L2 Health Indicators and The Value of Health PDF

CAS EC 387 Introduction to Health Economics
L2: Health measures and the value of health
Department of Economics
Spring 2020
Boston University () Demand for Health and Health Care Spring 2020 1 / 33
Health Indicators I
Distinguish between health and health care
What is health?
“a state of physical, mental, and social well-being and the absence of
disease or other abnormal condition” (Mosby Medical Encyclopedia)
A non-tradable, durable investment/consumption good that

depreciates over time
Health Indicators II
Measuring health
Mortality
Life expectancy
Morbidity
Disability
Well-being
Productivity
Absenteeism and presenteeism
Valuing health - is health not priceless?
The Value of Life I
What is the value of life?

“Life is the most precious good and its value cannot be measured in
terms of money”
Resources are scarce – decisions have to be made
One of the most di¢ cult but often unavoidable tasks in health care is
to place a value on human life
Economist’s view of the value of life:

What are individuals and societies willing to sacri…ce for longer
expected lifetimes?
What private choices do individuals make implicitly and explicitly about
their health and safety?
The Value of Life II
What collective (public) choices do societies make in terms of taxes,

laws, and regulations?
Why do we spend so much on health care in the last years of life?

For many of the very old and sick, their resources have very low
opportunity costs
They may rationally have “hope” for living, including the hope that
more advanced health care will be developed within their extended
lifetime
Their “social” value of life may be very high
The value of an extended life year may be as high for frail patients as it
is for those of higher quality health
Thought experiment - what is the appropriate trade-o¤?
The Value of Life III
Value of life = willingness to pay for a marginal reduction in survival
probability?
Identi…ed life versus statistical life
Suppose an individual derives utility of consumption u (c )
The individual will survive into the next period with probability
p 2 [0, 1]
If the individual does not survive, his utility is zero
Hence, his expected utility is:
E [u ] = pu (c )
Willingness to trade o¤ consumption for increase in survival

probability on the margin
The Value of Life IV
Human capital approach

Vale of life equals contribution to GDP (If healthy, live longer and
work more)
Include cost of illness avoided
Advantage: operational
Issues?
The Value of Life V
Willingness to pay
Rooted in subjective valuations – marginal considerations
Questionnaires /surveys
Issues?
Con‡icting and inconsistent results
Risk compensating wages

Advantage: actual behavior, not just stated preferences
Issues?
Risk trade-o¤s in consumption

Air quality/housing values
Car prices/fatality rates in tra¢ c
Seat belt, smoke detectors, airbags
Estimates I
Some value of life estimates

$9.1 million (EPA, 2010)
$7.9 million (FDA, 2010)
$9.4 million (TD, 2015)
$9.1 million (Viscusi, 2013)
Estimates II
Other studies:
Valuing Health I
Quality-Adjusted Life Years (QALYs)

Idea is to associate a given health state with a quality of life index
Weighs time with a health index that ranges between reference points
0 (death) and 1 (perfect health)
QALYs put a value on the expected years of life
Illness reduces the quality of life - discounts the value of life in poor
health: a trade-o¤ between time and health
Example: suppose illness that requires hospitalization has index 0.5 –

1 year of life in hospital equivalent to 6 months in good health
QALYs facilitates comparison between health states (and their

associated values)
Valuing Health II
Used in cost utility analysis (CUA) to evaluate the monetary value of

health states
Other
Physical functioning:
Number of Activities of Daily Living (ADL) limitations
Number of Instrumental Activities of Daily Living (IADL) limitations
Cognitive impairment
Depression (CES-D)
Rating and Estimation I
Rating Scales
Category scale: present rater with scenario; rate on ladder from 0
(death) to 10 (perfect health)
Visual analogue method: rater shown line, 100 centimeters in length,

with end points well de…ned. Rater marks line to indicate where
his/her preference
Approach also applied to obtain subjective probabilities (on scale of 0

to 1, what would you say is the likelihood that you will live to age 75?)
Decision Tree
Suppose surgical procedure with two possible outcomes PH and D
Rating and Estimation II
Standard gamble:
E [u ] = (1 p )u (PH ) + pu (D )
Normalize u (PH ) = 100, u (D ) = 0
"What probability of death p would make you indi¤erent between

having or not having the procedure?”
Clear and simple but not useful for more complex processes
Rationale and Examples I
Choices and trade-o¤s have to be made due to limited resources

