Abstract
Important assumptions that underlie cost-effectiveness analysis (CEA) are that production technologies are convex and that production processes always perform at constant returns to scale. However, in the short run these assumptions are likely to be violated. Therefore, CEAs might overestimate cost-effectiveness in the short run. To come up with a more precise cost-effectiveness outcome, we present a model that is able to correct the long-run incremental net benefit (INB) for short-run inefficiencies. This provides decision makers with a more realistic view of the expected efficiency gains. This model starts by determining the initial efficiency losses inflicted by inflexible resources. Then the model is made dynamic in order to adjust the efficiency losses by allowing for refilling and writing off freed capacity. Finally, the model calculates the length of the short-run time frame in which such efficiency losses exist, and a correction term with which the usual long-run INB should be adjusted to account for short-run inefficiencies. The model is applied to two cases: dialysis and digitizing a radiography department. The dialysis case shows moderate short-run efficiency losses while in the radiography case short-run efficiency losses are sufficiently large to cause a switch in cost-effectiveness from favorable to inefficient in the short run.
