Health Economics Metrics

Topic 1 of 76 · Economic reasoning foundations

Opportunity Cost

Opportunity cost is the value of the best alternative you give up when you commit a resource. In a health system with a fixed budget, spending £1 million on one thing means £1 million of health not produced somewhere else.

Why it matters

Opportunity cost is the deepest idea in health economics, and the one software engineers most often skip. Health budgets are fixed in any given year, so a new technology is never funded from "extra" money — it displaces something. The question a payer actually asks is not "is this good?" but "is this better than what the same money currently buys?"

This is why cost-effectiveness thresholds exist at all: the threshold is an estimate of the health that money buys at the margin of the current system. See willingness-to-pay thresholds.

The math

There is no single formula; opportunity cost is a comparison discipline:

Opportunity cost of choosing A = value of best forgone alternative B
Net gain from A = value(A) − value(B)

The empirical benchmark: Claxton et al. (2015) estimated the NHS produces one QALY for roughly £13,000 at the margin. So £13,000 spent on a technology that produces less than one QALY makes the nation less healthy, even if the technology "works."

Worked example

An NHS trust's transformation budget can fund exactly one of:

  • Option A: e-rostering software — saves £400,000/year in agency staffing spend.
  • Option B: discharge-coordination software — saves 2,000 bed days/year. At a marginal cost of about £150 per bed day actually freed, that is £300,000/year, plus earlier treatment for waiting patients.

Funding A means giving up B. The opportunity cost of A is B's £300,000 + patient benefit; the net case for A is only the difference, not A's headline £400,000. Any business case that compares a proposal against "do nothing" instead of the best alternative overstates its value.

Software engineering connection

Engineering capacity is a fixed budget too — roadmap slots, not pounds. A platform team that funds tool A saving engineer-hours at £500/hour when tool B delivers the same at £200/hour is destroying capacity, exactly as a health system funding a £40,000/QALY drug displaces £13,000/QALY care. The discipline transfers directly:

  • Always name the comparator ("versus what?").
  • Value engineer time at what it would otherwise produce, not at salary alone.
  • Treat "we have budget left" as the beginning of the analysis, not the end.

Pitfalls

  • Comparing against nothing. The correct comparator is the next-best use of the money, which is rarely "do nothing."
  • Assuming saved time has zero opportunity cost. Time saved is only valuable if redeployed to something valuable — see cash-releasing vs non-cash-releasing savings.
  • Ignoring displacement. "The budget will expand to fit" is almost never true in a national health service in-year.

Sources