(both public and private)
On what basis are choices made?
“The comparative analysis of alternative courses of action in terms of

their costs and consequences” (Drummond et al 2005)
Formal methods for comparing costs and bene…ts of a medical

intervention to determine whether the intervention worth doing
(according to some criterion)
Rationale and Examples II
Examples
What combinations of HIV drugs should people receive?
How should disease progression be monitored?
At what clinical stage should treatment be started/stopped?
In what age groups should mammography screening be undertaken?
Which is the most cost-e¤ective type of bed net to prevent malaria?
Various Methods I
Cost-bene…t analysis
Monetary valuation of outcomes
Cost-e¤ectiveness analysis
Natural unit of outcome eg. change in mortality
Cost-utility analysis
QALYs used to measure/value outcomes
Cost-minimization analysis
Outcomes are equivalent
Various Methods II
CBA measures bene…t in terms of money, e.g, value of life-years

saved, dollar outlays averted (value of reductions in readmissions to
hospitals):
NB = (BI BA ) (CI CA )
or incremental cost-bene…t:
CI CA
CB =
BI BA
CEA measures bene…t in terms of clinical outcome, e.g., mortality,

blood pressure, time to reoccurrence of cancer
Various Methods III
CEA typically de…ned:

CI CA
vs
EI EA
or incremental CE ratio:
CI CA
ICER =
EI EA
where C and E denote cost and e¤ects, respectively, and I and A

denote intervention and alternative
Pros and Cons I
Advantages
Make underlying assumptions explicit: alternatives are professional
opinion, rely on statements by special interest groups, e.g.,
pharmaceutical manufacturers, doctors’associations, etc
CBA/CEA provides a consistent framework for evaluating alternatives
Helps separate use of objective empirical evidence from subjective value
judgments
Limitations
Analysis does not give decision maker full evidence on alternatives
Populations are heterogeneous: evidence on which CBA/CEA is based
may not apply to decision-maker’s population
Long-run e¤ects not adequately documented
Pros and Cons II
Decision-maker does not have adequate technical knowledge to

evaluate strengths and weaknesses of studies
Study uses wrong perspective for decision-maker (relevant costs,

bene…ts excluded, irrelevant costs, bene…ts included)
General Procedure I
De…ne the intervention
Identify relevant costs
Identify relevant bene…ts
Measure costs
Measure bene…ts
Account for uncertainties
Perspective of Analysis I
Societal perspective: all costs and e¤ects (bene…ts) included no

matter who pays costs or receives e¤ects (bene…ts)
Patient and patient family perspective
Self-insured employer perspective
Public or private insurer perspective
Hospital perspective
Cost Measures I
Concept of opportunity cost
Direct cost
Value of all goods and services consumed in provision of the
intervention or in dealing with side e¤ects or other current or future
consequences of intervention
Indirect cost
Productivity costs (morbidity costs, mortality costs, cost of replacing
sick worker)
Danger of double-counting
Intangible cost
Pain, su¤ering, dis…gurement, etc
Cost Measures II
Other cost concepts

Future costs (discounting)
Sunk versus incremental costs
Modelling I
Optimal decision model

No universal de…nition but should include
A relevant structure representing a disease or process

Probabilities of events occurring
Costs
Outcomes/endpoints
Markov Models I
Principal components
Useful for diseases with various stages and/or if events can occur
repeatedly over time (e.g., AMI, cancer recurrence)
Assigns numerical values to health states allowing a synthesis of cost

and outcomes to be calculated
Typically uses quality-adjusted life expectancy
Health states - transient or absorbing
Fixed cycle lengths
Transition probabilities (constant or time dependent)
Individuals in the same state are indistinguishable
Memory-less model
Example I
Markov states
Localized cancer
Localized recurrence
Metastatic disease
Death
Cycle
Months, year - depends on timing of events and expected life of
population
Example II
Transition probabilities
Represented by an n n matrix A = (aij )
Here, aij 2 [0, 1] is the probability that person in state i will transit to
state j
If transition probabilities are allowed to vary over time, let Ak

represent the probabilities in cycle k
Let A represent the prognosis without treatment of interest:

2 3
0.945 0.006 0.014 0.035
6 0 0.913 0.052 0.035 7
A=6 4 0
7
0 0.607 0.393 5
0 0 0 1
Example III
Suppose a treatment reduces recurrence by 50% - then treatment

produces a transition prognosis:
2 3
0.955 0.003 0.007 0.035
6 0 0.913 0.052 0.035 7
AT = 6 4 0
7
0 0.607 0.393 5
0 0 0 1
Cost and utility

