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What Is the Incremental Cost Effectiveness Ratio?

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  • Written By: Jim B.
  • Edited By: M. C. Hughes
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  • Last Modified Date: 17 September 2016
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An incremental cost effectiveness ratio is an economic measurement used to study business alternatives which have both separate costs and separate outcomes. Doing this requires taking the difference between the two costs and dividing it by the difference in the two outcomes, thereby showing how much an alternative will cost to effect one unit of difference in the eventual outcome. Most commonly, an incremental cost effectiveness ratio, or ICER, is used to decide between alternative treatments in the medical field. Although it is difficult to measure the outcome of medical procedures in terms of tangible results to plug into the equation, medical economic professionals have methods to determine ICERs with some degree of accuracy.

Making choices between alternatives is a big part of the business world. Such choices become even trickier in the medical profession, with the health of individuals at stake. Of course, cost considerations are certainly still a factor in the medical industry as well, since health-care providers need to make profits to stay in business. For these reasons, many professionals who handle economic functions for hospitals and other health-care providers use a tool known as an incremental cost effectiveness ratio to balance these factors.

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As an example of how an incremental cost effectiveness ratio might work, imagine that one treatment costs $100 US Dollars (USD) and is guaranteed to cure a patient of some malady for four years. Another treatment costs $40 USD but will only cure the patient for one year. The cost differential of $60 USD is divided by the output differential of three to yield a total of $20 USD, which is the amount the more expensive technology needs to effect one unit of change.

Comparing the two numbers above, it would seem that the $100 USD treatment is more beneficial because it significantly extends the cure. The inherent difficulty with the incremental cost effectiveness ratio in the medical profession is that the outcomes cannot usually be measured with certainty. This means that medical economists have to come up ways around this problem.

Performing an incremental cost effectiveness ratio is simple if the outcomes between two alternatives, when tested in trials, are similar but their costs are different. It would then simply be a matter of choosing the cheaper alternative. When the outcomes prove to be different, medical professionals use measurements like quality-adjusted life years to plug in as the denominator in the ICER equation.

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