National Information Center on Health Services Research and Health Care Technology (NICHSR)
Health Economics Information Resources: A Self-Study Course
Module 4: An Introduction to the Principles of Critical Appraisal of Health Economic Evaluation Studies
Economic evaluation is concerned with the summation of costs and benefits over time, BUT, individuals and society tend to defer costs to the future than incur them now and individuals and society tend to prefer benefits now rather than in the future.
Individuals’ or society’s preferences for when to incur costs and receive benefits is reflected in the discount rate. Any economic evaluation where costs and benefits occur over a number of years should consider discounting. Discounting adjusts for costs (and benefits) occurring at different points in time.
Hypothetical example of discounting* (costs in £ per person per annum)
Costs arising during:
Rate of inflation is 5% per annum
* From Donaldson C, Shackley P. Economic studies. In: Oxford Textbook of Public Health. 3rd ed. Detels R et al. (eds.). Oxford. Oxford University Press. 1997.
Here is what this table means. Costs occurring now; i.e., in Year 0 are not discounted. Costs occurring in Years 1 and 2 are discounted with Year 2 costs discounted at a higher rate as they are incurred further into the future. In other words, future costs are given less weight because they "impinge" on us less than an equivalent cost arising now; also the further in the future the costs, the less weight they are given.
Year 1 and Year 2 costs are discounted back to present values by multiplying the original cost in each year by a discount factor. An example of a formula used to calculate discount costs is included here.
The choice of discount rate varies between countries.