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How health economics can drive innovation
May 16, 2025For innovators working to revolutionise healthcare, understanding the intricate balance of cost, value, and outcomes is crucial but complex. In this slightly longer blog than usual, our health economist Anna Buylova offers her insight to help you align your innovation to NHS priorities and accelerate its impact.
So, you’ve got your idea for a health innovation aligned with a clinical need. But what’s its economic value, and how do you measure it?
If you believe your innovation can reduce waiting lists, address bottlenecks in the system, save costs to the NHS or address health inequalities, you’ll need a framework that demonstrates its value, aligns with healthcare priorities and supports decision-makers in adopting and funding your solution.
Whatever type of economic evaluation framework you choose depends on what the objectives are of the decision makers. You may be able to address two objectives with the same approach. Either way it’s never too early to speak with a health economist.
Even before you think of implementing your first pilot, reach out for guidance on which area to focus on. Often, health economists can create a data collection template for you and suggest the best analyses.
Understanding how health economics is used in decisions about innovations
To maximise fulfilment of our health wishes with finite resources, a general principle is that we should allocate resources to interventions that represent good value for money.
When resources are allocated to one healthcare programme, there is a corresponding cost attached - which we call opportunity cost. It is the potential health benefit which could have been achieved had those resources been allocated to an alternative programme instead.
As a simple example, if an NHS Trust only has £15,000, it needs to choose between alternatives: three hip replacements, 10 hernia surgeries or 100 MRIs. If the Trust chooses three hip replacements, then the opportunity costs are 10 hernia surgeries or 100 MRIs which the Trust could have had instead.
A real case study by the London School of Economics, published in The Lancet, found that over the past 20 years, the NHS spent around £75 billion on new medicines, which led to 3.75 million extra years of full health for patients. However, if that £75 billion had been redirected to existing NHS services it would have generated 5 million years of full health.
So, budget holders are always having to consider the best value proposition for the funds they have.
When a new product enters the market, health economists can consider many things but mainly they consider the opportunity costs of reallocating funds toward it.
What is economic evaluation?
In a nutshell, economic evaluation is a method for comparing alternatives to determine which offers the greatest health outcomes based on costs and benefits. Prior to deciding on the best framework, health economists start by considering the following: perspective, time horizon, outcomes and data availability.
Perspective
The perspective is the point of view adopted and determines which costs and benefits to include.
Decision makers at different levels and in different parts of the healthcare system have different priorities - mainly because they have budgets that need to be spent over a predefined timeframe or have different immediate objectives.
For example, if a hospital Trust perspective is adopted, only outcomes and costs that impact the Trust’s budget would be included (such as ED admissions, length of stay, outpatient appointments) and hence primary care or out-of-pocket patient costs would be excluded.
Time horizon
This is the duration over which health economists calculate costs and benefits.
It is important because costs and benefits generally accrue over time and in most cases at different rates.
If the time horizon is one year, then anything relating to patient benefit or cost incurred/saved after one year is excluded from the evaluation.
Of course, the benefits to a patient from a new diagnostic tool — such as one that detects cancer earlier than current NHS methods — would likely be gained gradually over the course of the patient's life.
If the chosen time horizon is the patient's lifetime, both the accrued benefits and costs can be extrapolated using modelling techniques such as Markov models.
The different kinds of costs
Costs fall into various categories. If you are considering running a pilot, it’s always best to focus on collecting costs relevant to the decision-maker's perspective and for the period that matches the decision-maker's time horizon.
Direct costs are those associated directly with an intervention e.g. staff time.
Indirect costs are those that are not associated directly with an intervention e.g. loss of wage earnings to attend treatment.
Intangible costs are those that are difficult to attach a monetary value to e.g. pain, anxiety, patient experience.
The different kinds of benefits
Benefits also fall into various categories. There are:
Effects are those which have an immediate and direct effect on health, and which are generally measured in clinically defined units, such as change in cholesterol or reduction in tumour size.
Utilities reported over time represent individuals’ preferences for different health states and are used to derive health-related quality of life, which are recommended by NICE as preferred measure for use in appraisals. This is discussed in more detail below.
Impact are benefits which directly impact resources. e.g. emergency department admissions avoided or reductions in length of hospital stays.
Data availability
Although routinely collected data is available, it’s not all plain sailing.
Challenges include:
Navigating the NHS healthcare system to follow the full patient pathway.
Finding data that can give you the clinical outcomes directly useful to you.
Navigating information governance if dealing with multiple organisations.
- Having the budget for data access, such as Clinical Practice Research Datalink (CPRD).
Opportunities include:
Some resources are free such as the Cochrane database and peer-reviewed publications which can provide useful estimates.
Data linked to incentives or performance management are generally well recorded (this includes patient characteristics such as ethnicity).
ICBs can sometimes bring together data agreements more effectively meaning you can gain access to the data you need.
The QALY
Quality-Adjusted Life Year (QALY) is one of the more famous aspects of health economics. It is a way of quantifying health benefits, combining both the length and quality of life. Arguably, it can be used to quantify health benefits for any patient who is impacted by any health intervention and can help when comparing benefits and opportunity costs in different disease areas.
The quality of someone’s life can be measured by collecting feedback on subjective experiences such as mobility, pain, usual activities, and mental health via a questionnaire, e.g. EQ-5D.
Scores are then mapped to an overall quality of life on a scale of 0-1, where 1 is equivalent to perfect health and 0 is a state equivalent to death. For example, across the UK population (other countries have their own QALY mean values), rheumatoid arthritis has a mean value of 0.87, while multiple sclerosis has a mean value of 0.53.
The strength of using QALYs is that they capture key aspects of health, namely, quality of life and length of life, and allow comparisons across different disease areas.
The limitation is that collecting QALY data can be resource-intensive as it requires individual patients to fill in questionnaires and someone to administer questionnaires. Also, it is a measure of subjective experience at a given point in time and arguably does not capture important aspects of health like equity and patient choice or experience.
What are the different types of economic evaluation?
Remember, economic evaluation is a gradual process. While NICE appraisal is the gold standard for market access across England and Wales, it generally requires cost-utility or cost-effectiveness analyses and a strong evidence base. Prior to NICE appraisal, you can focus on shorter-term goals to generate an initial evidence base for your intervention.
You could start with something simple, like a budget impact analysis and small pilot studies. Pilots can lead to the innovation being embedded in the location where it was carried out and, more widely, if the outcomes are good.
Economic evaluation can be viewed as an incremental process that begins with basic economic reasoning and gradually incorporates more evidence, such as the clinical benefits or improvements in quality of life provided by your technology. Each time you run a pilot study, you may be thinking about collecting more evidence to strengthen the case for your innovation.
There are resources available to help you get started, including various templates (such as for budget impact models) and costs from sources like PSSRU and NHS reference costs. I would also recommend conducting literature reviews to understand existing evidence on pathways and competitors, as well as identify key parameters.
As you get more evidence from pilots, replace data from the literature in your economic models with specific data on your technology.
Lastly, do not overlook the value of qualitative evidence, as it can really help strengthen your economic argument.
Dr Anna Buylova is a Lead health economist at the HIN SL with over 15 years of experience in health economics. This includes decision modelling, methodologies of study design and conducting health economic evaluations across a range of diseases, settings and population groups as well as measuring determinants of socio-economic inequality in access to healthcare services.
She has worked in academia, the NICE early assessment centre and the wider NHS. She has an MPhil in Economics from the University of Cambridge and a PhD in Biostatistics from Imperial College London. She is particularly interested in emerging methodology trends both in health economics and statistics, and in making the most of data to improve care for patients.