost per unit of effect, a CBA calculates the ratio of all costs to all benefits of a program.
  • CEAs require careful calculation. Since CEAs are sensitive to place, scale, and errors in estimates, it may be difficult to precisely compare programs.

Overview

A CEA measures the cost per unit of effect (i.e. the cost to increase skilled birth attendance by 50 percent) or visa versa (i.e the percentage gain in skilled birth attendance induced by spending $100). The analysis must accurately reflect the program based on costs and impacts actually observed.

A CEA is useful for policymakers looking to compare programs when they are primarily concerned about one outcome of interest (i.e. increasing skilled birth attendance rather than maternal and child health broadly). It can be used to compare multiple interventions with common outcome(s) if the costs and benefits are computed using similar methodology for all programs.

Cost-effectiveness analysis (CEA) vs. cost-benefit analysis (CBA)

CBA calculates the monetary ratio of all costs to all benefits of a program. CBA can help to determine whether a program is worth the investment. It can also allow comparison across vastly different interventions (i.e. education versus agriculture). However, CBA requires a number of strong assumptions about the monetary value of all the different benefits, including the lifetime benefits of an intervention. In contrast, CEA is a transparent, simple, and objective measurement that enables comparison of programs with common outcome(s) of interest. However, the implicit assumption is a common post-intervention trajectory.

CBA Formula CEA Formula
CBA Formula.jpg CEA Formula.jpg

Considerations for cost calculations

  • Use program financial records. Typically, begin calculating costs by referring to program budgets, which provide a list of all relevant activities involved in implementing the program. Consider, however, that budgets are forward-looking estimates of true costs. Thus, it’s better to use actual program financial records on expenditures for calculations. However, this is not commonly done.
  • Interview program and field staff to get key information including unit cost data like allocation of staff time across activities and wages for staff at various levels of implementation team. Note that using average wages makes calculations less sensitive.
  • Model program costs at the margin. You want to capture marginal costs of new activities initiated as part of the interventions. For example, to calculate the costs of a school meals program, you may need the cost of new kitchen, cooks, implements, and food. However, you should not include the cost of school administration or buildings as these would exist whether or not the intervention was implemented.
  • Consider depreciation. Account for how to value new assets or equipment obtained over the program implementation period.
  • Consider the cost of user time. Include the costs of participation in program (i.e. using local wages).
  • Differentiate between pilot costs and scale-up costs.
  • Include spillover effects on indirect beneficiaries when quantifying impacts

Challenges to conducting CEA

  • It is difficult to get data on program costs, especially from other authors. This is where Field Coordinators come in, as they have an advantage in collecting local costs.
  • Since CEAs are sensitive to place, scale, and errors in estimates, it is difficult to compare studies. Exchange rates, inflation rates, discount rates, differing factor endowments, and the efficiency of implementors all affect CEA results and make valid comparisons between studies or programs difficult.
  • Because CEA measures cost of obtaining impacts on a single outcome, aggregating cost-effectiveness across multiple outcomes is difficult

Use in impact evaluations

Very few papers have undertaken comparative cost‐effectiveness of different programs. A meta-analysis of randomized experiments finds that of the 77 RCTs gathered, 56% don’t report any data on incremental costs. Studies that have incorporated CEA include Kremer, Miguel and Thornton’s Incentives to Learn and Banerjee, Cole, Duflo, and Linden’s Remedying Education.

Many researchers have no incentive to conduct a CEA. There is sometimes a trade-off between exposing program effectiveness and cost-effectiveness. For those that do conduct CEAs, it is unclear how to report insignificant results on outcomes. It is important to think about how insignificant CEA results should be interpreted and presented in such cases.

Back to Parent

This article is part of the topic Cost-effectiveness Analysis

Additional Resources