In lesson 4.1.2, we discussed how to calculate an incremental cost-effectiveness ratio. The incremental cost-effectiveness ratio, which is also known as an ICER is calculated as the difference between the cost of treatment A and the cost of treatment B divided by the difference between the benefits of treatment A and the benefits of treatment B. ICERs, therefore, are the costs needed to obtain one unit of benefit or effectiveness and ICER measures the benefits associated with an intervention relative to its cost. In this way, an ICER is a convenient way to combine costs and benefits into a single unit of measure. An important component of calculating any ICER is determining the reference intervention. In other words, what intervention or technology will the technology are trying to assess be compared to? It's often possible to use the current medical practice or standard of care as a reference intervention. However, if the technology you're trying to assess or the intervention you're trying to assess is new and the disease or treats does not have a standard of care, it's not possible to use that and a different reference intervention must be identified. When considering the reference intervention, it's also necessary to distinguish between independent events and mutually exclusive events. For example, medical therapy and lifestyle changes, such as a prescription and changing your diet are independent, but they can be used concurrently. However, bare-metal stent and a drug-eluting stent cannot be implanted in the same patient at the same time to treat the condition. This is an example of mutually exclusive interventions. Understanding these differences is important for determining the appropriate reference intervention. Next, let's consider the specific components of the ICER. First, the numerator, which is the changing costs. The cost of the intervention should include all costs associated with providing a treatment, which may include hospitalization costs, time costs, drugs, new technologies, or any other cost you can identify associated with the treatment. However, it's important to remember that any cost included in the denominator should not be included in the numerator. In other words, any "costs" avoided by an intervention are benefits included in the denominator and should not also be included in the numerator. Next, let's discuss the denominator in more detail. The denominator is simply the change in benefits, which can be measured in a variety of ways. Health-related benefits, such as number of symptom free days, time until mortality is one way to measure benefits. Alternatively, benefits could be measured financially by cost avoided or savings. Alternatively, quality of life measures could be used such as quality-adjusted life years. QALYs are commonly used when calculating ICERs because they take into account longevity and quality, and are considered more comprehensive than simple financial or health-related measures. However, depending on the audience, the scope and the goal of a cost-effectiveness analysis, any one of these types of measures may be appropriate. Having calculated the numerator and the denominator, we can now calculate the ICER as the change in costs divided by the change in benefits. The value of the ICER can then be used to determine whether or not an intervention is cost effective. So what makes a cost-effective intervention? Well, that depends. Recall that if we use QALYs, we need to assign a value to a life or a year of life. And that assumption will impact the value of the ICER calculated because there are numerous assumptions that go into any ICER calculation. There is no single cutoff or value for determining cost effectiveness. Generally, in the US, anything between $50,000 to $100,000 per QALY is considered a good buy or cost effective. The scope and goal of any cost-effectiveness analysis will determine how the ICER is interpreted. In the next lesson, we will discuss in more detail how to interpret the ICER, in particular using a graphical representation.