SPINE Volume 39, Number 22S, pp S9-S15

©2014, Lippincott Williams & Wilkins

INTRODUCTION TO VALUE BASED SPINE CARE

Health Economic Studies

An Introduction to Cost-benefit, Cost-effectiveness, and Cost-utility Analyses

Peter D. Angevine, MD, MPH,* and Sigurd Berven, MD†

I
n a health care economy with limited resources, the provi-
Study Design. Narrative overview.
sion of service that yields the greatest health benefit at the
Objective. To provide clinicians with a basic understanding of
lowest cost is a priority. Informed decision making in value-
economic studies, including cost-benefit, cost-effectiveness, and
based care requires information on benefits and costs. Orga-
cost-utility analyses.
nizing, prioritizing, and analyzing the many variables that
Summary of Background Data. As decisions regarding public
must be considered in making common health care decisions
health policy, insurance reimbursement, and patient care incorporate
is difficult for even the most experienced clinician. Rather than
factors other than traditional outcomes such as satisfaction or
performing a rigorous formal analysis of the options and their
symptom resolution, health economic studies are increasingly
possible beneficial and detrimental outcomes, most caregivers
prominent in the literature. This trend will likely continue, and
rely on informal heuristics to make the many decisions they
it is therefore important for clinicians to have a fundamental
are required to make each day. Understanding health care
understanding of the common types of economic studies and be
economics analyses and methods may empower the clinician
able to read them critically. In this brief article, the basic concepts
to participate in value-based health care decision making and
of economic studies and the differences between cost-benefit, cost-
guide choices toward the provision of optimal health care.
effectiveness, and cost-utility studies are discussed.
A formal, logical process that incorporates complex data
Methods. An overview of the field of health economic analysis is
and models the clinical decision-making process can help the
presented.
clinician to understand the potential impact of different fac-
Results. Cost-benefit, cost-effectiveness, and cost-utility studies
tors in the likely outcomes of an intervention. Economic stud-
all integrate cost and outcome data into a decision analysis model.
ies, including cost-benefit analysis (CBA), cost-effectiveness
These different types of studies are distinguished mainly by the way
analysis (CEA), and cost-utility analysis (CUA) organize the
in which outcomes are valued. Obtaining accurate cost data is often
available clinical and economic data and can help under-
difficult and can limit the generalizability of a study.
stand possible answers to the increasingly relevant question:
Conclusion. With a basic understanding of health economic
“what intervention gives the greatest benefit proportional to
analysis, clinicians can be informed consumers of these important
its cost?”.1
studies.
The purpose of this article is to introduce the topic of
Key words: health economic analysis, cost-effectiveness analysis,
economic studies in health care. It is intended to introduce a
cost-benefit analysis, cost-utility analysis, discount rate, decision
reader to some of the key elements of economic studies and
analysis, quality-adjusted life year.
to spur further in-depth reading about the subject. It is hoped
Spine 2014;39:S9–S15
that after reading this article, one can understand the meth-
odology of health care economic analysis and approach eco-
From the *Department of Neurological Surgery, Columbia University College
nomic studies with a critical and discerning eye that will guide
of Physicians and Surgeons, New York, NY; and †Department of Orthopaedic optimal care.
Surgery, University of California, San Francisco, CA.
Acknowledgment date: April 18, 2014. Revision date: June 25, 2014. MEDICAL DECISION ANALYSIS
Acceptance date: July 9, 2014.
Medical decision analysis is a formal method of organizing
The manuscript submitted does not contain information about medical
device(s)/drug(s).
and connecting probabilities of events and their outcomes in
Supported by AO Spine North America, Inc. Analytic support for this work
a way that allows an assessment of the possible impacts of a
was provided by Spectrum Research, Inc., with funding from the AO Spine decision.2 The decision model is based upon an index health
North America. state and the probability of change with a specific interven-
Relevant financial activities outside the submitted work: board membership, tion. The resultant analysis enables the clinician, administra-
expert testimony, grants, payment for lectures, royalties, stocks.
tor, or policymaker to evaluate a probability distribution of
Address correspondence and reprint requests to Peter D. Angevine, MD,
MPH, Department of Neurological Surgery, Columbia University College of
expected outcomes and to understand the cost of the index
Physicians and Surgeons, 710 W 168th St, Room 510, New York City, NY decision on the total potential cost of care. The model is
10032; E-mail: pda9@columbia.edu based upon clinical, epidemiological, patient-centered, and
DOI: 10.1097/BRS.0000000000000576 economic data.
