David Kent in American Scientist:
To help maximize the overall benefits in health care under a utilitarian framework and conditions of constrained resources, health economists use an analytic tool called cost-effectiveness analysis (CEA) that quantifies the added expenditure necessary to obtain a unit of health benefit (typically measured in quality-adjusted life years or QALYs, pronounced “kwallies”). The most common application of CEA is to examine the value of medical innovations compared to the standard of care routinely available, since new technologies are an important cause of the increase in health-care costs.
If the “unit cost” for a QALY of benefit (that is, the cost-effectiveness ratio) is less than some threshold (conventionally $50,000 or $100,000 per QALY), then adoption of the innovation is deemed “incrementally cost-effective,” since the benefit obtained compares favorably to that obtainable at similar cost using accepted medical technologies (such as dialysis, which has a cost-effectiveness ratio variously estimated at between $50,000 and $80,000 per QALY). Above the ratio, they are deemed not to be cost-effective. That is, the (relatively small) incremental benefits of the intervention do not justify the (relatively large) incremental costs.
More here.