Oxford Healthcare Value Briefing – No. 5

Oxford Healthcare Value Briefing – No. 5

This online monthly briefing from Better Value Healthcare, in Oxford, will provide the latest information on value. Including podcasts, book reviews and word of the month.

Where does money come from when there is no more money available?

Over the last twenty years, but less so in the last five years, we have become accustomed to a pot of new money into which we could reach to fund innovation or service improvement. But, we are now in a stage where there is no growth like there was before the Lehman’s Brother debacle, so where can the money come from? Well, the approach that is used in many industries is marginal analysis. Namely you take three budgets for example the budget for people with heart disease, the budget for people with cancer and the budget for people with respiratory disease, and you ask each of the budget holders what would be the effect of moving half a million pounds from their budget, and also ask them what would be the effect of increasing their budget by five hundred thousand pounds.

Now obviously it is a zero-sum game, so they cannot all get an increase or decrease, but you might finish up with a mix. Maybe with one of the budgets there is a very strong case for investing resource, so you might want to switch money from another. Sometimes you find that you make people think about something that they would like to do, and then within their own budget having thought out what was the effect of taking money out, they find resources within their own budget.

This is the process of marginal analysis; so you have a budget of fifty million pounds and you are either adding one million or losing one million you have to work out what is the affect at the margin. This of course requires budgeting that not only focuses on health centres and hospitals but which also focuses very much on programmes and systems. We are lucky in England because we have the only programme budgeting system in any large developed country. That is the focus of this month’s briefing.

Word of the Month – Marginal Analysis

Starting with a particular mix of services and analyzing changes in that mix. If resources can be shifted to produce greater benefit then this should be done.


When changes are taking place, for example in healthcare budgets, the changes take place at the margin – namely, if there are two budgets for £100m, it does not happen that one budget is cut completely with the £100m being given entirely to the other £100m budget. What happens much more often is a debate about taking £1m from one of the budgets and giving it to the other. The £1m that is cut is cut at the margin, and the analysis of the impact of the budget reduction or increase is always made at the margins in what is sometimes called in programme budgeting “marginal analysis”.

When considering whether or not to fund a new service its cost effectiveness can be considered in isolation. However in a world in which resources are finite, and not increasing, it is always important to consider the opportunity cost. One reason for doing this is to consider the investment of resources by the impact it would have of the margin of the budget to which it is being added. The same of course can be said to the cut in a budget. The aim of allocation is to achieve optimum allocation of resources, a point defined by the economist Pareto, as the point of indifference. This point is reached but it is not possible to gain more benefit from resources by switching a single pound, euro or dollar from one budget to another. There is no record of any health services ever having reached this point. Examples of 
used in an extract 
 21st Century

“The equating of the ratios of marginal benefit to marginal cost would then come in to play. The important points to be drawn from this are:

1) The determination of the boundary of care – and hence the balance of care –is a function of the relative costs and benefits of care in the different locations; and

2) To determine the balance of care it is not necessary to determine the costs and benefits of care for all individuals but merely those likely to be affected by small shifts in the existing boundaries of care, that is those of relatively high dependency levels in residential homes and those of relatively low dependency levels in hospital.”

Source: Mooney , G.H , Russell, E.M., Weir, R.D.(1980) Choices for Health Care. The Macmillan Press Ltd (p.31).

“The task of measuring costs and benefits should be done through marginal analysis. This involves starting with a particular mix of services and analyzing changes in that mix. If resources can be shifted to produce greater benefit, then this should be done.”

Source: Mitton, C .and Donaldson,C. (2004) Priority setting toolkit. A guide to the use of economics in healthcare decision making. BMJ Publishing Group. (p.18).

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