What are Opportunity Costs in Healthcare?

Opportunity costs play a critical role in healthcare decision making. With limited healthcare budgets and resources, stakeholders must carefully consider the trade-offs involved with funding different programs and interventions. Understanding opportunity costs enables more informed and efficient allocation of scarce healthcare funds.

What Are Opportunity Costs?

Opportunity costs refer to the value of the best alternative that is forgone when a choice is made. Put simply, it is the benefit you miss out on when selecting one option over another.

For example, if you choose to spend an hour studying, the opportunity cost is whatever else you could have done with that hour – working, exercising, sleeping, etc. The opportunity cost represents the value of the next best option.

In healthcare, opportunity costs come into play when deciding which programs and interventions to fund with limited budgets. Choosing to fund program A means not funding program B with those same resources. The opportunity cost is the health and economic benefits that would have resulted from funding program B.

Considering opportunity costs helps decision makers maximize value from healthcare spending. Resources should flow toward programs with the highest net benefits until budgets are exhausted. Analyzing opportunity costs identifies programs displaced by other options which may represent better value.

Why Are Opportunity Costs Important in Healthcare?

Opportunity costs are a critical concept in healthcare economics given:

  • Scarce Resources – Healthcare budgets are limited relative to potential interventions and demands. Tough funding trade-offs must be made.

  • Aging Populations – Increasing elderly populations will strain healthcare systems. Careful prioritization of spending will be required.

  • New Technologies – Emerging treatments are often costly. Assessing opportunity costs can inform if benefits outweigh costs.

  • Inequities – Not all populations can access or afford healthcare services. Opportunity costs highlight what is given up when resources are allocated to certain groups over others.

Considering opportunity costs leads to more value-based and equitable healthcare spending. Resources flow toward programs generating the greatest improvements in population health until budgets are fully utilized.

How Are Opportunity Costs Measured in Healthcare?

The opportunity cost of a healthcare intervention is best measured by the health benefits that could have been gained by funding the next best alternative use of those resources. Common metrics include:

  • Quality-Adjusted Life Years (QALYs) – QALYs combine length of life and quality of life into a single metric. One QALY represents a year of life in perfect health. Interventions are assessed based on cost per QALY gained.

  • Disability-Adjusted Life Years (DALYs) – DALYs quantify years of life lost due to early death and years lost due to disability from a health condition. Interventions are evaluated based on cost per DALY averted.

  • Life Years Saved – Simple assessment of gains in life expectancy resulting from an intervention.

For example, say program A yields 100 incremental QALYs over existing care at a cost of $2 million. Program B yields 80 QALYs for the same $2 million cost. The opportunity cost of choosing program A is the 80 QALYs that could have been gained from program B.

Careful measurement and comparison of outcomes enable smarter healthcare funding decisions. Resources should flow toward programs with lower costs per QALY until budgets are fully utilized.

Examples of Opportunity Costs in Healthcare Funding

Opportunity costs arise across many healthcare funding decisions at patient, organizational, and societal levels:

  • Medical procedures – Choosing robotic surgery over traditional open surgery incurs opportunity costs if evidence does not support superior outcomes from robotics.

  • New cancer drugs – Funding costly new cancer drugs may displace resources from screening programs and routine care yielding greater population benefits.

  • Hospital programs – Building a new orthopedic wing may limit funds available for mental health and preventative care services. The health gains forgone should be considered.

  • Insurance coverage – Covering high-cost low-value care incurs opportunity costs from not using those premium funds for cost-effective basic care.

  • Workforce – Increasing specialist training reduces primary care workforce development. Primary care access and prevention benefits may be forfeited.

  • Research funding – Government research grants toward rare diseases divert resources from common condition research with greater population impact.

As these examples highlight, opportunity costs apply at micro and macro levels of healthcare funding allocation. Awareness of opportunity costs leads to more efficient utilization of limited healthcare resources.

Challenges in Assessing Opportunity Costs

While the importance of considering opportunity costs is clear in theory, challenges exist in accurately measuring and accounting for them in healthcare decision making:

  • Data limitations – Quality evidence on outcomes and costs of alternatives is not always available, limiting comparisons.

  • Uncertain outcomes – Projecting and quantifying health gains from interventions involves assumptions and uncertainty.

  • Difficult trade-offs – Choices between funding rare disease drugs versus preventive programs elicit ethical dilemmas.

  • Vested interests – Providers and industry stakeholders may resist evaluations of opportunity costs which threaten their revenues.

  • Siloed decision making – Narrow focus on short term budgets may overlook broader health system opportunity costs.

  • Status quo bias – Tendency to maintain current resource allocation patterns even when suboptimal.

Despite these challenges, considering opportunity costs, even imperfectly, almost always yields better value than ignoring them in healthcare funding decisions.

Strategies to Overcome Opportunity Cost Challenges

Some strategies to address the challenges around opportunity costs in healthcare resource allocation include:

  • Conduct rigorous cost-effectiveness analyses of new interventions and programs versus existing alternatives. These provide data to inform opportunity cost evaluations.

  • Build decision-analysis models to estimate and compare expected costs and outcomes under different funding scenarios. Quantify the opportunity costs when resources are shifted.

  • Implement value-based healthcare frameworks, emphasizing value per dollar spent. This focuses decisions on opportunity costs.

  • Establish health technology assessment processes to formally evaluate opportunity costs before adopting new medical technologies and drugs.

  • Utilize public deliberation and engagement to surface societal values and preferences around difficult funding trade-offs and opportunity costs.

  • Promote transparency and accountability in how healthcare resources are allocated by publically reporting cost-effectiveness and opportunity cost estimates.

While not eliminating all difficulties, these steps can embed opportunity cost considerations more deeply into healthcare funding processes. This enables smarter allocation of limited resources.

Conclusion: Opportunity Cost Awareness Drives Better Healthcare Value

Opportunity costs are unavoidable in healthcare given funding constraints and growing demands. explicitly evaluating opportunity costs though enables better funding decisions which maximize outcomes and benefits achieved from scarce healthcare resources.

Quantifying opportunity costs in terms of cost per QALY, DALY, and life years provides a metric for comparing the value of investing in competing programs, interventions, and technologies.

While challenges exist in accurately measuring opportunity costs, considering them qualitatively leads to more efficient and equitable allocation of healthcare resources as compared to ignoring them.

With aging populations and increasing healthcare costs on the horizon, all healthcare systems must focus resources toward high-value interventions with lower opportunity costs. Opportunity cost awareness can help stretch limited budgets further and attain better population health.

Health Economics – Profit Maximization, Intro and Opportunity Costs


What is an example of opportunity cost in a hospital?

For example, giving additional tasks to current full-time healthcare workers will not incur any additional financial costs (assuming they do not need to work overtime for the additional tasks), but their time still has an opportunity cost in terms of the other duties that were not performed (or poorly performed).

What are examples of opportunity costs?

When economists refer to the “opportunity cost” of a resource, they mean the value of the next-highest-valued alternative use of that resource. If, for example, you spend time and money going to a movie, you cannot spend that time at home reading a book, and you can’t spend the money on something else.

What is nursing opportunity cost?

To the nurse, it is the value of the forgone opportunity to work somewhere else. To health care or society at large it is the value of the best alternative use of the nurse’s la- bour. In most cases of economic evaluation, the relevant opportunity cost will be that to society in some sense.

What is considered an opportunity cost?

Opportunity cost is the forgone benefit that would have been derived from an option other than the one that was chosen. To properly evaluate opportunity costs, the costs and benefits of every option available must be considered and weighed against the others.

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