Cost-effectiveness Analysis (CEA)

Definition

Cost effectiveness analysis (CEA) refers to a systematic process that helps in comparing two or more courses of action by considering their relative costs and outcomes or effects. Cost effectiveness analysis is related to cost benefit analysis but there is a slight difference between them. Unlike cost benefit analysis (CBA), cost effectiveness analysis does not assign any monetary value for measuring the effects.

One of the fields where cost effectiveness analysis is mostly used is the health services. This is because; in this field comparing health effects on the basis of monetary value does not seem to be appropriate. The CEA is expressed as ratio where the health gain from a measure such as premature births prevented, years of life, etc are taken as denominator and the cost linked to the gain in health is taken as numerator. Quality adjusted life year (QALY) is the most frequently used measure of outcome.

Analyzes of cost effectiveness are usually pictured on a plane of cost effectiveness which has four quadrants. In quadrant I, the outcomes that are plotted are more expensive and more effective, in quadrant II, the outcomes are less expensive and more effective, in quadrant III, it is less expensive and less effective and in quadrant IV, they are more expensive and less effective.

Application of CEA

The concept of cost effectiveness is used for many purposes, especially for planning and managing different types of organized activities. In many aspects of life, this concept is applied. It can be applied for acquiring military tanks, where not only comparison is done on the purchase price of the competing designs, but also other aspects are compared which includes top speed, armor protection, caliber and armor penetration of the guns, operating radius and rate of fire. A military planner may choose the tank which is much less expensive and can be easily produced than its competitors, but whose performance in the other areas is either equal or slightly less than them, because it is more cost effective. But if the difference between the price of the tank and its competitors is not much, and also the competitors have better performance in other areas, then the military planner may drop that tank and select its competitor.