This was published as an appendix to E. Single, D. Collins, B. Easton, H. Harwood, H. Lapsley, & A. Maynard (& R. Bowie) (1997)<> International Guidelines for Estimating the Costs of Substance Abuse (Canadian Centre for Substance Abuse)
Each discipline has its own terminology. In an growing interdisciplinary area as for the evaluation of substance abuse, such terminology while necessary can be a hindrance. The following glossary is of terms which have come up in the course of the work thus far. The glossary is confined to terms used in the various papers and does not claim to be comprehensive, or to replace more extensive dictionaries of health economics.
Wherever possible a standard dictionary term is used. Where there are a variety of definitions we have used the one which corresponds most closely to that in the papers.
In some cases where the term is relatively new and/or contentious, or will be unfamiliar to the non-specialist economist, there is some elaboration of its meaning. We have clustered some common terms, often opposites, together so the reader can gain a better idea of the distinction or contrast that is being sought. Words in bold in the text have their own reference.
We are grateful to David Collins and Helen Lapsley for commenting on an earlier draft, but take full responsibility for any errors and omissions.
Brian Easton and Robert Bowie
abuse see use
addiction & dependence can be treated as synonymous in the case of drugs/substance. Addiction is defined by Jacob and Fehr as “a state of dependence upon a drug substance which is harmful to physical or mental health, social well being, and/or economic functioning”. This poses a problem for economists as to what extent the phenomenon involves irrationality.
avoidable costs & unavoidable costs. In the context of cost-of-illness studies avoidable costs are those which could be avoided in the future if the appropriate treatment or policy were to be implemented. However some costs are the result of actions taken in the past, and are unavoidable, despite the new treatment or policy. If everyone stopped smoking, there would still be morbidity and mortality effects from the physiological damage of past smoking. The continuing costs of these would be unavoidable.
benefit cost analysis see cost benefit analysis
benefits see costs
consequences/causality/costs is a summary of the three step process in the Harwood paper for the framework for cost of illness studies. The elaboration is
– identify the tangible consequences attributable to substance abuse;
– document causality between substance abuse and the consequences, and quantify frequency;
– assign economic values.
Maynard et al use a parallel identification/measurement/valuation framework.
core & non-core. Core costs in relation to substance abuse are those which occur primarily within the domain of the health system, while non-core costs occur outside it. The public health sector is a part of the core, but so is the private health sector. See institutional arrangements.
cost-benefit, cost-effectiveness, cost-of-illness analyses & QALYs. Cost-benefit analysis (CBA) a.k.a. benefit-cost analysis involves the enumeration and evaluation in terms of a common unit, usually money, of all opportunity costs and benefits of taking a particular action. The costs and benefits are measured from the societal viewpoint, and usually ignore the distribution within the nation. If the benefit of an action exceeds the costs then there is a sense in which it is the interests of the nation to take that course. Where there are costs and benefits through time, the method involves discounting. Cost-effectiveness analysis (CEA) is the procedure for identifying the least-cost means of pursuing a particular objective. For instance there may be two (or more) treatment alternatives. A CEA would evaluate which treatment produced the given outcome using least resources. QALYs, or quality adjusted life years, measure any years of life gained from a treatment adjusted for consequential changes in the quality of the life as the result of an improvement in the enjoyment of the years from reduced pain, increased mobility, and so forth.
cost-effectiveness analysis see cost-benefit analysis
cost-of-illness analysis (COI) asks what are the total costs incurred by a particular illness. Since the cost measure is an opportunity cost, they in effect ask what would be the resources released to society if the illness did not exist. Thus the cost-of-illness is related to the benefits from a cost-benefit analysis. The economic and social costs of substance abuse are a cost of illness analysis.
