Health economics is not just about measuring costs

December 2017
Dr Marian Shanahan, NDARC

Many discussions between health economists and their clinical and policy research colleagues begin with comments such as ‘we want to know what X costs or what will it cost to fund Y?  But these questions, while useful and interesting, do not fully encapsulate what health economics and economics have to offer more broadly.  This also limits the capacity to collaborate and generate the evidence necessary to inform policy.

A case in point is the recent Federal Government’s Social Services Legislation Amendment which proposed to establish a drug testing trial that would remove exemptions for drug and alcohol dependence and make changes to reasonable excuses clauses for those receiving (selected) government payments ("Social Services Legislation Amendment (Welfare Reform) Bill 2017," 2017). Multiple submissions to the Senate inquiry pointed out that there was no evidence that such a policy would achieve the proposed outcomes. In fact, the minimal evidence that does exist suggests there would be substantial harms to the individuals involved (Drug Policy Modelling Program, 2017; Royal Australasian College of Physicians, 2017; UnitingCare Australia, 2017). Furthermore, referrals into a sector where there is limited scope to provide additional treatment is not a solution. Indeed, the point was made in many submissions that such a trial would be very financially expensive to implement. On the balance of probabilities, it would appear that that the harms and costs would surely outweigh the benefits perceived by those advocating for this bill.  The truth is we don’t have the economic evidence to refute this bill – but we could, and I would argue we should.

Economics has its roots in three constructs: production, scarcity and distribution. In terms of production we are interested in both what is being produced, how it is produced and for whom it is being produced. The what, is all things society produces including: improved health status, quality of life, wellbeing, food, lower crime rates, new roads, better school outcomes, housing, wine and clothing, for example.  The making of each product (outcome) consumes resources, and given the scarcity of resources, understanding whether resources are being used in the most efficient manner is important.  Finally, who are we producing for or how is it being distributed —only for those who can pay, those who are willing to pay, those who need it the most, or those who are most vocal? Each of these constructs has a role to play and when policy is implemented without considering each in full, decisions are often made which appear arbitrary and may result in increased marginalisation.

How can health economics be applied in the alcohol and other drugs field and how should it be applied? The use of health economics is one approach by which additional information can be garnered to assist with decision making. As intimated above, often health economics is considered simply as a tool to compare the costs of an intervention or disease, but health economics is much more. For example, health economists pursue research on a wide range of policy relevant issues such as:

  • The impact of program funding changes on health outcomes
  • The uptake of a new medication listed on the PBS, and the impact on substitutes
  • The impact of new AOD treatment on costs and quality of life relative to existing treatments
  • Societies willingness to pay for existing and new interventions
  • The impact on clinical practice patterns (supply) and demand by patients due to changes in payment modalities
  • Intergenerational effects of poverty, of drug use, and of unemployment
  • The costs and benefits to society related to changing alcohol policies (minimum pricing, legal age, volumetric taxation)
  • Measuring and valuing preferences and trade-offs of treatments and policies

Questions can be limited in scope, such as, is it more cost-effective from the treatment provider’s perspective to implement telephone counselling or to provide brief intervention for cannabis cessation face-to-face? Or, as with the proposed drug testing trial, complex analysis is required which includes quantifying both harms and benefits across a broad range of inputs and consequences.  

How do we answer economic questions?

There are multiple methods from which to choose:

  • Complex models which explore broad social policy changes (i.e. changes in Medicare) or those which explore a population of interest models (i.e. heroin careers over a lifetime) 
  • Theory determined econometric (statistical) analysis of large data sets (i.e. estimate the price elasticity of tobacco; or assess the impact of minimum price on alcohol consumption)
  • Cost effectiveness analysis: (i.e. alternate policing strategies: cost-effectiveness of cautioning for cannabis offences; a cost-effectiveness analysis of opioid substitution therapy upon release in reducing mortality among prisoners with a history of opioid dependence)
  • Cost utility analysis: (i.e. Cost utility of oromucosal cannabis-based medicine for spasticity in multiple sclerosis)
  • Cost benefit analysis: (i.e. Interventions to Promote Postsecondary Attainment: A Review of the Evidence and Benefit-Cost Analysis)

While some of these methods include the valuing of resources consumed (costs), others use purchase price information, or behaviour change to evaluate policy but in every example, the methods extend beyond costing – each involves some measure of what is being produced or what is being achieved.   I would suggest, however, that policy analysis in the AOD sector in Australia is severely limited by the lack of actual costs of providing treatment within the AOD sector.  Given the variety of funding mechanisms for the AOD sector (Ritter et al., 2014) this is not surprising. Treatment agencies seek and receive funding for programs and staff often work across programs thus making determining the actual cost per episode of care difficult to ascertain.  However, this lack of information on costs by treatment type further makes it challenging to understand just what the expenditure is ‘purchasing’ in terms of outcomes and whether resources are applied in the most efficient way to achieve the desired outcomes. 

In addition to considering the important gains to the individual, health economics brings the ability to move beyond the individual to considering outcomes that generate benefits for society (Mooney, 2012).


Drug Policy Modelling Program, N. (2017). Submission to Social Services Legislation Amendment (Welfare Reform) Bill 2017 Senate Community Affairs Legislation Committee. Canberra Parliament of Australia.

Mooney, G. (2012). The Health of Nations: Towards a New Political Economy. London, England: Zed Books Ltd.

Ritter, A., Berends, L., Chalmers, J., Hull, P., Lancaster, K., & Gomez, M. (2014). New horizons: the review of alcohol and other drug treatment services in Australia. Retrieved from Sydney:

Royal Australasian College of Physicians. (2017). Submission to Social Services Legislation Amendment (Welfare Reform) Bill 2017 Senate Community Affairs Legislation Committee. Canberra Parliament of Australia.

Social Services Legislation Amendment (Welfare Reform) Bill 2017, Australian Federal Parliament (2017).

UnitingCare Australia. (2017). Submission to Social Services Legislation Amendment (Welfare Reform) Bill 2017 Senate Community Affairs Legislation Committee. Canberra Parliament of Australia.