Cost Utility Analysis (CUA) is useful for evaluating, and comparing, programs that aim to reach the same goal in non monetary terms. CUS develops an overall measure of utility or value based on the preferences of individuals. Well-known application of cost utility analysis is in the health sector, with the use of Quality Adjusted Life Years (QALYs). The QALY allows each potential program to be measured according to the extent to which it extends life expectancy while also improving the quality of each year lived. Developing this indicator involves determining satisfaction derived from different health states.
Determine the attributes of utility/ value. Determine the utility of each single attribute. There are a number of methods to assess single-attribute utility:
- Proportional scoring: This method presents each attribute according to a common utility scale. This can be presented in a graphical manner. The x axis presents the lowest-scoring attribute to the highest. The y-axis presents the utility scale. Increasing amounts of an attribute are associated with increasing amounts of utility. The lowest amount of an attribute is assigned a utility of 0 and the highest a utility of 100. Other attributes can be plotted accordingly.
- Direct method: Again the low and high scores are given scores of 0 and 100. Individual stakeholders are then asked to score the remaining attributes.
- Variable probability method: Stakeholders assess their preferences for varying amounts of a range of probabilities. Individuals choose the probability that makes them indifferent between the highest scoring attribute and the lowest scoring attribute.
Assess importance weights. This involves determining the relative weight or ‘importance’ of each attribute to overall utility. The direct method and the variable probability method can be used to estimate importance weights.
- Direct method: Ask individuals to allocate a total of 100 points among attributes according to their relative importance.
- Variable probability method: Ask individuals to choose between two options when there is a 100% chance of A occurring and a 0% chance of B occurring. Change the probabilities until there is no difference between whether they choose option A or B.
Discount utility if utility gains occur over a period of many years.
Gather cost data. One method of valuing program inputs is the Ingredients Method. This involves identifying all of the ingredients of a program and their cost. An evaluator must make sure to include the cost of any resources that are contributed or donated. Common categories of costs are:
- equipment and materials
- other program inputs
- required client inputs.
Examine causality. The evaluation should be designed to determine whether it is the particular intervention that causes a change in the measure of utility.
Combine costs and utility. Divide the cost of each alternative by its utility. The ratio is the cost of obtaining a single unit of utility. The smallest ratios are the alternatives that provide a given amount of utility at the lowest cost.
Account for uncertainty by undertaking a sensitivity analysis. The sensitivity analysis identifies the parameters with the most uncertainty and identifies a range over which that parameter might vary. Then re-estimate the cost-utility ratios over the entire range of the given parameter (a one-way sensitivity analysis) or over two or more parameters (a multi-way analysis).
When to use this option: This method can be used where monetizing outcomes is not possible or appropriate and when the evaluator needs/wants to consider individual preferences.
Advantages to using this option:
- CUA makes careful attempts to consider individual preferences
- A large number of potential outcomes can be included in the evaluation
- CUA can contribute to consensus building and participatory decision-making as stakeholders are called upon to assess their preferences for diverse outcomes
Disadvantages to using this option:
- Results are often difficult to reproduce among different evaluators because of the numerous and sometimes conflicting methodologies that are used to estimate importance weights.
Don’t use a budget to develop project costs: A budget will give an evaluator information on what expenditure is planned. But it won’t provide information on what was actually spent. And a budget may not provide a yearly breakdown of costs. An evaluator might use the project budget as a starting point, but should also seek information elsewhere to determine accurate and annualized costs for all project ingredients.