costs, opportunity costs, historical costs, & benefits. Opportunity cost is the value of a resource in its most highly valued alternative use. It is the concept economists use when valuing costs. They ask if a resource is not used for this purpose what is its value in the next best purpose. In a competitive market in which all goods are traded and where there are no market imperfections, the opportunity cost of a resource is revealed by its market price. However these assumptions do not always hold, as when the resource not bought and sold, that it is non-market. Sometimes payments which appear to a layperson to be costs are not opportunity costs, and are left out of the calculations or calculated in a different way. e.g. historical costs and transfers. Historical costs reflect the past payments for a resource, but they may not represent the opportunity cost. If some medical equipment it is now useless, its opportunity cost is zero or the scrap value, while its historical cost is the cost of purchase, less depreciation. Benefits are the gains, before costs are deducted, of any particular course of action, preventive program, therapy, treatment, etc. They are usually valued in money terms. Ideally the valuation is willingness-to-pay.
counterfactual propositions are the situation which the economist sets up as the alternative to the current one in order to assess the benefits and opportunity costs (e.g. for a cost-benefit analysis) of a different policy or treatment or circumstance. For instance the economist may be investigating the policy of raising taxes on alcohol, or of a new treatment regime for a narcotic, or the situation in which tobacco had never been available. Cost-of-illness studies have the counterfactual proposition that the illness does not occur. There may be more than one counterfactual proposition to a situation, so the results may be very sensitive to the exact assumption. For instance, it could be argued that the counterfactual to a situation without alcohol is greater use of narcotics.
demographic approach & human capital approach. The demographic approach described in detail in the Collins and Lapsley paper involves the counterfactual proposition of what would have occurred to the population if the illness (or whatever) had never occurred in the past. It is essentially a retrospective approach, and reflects a national accounting method. Some of the costs included in the demographic approach are unavoidable as far as a cost-benefit analysis is concerned. The human capital approach discussed in the Harwood paper and used extensively in cost-benefit analyses involves traces the future effects of the change in policy (or whatever) on the population. Its counterfactual proposition is about what would happen if the illness ceased from the present, and values future gains by discounting into the present. It is essentially a prospective approach, dealing only with avoidable costs.
dependence see addiction
direct costs & indirect costs. In health economics direct costs are usually the costs to the core health system. Indirect costs are those incurred elsewhere, notably but not exclusively productivity lost. However elsewhere in economics the terms refer to variable costs and fixed costs respectively, and these (or other) definitions sometimes are used in health economics.
discount rate see discounting
discounting, discount rate, & present value. Discounting is the procedure by which a flow of benefits or costs incurred or accruing at different points in time is expressed as an equivalent money sum at a single point in time, normally the present. It is especially important where there is an investment element to the activity. Discounting involves the use of a discount rate, which is difficult to measure or agree upon. In principle the discount rate is the rate of exchange between money sums at different times, in effect an interest rate. In the case where the sum is discounted back to the current date, it is called the present value.
double counting, insurance. Double counting is the phenomenon where a resource is included in a total more than once. It needs to be avoided. For example insurance spending has to be split into two components. The first is the actual cost of administering the scheme, the transaction cost. The second is the payment to the insured. This benefit is offset by the cost in the insurance payment. It would be double counting to include the insurance payment (except for the transaction costs) such as for the motor vehicle coverage, and the cost incurred by the payment the insurance covered, such as the cost of car repairs.
external costs see internal costs
gross costs & net costs. Gross costs consists of all costs, and ignore any offsetting benefits. If the benefits are deducted the remainder are net costs. In the event of a net cost being negative (i.e. benefits exceeding gross costs), there is a net benefit.
human capital approach see demographic approach
identification/measurement/valuation is the summary of the three step process in the Maynard et al paper for the costs of illness studies.the elaboration is
– which elements to include in the work;
– how to measure the effects in each area over the relevant time period;
– how to value these effects in a common unit of account.