Spine www.spinejournal.com S9
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 INTRODUCTION TO VALUE BASED SPINE CARE
Decision analyses, regardless of how apparently simple
they are, involve many assumptions and choices, some of
which may not be obvious. The most important of these is the
perspective of the analysis. With some decisions, only 1 per-
spective may be important or makes sense. On the contrary,
many problems, particularly those in public health, may have
many possible perspectives, such as the individual, commu-
nity, insurance company, hospital, or state or national govern-
ment. For example, in the surgical management of adolescent
idiopathic scoliosis, the hospital perspective may be limited
to the episode of care, or the inpatient stay. The insurance
perspective may be limited to the duration of time that adoles-
cents are covered by the insurance of their parents. The patient
and the physician share a much longer perspective, and a time
frame that extends for a lifetime. The decision analysis model
must be for a specific time frame. This is important both for
estimating costs and outcomes and for determining the type
of model that is appropriate. The latter is an advanced topic
that will not be discussed further here but is covered in several
of the references.
Medical decision making is complex and may encompass
countless considerations for the patient, the surgeon, the hos-
pital, the insurance company, and for public health and social
welfare. Medical modeling involves choosing a finite number
of options and data elements and estimating the distribution
of outcomes based upon the best available data. Branching
decision trees are the most common model used to organize
and visualize the possible outcomes of a decision and their
probabilities. A simple decision tree for the treatment of a
benign painful condition is shown in Figure 1. The decision
on whether or not to have the procedure is represented by
the square “node.” The circular nodes represent subsequent
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Figure 1. Example of decision analysis model. The
square “decision node” represents the decision be-
tween surgical and nonsurgical management. The
circular “chance nodes” represent possible outcomes
resulting from the decision.
possible events that result from the decision. Events are
assumed to flow from left to right through the tree.
Each branch exiting a chance node is assigned a probabil-
ity. The branches are assumed to represent all possible out-
comes at the point represented by the node. Consistent with
probability theory, the sum of all probabilities at each node
must be 1, representing all possible outcomes. Although these
are modeled as chance events, in reality one can model subse-
quent decisions, also. For example, if recurrent radiculopathy
is modeled as a possible outcome after lumbar microdiscec-
tomy a decision tree could include a branch for reoperation.
The decision would be modeled as a simple probability based
on data regarding the proportion of patients who undergo
reoperation under similar circumstances.
The probabilities used in a decision analysis are ideally
derived from high-quality data sources. Peer-reviewed litera-
ture is the usual source for most probabilities used in decision
analysis of health care problems. In some cases, data are not
available in a form that is directly translatable to probabili-
ties in a decision tree. In other cases, such as the incidence
of complications after a procedure or adverse reactions to a
medication, published incidence data may be directly used in
the decision tree.
Finally, the decision tree is populated with outcomes and
cost data. The selection of the types of outcomes used in the
tree and the methods for determining costs are discussed
briefly in the following text. For an economic analysis, each
path through the tree is associated with a cost and with an
outcome. A process of “rolling back” probabilities and out-
comes or costs is used to analyze the tree. This is shown in
Figures 2 and 3. Starting at the final branches, the outcome
value (or cost) of each branch is multiplied by the probability
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 INTRODUCTION TO VALUE BASED SPINE CARE
Figure 2. A, Outcomes, measured on a scale of 0 to 1, have been
added to the final branches of the model. B, The tree is analyzed by
“rolling back” the probabilities and outcomes. The value at each node
is the sum of the products of the probability and outcome for each
branch. For the topmost node, for example, (0.9 × 1) + (0.8 × 0.1)
= 0.98.
associated with that outcome. All of these partial valuations
are added together for each node. This gives the expected
value for a particular node. Then, working backward, a simi-
lar process is performed at each node until the decision node,
the first node, is reached. Then, the expected values for each
decision branch can be compared, and the best option, based
on the greatest expected outcome or lowest expected cost,
may be selected.
