Spring 2017

Course Details
Instructor: Sakine Batun (IE 333, sakine@metu.edu.tr)
Class Meeting: Mondays 13:40 16:30, IE 301
Prerequisite: Knowledge of basic probability theory and operations research
techniques.
Course Web Page: https://odtuclass.metu.edu.tr/
Reference Books:
Drummond, M.E., OBrien, B., Stoddart, G.L., and Torrance, G.W., Methods for the
Evaluation of Health Care Programmes, Oxford Medical Publications, 2005.
Gold, M.R., Siegel, J.E., Russell, L.B., and Weinstein, M.C., Cost-Effectiveness in
Health and Medicine, Oxford University Press, 1996.
Hunink, M.G.M., Glasziou, P.P., Siegel, J.E., Weeks, J.C., Pliskin, J.S., Elstein, A.S., and
Weinstein, M.C., Decision Making in Health and Medicine: Integrating Evidence and
Values, Cambridge University Press, 2001.
Brandeau, M.L., Sainfort, F., and Pierskalla, W.P. (Eds.), Operations Research and
Health Care: A Handbook of Methods and Applications, Kluwer Academic
Publishers, 2004.
 Course Details
Tentative Course Outline: IE/OR applications in healthcare
Introduction Introduction to decision making under
Economic evaluation of healthcare uncertainty
interventions Markov Decision Processes

Basic types of economic evaluation Stochastic Programming

Components and mechanics of cost- Healthcare operations

effectiveness analysis Public health problems
Identifying and valuing health Clinical applications
outcomes
Measuring costs
Grading: Course grade will be based on:
Sensitivity analysis
Assignments (10%-15%)
Decision analytic modeling in healthcare
In-class exercises and quizzes (20%-25%)
Decision trees
Midterm exam (30%)
Value of information
Final exam (35%)
Sensitivity analysis

Dynamic models
IE 492 February th
20 , 2017
Today
Introduction
Economic evaluation of healthcare interventions
Motivation
Basic types of cost-outcome studies
Purpose and foundations of CEA
Elements of CEA
Healthcare System
Healthcare system is the organization of people,
institutions, and resources to deliver healthcare services to
meet the health needs of target populations.

Different types of classification schemes exist

Financing
public vs. private

if public: tax-based vs. insurance-based

Service provision
public vs. private
History of IE/OR in Healthcare
 History of IE/OR in Healthcare
Time and motion studies for Nurse scheduling algorithms (Warner,
1911-18 1972
surgeries (F. Gilbreth) Wolfe)

1920-40 Basic process and capacity analysis
Management engineering invented
1945
and applied to nursing (L. Gilbreth)
Perishable inventory theory applied
1970-72
to blood banks (Pierskalla)
1972-73 Simulation planning models (Rising)

SPC in healthcare (advocated by 1974 Regional planning OR models (Wolfe)

1957
Deming)

First queueing and scheduling 1967-82 Diagnostic-related groups (DRGs)

1959
studies (Smalley, others)
1979 Forecasting bed needs (Griffith)
Clinical information systems
1965
(Kennedy et al) 1980 Cancer screening optimization (Eddy)
Hospital inventory optimization
1965 1980s MDM utility theory (Weinstein)
(Reed, Stanley)

First simulation queueing studies of 1988 Total quality management (Berwick)

1965-66 patient waits (Nuffield Report, Fetter,
Thompson) 1990s Patient safety movement (Leape)
IE/OR in Healthcare
<2% from the OR/MS community actually focuses on
healthcare M.W. Carter (OR/MS Today, 2002)
Many IE/OR applications in healthcare especially during the
last 10-15 years
We will cover some of them throughout the semester
Healthcare operations
appointment scheduling, operating room scheduling, capacity
planning
Public health
resource allocation, disease prevention/screening, infectious disease
modeling, vaccines/immunization
Clinical applications
diagnostic testing, medical treatment modeling
 http://www.gapminder.org/

Healthcare costs are increasing.

More money doesnt mean
more health.
Why is it important?
Rapidly increasing costs of healthcare
Will continue due to many reasons:
Ageing of population
More people with chronic illnesses and co-morbidities
Increased intensity
Intensive care units, transplantations, drugs, etc.