Harwood uses the parallel consequence/causality/cost framework.
illicit drugs & licit drugs. It is usually unlawful to use illicit drugs, which typically include narcotics. Licit drugs are those whose use in generally lawful, and usually include alcohol and tobacco. (Although in some countries alcohol consumption is unlawful.) Note that it is possible to misuse a licit drug as occurs with some prescription drugs. Economists do not distinguish drugs by their legal status as much as by their effects, noting that making some unlawful may be a means of regulating their use. The complication is that market for illicits are distorted, and data hard to obtain, so it is very difficult for an economist to analyze them. What is important about the distinction is that the current evidence suggests that in many countries licit drugs generate more economic costs than illicit ones, so it is likely to be inefficient for policy to concentrate solely on illicit drugs.
incidence, prevalence & point prevalence. Incidence is the number of instances of illness commencing, or of persons falling ill, during a given period for a population. It is about new events. Prevalence is the number of instances of a given disease or other condition in a given population at a designated time. If the period is not mention, the concept usually refers to the situation at a specified point in time, that is point prevalence.
indirect costs see direct costs
insurance (treatment of) see double counting
institutional arrangements differ from country to country. Thus they may influence the balance between private and public costs, since some countries make greater use of user charges, and consequentially the balance between internal and external costs. Institutional arrangements may also influence the effectiveness of policies, if for instance greater internalization of decisions reduces the quantity of substance abuse.
intangible costs see tangible costs
internal costs & external costs. Economists usually assume that individuals make decisions in their own interests. The costs and benefits and benefits taken into account are internalized while those which are ignored are external to the decision. These externalities occur when the individual making a decision ignores the consequences of their decisions on others (other than the further effect it might have on them). A complication is that while internal costs are private costs to the decision-maker, some of the external costs may be private costs to others. The complement of private cost in the context of these studies is social cost, some of which may be in the private sector.
irrational see rational
licit drugs see illicit drugs
market & non-market. the point of this distinction is to observe that while many costs and benefits occur tangibly in the market others, of sometimes greater importance, occur outside it. This includes intangibles but also activities in the household and elsewhere such as carework and housework, which is not paid, but nevertheless involves the resource of labour effort (and which may be diverted from the market).
morbidity & mortality. Morbidity is any subjective or objective departure from a state of physiological or psychological wellbeing. (Sickness, illness, and morbid condition are synonyms in this sense.) Mortality refers to death.
mortality see morbidity
national accounts are a system of analysis the production, distribution, expenditure, and financing of a nation. In recent years the international standards have been extended from a primary concern on market activities, to cover non-market ones such as the environment and housework. Some features of cost-of-illness studies can be seen to be in a national accounting framework.
net costs see gross costs
non-core see core
non-market see market
non-quantifiable see quantifiable
non-rational see rational
opportunity costs see benefits
point prevalence see incidence
present value see discounting
prevalence see incidence
private, public, and social costs. Private costs have two meanings in the economics literature. They may refer to the costs considered by the single private decision maker (internal costs), or they may refer to the costs of those in the private sector, not carried by the public sector. As a rule public costs refer to costs in the public (i.e. government) sector. The complement of private costs in the first sense of the private decision maker is usually social costs. Because there is no uniformity of definition, the terms “public” and “private” should always be treated with care.
productivity loss. As a result of illness a person may be less productive because of higher absenteeism or poorer output on the job. This loss of production is included in the costs of illness. In principle loss of productivity should cover consequences outside the market economy, such as reductions in human carework and housework by the sick person.
prospective & retrospective. A retrospective analysis typically involves a counterfactual proposition about an event which might have occurred in the past as it impacts on the situation today, whereas a prospective analysis asks about the effects of a counterfactual event with effects which begin at the point in time of the analysis (or shortly after) with consequences into the future.
public costs see private costs
QALYs (quality adjusted life years) see cost-benefit analysis
quantifiable & non-quantifiable Many benefits and costs are directly quantifiable (or measurable), or can be indirectly quantified. However in the case of some of the most important – often social – ones it is not possible (or easy) to do so, and these are called non-quantifiable. Sometimes ad hoc methods are used to put estimates on non-quantifiable costs, rather than leave them out of the evaluation altogether.