MEASURING OUTCOMES
Outcomes of care are difficult to measure, and we do not have
a clear consensus on the outcome measure that best reflects
the patient’s health care experience. Populating the decision
tree with estimates of the value of the various outcomes is
a fundamental component of the value equation, and deter-
mines the end result of the value calculation. Each branch that
Spine
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represents a distinct outcome is given a value. The differences
between CEA, CBA, and CUA are mainly differences in the
way that outcomes are valued (Table 2).
A CBA values both costs and outcomes in monetary units.
This allows for costs and outcomes to be combined, and the
optimal choice is the one with the greatest net gain (or small-
est loss).3 Although this simplifies the analysis of the decision
tree in some ways, this method has drawbacks. In health care
analyses, it may be difficult or objectionable to value health
benefits or lives in monetary terms. Although CBA is the stan-
dard mode of analysis in some fields, it is rare to see it in
the field of health economics. An example of a CBA in spine
surgery is the study on cost savings of vancomycin powder in
instrumented and noninstrumented spine surgical procedures.
Emohare et al4 demonstrated that the expenditure of $1152
on intraoperative vancomycin may save more than $500,000
in revision surgery for infection.
CEA is an alternative that avoids the potential problems of
valuing outcomes in money that uses “natural units” to assess
outcome.5 For example, if one were assessing different immu-
nization protocols, a natural way to assess outcomes would be
the number of cases. Other possibilities of natural outcomes
would include deaths, pain score, or serum cholesterol levels.
This method has at least 2 obvious advantages. First, readily
available outcomes can be used. The outcomes can be selected
to take advantage of data that are available during the course
of treatment. Second, avoiding the need to convert outcomes
from 1 form to another eliminates 1 potentially large source of
uncertainty. The disadvantages of CEA are mainly limitations
of generalizability. Although results given in lives saved have
an understandable impact, other disease-specific such as cases
averted or pain score changes may lack context, particularly if
the disease or outcome metric is unfamiliar. An example of a
cost-effectiveness study is the Swedish Lumbar Spine Study on
fusion compared with nonoperative care for chronic low back
pain.6 The authors concluded that the incremental cost per
Oswestry Disability Index unit gained by surgery compared
with nonoperative care averaged 5200 Swedish Krone. The
limitation of cost-effectiveness as an outcome is that the value
of an Oswestry Disability Index unit is not well defined, or
translatable to other comparative health conditions.
Finally, CUA uses “health-state utilities” based on von
Neumann-Morganstern expected utility theory, to value
health outcomes.7,8 Utility scores are preference-based assess-
ments of various health states that conventionally range from
0 (death) to 1 (perfect health). The most common and famil-
iar utility in health economic analyses is the quality-adjusted
life year (QALY).9 Quality adjusted life years is the unit of
measure derived from the area under the curve of health sta-
tus preference (utility score) over time. By incorporating both
length and quality of life, measuring outcome in QALYs can
avoid many of the pitfalls of using either monetary or natu-
ral units to value outcome. QALYs can be obtained for and
compared among disparate health conditions. They can be
estimated from several off-the-shelf questionnaires includ-
ing the EuroQol Group 5-Dimension Self-Report Ques-
tionnaire and the Short Form-12. Cost-utility outcomes are
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 INTRODUCTION TO VALUE BASED SPINE CARE
Figure 3. The model and analysis for example cost data. These results
and those from Figure 2 are combined in the final base-case analysis
shown in Table 1.
