Cost-Effectiveness Analysis in Healthcare

Legislative and Regulatory Position:

The Academy of Managed Care Pharmacy (AMCP) supports policies that encourage the incorporation of cost-effectiveness considerations into health care decision-making. Cost-effectiveness analysis (CEA) is a method to assess the value of the clinical outcomes of a treatment relative to the cost. This type of analysis aligns with managed care objectives to optimize patient outcomes, maintain affordability, and encourage sustainability.¹ CEA offers guidance to decisions about coverage and pricing to support managed care strategies—like formulary design, prior authorization, step therapy, and value-based contracting.² Policies that promote cost-effectiveness help to ensure patients have access to treatments that deliver meaningful health outcomes at sustainable costs. 

Comparative Effectiveness Research vs. Cost-Effectiveness Analysis

CEA and comparative effectiveness research (CER)³ are each used in evaluating treatment options, yet they take different approaches. CER concentrates on determining which treatments are effective for specific patient groups, establishing a solid basis for coverage and utilization decisions.^{3, 4} On the other hand, CEA also considers economic factors, assessing both the outcomes from a given intervention and the costs associated with that intervention. AMCP advocates for federal leadership in promoting these tools to prioritize patient-centered outcomes and evidence-based practices. 

Use of Quality-Adjusted Life Years and Alternative Metrics

CEA is based on cost per outcome. These outcomes can vary from disease-specific outcomes to patient-centered quality of life outcomes. The most commonly used outcome measure in CEA is the quality-adjusted life year (QALY).⁵ QALYs combine both the length and quality of life into a single metric. While QALYs facilitate comparisons across various health conditions, they also raise ethical and legal issues. The Affordable Care Act prohibited the use of comparative effectiveness evidence in Medicare in ways that may discriminate against older adults, people with disabilities, or those facing terminal illnesses.⁶ Additionally, HHS explicitly prohibited the application of value assessment methods—including QALYs—if they are used to devalue life-extension for individuals with disabilities in federally funded programs.⁷

To address the limitations of QALYs, several alternative measures have been proposed:

• Equal Value Life Years (evLY): The evLY approach was created to remove the biases associated with QALYs by valuing each additional year of life equally, no matter the individual’s health condition or disability.⁸ In contrast to QALYs, which assign less weight to years lived in poor health, evLY applies a standardized "full health" value to all additional years. 
• Equal Value of Life Years Gained (evLYG): The evLYG is based on a rationale similar to that of evLY.⁹ It treats all life years gained as equally valuable, regardless of an individual's health status or quality of life. 
• Generalized Risk-Adjusted Cost-Effectiveness (GRACE): The GRACE model recognizes that the value of health improvements varies based on a person's initial health condition.¹⁰ GRACE ensures that treatments for patients in worse baseline health are not undervalued and considers patients' risk preferences, understanding that the perceived value of interventions can differ based on whether they decrease uncertainty or offer the possibility of significant health gains.^{11, 12}

Conclusion

CEA plays a vital role in ensuring that health care resources are utilized responsibly and fairly, with an emphasis on patient-centered results. Although traditional metrics like QALYs have served as a common method for assessing healthcare value, they also present ethical and legal challenges that need to be addressed. The development of alternative metrics—such as evLY, evLYG, and GRACE—demonstrates a growing awareness that value assessments need to incorporate both economic sustainability and equity among various patient groups. AMCP supports further evaluation of these metrics and developing policies that encourage thorough, transparent, and innovative methods for conducting cost-effectiveness analyses. These strategies should include real-world evidence and a focus on equity and should acknowledge patients’ experiences.

Approved by the AMCP Board of Directors, December 2025

See also: 

AMCP Legislative and Regulatory Positions

¹ Kim, DD & Basu, A. How Does Cost‑Effectiveness Analysis Inform Health Care Decisions? (2024). Available at: https://edhub.ama-assn.org/ama-journal-of-ethics/module/2782545 

² AMCP Format for Formulary Submissions v5.0 (2024). Available at: https://www.amcp.org/sites/default/files/2024-04/AMCP-Format-5.0-JMCP-web_0.pdf

³ AMCP Comparative Effectiveness Research and Patient‐Centered Outcomes Research (2025). Available at: https://www.amcp.org/legislative-regulatory-position/comparative-effectiveness-research-and-patient-centered-outcomes-research 

⁴ Agency for Healthcare Research and Quality. (2024). Methods Guide for Comparative Effectiveness Reviews. Available at: https://effectivehealthcare.ahrq.gov/products/collections/cer-methods-guide

⁵ Bleichrodt H & Quiggin J. Life-cycle preferences over consumption and health: when is cost-effectiveness analysis equivalent to cost–benefit analysis? (1999). Available at: https://www.sciencedirect.com/science/article/abs/pii/S0167629699000144?via%3Dihub 

⁶ 42 U.S.C. 1320e-1(d)(1). Available at: https://www.ssa.gov/OP_Home/ssact/title11/1182.htm https://www.law.cornell.edu/uscode/text/42/1320e-1

⁷ 45 C.F.R. 84.57. Available at: https://www.ecfr.gov/current/title-45/subtitle-A/subchapter-A/part-84/subpart-F/section-84.57

⁸ Campbell, JD, Whittington, MD & Pearson, SD. An Alternative Measure of Health for Value Assessment: The Equal Value Life-Year (2023). Available at: https://doi.org/10.1007/s40273-023-01302-6

⁹ Paulden M, et al. Logical Inconsistencies in the Health Years in Total and Equal Value of Life-Years Gained (2024). Available at: https://www.valueinhealthjournal.com/article/S1098-3015(23)06201-0/fulltext

¹⁰ Lakdawalla, DN & Phelps, CE Generalized Risk-Adjusted Cost-Effectiveness (GRACE): Ensuring Patient-Centered Outcomes in Healthcare Decision-Making (2021). Available at: https://www.ispor.org/publications/journals/value-outcomes-spotlight/vos-archives/issue/view/patients-versus-process-the-data-and-the-drivers-behind-patient-centered-outcomes/generalized-risk-adjusted-cost-effectiveness-(grace)-ensuring-patient-centered-outcomes-in-healthcare-decision-making

¹¹ Lakdawalla, DN & Phelps, CE. The Generalized Risk-Adjusted Cost-Effectiveness (GRACE) Model for Measuring the Value of Gains in Health: An Exact Formulation (2023). Available at: https://www.cambridge.org/core/journals/journal-of-benefit-cost-analysis/article/generalized-riskadjusted-costeffectiveness-grace-model-for-measuring-the-value-of-gains-in-health-an-exact-formulation/9BC67759A734806BBADF3B3259DCEE7C

¹² Gibney, M. A New Way of Determining a Drug’s Value — with Health Equity in Mind (2024). Available at: https://www.pharmavoice.com/news/drug-pricing-value-milliman-qaly-solv-icer-nice/726482/