rational, non-rational & irrational. Economics assumes that individuals are generally rational, pursuing their own best interests as best they. (“Bounded” rationality recognizes they may not have the information, time, or best decision strategies to do so – that decision making involves costs.) Note that the internal decision may ignore the external costs to others. However the existence of addiction and drug abuse may suggest that sometimes individuals act irrationally, failing to pursue their own best interests, even in a bounded way. Collins and Lapsley explore this issue further in the section on addictive and non-addictive consumption. Their conclusion is that where drug consumption is irrational, the expenditure on the drugs is not a benefit to the individual and hence is a part of the total costs of abuse.
retrospective see prospective
social costs see internal costs and private costs
social value from gains of additional life years see value of life
tangible & intangible. Tangible costs and benefits are those which can be easily measured in money terms. Intangible ones cannot be so easily measured, although it is often useful to make an attempt to do so (perhaps using a willingness to pay approach). Very often the intangible costs involving changes in quality and length of life prove to be more important in the valuation than the tangible ones.
transfers (such taxes, subsidies, and welfare payments) do not relate to resource costs, so that the cost to one is offset by the benefit to someone else. (As when somebody’s tax is another’s social security payment.) It would be double counting to include the transfer payment as a cost, not to offset the contribution. Again transaction costs may be relevant.
transaction costs are those costs involved in a transaction. They include any costs for administering the transaction (e.g. the government and private compliance costs of the inland revenue system), plus any loses from behavioral responses (as when taxpayers reduce effort because of higher tax rates). The past practice has been to assume transaction costs may be neglected because they are small. They may not be.
unavoidable costs see avoidable costs
use & abuse Economists tend not to judge the usefulness of the use of a product or substance to the user, other than in terms of the user’s assessment. However the existence of addiction and irrational behaviour would seem to undermine that assumption. Other disciplines seem not to have a rigorous definition of abuse. A medical definition might be “drug abuse is deemed to occur when a relevant aetiological fraction is greater than zero, i.e. when drug abuse adversely affects the health of the user”. Economists tend to assume that a rational user takes this detriment into consideration when they are making the use decision. Sometimes the term is used pejoratively. Abel’s Dictionary of Alcohol Use and Abuse remarks, no doubt ironically, that alcohol abuse is “consumption to the point where it results in social disapproval”, which is the sort of judgment that economists’ try to avoid. Even so the term may be used as a short-hand for some longer concept which is carefully defined. For instance Collins and Lapsley define the term in their paper as “when the use of a drug or substance imposes social [external] costs in addition to private [internal] costs”, and devote an entire section to refining their definition.
value of life recognises that the effect of a treatment (or policy) may be to save lives, and that this effect should be included in a cost-benefit analysis. Otherwise the analysis would ignore life enhancing treatments, and comparisons would favour those which made no such comparisons. On the other hand the notion of putting a finite sum on the “value of life” might seem offensive. To put an infinite sum, however, would mean that there could be no trade-off for improvements in the quality of life. For example a CBA would be likely to favour a zero speed limit for cars if the value of life was infinite. The study’s approach has favoured the replacement of a value of life concept with a social gains from additional life years. Whichever concept is used, it is difficult to get an agreed value for the item. A description of approaches for estimating the value of life will be found in the Maynard et al paper.
willingness to pay is a measure of benefit opportunity cost, especially where an intangible is involved. Measurement can involve a polling individuals, asking what they would pay for the resource or outcome. There is a growing body of empirical studies – such as using surveys – which attempt to measure the willingness to pay.
Abel, E.L. (1985) Dictionary of Alcohol Use and Abuse: Slang, Terms, and Terminology, Greenwood Press, Connecticut.
Jacob, M.R. & K. O. Fehr (1987) The Addiction Research Foundation’s Drugs and Drug Abuse: A Reference Text, Toronto.h