most useful for procedures in which the intended outcome
of care is an improvement of quality of life. Most discre-
tionary spine procedures in adults are amenable to evalua-
tion using the cost per unit of improvement health status, or
utility. CUA is less useful in procedures in which the primary
goal of care is to avoid the consequences of disease progres-
sion, or to prolong survival. Specifically, CUA in adolescent
idiopathic scoliosis may underestimate the value of care in
the patient with limited preoperative health compromise. The
value of care in adolescent idiopathic scoliosis is measured
by the value of avoiding the expected consequences of defor-
mity progression. Disability-adjusted life year estimation may
be most useful for preventative interventions. Similarly, an
en bloc excision of an asymptomatic chordoma of the sacrum
may improve survival, but would not be expected to improve
patient preference for health status as a result of care. There-
fore, CUA studies may be most appropriate for conditions
in which the goal of care is improvement of patient reported
health status.
As with cost estimates, health states that occur in the future
should be discounted. Discounting future costs without dis-
counting future outcomes will result in erroneous results.
Conventionally, outcomes (and costs) that occur more than
1 year in the future are discounted. The same discount rate
should be used for costs and outcomes.
TABLE 1. Results of Example Cost-Utility Analysis Shown in the Figures
EV Cost ($) EV Outcome C/E Ratio ($/QALY)
No surgery 500 0.86 581
Surgery 5100 0.96 5312
Δ Cost = (cost of surgery) − (cost of no surgery).
Δ Outcome = (outcome with surgery) − (outcome with no surgery).
EV indicates expected value; C/E, cost-effectiveness; QALY, quality-adjusted life year; ICER, incremental cost-effectiveness ratio.
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MEASURING COSTS
Costs are an important component of any cost-benefit, cost-
effectiveness, or cost-utility model. Estimating costs for the
model is complex, and may vary significantly depending on
the perspective of the stakeholder. The investigator must first
determine what costs should be included in the analysis. A
cost, in economic terms, is any use of a resource. For anal-
ysis, all costs must be in the same units, usually currency.
Time and materials are both types of costs and need to be
appropriately valued and incorporated into the decision
model. Costs include direct costs, which are quantifiable and
measurable, and indirect costs including the costs of keeping
lights on and full staffing in a hospital. Some of the most
significant costs of illness and care include lost productivity
and wages, burden on families, care provider costs, and non-
medical costs. Therefore, direct costs alone underestimate the
total cost of an illness. Costs in economic analyses are dis-
tinct from charges. Retail prices are not the same as economic
costs. In health care analyses, this is frequently relevant when
determining hospital costs associated with care delivery.
Hospital charges include markups over what was paid for
materials or services and, in general should not be used in
economic analyses because they are not directly translatable
to direct costs. Instead, the investigator should determine or
estimate the true cost of the service, material, or procedure.
Direct costs are not transparent and hospitals and manufac-
turers are limited in complete disclosure of cost information.
In some models, the reimbursement from Medicare or other
payers may be used as an estimate of cost, but this method-
ology is limited because the contribution margin (revenue-
direct cost) may be highly variable between procedures and
payers. Published literature may also be a useful resource for
estimating cost data.
Costs for similar services or materials can vary significantly
between institutions and geographical regions. Bederman
et al10 demonstrated 8-fold variation in the costs of implants
and in total costs of care for common spine procedures. The
expected audience for the analysis may also be an important
consideration in deciding whether the variation is important.
Sensitivity analysis can be used to determine the effect of
changes in cost estimates on the overall results of the study. A
final consideration that is relevant to perspective is the neces-
sity of discounting future costs (and benefits) that occur in
the medium term to long term. Generally, it is appropriate to
discount costs that occur more than 1 year in the future; in
most situations, the present value of a dollar is greater than
Δ Cost ($) Δ Outcome (QALY) ICER ($/QALY)
— — —
$4600 0.1 46,000
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 INTRODUCTION TO VALUE BASED SPINE CARE
TABLE 2. Components of Decision Analysis
Methods
Cost Outcome
Monetary value (dollars gained or
CBA Monetary value
saved)
Disease or condition-specific units of
CEA Monetary value
outcome
Health status preference (utility)
CUA Monetary value
quality-adjusted life years
CBA indicates cost-benefit analysis; CEA, cost-effectiveness analysis; CUA,
cost-utility analysis.
the future value of that dollar. In the base case analysis, a
discount rate close to the average inflation rate is used. Sensi-
tivity analysis may be used to test the robustness of the results
over a range of discount rates.
