Opportunity cost

Healthcare budgets are limited, and the adoption of a new health intervention affects the rest of the system: adding resources to one part of the system means reducing them in another. The opportunity cost refers to the health effects that are “lost” when a less effective intervention is chosen instead of a more effective one. Table 1 provides a simple example, in which treatments A, B and C all have the same financial cost, yet they differ in health effects. Choosing treatment A over treatment B has an opportunity cost of 1 unit of health effect, while choosing treatment C over treatment B has an opportunity cost of 2 units.

Table 1. Cost and effect data for three alternative health interventions

Treatment Cost Units of health effect
A£1,0003
B£1,0004
C£1,0002

Accurate estimation of opportunity costs requires identifying all the relevant alternative interventions with their costs and benefits. Ultimately, opportunity costs depend on the healthcare budget: increasing the budget automatically reduces opportunity costs.

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