Cost Effectiveness Analysis
Prepared for the GDN-R4D Strengthening Institutions Project 25 February 2010
Description of Cost Effectiveness Analysis The third analytical component of the Strengthening Institutions project is cost effectiveness analysis in the education, health, and water sectors. The purpose of this activity is to estimate the costs of achieving a given marginal outcome using different policy or program alternatives with similar goals. Although costs and outcomes of policies are often evaluated separately by analysts, it is useful to look at these two components together to better inform decisions about the best way to improve development outcomes. For example, a program to provide a textbook for every student may be significantly more expensive than a program to train teachers on improving literacy; however, the textbook program may be a better policy decision if the textbook program results in increases in child literacy while the teacher training has no impact. Likewise, a program making contraceptives available at all of the primary health clinics in a district may reduce teenage pregnancies more than putting up posters in every clinic; however, the poster program may be a better policy choice if it is significantly less expensive than the contraceptive program. By calculating the cost-effectiveness ratios of policy alternatives, partners will be able to engage in more informed dialogue with decisionmakers regarding policy or program alternatives in health, education, and water. To conduct a cost effectiveness analysis, partners will need to (1) identify two or more policy alternatives with similar goals, (2) estimate the total costs associated with each alterative, (3) estimate the effectiveness of each alterative in achieving the common goal, and (4) calculate and compare the cost-effectiveness ratios of the alternatives. Two critical decisions that partners will make for each cost effectiveness analysis exercise is how to calculate costs of the alternatives and what measure of effectiveness to use. Each of these decisions will be discussed in detail during the January 2010 workshop; however, because of the importance, we provide some information about these components of cost effectiveness analysis in the box below. Calculating COSTS: All costs associated with a policy or program alternative should be included when doing cost effectiveness analyses. While a budget provides useful information about many costs, partners may need to look beyond the budget to measure the true cost of an alternative. For example, if a state-run education program requires parents to pay school fees for program supplies, these fees should be calculated into the cost of the program (despite the fact that these fees will not show up as government expenditures). Measuring EFFECTIVENESS: A single measure of effectiveness should be used for all alternatives in a cost effectiveness analysis, and this measure of effectiveness should match the objective of all alternatives. Two programs that are intended to increase secondary school retention would be well suited to CEA; however a program that is intended to increase school retention and a program that is intended to improve test scores would not work well in a CEA. nd
Source: Levin and McEwan (2001), Cost Effectiveness Analysis 2 edition
Project Requirements For the purpose of the Strengthening Institutions project, partners will be required to complete specific types of cost effectiveness analyses for the three social sectors that are the focus of this program – health, education, and water. Although these requirements apply to all partners, it is important to note that we have not defined the project or program alternatives that partners should analyze. This means that the cost effectiveness results will not be benchmarked across countries. However, this also means that partners should select program or policy alternatives that are priority areas in their countries and of importance to their organizations. The required cost effectiveness analyses are described in the Annex. Partners will have an opportunity to discuss these requirements during the January 2010 conference (after working with them during break-out group sessions) as well as begin discussing what topics and alternatives they will study for the cost effectiveness work. To make the sessions on cost effectiveness as productive as possible, we ask that all partners develop a tentative plan before the conference outlining what topics and alternatives they wish to analyze.
Annex. Topics for Cost Effectiveness Analysis Each partner will complete a minimum of six (6) cost effectiveness analyses, two each in the education sector, health sector, and water sector. While the information below provides some guidelines about the cost effectiveness studies that partners are asked to complete, we want to emphasize that these are minimum requirements (i.e. we encourage partners to do more than those required here) and that each of the analyses allows significant flexibility for partners to select alternatives that best reflect the priorities of their own country and organization.
Cost Effectiveness Analysis – “BASIC” Each partner will complete one “basic” cost effectiveness analysis in each sector that compares the cost effectiveness of at least 2 different facility types. While this analysis is being called a “cost effectiveness analysis” for the purpose of this project, the Basic CEA is really just a comparison of unit costs. An example of this type of analysis was included in the break-out group exercise in Prague. Examples include: • A comparison of the cost effectiveness of vocational versus general secondary education with the effectiveness measure of graduating students. • A comparison of the cost effectiveness of wells versus public water taps with the effectiveness measure of the number of people will access to clean water.
Cost Effectiveness Analysis – “PROGRAM” Each partner will complete one “program” cost effectiveness analysis in each sector that compares the cost effectiveness of at least 2 different programs (with similar goals). Examples include: • A comparison of the cost effectiveness of a malaria education program versus a mosquito net distribution program with the effectiveness measure of malaria rates in the catchment area. • A comparison of the cost effectiveness of a teacher training program for improving student literacy versus a textbook program with the effectiveness measure of student reading exam scores.