Cost-effectiveness analysis (CEA) is an alternative to cost-benefit analysis (CBA). The technique compares the relative costs to the outcomes (effects) of two or more courses of action.
CEA is most useful when analysts face constraints which prevent them from conducting cost-benefit analysis. The most common constraint is the inability of analysts to monetise benefits. CEA is commonly used in healthcare, for example, where it is difficult to put a value on outcomes, but where outcomes themselves can be counted and compared, e.g. ‘the number of lives saved’.
CEA measures costs in a common monetary value (££) and the effectiveness of an option in terms of physical units. Because the two are incommensurable, they cannot be added or subtracted to obtain a single criterion measure. One can only compute the ratio of costs to effectiveness in the following ways:
CE ratio = C1/E1
EC ratio = E1/C1
where: C1 = the cost of option 1 (in £); and E1 = the effectiveness of option 1 (in physical units).
The first equation above represents the cost per unit of effectiveness (e.g. £s spent per life saved). Projects can be rank ordered by CE ratio from lowest to highest. The most cost-effective project has the lowest CE ratio. The second equation is the effectiveness per unit of cost (e.g. lives saved per £ spent). Projects should be ranked from highest to lowest EC ratios.
The outputs to be ranked by cost-effectiveness analysis will often be social or environmental in nature. For example, work in health economics looking at the cost-effectiveness of different treatments. As with CBA, the level of detail for the analysis will typically depend on the specific issue being addressed, but should take a broad view of costs and benefits to reflect all stakeholders.
Source: (Prime Minister's Strategy Unit, 2004)
Example
In 2005 the UK Government undertook a value for money analysis of Government investment in different types of childcare. The choice was between higher cost "integrated" childcare centres, providing a range of services to both children and parents, or lower cost "non-integrated" centres that provided basic childcare facilities.
The analysis used a variant of cost-effectiveness analysis to allow the comparison of the cost-effectiveness of childcare to other policy areas such as employment, education and crime, where the evidence allowed the analysts to quantify intermediate outputs from the policy (e.g. improved educational attainment aged 18) but not the final outcomes of the policy (e.g. better overall life chances, higher skilled workforce and higher economy wide productivity growth).
Source: (Prime Minister's Strategy Unit, 2004)
from: http://betterevaluation.org/evaluation-options/CostEffectivenessAnalysis
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