13 Research methods, statistics, critical review and evidence-based practice13.6 Economic analysis
13.6.7.4 Discounting
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Written by Resident Doctor Committee · Published
What discounting does
Discounting converts future costs and health gains to smaller present values, and the further away they fall, the smaller they become.
Present value = future value / (1 + r)^t, where r is the annual rate and t the number of years ahead.
Discounting is not an adjustment for inflation: costs are first set in a common price year, then discounted at a real rate.
How much the far future shrinks
Years ahead | Value of £1,000 at 3.5% | Value of £1,000 at 1.5% |
|---|---|---|
10 | £709 | £862 |
20 | £503 | £742 |
40 | £253 | £551 |
At 3.5%, value roughly halves every 20 years; at 1.5%, it halves about every 47 years.
Discounting alters the result most for a programme with costs paid now and benefits many years later, such as prevention, early intervention and childhood services.
UK rates
Framework | Costs | Health effects |
|---|---|---|
NICE reference case | 3.5% | 3.5% |
NICE exception | 1.5% | 1.5% |
Green Book, years 1 to 30 | 3.5% | 1.5% |
NICE may consider the 1.5% exception only when untreated people would die or live very severely impaired lives, treatment is likely to restore near-full health, and benefits last a very long time.
Should health share the rate for costs?
The Keeler-Cretin postponement argument shows that if health is discounted more slowly than costs, delaying an unchanged programme improves its incremental cost-effectiveness ratio.
The case against a single rate is that health is not a tradable asset, so the income-growth reason for discounting money does not transfer to health.