If reward is zero for death and one for all other states the model
calculates life expectancy
Example IV
If rewards re‡ect a health-related quality-adjustment, model measures

quality-adjusted expected life
2 3
State Cost Utility
6 Local 500 0.95 7
6 7
6 Recurrence 2, 000 0.80 7
6 7
4 Metastatic 20, 000 0.40 5
Dead 0 0.00
Markov cycle tree
Evaluation
Cohort simulation - tracks a hypothetical cohort simultaneously
(average patient)
Example V
Monte Carlo simulation - randomly selects patient from cohort and
sends through system one at a time
Set seed e.g. P0 = (1, 0, 0, 0) - all have localized cancer
After cycle 1, the proportions of patients in each state:

2 3T 2 3 2 3T
1 0.945 0.006 0.014 0.035 0.945
6 0 7 6 0 0.913 0.052 0.035 7 6 0.006 7
6 7 6 7=6 7
4 0 5 4 0 0 0.607 0.393 5 4 0.014 5
0 0 0 0 1 0.035
After cycle 2:
2 3T 2 3 2 3T
0.945 0.945 0.006 0.014 0.035 0.893
6 0.006 7 6 0 7 6
0.913 0.052 0.035 7 6 0.011 7
6 7 6 = 7
4 0.014 5 4 0 0 0.607 0.393 5 4 0.022 5
0.035 0 0 0 1 0.074
Example VI
Pattern:
Pk = Pk 1A
Cohort simulation forms a Markov trace giving the cumulative utilities

and costs
Five cycles
2 3
Cycle 1 2 3 4 U CU
6 0 1 0 0 0 0.475 0.475 7
6 7
6 1 0.945 0.006 0.014 0.035 0.908 1.383 7
6 7
6 2 0.893 0.011 0.022 0.074 0.866 2.249 7
6 7
6 3 0.844 0.016 0.026 0.114 0.825 3.074 7
6 7
4 4 0.797 0.019 0.029 0.155 0.784 3.858 5
5 0.754 0.022 0.030 0.194 0.746 4.604

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CAS EC 387 Introduction to Health Economics

L2: Health measures and the value of health

Distinguish between health and health care

A non-tradable, durable investment/consumption good that

Valuing health - is health not priceless?

What is the value of life?

Resources are scarce – decisions have to be made

Economist’s view of the value of life:

What collective (public) choices do societies make in terms of taxes,

Why do we spend so much on health care in the last years of life?

Thought experiment - what is the appropriate trade-o¤?

Willingness to trade o¤ consumption for increase in survival

Human capital approach

Include cost of illness avoided

Risk compensating wages

Risk trade-o¤s in consumption

Some value of life estimates

$7.9 million (FDA, 2010)

$9.4 million (TD, 2015)

$9.1 million (Viscusi, 2013)

Quality-Adjusted Life Years (QALYs)

QALYs put a value on the expected years of life

Example: suppose illness that requires hospitalization has index 0.5 –

QALYs facilitates comparison between health states (and their

Used in cost utility analysis (CUA) to evaluate the monetary value of

Visual analogue method: rater shown line, 100 centimeters in length,

Approach also applied to obtain subjective probabilities (on scale of 0

Normalize u (PH ) = 100, u (D ) = 0

"What probability of death p would make you indi¤erent between

Choices and trade-o¤s have to be made due to limited resources

On what basis are choices made?

“The comparative analysis of alternative courses of action in terms of

Formal methods for comparing costs and bene…ts of a medical

How should disease progression be monitored?

At what clinical stage should treatment be started/stopped?

In what age groups should mammography screening be undertaken?

Which is the most cost-e¤ective type of bed net to prevent malaria?

CBA measures bene…t in terms of money, e.g, value of life-years

CEA measures bene…t in terms of clinical outcome, e.g., mortality,

CEA typically de…ned:

where C and E denote cost and e¤ects, respectively, and I and A

Decision-maker does not have adequate technical knowledge to

Study uses wrong perspective for decision-maker (relevant costs,

De…ne the intervention

Identify relevant costs

Identify relevant bene…ts

Account for uncertainties

Societal perspective: all costs and e¤ects (bene…ts) included no

Patient and patient family perspective

Self-insured employer perspective

Public or private insurer perspective

Concept of opportunity cost

Other cost concepts

Sunk versus incremental costs

Optimal decision model

A relevant structure representing a disease or process

Assigns numerical values to health states allowing a synthesis of cost

Typically uses quality-adjusted life expectancy

Health states - transient or absorbing

Fixed cycle lengths

Transition probabilities (constant or time dependent)

Individuals in the same state are indistinguishable

If transition probabilities are allowed to vary over time, let Ak