Discount rate

In economic evaluations, discounting is the practice of reducing the monetary value of future costs and the health value of future outcomes to reflect their lower present value. This adjustment is necessary because interventions often involve costs and benefits that are distributed across different time periods, extending into the future. The rationale for discounting stems from various factors, including societal time preference (a preference for immediate over delayed benefits), the opportunity cost of capital (resources could be invested elsewhere to yield a return), and the uncertainty surrounding future events.
The process typically involves constructing streams of costs and health outcomes over time, to which a discount factor is applied annually. This discount factor increases over time, based on an underlying discount rate. For instance, NICE in the UK recommends discounting both costs and health outcomes at a rate of 3.5% per year. This means that 1 QALY experienced or £100 spent in the second year would have a present value of approximately 0.966 QALYs or £96.62. By year 11, the present value would be roughly 0.709 QALYs or £70.89. The choice of the discount rate is of particular importance for interventions with long-term effects, such as preventive healthcare interventions, because a higher discount rate will substantially diminish the present value of distant future costs and health gains. This could alter the perceived cost effectiveness of the intervention.