HERC: Budget Impact Analysis
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Budget Impact Analysis

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Overview

A budget impact analysis is an economic assessment that estimates the financial consequences of adopting a new intervention. In a budget impact analysis, you estimate the cost of implementing an intervention (Wagner et al., 2020) and compare these costs to changes in downstream health care costs for an organization (Wagner, Dopp, and Gold, 2020). This narrow type of cost analysis can inform questions of an intervention’s feasibility within budgetary realities and whether the intervention will pay for itself. See Wagner, Dopp, and Gold (2020) for an example of a budget impact analysis using a cardiac rehabilitation intervention as a case study.

Conducting a Budget Impact Analysis

Points to Consider

Perspective

As a budget impact analysis is often used for resource allocation purposes, it takes a payer's perspective and uses a short-term time horizon (often 1 to 5 years). A budget impact analysis does not use discounting. Results should be presented on an annual or quarterly basis, or in whatever increment of time that is relevant to the decision maker.

Costs

The focus of a budget impact analysis is the direct costs of specific resources needed to put the intervention into effect, such as supplies, equipment, and staff. Because the budget impact analysis uses a short-term time horizon, and overhead costs are fixed in the short term. Typically costs that are fixed are excluded from the analysis (Wagner et al., 2020). This distinguishes budget impact analysis from cost-effectiveness studies, which typically all costs, assuming all of them are variable. This difference can be important, as some fixed costs, such as overhead, can account for a substantial part of the cost of operating a hospital or health care system.

Data

A budget impact analysis typically requires analysts to measure changes in participant’s downstream health care use and costs. Two common sources of cost and utilization data are administrative data and self-report data. Administrative data can simplify patient tracking, although analysts will need to make decisions about how to extract, transform, and summarize the data. Utilization and costs can also be tracked using self-report data. Although self-report lacks the precision of administrative data, there are methods researchers can use to strengthen precision in self-report. See Wagner, Dopp, and Gold (2020) for details about using administrative and/or self-reported data.

Substitution or Add on Service

When setting up a budget impact analysis, one should consider whether the intervention is replacing the existing standard of care (substitution), is being used in addition to the existing standard of care (combination) or is being used only in situations where there has been no existing care (e.g., due to patient intolerance of standard care). In the case of substitution, cost offsets should be included in the model. In all cases, if the intervention causes changes in health care utilization (due to changes in outcomes, symptoms, and/or adverse events), this should be included. 

Models vs Empirical Data

Some BIA models can be created in Excel with a few parameters and assumptions. This is possible, for example, if the pharmacy service is considering switching out one medication for a different medication (Mauskopf et al., 2007; Sullivan et al., 2014). Such modeling exercises are less compelling for implementation studies. In these sitatuation, analysts might consider empirical analyses; for example, see Daniels et al. (2024). 

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Budget Impact Analyses versus Cost-Effectiveness Analyses

A budget impact analysis can be performed in addition to a cost-effectiveness analysis. A cost-effectiveness analysis evaluates whether an intervention provides value relative to an existing intervention (with value defined as cost relative to health outcome). A budget impact analysis evaluates whether the high-value intervention is affordable. For example, a cost-effectiveness analysis may indicate that Drug A is a good value relative to Drug B because it has an incremental cost-effectiveness ratio (ICER) of $40,000 per Quality-Adjusted Life Year. This means that per person, one needs to spent $40,000 additional dollars to provide each patient with Drug A. If there are 50,000 patients within a health system that need this drug, the healthcare system will have an additional $2 billion dollars of budget impact to treat these patients, which may not be affordable.

Similarities and differences between budget impact analyses and cost-effectiveness analyses
Features Budget Impact Analysis Cost Effectiveness Analysis
Perspective Payer Societal
Time Horizon Short-term Long-term/Lifetime
Model Inputs Payer-specific Population-average
Model Output Cost Cost and Health Outcomes
Uses Discounting No Yes
Fixed Costs Excluded Usually included, assuming that all costs are variable
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Resources

 

Last updated: April 24, 2025