Costs of illness are an important input in cost-effectiveness analysis (CEA). Reviews of the literature have found that many CEAs are of low technical quality and fail to take account of costs of illness appropriately. The costs of illness and disease averted by an intervention, indirect costs, and medical care costs in added years of life are topics that present methodological issues and are not handled consistently in CEAs. Costs of illness and disease averted may be estimated by prevalence- or incidence-based methods; the correct conceptual paradigm depends on the nature of the disease. Incidence costs may be estimated by modelling the disease process, or directly from prevalence costs, the choice being determined by the extent and quality of data available. Regardless of the method, in forward-looking CEAs potential technological change must be taken into account so that incidence-based lifetime costs estimated from current treatment practices will not be biased. Whether to include indirect costs is an important issue, because indirect costs may be large and have a significant impact on the cost-effectiveness ratio. In the pure CEA model, indirect costs are excluded on ethical grounds and to prevent incursion of elements of cost-benefit analysis into CEA. The modified CEA model accepts enhanced productivity as an economic benefit made possible by, but distinct from, the health effect of an intervention. Indirect costs are included when appropriate, depending on the perspective of the analysis, the measure of effectiveness, and who bears the costs. When medical care extends life, expenditures will be incurred in the added years for illness and disease unrelated to the intervention. As with indirect costs, the pure CEA considers unrelated 'downstream' costs an indirect consequence of the health benefit of the intervention and excludes them from CEAs with the societal perspective. The modified CEA treats unrelated downstream costs as an economic effect of the change in health due to the intervention and includes them in order to have a more complete accounting of the cost of the intervention.