Discounting

Until recently it has been common practice in economic evaluations to “discount” both future costs and benefits, but recently discounting benefits has become controversial. Discounting makes current costs and benefits worth more than those occurring in the future because there is an opportunity cost to spending money now and there is desire to enjoy benefits now rather than in the future. The reason why current spending incurs an opportunity cost relative to delayed spending is that a monetary investment yields a real rate of return and therefore there is a cost to spending money in the present.

For example, if £100 were invested with a nominal return of 10%, in one year's time it would be worth £110; if inflation was 4% this would result in a real return of £6 on every £100 invested. If for some reason £100 of healthcare spending were delayed for one year then (assuming prudent investment) we could expect that in one year's time we would have £106 for healthcare investment.

To take into account the opportunity cost of investing now rather than waiting one year we have to discount future costs. Therefore, if two healthcare interventions both released …