The purpose of a cost-effectiveness analysis is to determine the relationship between the benefits and expenses of a program. Naturally, there are many different ways to do this but there are some common steps for approaching this as shown below
- Define the program and outcome indicators
- Determine what you want to know
- Compute cost
- Determine the scope of program outcome data
- Compute outcome data
- Compute cost-effectiveness ratio
Define the Program and Outcome Indicators
Defining the programs means to know all the components and features of the program. For example, a reading lab program might have the following components.
- Online reading in a computer lab that develops reading comprehension and pronunciation skills
- Participation 30 minutes a day twice a week
- The program lasts one semester
- Participants are 30 fifth graders who are reading 2 levels below grade level
The example above is highly simplified but serves our purpose. Once the program is defined it is necessary to determine the outcome indicators. Outcomes are measurable changes in behavior. For our reading lab example below is the the outcome we want to measure.
- Number of fifth-grade students who are reading at or above grade level at the end of the semester of reading lab participation.
With the information above we can move to step 2.
Developing Questions
Once you know what the program is about and the outcome you want to measure it is now time to shape questions for the study. This might seem like a wasted step because obviously we want to gather data about the outcome indicator. However, there might be more than one thing we want to know about the outcome. For example, we might want to know if there are differences by gender, race, or socioeconomic factors. Since we can nuance and complicate the study it is important to state explicitly what we want to know. Below are the questions for our reading lab example.
- How many fifth-grade students reach grade level for reading comprehension through the use of the reading lab twice a week for 30 minutes?
- How many fifth-grade students are unable to reach grade level for reading comprehension through the use of the reading lab twice a week for 30 minutes?
- What is the cost per fifth-grade student for the use of the reading lab over the semester?
The next step is to determine the cost of the program
Determine Cost
It is now time to find out how much money was spent. This is a straightforward process that includes calculating the expenses for personnel, facilities, equipment, and other expenses. For our reading lab example, the costs are simple to compute and our shown below.
- Personal: The total cost is 0 zero dollars because the teachers are already paid by the school and no additional staff was necessary
- Facilities: Again, the total cost was zero because an existing computer lab was used.
- Equipment: The expense for the license for the reading software is $30,000 dollars for the length of the program
- Other expenses: Zero dollars for other expenses
For our example, only $30,000 is used for this program.
Determine Scope of Data Collection
The amount of data to collect depends on the questions to answer and the maturity of the program. If the program has been around for several years you have to decide if you want to collect data from all years or a subset. In our example, this is a new program so we will take all data from the the fifth graders who participated in the reading lab program.
Compute Outcome
Once the program has run its course it is time to determine outcomes. For our example, after the reading lab program was completed, each student took a reading comprehension test to assess what grade level they were at. For our purposes, students at or above grade level are considered successful. Below are the results
| Success | Unsuccess |
| 20 | 10 |
The information in the table above has already answered our first two questions for this study. We can now use this information to determine the cost-effectiveness ratio to answer the last question.
Cost-Effectiveness Ratio
The cost-effectiveness ratio can be calculated by dividing the cost of the program by the outcome. For our example, this would mean dividing $30,000 by 20 (number of success). In the table below we have several important calculations
| Reading Lab Program | |
| Program cost | $30,000 |
| Success rate | 20 / 30 * 100 = 66% |
| Number of students at grade level | 20 |
| Cost per successful student | $30,000 / 20 = $1,500 |
The table above provides all the information we need to assess this program within the scope that we defined. Right now it is hard to tell if this program is good or not because there is no standard or another program to compare it to. However, having external standards or another program for comparison is often expected with real examples.
Sometimes an additional step that is taken is a sensitivity analysis. A sensitivity analysis is especially important when there are a lot of estimations in the model. When it is necessary to estimate it is important to adjust these values high and low to see how they affect outcomes. For our example, this is not applicable.
Conclusion
Cost-effectiveness analysis is an important tool in determining the value of a program. The goals of a program are normally to help people while keeping in mind cost and effectiveness. The analysis presented here allows an evaluation to assess programs so that services can be rendered efficiently.