This report compares uses a cost-effectiveness analysis (CEA) of two policies: the US Individuals with Disabilities Education Act (IDEA), and New Zealand’s PHARMAC medicines funding policy. Traditional CEA combines the cost of a given intervention and its outcomes with its effectiveness, and then uses the resulting cost-effectiveness ratio to compare that intervention to alternative interventions that are aimed at accomplishing the same goal.[1] The result of a CEA is expressed as ‘cost per natural unit of outcome.’[2]
Operating under conditions of resource scarcity and budget restraints, it is assumed that the two policies in question have similar goals: to satisfy the needs of the highest amount of individuals possible. Therefore, the natural unit of outcome will be ‘needs satisfaction.’ These two policies are very different, however, and comparison between the two has to be made at a relatively high level of abstraction. Needs satisfaction will be measured by two different units: in the case of IDEA, as improved performance on standardised tests (PST); and in the case of PHARMAC, as QALY improvements (QI). Effectiveness requires the maximum amount of these two units for the greatest amount of people within the bounds of a fixed budget.
This analysis forgoes the use of the more widespread ‘cost-benefit analysis’ for two different reasons. One is that, at least in the medical field, cost-effectiveness analysis is already well established.[3] The second reason is that monetising all the possible outcomes of different policies diverts from their original goal: satisfying the needs of the greatest amount of individuals to the fullest extent possible. This report examines how decisions about resource allocation should be made after budgets have already been set – it is not concerned with how to decide on a budget.