Advance in technology
Resources are limited and should be carefully
allocated
More money does not necessarily mean more health
What is it?
Two features characterize economic analysis:
Inputs and outputs = Costs and consequences
Choices
Comparative analysis of alternative courses of action
in terms of both their costs and consequences
Our focus: Cost-Effectiveness Analysis (CEA)
In healthcare setting: An analytic method designed
to inform decision making regarding both the
economic and clinical consequences of various
possible actions
Types of cost-outcome studies
Cost Minimization/Identification
Efficacy is assumed to be the same, and the costs of the various
possibilities are determined to find the least expensive
Common in pharmacy and therapeutic committees
Ex: Suppose Drug A (Cheapocillin) and Drug B (Cephokillumall)
have the same cure rates in pneumonia. Which drug should the
hospital have on formulary?
Cheapocillin Cephokillumall
Drug cost/dose $0.50 $22.00
Administration cost/dose $11.00 $8.50
Doses/day 4 1
Laboratory costs $0 $10.50

Total daily costs $46 $41

Types of cost-outcome studies
Cost-Consequence
Enumerates the costs and health consequences of
strategies, but makes no attempt to measure
health outcomes in the same metric
Treatment A Treatment B

18 Deaths 10 Deaths

22 Strokes 55 Strokes

$120,000 $195,000
Types of cost-outcome studies
Cost-Effectiveness Analysis
Measures both the costs and outcomes, but assures
that all of the outcomes are measured in the same
metric across all alternatives
cost per infection prevented
cost per life saved
cost per life-year saved
Each outcome measure has its own pros and cons
cost/life saved vs. cost/life-year saved
Can you compare the life of a 2-year old with the life of an
80-year old?
Types of cost-outcome studies
Cost-Utility Analysis
Measures outcomes in terms of the value placed
on the outcome, not the outcome itself
Requires an ability to place numeric comparisons
of various outcome states
We all know that life in different health states is
not valued equally:
a year of life in full health
a year of life after a stroke
a year of life in severe pain
Types of cost-outcome studies
Cost-Utility Analysis (continued)
But by how much?
1 year of life w/stroke = 70% of full health?
1 year of life w/stroke = 80% of full health?
1 year of life w/stroke = 90% of full health?
Whose values should you use?
Patients?
They are the ones living through it.

Societys/Societies?
Everyone is affected by the use of resources.
Types of cost-outcome studies
Cost-Utility Analysis (continued)
People value these states differently
The basic idea is that years of life need to be
quality adjusted to make the comparisons
equivalent
Utility analysis allows outcomes to be measured in
Quality Adjusted Life Years (QALYs)
Types of cost-outcome studies
Cost-Benefit Analysis
Much more common in economics and policy than
in healthcare
Measures both costs and outcomes in monetary
values
Has the advantage of being able to compare
programs across a wide variety of social needs
Housing, defense, healthcare
Has the problem of placing monetary value on
human life
Types of cost-outcome studies
All cost-outcome studies measure the costs in
monetary values; it is the benefits that are measured
in different metrics
Type of Cost Benefit
Analysis Measure Measure

Cost Minimizing monetary value none

Cost-Benefit monetary value monetary value

Cost-Effectiveness monetary value clinical state

Cost-Utility monetary value utility (QALY)

MUCH WIDER USE OF M.R.I.'S URGED FOR
BREAST EXAM
By DENISE GRADY

Published: March 28, 2007

Two reports being published today call for greatly expanded use of M.R.I. scans in
women who have breast cancer or are at high risk for it. The recommendations do not
apply to most healthy women, who have only an average risk of developing the disease.

Even so, the new advice could add a million or more women a year to those who need
breast magnetic resonance imaging -- a demand that radiologists are not yet equipped to
meet, researchers say. The scans require special equipment, software and trained
radiologists to read the results, and may not be available outside big cities.

Breast M.R.I. costs $1,000 to $2,000, and sometimes more -- 10 times the cost of
mammography -- so a million more scans a year would cost at least $1 billion.
Ex: MRI in Breast Cancer
Is $1 billion too much?
The real issue is what we are willing to pay for
Suppose that MRIs are better than mammograms
even in women at low risk
How much better?
How many extra lives for $1B?
How much more expensive?
The real issue is what are we getting for what we are
spending?
Ex: MRI in Breast Cancer
The MRI found 30 of 969 women (3.1%) who had
breast cancers that were negative on mammogram
It had 91 false positives (-mammogram, -biopsy)
(9.4%)
The study is not able to predict how may of the 30
would have been found on routine follow-up
So, is it worth $1 billion to find 30 cancers per 1000
women some number of months earlier than we
would have found them under standard care?
Other Examples
Coverage decisions
Should the use of a new drug for the treatment of Acute MI
(heart attack) in the emergency room be approved?
Should hepatitis vaccination in children be covered by the
government?

These choices are all of the form:

Program A Stream of costs and outcomes

Choose: ?

