HERC: Opportunity Costs
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Opportunity Costs

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Opportunity costs

The opportunity cost of any given action or decision is typically defined as the value of the forgone alternative action or decision. That is, opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen. In economics, opportunity cost represents the relationship between scarcity and choice. It incorporates all associated costs of a decision, both explicit and implicit.

Opportunity costs are a major concept in economics and the key distinction between economic costs and accounting costs. Accounting costs are the monetary costs recorded on the books, whereas economic costs include accounting costs plus opportunity costs. Indirect or non-monetary costs that are taken into consideration for calculating economic costs but not for calculating accounting costs include most notably time costs. In health care research, there exist opportunity costs of health as well, discussed more later in the context of cost effectiveness analyses.

Researchers conducting cost evaluations in health care often use available accountancy data, and accountancy practices are not meant to measure opportunity costs. Therefore, insights derived from research that did not consider opportunity costs will be limited in scope and researchers may wish to acknowledge this limitation and readers should interpret results from these studies with some caution.1

However, despite opportunity costs being a fundamental concept in economics and a critically important one for understanding decision-making by individuals and organizations, there are several complexities in applying the concept of opportunity costs, which lead to few research studies that explicitly measure opportunity costs.

Health economists often disagree on how to measure opportunity costs.1 For instance, ideally, any action should be compared with all relevant actions, including doing nothing.1  The choice of comparisons included in a study can play a crucial role for identifying opportunity costs. It is often infeasible to identify all possible alternatives in order to identify the next best alternative.2 For instance, when measuring costs of one intervention with another, as in cost effectiveness analyses, the “do nothing” option is viewed as unethical, and many studies therefore do not include it as a relevant option. The convention is to compare interventions of interest with existing practice.1

Researchers examining opportunity costs of any resource are advised to make explicit the alternative uses of that resource they are considering. To this extent, it can help to clarify the perspective of the study, i.e. societal, patient, provider etc. A societal perspective incorporates all the costs and benefits regardless of who incurs or obtains them. Limited or narrowed perspectives may make it seem like costs are being reduced and potentially mask that costs are merely being shifted from one party or sector to another.1 Clarifying the perspective of the study is important for defining a range of opportunity costs to be considered in a given study.1

The most commonly accepted form of measuring opportunity costs of time for working age adults is their hourly wages in paid work.1 Researchers using this measure should take into account whether the time lost involves time that would have earned wages or time that would have been used for leisure/recreational purposes (and the value of the leisure time), and the likelihood of individuals being unemployed during the study period.

 


References

1.           Palmer, S., Raftery, J. Opportunity Cost. the BMJ. Published online 1999.

2.           Sandmann, F.G., Robotham, J.V., Deeny, S.R., Edmunds, W.J., Jit, M. Estimating the opportunity costs of bed‐days. Health Econ.