Cost-effectiveness analysis and capital costs

Abstract

Traditionally, economic evaluations in terms of cost-effectiveness analysis are based, explicitly or implicitly, on the assumption of constant returns to scale. This assumption has been criticized in the literature and the role of cost-effectiveness as a tool for decision making has been questioned. In this paper we analyze the case of increasing returns to scale due to fixed capital costs. Cost-effectiveness analysis is regarded as a tool for estimating a cost function. To this cost function two types of decision rules can be applied, the budget approach and the constant price approach. It is shown that in the presence of fixed capital costs the application of these two decision rules to a specific patient group will give different results. The budget approach may lead to suboptimizations, while using the price as a decision rule will give optimal solutions. With fixed capital costs and when an investment can be used for treating several patient groups, these groups are no longer independent. Therefore the cost-effectiveness analysis has to be performed simultaneously for all patient groups that are potential users of the investment.