13 Research methods, statistics, critical review and evidence-based practice13.6 Economic analysis
13.6.7.1 Direct and indirect costs
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Written by Resident Doctor Committee · Published
Perspective
Perspective decides which costs an analysis counts: provider, NHS and personal social services (PSS), patient and family, employer or society.
The NICE reference case uses NHS and PSS costs and excludes productivity costs.
Three kinds of cost
Type | What it is | Examples |
|---|---|---|
Direct | A resource consumed in delivering the intervention or care itself, priced from what the provider spends | Staff time, drugs, bed days |
Indirect | The value of production lost because of illness, treatment or premature death, not money spent on care | Work absence, reduced output, lost future earnings |
Intangible | A non-monetary burden with no market price, which resists valuation in money | Pain, fear, distress, shame |
Direct costs
Direct medical costs are staff time, medication, inpatient days, investigations, equipment and facilities.
Direct non-medical costs are social care, supported accommodation, transport, childcare, criminal justice resources and the patient's own spending.
In psychiatry, staffing and admissions often cost more than the drugs, so a dearer drug can lower total costs.
Indirect costs
"Indirect costs" means productivity losses in health economics but shared overheads in accounting, so "productivity costs" is the clearer term.
Overheads already inside a unit cost are not added again.
Approach | What it counts | Size of estimate |
|---|---|---|
Human capital | All production lost over the working period, valued by wages and employer costs | Large, especially when illness starts in early adulthood |
Friction cost | Production lost until a replacement restores it, plus recruitment and training | Usually lower |
Unpaid care is valued by the best alternative use of the carer's time or by the cost of equivalent paid care.
A retired person's leisure still has value: having no wages does not make the opportunity cost zero.
Transfers and double counting
Benefits and taxes are transfer payments: they move purchasing power without consuming resources, so they stay out of societal totals.
Counting both a payment and the resource it funds is double counting.