The perspective of cost analysis will determine, to a signifi-
cant degree, what costs should be included in a model.11,12 A
cost from one perspective, for example, a hospital, may not
be from another, for example the patient or the payer. Specifi-
cally, the hospital total costs include direct costs for materi-
als and services, and indirect costs for fixed capital expenses.
Adding a fixed percentage to direct costs to determine indi-
rect costs is problematic in procedures that have a significant
component of cost attributable to medical devices because
the direct costs of devices are not proportional to the cost
of maintaining fixed costs of the hospital infrastructure. The
hospital perspective of cost is limited to the episode of care,
and readmission to another hospital, prolonged recovery, and
return to work are not relevant to the hospital perspective of
costs. The payer has a similarly limited perspective on costs.
The predicted probability of an insured patient losing private
insurance within 12 months is more than 20%.13 A private
payer has little financial incentive to be concerned about the
5-year follow-up of a 63-year female undergoing surgery for
degenerative spondylolisthesis because that patient is unlikely
to retain private insurance during that time period. The per-
spective of cost for the employer or dependent family may
focus upon return to work, productivity, and quality of life
after a spine procedure, and these components of cost are not
in the purview of the hospital or payer. The patient and the
physician share a long-term perspective with consideration of
costs during a lifetime, and with prioritization of a durable
improvement of quality of life. Costs remain the most com-
plex component of the value equation, and the perspective
of the stakeholder determines what components of cost to
model. The most complete model will include direct costs,
indirect costs, and social costs.
ANALYSIS AND INTERPRETATION
After the decision analysis model has been developed and pop-
ulated with the estimated probabilities, costs, and outcomes,
the overall analysis can be performed. The “gold standard”
for this is the incremental cost-effectiveness ratio (ICER). This
Spine
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SPINEF1406_LR S13
Health Economic Studies • Angevine and Berven
is a measure of the cost associated with the “incremental”
benefit of 1 treatment compared with the next most effective
option. This is an important distinction as the result is usu-
ally different, often significantly so, than that obtained from
simply calculated the ratio of cost to outcome. An example
analysis is shown in Table 1. Note that although the cost-
effectiveness ratio and the ICER are both measured in dol-
lars per QALY, their values are vastly different. Although the
expected cost of surgery is $5100 and its expected outcome
is 0.96 QALYs, its incremental benefit over the no surgery
option is 0.1 QALY with a $4600 greater cost. The ICER, a
ratio of the difference in cost and the difference in outcome,
is the measure of the true benefit of 1 option compared with
another. In the example, the ICER is $46,000 per QALY.
Within a model, it is generally fairly straightforward to
determine which option is best, or whether there is a differ-
ence between options at all. Furthermore, for an individual or
an organization with a specific budget or other constraints the
implications of the analysis may be clear. For analyses con-
ducted from a societal perspective, however, the significance
of the results is less certain. Whether or not an intervention or
program is “cost-effective” is a judgment based on many fac-
tors.14 Although an upper threshold of $60,000 to $100,000
per QALY is often discussed as a limit for cost-effectiveness,
this is a societal, not a medical, judgment. Because of these dif-
ficulties, further analyses may be performed to determine the
probability of an intervention being cost-effective at different
thresholds.15
EXAMPLE: SPINE PATIENT OUTCOMES
RESEARCH TRIAL HERNIATED LUMBAR
DISC STUDY
Tosteson et al16 published a CUA based on the intervertebral
(lumbar) disc herniation arm of the Spine Patient Outcomes
Research Trial in 2008. Using primary outcomes data from
both the randomized and observational arms of that study
and cost data estimated from Medicare charges and pay-
ments, as well as self-reported out-of-pocket resource use
and missed work, the authors calculated a base-case ICER
of $69,403 per QALY (95% confidence interval, $49,523–
$94,999 per QALY) for surgical management compared with
usual nonoperative care. A subgroup analysis showed that
the cost per QALY was lower for the Medicare population
than for the non-Medicare population. Sensitivity analyses
were performed for some of the cost assumptions but were
not reported for other variables, such as outcomes or prob-
abilities. Combined with similar results from previous studies,
the findings reported by Tosteson et al16 indicate that, during
a period of 2 years, lumbar discectomy for the treatment of
intervertebral disc herniation provides a clinical benefit over
usual nonoperative care at a cost below society’s willingness-
to-pay threshold.
