Question 1

1. Define Economic Evaluation with an appropriate diagram.

Definition:

Robbins in 1935 defined economics as “the science which studies human behaviour as a
relationship between ends and scarce means which have alternative uses”.
Economic Evaluation is the process of identifying, measuring, valuing inputs and outputs of two
alternative programs/activities/projects and comparative analysis of these two alternatives
program/ projects/activities.
In health care economic evaluation is the process of analysis of the relationship between the
health effect or benefit and the resources utilized and whether the scarce resources are utilized
optimally or not to get the desired benefits.

In economic evaluation benefits may be

 direct health benefits to the individual

 non-health improvements in quality of life for the individual and family
 reduced use of other health care interventions
 benefits to other agencies
 productivity benefits

Cost analysis Risk and Protective

Problem Identification
Factor identification

Economic Impact Program and policy Economic evaluation

development

Program and policy Economic Evaluation Implementation and

evaluation dissemination

Fig: Public health economic evaluation model ( Source: Introduction to economic evaluation,
CDC. Available at
http://www.cdc.gov/dhdsp/programs/spha/economic_evaluation/module_i/podcast_i.pdf
 Cost Identification Consequences Valuation
.

Health
Health state Effects State
Health change Willingnes
Sector s to pay

Resources Other sector Health Care Other value Other Value

Consumes Programs created created
Family/Patient
Resources Global
willingness
Saved
to pay

Productivity
Losses Health Sector

Other sector Values of

resources
Family/Patient served
s
Productivity
Losses

Fig: Diagram of Economic Evaluation ( Source: Bishnu Sapkota Sir’s Slide)

Tools of Economic Evaluation

 Cost effectiveness analysis

 Cost Utility analysis
 Cost benefit analysis
 Cost minimization analysis
Steps of Economic Evaluation

 Defining the perspective of the evaluation

 Determining the components to be evaluated
 Clarify the evaluation Objectives
 Determine the study design
 Identifying, assessing and valuing the cost of alternative activities
 Adjusting the cost and benefits for differential timings
 Measurement of cost and consequences
 Putting the cost and benefit of alternatives together and comparing
 Testing the sensitivity of result

Benefits of Economic Evaluation

To maximize the benefits

To manage demand and supply of health care services
To minimize cost of the program with best outcomes
To provide bargaining power with suppliers of health care programs.

Conclusion
In economic evalution we identify what are the strategies, measure resource in terms of natural
units, measure consequences of current activities and value the result in terms of utility and
monetary and compare the current program with the alternative programs
Without alternatives we cannot evaluate the program. The alternatives may be mutually
exclusive or independent alternatives.
Evaluation of an intervention, program, or strategy is the process of looking how well the
activities/ intervention/program reaches its intended goal of improved health outcomes. In
contrast, economic evaluation helps us understand the cost factors related to an intervention.
Economic evaluation can be done prospectively and retrospectively.
Economic evaluation enhances decision making process and helps in making appropriate
program for the intervention.
 2. How Cost Utility Analysis (CUA) is different from Cost Effectiveness Analysis
(CEA)?

Difference between Cost Utility Analysis and Cost Effectiveness Analysis

S.N Cost Utility Analysis Cost Effectiveness Analysis

1 In cost utility analysis outcome In cost effectiveness analysis
valuation is done in utility or effectiveness is measured in natural
satisfaction ( DALYs and QUALYs) health outcomes (The way the outcomes
are occurring, cases prevented, years of
life saved)
2 It compares the outcomes of different It compares outcomes of same programs
programs or same outcomes of different programs
3 Allocate funds for the intervention Select best intervention for given
program outcomes
4 Health sector level decision Program level decision
5 Outcomes are single/multiple, generic Outcomes are single, unvalued and
and incorporate the notion of value. program specific
6. Broad application Limited application

3. What are the different perspectives for Economic Evaluation? Which perspective do
you think is most appropriate, in general, and why?

In economic evaluation it is very important to understand the different perspectives because

it defines the basis of analysis and determines the relevant cost that need to be accounted for.
An item may be cost from one perspective but not from others, for example patient travel
cost is the cost from patient and societal perspective but not from provider perspective.
Different perspectives for economic evaluation are described as below

 Provider Perspective: These includes all the cost incurred by providers during
delivering of services including salary of doctors, cost of equipment, medications,
consumables, fixed assets etc. and consequences of the services provided by the
providers.
 Patient perspective: These includes all the cost that patient have to bear for
getting health care services including cost of travel to health facility, cost of time.
 Health system perspective: These include policy level activities. It takes account
both provider and patient perspective.
 Societal perspective: It is wider perspective. It includes provider perspective,
patient perspective including health system perspective. It has benefit of
quantifying cost and benefit associated with related stakeholders in the society. It
accounts for all costs incurred by society in delivering health services and they
include loss of productivity due to employees being away from work because of
medical leaves
We always evaluate cost and consequences of alternative course of action in economic
evaluation. There are mainly four perspectives of economic evaluation. Among them
Provider perspective and patient perspective are narrow perspectives which only includes
the cost and consequences related with provider and patient respectively. Another
perspective i.e. health system perspective is little boarder than the two perspectives.
However, it also does not take into account the boarder societal cost and consequences.

