Opportunity cost

Health systems do not have endless amounts of money, endless numbers of clinicians, or an infinite number of beds. In other words, they have constrained resources. When we have constrained resources, we have to choose what to use those resources on. The corollary to this is that, when we use our resources for one thing, the resources are not available for something else.

This is hugely important in health economics because we are often expected to use health resources for things that sound like good ideas but that displace other good ideas. For example, it may be possible to get rid of some of the waiting lists for elective surgical procedures by concentrating some resource on working through the backlog of patients waiting to be treated. However, this would require operating theatre time, surgeon time, nursing time, anaesthetist time etc. that would then not be available for other elective procedures or, possibly, for emergency procedures.

The opportunity cost of a decision has a specific value. This quantity is the value of the best alternative decision that has not been made. In the elective surgery example above, it may be the value of working through a different waiting list, or of just carrying on as usual.

As you may see, opportunity cost is important for helping us to make informed decisions in a complex system with constrained resources. You may also see that calculating the opportunity cost for a decision can be pretty complex because it requires that you know what the best alternative decision is.

Opportunity cost comes into play when we think about the decisions made by groups such as the National Institute for Health and Care Excellence (NICE) in the UK. One of NICE’s roles is to make recommendations about which drugs to fund from the central NHS drugs budget. Every drug that has to be paid for removes resource from the NHS drugs budget, and so there is an opportunity cost in terms of other drugs that, in principle at least, could not be funded.

It is this opportunity cost that underpins issues about, for example, expensive drugs for the treatment of terminal cancer. In practice, it is very difficult for NICE to make these decisions across diseases. For one thing, it would have to revise all its decisions every time a new drug came out because the next best alternative may have changed. Instead, NICE has come up with standard thresholds that can be applied across different illnesses. The precise choice of threshold is quite complex, and is the subject of ongoing research.

Posted in Glossary Tagged with: , ,
0 comments on “Opportunity cost
1 Pings/Trackbacks for "Opportunity cost"
  1. […] The claim is that the NHS in England is prepared to pay more for new drugs than they are worth because we could get more health benefit for the same money by investing elsewhere. The thing that underpins all of this is a hugely important economic principle called opportunity cost. […]

Leave a Reply