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Cost Benefit Analysis (CBA)

• Public funds are never sufficient. Hence, there is a need to rank various projects so that the officials can select the intervention that would deliver the highest monetary return to the population
• The next ranked intervention would be considered when more funds become available or after the first one is complete
• Hence, in CBA, costs and benefits are expressed in monetary terms i.e.'cost= money spent' and 'benefit = money saved +money earned'.
• Both costs and benefits are to be adjusted for the inflation. Hence these are expressed as per their "net present value“ for the purpose of CBA
• E.g. policy makers need to decide if it would be more beneficial to tackle indoor air pollution in the district or to implement HIV screening program?
• CBA of both can be done and the intervention with the higher return (benefit) per unit cost, would be more apt for implementation first
CBA – Procedure
There are three main steps in conducting a Cost-Benefit Analysis:
1. Computing program costs;
2. Computing program benefits
3. Comparing the costs and benefits – calculate the Cost-Benefit Ratio (CBR) or Benefit-Cost Ratio
• The idea is to demonstrate that, even if we don’t consider some really important non-monetary benefits, the program still results in significant monetary benefits compared to its costs.
• For example, if the outcome is preventing HIV: one could compute the monetary value by adding up:
– The average healthcare costs for an HIV patient and
– The monetary gain of years of productivity saved
– Then one can estimate how much money the program saves for every ₹ 1000 spent
Another Hypothetical Example – CBA
Whether is it worthwhile to invest in reduction of indoor air pollution (IAP) in a developing country?

1. Measuring the cost involved in reducing IAP
Direct costs: These are the costs of materials, equipment, staff salaries, and overhead costs that go into an intervention. E.g laying down gas pipelines, purchasing natural gas, cost of procuring LPG cylinders, cost of transporting them to villages, cost for developing bio-gas plants in certain remote villages etc.
• ₹1000 million for gas pipelines
• ₹1400 million for procuring gas cylinders
• ₹800 million for construction of bio – gas plants
• ₹1200 million as salary of new staff required
• ₹ 2000 millions for TV, radio, newspaper, local magazine advertisements for creating awareness of the importance of reduction in IAP
• ₹ 200 million for training health workers to create awareness in their State
Indirect costs:
• For example, the indirect costs of a man staying home to get equipment installed and to learn the functioning of gas stove may include lost wages .
• In order to measure these costs, interviews may be conducted, e.g. type of employment in the area, educational status etc.
• Secondary data, such as city bus fares and minimum wage rates can be used to estimates indirect costs
– Let’s say this cost is calculated to be ₹ 2500 million for the State
Total Cost: ₹ 6600 + ₹2500 = ₹ 9100 million

2. Calculating the Benefit Gained by Reduction in IAP
a) Savings in cost of treating childhood pneumonia attributable to IAP
– Attributable risk to IAP in various studies = 40%
– Incidence in the target population = 400/1000 under-5 children
– Incidence attributable to IAP = 40 % of above i.e. 160 per 1000 under 5 children
– Average expenditure per episode (doctor, nurse, time, medicines, iv fluids, health worker’s time etc.) = ₹ 5000, hence a saving of ₹ 160X5000= ₹ 800,000 per 1000 under 5 population
– If under 5 population of the country is 45 million, the savings add up to ₹ 460000 million saved
b) Reduction in respiratory infections in women leave more working days, hence a gain of: ₹ 400000millions as per the local minimum wages
c) Daily time saving from firewood collection translated into further monetary gain of ₹ 5,00,000 million
Total monetary gain = 460000 + 400000 + 500000 = ₹ 1360000 million
Benefit – cost ratio (BCR)= 1360000/9100 = 150 appx.
• Hence for every ₹ spent, the country earns a huge ₹ 150
• Thus the decision goes in favor of investing in a program for reduction in IAP instead of 4 other suggested programs which had a BCR ranging from 5 to 7.9 only
• These will be considered when more funds are available and again after calculating the CBR

Uses of CBA in health care:
1. To provide a basis for ranking projects. Comparing the computed cost of each option against the expected benefits, it is assessed if the benefits outweigh the costs, and by how much
2. To determine if it is a sound investment/decision (justification/feasibility)

Advantages:
1. Allows comparison of outcomes between two policies with different outcomes e.g.
– whether to invest the limited resources on reduction of pneumonia in under-5 children or on screening for early detection of cervical cancer among middle aged women.
– The CBA is done for each policy and the one with a higher benefit per unit cost is selected for further consideration
2. It can take into account all the possible outcomes which can be translated into monetary value

Disadvantages:
1. Not all benefits can be converted in to monetary benefits e.g. social benefits may not be convertible to monetary terms. In this circumstance, CBA may not be useful
2. Data collection can be complex for costs as well as benefits - not all effects can be assessed (e.g. distributional effects)

References:
• WHO, 1974. Modern Management Methods and the Organization of Health Services; Geneva
• WHO, 2006 . Guidelines for conducting cost–benefit analysis of household energy and health interventions; eds: Guy Hutton,Eva Rehfuess. WHO press, Geneva.
• WHO, 2003. Who Guide to Cost- Effectiveness Analysis; Geneva
• Park’s Textbook of Preventive and Community Medicine. 24th ed, 2017, Bhanot Publishers, Jabalpur
• MIKAEL S, LARS H; A Comparison of Cost-Benefit and Cost-Effectiveness Analysis in Practice: Divergent Policy Practices in Sweden; Nordic Journal of Health Economics, Vol. 5 (2017), No. 2, pp. 41-53

Cost Benefit Analysis (CBA): http://www.ihatepsm.com/blog/cost-benefit-analysis-cba
Cost Effective Analysis (CEA): http://www.ihatepsm.com/blog/cost-effective-analysis-cea
Difference between Cost-Benefit and Cost-Effective Analysis: http://www.ihatepsm.com/blog/difference-bw-cost-benefit-and-cost-effecti...
Input-Output Analysis: http://www.ihatepsm.com/blog/input-output-analysis
Cost accounting in Healthcare: http://www.ihatepsm.com/blog/cost-accounting-healthcare