The United States (US) health care system is in the midst of a transition from fee-for-service health care to “value-based health care” with increasing scrutiny on the high cost of orthopaedic surgical procedures.¹ Health care systems and policy makers are employing novel strategies, such as bundled payment programs, to reduce cost and improve patient outcomes. As such, research evaluating the cost-effectiveness of orthopaedic interventions has become increasingly important in both clinical and health care policy decision making. Historically, clinical decision making in orthopaedic surgery has been informed primarily by anecdotal surgeon experience, expert opinion, and small uncontrolled case series. This has evolved with greater emphasis on evidence-based medicine toward larger, multicenter clinical trials employing randomization, blinding, and patient-centered outcome measures. However, implicit in both of these approaches is the idea that the more effective intervention is always preferred, regardless of its cost. Economic analysis is an alternative approach that incorporates the cost of an intervention into the clinical and policy decision-making framework. Two underlying assumptions that are important for acceptance of this methodology are (1) resources are constrained that is, there is not an unlimited budget and (2) a more effective intervention may not always be preferred if the incremental benefit is small relative to the monetary cost.²

The first assumption is more widely accepted. In the United States, although health care spending is not fixed, the steady rise as a fraction of gross domestic product (GDP) over the last several decades has been labeled a health care “crisis.”³ There is no absolute threshold, but the idea that resources are not unlimited is not debated. The second assumption that certain high-cost interventions with small incremental benefit may be too expensive is more politically and ethically troublesome.⁴ An attempt to factor cost into a ranking system to determine Medicaid coverage in Oregon in the 1990s led to widespread public outcry due to concerns over rationing and government control of health care.⁵

To date in the United States, the Centers for Medicaid and Medicare Services (CMS) has accepted comparative effectiveness research, but has declined to use cost-effectiveness analysis for beneficiary coverage decisions.^6,7 In other countries, economic analysis has seen greater acceptance by governments seeking to control costs of health care and maximize scarce resources. Many countries have dedicated government agencies, such as the National Institute for Clinical Excellence (NICE) in the United Kingdom, that perform economic analysis, the results of which weigh heavily in coverage decisions in the frequently nationalized healthcare systems.⁸

Despite the absence of an explicit use of economic analysis by CMS in the United States, there are a growing number of studies published both in the orthopaedic and other medical literature.^9,10 Review articles have been published in every orthopaedic subspecialty summarizing the existing cost-effectiveness analysis (CEA) literature.^{11,12,13,14,15,16} The results are incorporated into decision making by private insurers, professional societies, and to some degree individual surgeons. It is, therefore, important for orthopaedic surgeons to have a basic understanding of the principles of economic analysis and familiarity with the interpretation of study results.

To date, the standard for CEA methodology in the United States is based on the recommendations of the Panel on Cost-effectiveness in Health and Medicine, published in 1996.¹⁷ The panel emerged due to the lack of standardization in CEA methods and aimed to put forth a set of recommendations for each component of a CEA that would form a base case, called the reference case, that should be performed in all studies. Although the authors recognized no single method applies to all circumstances, the goal of the reference case is to allow greater comparability across economic analyses. Furthermore, it provides a framework for the reader to evaluate the methodologic quality of studies being interpreted. More recently, a second panel on Cost-effectiveness in Health and Medicine was convened to update its recommendations, which were published in JAMA in 2016.¹⁸ These recommendations are incorporated throughout the chapter and summarized in an outline at its conclusions.

Although there is variability in the nomenclature used to describe types of economic analysis, the terminology described in this chapter is generally accepted.^19,20 Each approach shares the inclusion of cost but varies in the method and degree to which other data are incorporated. Table 1 summarizes each type of economic analysis and lists the strengths and limitations.

There are two major categories for CEA study design: clinical trial-based and model-based studies. In the former, cost data are collected in the context of a clinical trial through empiric observation. The latter relies on simulations, typically computer-generated, that make assumptions regarding the costs and effects of an intervention based on data from other sources. Each has specific advantages and disadvantages, and the two are frequently combined to achieve the best possible result.