UNCERTAINTY IN AND LIMITATIONS OF
ECONOMIC ANALYSES
Medical decision analysis involves modeling under condi-
tions of uncertainty. The results of economic studies of health
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 INTRODUCTION TO VALUE BASED SPINE CARE
interventions are best understood as estimates based on a spe-
cific model and data that should, similar to other economic
analyses, be tested and updated as new information becomes
available.17 The robustness of the results of a CUA or other
economic analysis should be thoroughly tested. This sensitiv-
ity analysis gives the investigator and the reader an under-
standing of the likelihood that the base case results accurately
represent the underlying reality. Figures 4 and 2A, B demon-
strate examples of probability distributions of outcomes for
operative and nonoperative care. Using these probability dis-
tributions, the investigator can model the likelihood of spe-
cific outcomes, and the cost of reaching that outcome. If, for
example, altering cost, outcomes, and probability estimates
for important variables within plausible ranges does not sig-
nificantly change the results, one can be reasonably assured
that the model will apply to a fairly wide set of circumstances.
On the contrary, if a relatively small change in one estimate
dramatically alters the results the investigator or reader will
likely want to ensure that estimates of that variable are as
accurate as possible. At the same time, neither the robust-
ness of the model nor its absence indicates the accuracy of
the model itself, which should be tested thoroughly against
confirmatory data from other sources.
Health economic analyses, similar to randomized clinical
trials, are most useful at a population level. An individual
patient may have significantly different risks, costs, or values
than the average values used in an overall analysis. Eliciting
these differences may be difficult and is not generally part of
a clinical encounter. A strongly robust model may, however,
reassure the patient and clinician that the results are likely to
apply in a particular circumstance.
CONCLUSION
Economic analyses of health interventions are an impor-
tant tool for many audiences, including patients, physicians,
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Figure 4. Example model with probability values
included. Numerical values may be obtained from
primary research or from a literature review.
hospitals, and health care systems, insurance companies, and
governmental policy makers. A single economic study should
not be interpreted as a definitive demonstration of the cost-
effectiveness of an intervention, but CEA, CBA, and CUA
that are designed well and conducted can serve as a helpful
decision aid for its intended audience. Physicians and other
providers, who have a thorough understanding of the clinical
conditions and interventions, are critical to the proper design,
conduct, and interpretation of economic analyses.
In a health care economy with limited resources, value is
the priority of health care decisions.18 Informed choice in a
value-based health care economy is characteristically made
with incomplete information. Decision analysis is the pro-
cess of making calculated decisions under circumstances of
uncertainty. Medical decision modeling uses the best available
data to guide informed choice. The literature on cost analysis
in spine interventions remains limited, and the introduction
and adoption of new techniques and technologies outpace the
studies of value and cost analysis. Reimbursement, coverage
levels, and access to care for patients with spinal disorders are
dependent upon demonstration of value of specific interven-
tions. Future research using the techniques reviewed in this
article is a priority for guiding an evidence-based approach to
spine care in a value-based health care economy.
➢ Key Points
‰ Health economic analyses integrate cost data
with clinical outcomes data to estimate the
economic impact associated with any gain in
outcomes comparing one treatment option with
another.
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 INTRODUCTION TO VALUE BASED SPINE CARE
‰ Cost-benefit, cost-effectiveness, and cost-utility
analyses measure outcomes in units of money,
health outcomes, and QALYs, respectively.
‰ Understanding concepts such as decision
analysis, discounting, and sensitivity analysis will
help clinicians interpret the results of economic
studies.
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