In the language of economists, opportunity cost refers to the return or other forms of benefit that we could have received, but gave up, to take another course of action. In mathematical terms, it is the difference between the utility of what we have chosen and that from the foregone choice. Or, in much simpler terms, its what’s given up when making a choice. A positive opportunity cost shows that we made a good decision. A negative opportunity cost indicates that we would have been better off with a different decision. When making choices on what to cover with healthcare packages, the opportunity cost is mostly expressed in terms of healthy years of life lost or gained. Bad choices are therefore being paid in years of healthy life lost: in healthcare, the opportunity cost is not concerned with saving money.
An increasing number of low-and middle-income countries (LMICs) are starting to use Health Technology Assessments (HTAs) as an input for decisions on what’s covered, reimbursed, procured, and prescribed. But only a few carry out systematic economic evaluations and an even a smaller number explicitly considers the opportunity cost of their decisions. These decisions can have a very high opportunity cost and they are paid not in terms of money but lives lost. For example, a recent analysis by Hasdeu et al. finds that in one country of Latin America, much more lives could have been saved if the government had decided to invest in respirators for critically ill COVID-19 patients instead of financing one high cost drug for a rare disease that had been evaluated and not recommended by the national HTA body. Consequently, the purchaser was implicitly valuing each life of a patient with the rare disease,70 times more than each life of a serious patient with COVID-19 requiring the respirator.
Rarely are decisions evaluated in terms of what could have been gained in terms of health by allocating the resources to alternative options. In most LMICs, with noteworthy exceptions such as Brazil or Thailand, evidencing the opportunity cost does not seem to be standard practice. How else can we understand that many countries across Latin America and the Caribbean are still not covering many essential health services, especially for the most vulnerable while deciding to cover sometimes extremely costly interventions with a limited health benefit for small groups of patients?
This situation is at odds with the fact that it is LMIC that are paying a much higher opportunity cost by misallocating their resources as there are pressing and essential needs that are often inadequately covered. The opportunity cost of coverage decisions is likely to increase even more at the wake of the pandemic, considering the grim fiscal picture that is emerging, the disruption of essential health services and the growth of the population that will depend almost exclusively on the public sector to receive health services. The flipside of the coin is that it is also LMICs that have the most to gain from considering the opportunity cost of their choices when making decisions.
Cost effectiveness analysis seems to be a trendy word, yet it is often forgotten that the mere incremental cost effectiveness ratio does not tell anything about whether an intervention should or should not be publicly financed. In theory, each coverage decision would have to be compared with all possible alternatives of investing that same money. For example, to decide whether to cover intervention A for Disease 1 we would have to determine the additional benefit of A not only with the current intervention of Disease 1 but also with all other possible interventions for all other diseases. This is of course not feasible.
Therefore, many countries around the world have started to use cost effectiveness thresholds based on opportunity cost to decide whether to invest in something or not. As brilliantly presented by Andres Pichon Riviere in an open online course on explicit priority setting and health benefits packages, developed by the CRITERIA network of the IDB with the support of CGD, this threshold represents the level above which any coverage decision would not be good value for money since it would produce less health for each dollar invested or in other words, an overall loss in health. This approach has become popular in many high-income countries, and an increasing number of LMICs have calculated their own thresholds.
It can only be hoped that the concept makes the leap forward from paper to decision making and that, at the same time, the notion of the opportunity cost will be finally understood by most key stakeholders. Too many still think that the opportunity cost is about money and saving-but the truth is: it is about gaining more healthy lives. Let’s see how we can start to combat together this opportunity cost neglect and increase transparency and consistency—two additional benefits of using thresholds—in the process.
If you want to learn more about opportunity cost, cost effectiveness, cost effectiveness thresholds and related issues, subscribe to the recently launched edX based MOOC on explicit priority setting, health benefits packages and strategies to make medicines affordable here for the version in English or here for the version in Spanish.
CGD blog posts reflect the views of the authors, drawing on prior research and experience in their areas of expertise. CGD is a nonpartisan, independent organization and does not take institutional positions.
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