Understanding QALYs and cost-effectiveness

Healthcare resources – doctors, hospital beds, drugs – are finite. Therefore, all healthcare systems must find some way of rationing these resources. In market-based systems such as the US, this is primarily done through prices: patients with a higher ability to pay and better insurance have better access to healthcare and treatments.  

Alternatively, governments around the world often attempt to ration healthcare based on need, heavily relying on waiting lists, triage, and treatment prioritisation. However, government budgets are also finite, so when rationing healthcare based on need, it is crucial to have some objective measure of each treatment option’s cost-effectiveness. This ensures healthcare budgets prioritise treatments that provide the largest benefit for the lowest cost, providing a fair and evidence-based approach to rationing healthcare according to need. 

But how do you directly compare the cost-effectiveness of treatments with different effects across different disease areas? While costs are typically measured in a common unit (the relevant government’s chosen currency), treatment effects are not: how do we compare £1000 spent on extending the lives of late-stage cancer patients to £1000 spent on preventing cardiovascular disease? The treatments may save lives in both cases. Still, the patient populations are incredibly different, and the number of life years gained varies enormously across treatments and diseases.  

Furthermore, not all life years are equal: even if two different treatments extend life by the same amount, the quality of life in those years can vary dramatically. Moreover, often, we are comparing treatments which simply reduce symptoms, thereby improving quality of life without having any effect on life expectancy.  

For this reason, the National Institute for Health and Care Excellence (NICE) uses Quality-Adjusted Life Years (QALYs) to assess the cost-effectiveness of healthcare treatments in the UK, thereby informing its reimbursement decisions. QALYs provide a common, objective measure of health benefit on which healthcare treatments can be directly compared across different patient populations. By estimating the QALYs gained and costs incurred for each treatment option, we can rank each treatment based on its associated cost per QALY gained or its average cost-effectiveness ratio (ACER). 

In healthcare, we typically want to compare treatments: we want to know if a new treatment confers enough benefit when compared to the current standard of care to justify the additional cost. This is why cost-effectiveness is typically measured in terms of the incremental cost and incremental QALY benefit for a particular treatment when compared with the current standard of care. This gives rise to the incremental cost-effectiveness ratio (ICER), NICE’s key decision metric. For NICE, it is the ICER of a new treatment versus the current standard of care that is used to determine its cost-effectiveness. 

NICE makes this judgment based on a pre-determined threshold of £20-30,000 per QALY gained. If a new treatment’s ICER is above this threshold, it is not deemed cost-effective, meaning that NICE is much less likely to recommend that the drug be reimbursed in the UK. However, NICE’s approach to judging cost-effectiveness raises key questions: Are these thresholds appropriate for 2025? Are they based on a sound theoretical or empirical framework? Do they reflect real-world opportunity costs? How do they compare to thresholds used internationally? 

Written by Eleanor Butler, Aoife Kearney and Tommy Hoare

Decisive Dialogue 7th March 2025