What is Cost-Utility Analysis?

Malcolm Tatum

Also known as CUA, cost-utility analysis is a type of evaluation process that is often utilized when making decisions regarding the purchase of goods and services. The basic idea behind this type of economic analysis is to consider the costs of the purchase in terms of the benefits or utility that is derived from that purchase over a specified period of time. This general concept translates well into a number of different settings, ranging from buying a new piece of furniture to determining the benefits associated with having a particular type of surgical procedure done.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

One of the easiest ways to understand the process of a cost-utility analysis is to consider the purchase of a new mattress. Here, the goal is to decide if the benefits or utility that is derived from that purchase will be sufficient to justify the cost. Assuming that the individual who will sleep on the mattress is currently unable to enjoy recuperative sleep at night due to sleeping on an older and somewhat lumpy mattress, the utility of a sleeping soundly every night for the next several years easily makes the purchase worth the price.

In health economics, the role of cost-utility analysis often has to do with the benefit or utility that is achieved by utilizing specific methods to either improve the quality of living for a patient, extend the life of that patient, or a combination of the two. This is sometimes referred to as a health technology assessment. The idea is to determine if the expense of undergoing a costly surgical procedure will yield a sufficient amount of benefit for the patient over an acceptable period of time. Assuming the procedure would alleviate pain currently endured by the patient and make it possible to enjoy a relatively normal life for a few more years, chances are the procedure will be considered worth the experience. Should the procedure be highly unlikely to result in lengthening the life of the patient or increasing the chances for recovery, the results of the cost-utility analysis may indicate the cost does not yield enough benefit to be considered sufficient, and other less costly modes of treatment are utilized instead.

It is important to note that a cost-utility analysis is somewhat similar to a cost-benefit analysis, in that both approaches seek to determine if there is sufficient return generated by a given action to make that action worthwhile. A cost-benefit analysis tends to focus more on the monetary value that is achieved, whereas the cost-utility analysis is somewhat broader in terms of the benefit to society and often includes room for a significant amount of subjectivity. What is perceived by one person to constitute an equitable amount of benefit or utility for the cost may be unacceptable for another.

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