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

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.