An economic evaluation which confined itself to one of the single perspectives (provider
perspective/patient perspective/health system perspective) would not maximize health
outcomes within limited budget and would not necessarily maximize the welfare of
society within available resources. Consider for example, the reduction of psychiatric
hospital beds, which might seem cost effective from the perspective of the health service
but less so from that of society as a whole, including patients’ or carers’ perspectives.
A societal perspective helps detect cost shifting between sectors. During implementation
of any health care program the society’s total welfare should be focused. Decision should
be taken from the perspective of those who use it and pay for it i.e. the whole population.
Adopting societal perspective facilitates policies aimed at maximizing the welfare gains
to society or minimizing the losses. Thus economic evaluation from the perspective of
society is critical which focuses involvement of caregivers and patients who belong to
working class that contribute to society’s productivity.
However, in economic evaluation in practice, it may not always be possible for including
all the perspectives and all the relevant costs and benefits because of funding or time
constraints. We have to do economic evaluation by excluding particular effects if they are
likely to have little impact on the overall results.
Question 2

1. What is welfare economics? [Give definition and assumptions]

Definition
Welfare economics is a branch of economics that focuses on the optimal allocation of resources
and goods and how this affects social welfare. It analyzes the total good or welfare that is
achieved at a current state as well as how it is distributed. ( Investopodie)
Welfare economics use microeconomics technique to evaluate welfare.
Neoclassical framework of welfare economics are:
 Individualistic
 Utility principle
 Consumer sovereignty
 Consequentialism
 Welfarism

Two fundamental theorems of welfare economics

a. The first states that given certain assumptions, competitive markets produce Pareto
efficient outcomes. That means competitive markets tend towards an efficient allocation
of resources. PERATO principle is the heart of welfare economics. It tells that
individuals are best judge of their own welfare. It is a part of normative economics which
deals with value judgment and theoretical scenario and incorporates subjectivity in its
analysis.
It deals with competitive market. Value for money is greatly focused in this theorem. It
tells that efficient service provision is necessary for gaining PERATO optimality.
Assumptions
 Services should be as similar as possible in terms of quality and quantity
 Large number of service providers and receivers
 There should be free entry and exit from the market
 No governmental regulation with profit maximization.

b. The second theorem states that out of all possible Pareto-efficient outcomes, one can
achieve any particular one by enacting a lump-sum wealth redistribution and then letting
the market take over. i.e. given further restrictions, any Pareto efficient outcome can be
supported as a competitive market equilibrium. It tells that what will be the distribution
of the service provided to the society depends upon the income of the society or
individual.
PERATO efficiency does not tell how the resources are distributed. It also does not states
whether is equity not. If the statuses of two individuals are unequal then service provision
may be unequal.
 Citizen B’s Happiness units
A

C
B PERATO Optimum
frontier

Citizen A ‘s happiness units

Fig: The concept of PERATO optimality

All the points inside the PERATO optimum frontier line are PERATO inefficient points and
change is desirable at these points. All the points in the frontier are PERATO efficient points
however, only one point identifies where social welfare can be maximized.

2. State decides to provide Ambulatory services from the private sector where the people
has to pay out-of-pocket to receive the services. Health Economist thinks that this service
delivery mechanism is not appropriate due to market failure.

a. What they mean when they say market failure?

Market failure is the condition which occurs when one or more of the assumptions of perfect
competition are not fulfilled.

Assumptions of perfect competition

 The market consists of many health care consumers

 The market has many health care providers

 There is free entry and exit

 The health care services provided are homogenous

 Providers and consumers in the market have perfect information

If any one of the above mentioned assumptions of perfect market are missing then it is termed as
Market Failure.

c. What are the reasons of market failure in this context (mention three reasons with
examples in this context)
 The reasons of market failure in this context are

a. Monopoly/ oligopoly service provision

There are very few service providers because of the difficulty of entering in the health care
service field and licensing. Since the service is provided through private sector, there is no
control in fee structure. Because of this the service provider will charge cost of the service
haphazardly which ultimately demotivate general public.

b. Perfect information doesnot hold:

General people doesnot have technical knowledge as provider have in health care market.
The general people may not have knowledge on ambulatory service that the private sector
provided and what is its utility. So perfect information about ambulatory service may not
exist and market failure may occur.

c. Public goods: 

Some aspects of health are public goods, meaning it costs nothing for an additional
individual to enjoy the benefit and it is not possible to exclude an individual from enjoying
it. In this case all the individual in the society may not need the ambulatory services. But the
private sector is providing the service without addressing those who have no benefit using it.
Thus market failure may occur.

d. It is highly emphasized that this service delivery mechanism also affects the distribution
of services in the society? Why do you think this is the case? [Hint: Explain with
reference to second theorem of pareto-optimality]

3. What are different ways to measure such inequality in terms of

a. Distribution across socioeconomic status

b. Ability-to-pay

c. Impact of out-of-pocket payment on income and poverty