Program B Stream of costs and outcomes

Purpose of CEA
Fundamental role of CEA is to inform how much you get for what
you pay
Cannot tell you what the correct choice is
It provides analysis of the consequences of one choice vs.
another
From a social and political standpoint, these decisions involve many
issues other than how much you get for what you pay
Efficacy
Effectiveness/Usefulness
Availability
Equity
Legal responsibilities
Foundations of CEA
Application of CEA in healthcare borrows concepts
and ideas from Economics and Social Theory
Economics
Law of diminishing returns

Pareto optimality

Social Theory
healthcare is not solely a personal good

somehow different from buying cars and video games

fairness
Economic Foundations of CEA:
Law of Diminishing Returns
For any given disease/condition, initial resources
affect outcomes more than later efforts law of
diminishing returns
A straightforward example is to look at screening
intervals:
Cervical cancer
is a slowly progressive disease with a reasonably
predictable natural history
has an asymptomatic phase in which it can be detected
and cured
What is the appropriate screening level?
Every year? Every 6 Months? Every month?
 Economic Foundations of CEA:
Law of Diminishing Returns
What is happening as more resources are thrown at
cervical cancer screening?
50
Days of life saved per

Pap screening for cervical cancer

woman screened

1-yr interval

2-yr interval The more often you screen

3-yr interval
25 the more cancers you pick up
the more it costs
5-yr interval
dollars
0
$0 $250 $500 complications
Cost of pap screening per woman
Economic Foundations of CEA:
Law of Diminishing Returns
As more resources are spent on a particular
product or activity, there is a progressively smaller
return for each additional dollar
Health

Health
Decreasing marginal return

Potential detrimental
effect of more resources
H

Resources expended $ $ Resources expended

Increment in
resources
Economic Foundations of CEA:
Pareto Optimality
Pareto optimal
Any change in distribution that would make
someone better off would make someone else
worse off

Society should keep redistributing the resources until

Pareto optimality is achieved
Economic Foundations of CEA:
Pareto Optimality
The application of Pareto optimality in healthcare
Given a fixed budget, if we can redistribute the
resources spent on health such that we produce
more health for the same resources, we should do
that
We should continue redistributing resources
according to these principles until we cannot
rearrange without losing health
Effects of a New Intervention
For any new intervention (a new antibiotic, minimally
invasive laparascopic surgery, early discharge from the
hospital) there are two different types of outcomes that
occur by introducing the intervention
Cost outcomes:
The intervention can be cheaper or more expensive
than the standard therapy
Effectiveness outcomes:
The intervention can be better than the standard
therapy
More lives saved, more cures, fewer complications
or worse than standard therapy
Cost-Consequence Space
CEA analysis is only useful
when there is a tradeoff

More Expensive
Net Incremental Costs
between cost and
effectiveness
No CEA
Worse Better

Less Expensive
The most difficult part in Existing Program

CEA is assuring that the CEA Yes

components are correct
Determinations of costs Net Incremental Effectiveness

Determination of effects
Elements of CEA
Strategies/options being compared
CEA requires a comparison between two or more options
An option can only be cost-effective relative to other
options
Cost-effectiveness depends on the comparators chosen
Comparators should include all clinically relevant options
At minimum, current standard of care and other usual options
Comparison of a new strategy to a strategy that is not typically used
is not helpful
Strategies should be described in sufficient detail so that
the strategy could be implemented in another setting
Elements of CEA
Perspective of the analysis
Determines the costs to be considered in the analysis
Societal perspective: all costs
Patient perspective: only costs incurred by the patient
Other perspectives include third-party payer (insurance),
health system, hospital, or health agency

Different perspectives can have different effectiveness

terms
Societal: life years, QALYs, etc.
Hospital: bed days avoided, employee illness averted, etc.
Elements of CEA
Time horizon

Analyst must decide a priori how long the

interventions must be tracked
Usually determined by the clinical features of the
illness or its treatment
Acute dysuria in women: 1 month
Cardiovascular risk reduction: lifetime

Also determined by available data

Elements of CEA
Scope of the analysis

Analyst must appropriately choose the

cohort to be considered in the analysis
An analysis might be relevant for an entire
population or for only a relatively small subgroup

Scope of outcomes considered

Elements of CEA
Measuring and valuing costs
Only rarely are costs available from clinical trials
Other sources are necessary
Measuring and valuing outcomes
Randomized trials, cohort studies, administrative databases
Time preference
Timing of costs and outcomes should be considered in an
analysis
Accounting for uncertainty
Sensitivity analysis to examine the effects of uncertainty on
the model