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Cost-Effectiveness Analysis

Cost-Effectiveness Analysis
Also known as: CEA、Cost-effectiveness analysis

A method for comparing the costs and effects of alternatives using a common outcome unit. It examines additional effects relative to additional costs without converting outcomes in natural units into monetary values. [1]

Cost-effectiveness analysis planning and calculation worksheet — openReferences and checked sections
Difficulty
Intermediate
Cost
Medium
Duration
Planning example, not a universal standard duration: 2 weeks–3 months, including outcome data collection and analysis
Content updated: 2026-09-13Source checked: 2026-09-13 (includes AI cross-checking)No documented human reviewIncludes fictional examples

How it works at a glance

Align costs and effects across the same population, period and perspective. Distinguish the average cost-effectiveness ratio from the incremental cost-effectiveness ratio (ICER), calculated from differences between alternatives. [1]

ICER is the difference in costs divided by the difference in effects. Consider alternatives after checking options that cost more and are less effective, the interpretation of zero or negative differences, and uncertainty in effect estimates. [1]

  1. Define the comparator
  2. Select the outcome indicator
  3. Identify costs
  4. Collect and analyze effect data
  5. Calculate CER and ICER
  6. Compare with thresholds and analyze uncertainty
Sequence of implementation steps. See “Implementation steps” for details of each stage.

When to use it and when it is unsuitable

When to use it

  • When you want to compare the cost efficiency of interventions or programs pursuing the same goal and select the most efficient approach
  • When deciding which interventions should receive priority for limited resources under a budget constraint
  • When monetizing outcomes in health care, welfare or education is ethically or politically difficult to accept
  • When developing guidelines or using health technology assessment (HTA) to consider adopting a new treatment or intervention

When it is unsuitable

  • When comparing programs with different goals. CEA cannot function without a single common outcome indicator; CBA or Value for Money evaluation is more appropriate.
  • If different outcomes or equity matter and a single common outcome cannot support a decision, combine outcome-specific findings with multi-criteria judgments.
  • When identifying costs is itself difficult, for example because delivery arrangements are complex and cost attribution is unclear

Participants, roles, and deliverables

Participants and roles

Evaluation lead for economic analysis, program staff providing cost data, and a statistician estimating effect sizes. Review by relevant specialists, such as in health care or education, is desirable.

Main deliverables

  • Cost and effect data table by alternative
  • CER and ICER calculation table
  • Sensitivity analysis, including a cost-effectiveness plane and CEAC for probabilistic sensitivity analysis
  • Cost-effectiveness analysis report

Implementation steps

  1. Define the comparator
    Specify the intervention and comparator: no intervention, existing practice or an alternative. Reach agreement carefully, because the choice of comparator decisively affects ICER.
  2. Select the outcome indicator
    Define a common outcome in natural units and a common period for the alternatives. Check how effects are estimated and the basis for causal interpretation. Analyze different outcomes separately and show their trade-offs.
  3. Identify costs
    Include direct costs, such as personnel, supplies and facilities, and indirect costs, such as beneficiaries' opportunity costs, according to the analytical perspective. Document calculation methods and their basis.
  4. Collect and analyze effect data
    Measure or estimate outcomes for each alternative. For observational studies, control for confounding and state the limits of causal inference. Check sample size and statistical uncertainty.
  5. Calculate CER and ICER
    Calculate incremental costs and effects between alternatives. Consider more costly, less effective options and extended dominance, then interpret ICER among the remaining options. Do not choose solely on the basis of a lower average cost-effectiveness ratio.
  6. Compare with thresholds and analyze uncertainty
    Compare findings with applicable thresholds or value judgments about budgets and outcomes. Report incremental costs and effects even without a threshold, and examine uncertainty through sensitivity analysis. Interpret a negative ICER by returning to the signs of incremental costs and effects.

Strengths and limitations

Strengths

  • Not monetizing outcomes makes this approach more ethically acceptable in health care, welfare and education.
  • Directly compares alternatives pursuing the same goal and helps prioritize them within a limited budget.
  • Avoids monetizing outcomes, but collecting and estimating costs and effects still requires substantial resources.
  • ICER is a simple indicator that policy-makers and funders can readily understand.

Limitations

  • Programs without a common outcome unit cannot be compared directly using a single ICER.
  • Cost-effectiveness thresholds can be arbitrary, and adoption decisions depend heavily on the selected threshold.
  • As with CBA, causal attribution remains an issue: whether observed outcomes resulted from the intervention.
  • Combining different outcome dimensions, such as health and social participation, into a single indicator loses important information.

Common pitfalls

  • An inappropriate ICER comparator or baseline changes the overall conclusion. Doing nothing under current conditions and using the best existing approach produce entirely different ICERs.
  • When effect data come from observational studies, findings are often reported with insufficient adjustment for selection bias. Overestimated effects artificially lower ICER.
  • Understating costs by omitting implementation costs, such as personnel, training and system development, makes cost-effectiveness appear better.

Conditions of use and evidence

  • When comparing alternatives, examine incremental costs and effects between appropriate comparators, not only total cost divided by total effect. [1]
Fictional example; not actual results

Compare two application support options

A fictional illustrative example comparing options A and B for the same population and period, with additional people completing applications as the effect.

OptionCostAdditional people completing applicationsAverage cost-effectiveness ratio
AJPY 100,00010 peopleJPY 10,000 per person
BJPY 160,00020 peopleJPY 8,000 per person
Increment for B relative to AJPY 60,00010 peopleICER = JPY 6,000 per additional person

Common errors in judgment

Common mistake

Treating the difference between each option's average ratios as ICER

How to revise

Divide the cost difference by the effect difference.

ReasonICER is not the subtraction of two ratios.

Common mistake

Always adopting the cheaper option even if it has a smaller effect

How to revise

Consider the effect forgone, cost savings and opportunity costs.

ReasonA low cost alone does not establish contribution to the goal.

Organize your thinking by writing

Cost-effectiveness analysis planning and calculation worksheet

A practical template is available to fill in and print on A4 paper.

Open worksheet

Related methods

Cost-Benefit AnalysisCost-Utility AnalysisValue for MoneyRandomized Controlled TrialMeta-Analysis and Systematic Review

References and checked sections

  1. Developing NICE guidelines: Incorporating economic evaluation
    National Institute for Health and Care Excellence
    Section consulted
    Presentation of results / incremental approach
    How it relates to the text
    When comparing alternatives, examine incremental costs and effects between appropriate comparators, not only total cost divided by total effect.
    Source checked: (includes AI cross-checking)

Editorial and checking information

Content updated: Source checked: (includes AI cross-checking)No documented human reviewIncludes fictional examplesEditorial policy and scope of checkingCite this pageReport a correction

How to cite this page

EvalCompass Editorial Team. “Cost-Effectiveness Analysis”. EvalCompass, updated 2026-09-13. https://evalcompass.jun-nakatani.com/en/methods/cea/
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Change history
  • — Checked sources for definitions and applicability conditions, and added fictional examples, reasons for judgments and examples for every worksheet field. Revised unverified claims about history and adoption. Also reviewed existing procedures and cautions, and adjusted fixed participant counts and thresholds and generalizations about institutions.