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. Time costs are a notable example of indirect or non-monetary costs that are taken into consideration for calculating economic costs but not for calculating accounting costs. In health care research, opportunity costs of health are another consideration, discussed later in the context of cost effectiveness analyses.

Acknowledging limited scope when opportunity costs are not considered

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. Researchers may wish to acknowledge this limitation, and readers should interpret results from these studies with some caution.¹ See an example of a study by HERC researchers which highlights the lack of telehealth studies examining time costs for patients and providers.

The most common approach for measuring opportunity costs

The most common way to measure 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.

Understanding theoretical complexity and nuance in measuring opportunity costs

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

Although measuring opportunity costs of time for working age adults using their hourly wages is a commonly accepted method¹ as described above, we highlight some theoretical complexities for an interested researcher. Health economists may sometimes disagree on how to measure opportunity costs.¹ Some definitions of opportunity cost suggest it is the cost of the best alternative which was forgone. For instance, ideally, any action should be compared with all relevant actions, including doing nothing.¹ Yet, it is often infeasible to identify all possible alternatives and also difficult to then determine which of the alternatives would have been the best alternative.² Furthermore, in cost effectiveness analyses, the “do nothing” option may be viewed as an unethical alternative, and many studies therefore do not include it as a relevant option. The convention for cost effectiveness analyses thus is to compare interventions of interest with existing practice.¹

The choice of comparisons included in a study can therefore play a crucial role in identifying opportunity costs. Researchers examining opportunity costs of any resource are advised to make explicit the alternative uses of the 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

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References

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

2. Sandmann, F.G., Robotham, J.V., Deeny, S.R., Edmunds, W.J., Jit, M. Estimating the opportunity costs of bed‐days. Health Economics, 2017.

Last updated: April 9, 2026