How to Do a Cost-Effectiveness Analysis – Read All Details

Cost-effectiveness analysis promotes a balance of losses and benefits for drug manufacturing companies (healthcare providers) and consumers. By achieving cost-effectiveness, a company can incur losses in creating one product (service) in favour of another while benefiting from increased demand for other services. This allows businesses to easily adapt to market demands and make up for any financial losses.

This article will explain in more detail what a cost-benefit analysis is, show a simple example of how such an analysis can be calculated for a medical program, and explain the usefulness of creating a digital model for the calculations.

What is cost-effectiveness?

It is an indicator that can be calculated by measuring the revenues and costs of a production, a service company, or a specific project. If the first indicator is higher than the second, everything is going well and the company has achieved financial success. If the opposite is true, the company is making a loss. 

Analysis and optimization of economic efficiency allow companies to get the maximum result from the available resources, which will not only recoup costs but also bring profits. Therefore, companies are constantly looking for more profitable materials, suppliers, and other ways to get the same result using different types of resources. 

How to Improve Cost Efficiency 

This process involves using various techniques that allow the company to increase efficiency in given directions. 

For example, making a standard amount of goods or services, but reducing costs, can be done by:

• automating the business;
• improving the skills of employees;
• reduction of waste;
• improvement of production equipment.

Doing a standard amount of goods or services but reducing costs can also be done by:

• saving resources;
• through the use of resource-saving technologies;
• reducing employees.

It is important to note that laying off many people is unnecessary if the business is not automated enough.

It is up to each entrepreneur to decide which method to use. It all depends on what the goals of the business are. But usually, during economic growth and an increase in demand, companies choose the first method, and during a downturn – the second. The second case is recommended to use as a temporary option. 

Indicators of economic efficiency of the company

Efficiency is evaluated in terms of achieving economic goals. They can be long-term, such as continuous growth and development, or short-term, such as stabilizing the company’s performance in response to unpredictable events, which are called economic shocks.

To find out how well a company is doing, economists use a wide range of indicators. They measure macroeconomic variables that directly or indirectly judge whether economic performance has improved or deteriorated.

Key economic indicators:

• cost recovery–the period of time it takes for revenues to begin to cover costs;
• gross income includes net income and payroll; 
• profitability – the realized part of income, including all expenses;
• profitability – the ratio of profit to costs, usually determined by commodity production, but can also be determined by gross output;
• profit rate – the ratio of profit to the cost of fixed and current assets;
• cost or individual price – the amount expended in the production of goods; 
• labour productivity – output of gross and net production per unit of labour input.

Pareto economic efficiency

Economists also often use the concept of efficiency based on the Pareto method, named after Vilfredo Pareto, an Italian engineer and economist who researched the optimal allocation of resources in the economy. According to Pareto, an allocation is considered efficient if, from a certain point, it is impossible to make something better without making something else worse. For example, if a medical laboratory is working to its limits, it is impossible to increase its productivity without worsening the physical and moral condition of the medical staff or the quality of the results. 

The Pareto concept of efficiency is often criticized because, in real life, there are too many factors that affect the allocation of resources and the well-being of people.

Example of calculating project cost-effectiveness

Cost-effectiveness is a measure of how successful a company or project is from an economic standpoint compared to how successful it could potentially be. 

The formula for determining cost-effectiveness is as follows: the ratio of the result to the costs necessary to obtain it (Economic efficiency = Result / Costs)

Let’s look at a simple example of calculating cost-effectiveness for a program to attract patients who struggle with alcohol addiction to sessions in a psychological help group. Let’s say patients are recruited to the group using one-on-one referrals and SMS texting. To compare which option for attracting patients is more financially advantageous, do the following steps:

Determine which results of both actions you will be comparing

It has to be the same result, but it has to be something that can be accurately quantified. You also need to decide exactly how the result will be measured.

In our example, it is the number of people who decide to attend the group. For the calculations, determine how many visits they need to make in order to consider the referral program a success. For example, should the calculations include those who only visited the group once or twice? The calculations should be done the same every time.

Calculate the results of both actions under consideration

In our example, calculate how many people began to visit the group after receiving the mass SMS-messages and how many – after one-to-one appeals.

So, let’s say 100 patients received the messages, and 30 of them started attending the psychological help group.

A second group of 100 attended one-on-one counselling sessions. Of those, 52 began attending group meetings. Then subtract how many of them received mass text messages (52-30=22). This means that one-on-one counselling attracted 22 people to the group.

There is also a third group that received SMS messages reminding them to attend a psychological help group. Let’s assume that 45 people attended the group during the time period in question. Let’s subtract from them the number of people from the first group (45-25=20). This means that receiving SMS attracted 20 people to the group.

Calculate the cost of each activity, taking into account all expenses, including the cost of time spent by employees on its implementation

Our example is the sum of all costs required to conduct individual consultations and the sum of all costs for SMS-mailing. Assume that the sum of the costs of one-to-one appeals for 100 people was $ 3600, and the total cost of SMS-mailing – $ 600.

Calculate the cost-effectiveness for each of the actions using the formula above

In our example, we get these results:

	Calculation of economic efficiency	Result
Efficiency of SMS-mailing	600 / 20	30
The effectiveness of individual counseling	3600 / 22	164

As you can see, in our example, sending SMS-messages is more cost-effective than individual consultations.

Modelling Cost Efficiency

In our example, we considered the simplest method of cost-effectiveness analysis. It can be performed manually when you want to compare several actions that have the same easy-to-calculate result, and the only goal of such analysis is to save money. For example, in the case we are considering, individual consultations could have other benefits – such as emotional and informational support, which SMS mailings cannot provide.

Also, in life, it is often difficult to manually take into account all the data and parameters that affect the result, especially at the stage of preliminary calculations, which predict the results of future programs. In this case, it will help with cost-effectiveness modelling, which can be ordered at the link.

Cost-effectiveness modelling is the process of creating computer models that help evaluate the economic efficiency of various strategies and solutions. Such models use complex mathematical equations based on selected parameters that describe the relationships between them. This allows the use of all data that affect economic processes. Numerical models allow health professionals and researchers to make more informed decisions based on complete data and analysis.