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Methods in Economic Evaluation in Health & Medicine

Technical Report · March 2013

DOI: 10.13140/2.1.2383.0722

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Methods in Economic
Evaluation in Health &
Medicine
Preeti Zanwar, Ph.D., M.P.H., M.S.
NIH/NRSA Post-Doctoral Trainee
Sealy Center on Aging
March 12, 2013
Acknowledgements
James Goodwin, M.D.

Yong-Fang Kuo, Ph.D.

Sarah Toombs, Ph.D., E.L.S.

Sealy Center on Aging

Sealy Center on Aging
Sealy Center on Aging
Sealy Center on Aging
Life Expectancy at Birth

Source: OECD Health Data 2011; World Bank and national sources for non-OECD countries.
Sealy Center on Aging
Sealy Center on Aging
Sealy Center on Aging
U.S. Ranks Last Among Seven Countries on Health System
Performance Based on Measures of Quality, Efficiency, Access,
Equity, and Healthy Lives

Sealy Center on Aging

Key Economic Concepts

Opportunity Cost of a resource or program

- Ensure that scarce resources are used efficiently

- Costs are consequences of choices

- Value of the next-highest-valued alternative use of that

resource that is forgone

- Sum of cost (monetary value) + value or sacrifice of what

is foregone (lost time, lost benefit, pleasure, opportunity)

Marginal Cost – change in cost when quantity produced changes by one unit

Marginal Benefit – additional satisfaction or utility upon consumption of an

additional unit of a good or service

Library of Economics and Liberty, 2013

Sealy Center on Aging
Key Concept of Economic Efficiency

Efficiency: maximal health benefits with a fixed amount of

resources. Marginal Costs (MC) = Marginal Benefit (MB)

Inefficient use of resources: Intervention at levels before and

beyond the point at which MC = MB production.

Efficient use of resources: when the extra health benefits gained

from the last $ spent are the same for all interventions.

Model of Economic Analysis, Chapter 12: Clinical Economics, http://painconsortium.nih.gov/symptomresearch.htm

Sealy Center on Aging
Concept of Law of Diminishing Returns

Relationship Between Costs and Outcomes

Model of Economic Analysis, Chapter 12: Clinical Economics, http://painconsortium.nih.gov/symptomresearch.htm

Sealy Center on Aging

 Why Is Economic Evaluation Important?

1. Without systematic analysis, it is difficult to identify

clearly the relevant alternatives.

2. The viewpoint assumes an analysis is important.

3. Without some attempt at measurement, the uncertainty

surrounding orders of magnitude can be critical.

Drummond MF et al. Methods for Economic Evaluation of Healthcare

Programmes, 3rd Edition Oxford University Press, 2005

Sealy Center on Aging

What Does Economic Evaluation Mean?
Two Features:
Both inputs and outputs - > costs and consequences
Choices

Economic evaluation is the comparative analysis of alternative courses of

actions in terms of both their costs and consequences
Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition , Oxford University Press, 2005

Sealy Center on Aging

Role of Economic Evaluation in Healthcare
Three Conversation Among Three Analysts

Analyst A (Welfarist Approach)

- Ascertain the total amount that individual would be willing to pay for the
intervention

- Reflects non-health attributes of programmes

Analyst B (Extrawelfarist Approach)

- Consider healthcare resources only and compare the resources consumed

with the health obtained

- Stay within the confines of healthcare budget

Analyst C (Decision-maker Approach)

- Take a broad societal perspective by measuring a wide range of costs and

consequences and present them in a way that helps decision makers make a
better judgment
Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition, Oxford University Press, 2005

Sealy Center on Aging

Three Dimensions of Clinical Economics

Medical Care
(individual)

Public Health
(population)

Model of Economic Analysis, Chapter 12: Clinical Economics

http://painconsortium.nih.gov/symptomresearch.htm

Sealy Center on Aging

Components of Economic Evaluation in
Health Care

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition , Oxford University Press, 2005

Sealy Center on Aging

Some Formulations of Economic Evaluation

Cost-benefit analysis
(W’) – (C1 + C2 + C3 + C4)
[(W + V + S1 + S2 + S3 + S4) – (C1 + C2 + C3 + C4)]
……………………………………………………………………………………
Cost-effectiveness analysis
(C1 – S1)/E
[(C1 + C2 + C3 + C4) – (S1 + S2 + S3 + S4)]/U
………………………………………………………………………………..…
Cost-utility analysis
(C1 – S1)/U
[(C1 + C2 + C3 + C4) – (S1 + S2 + S3 + S4)]/U

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition , Oxford University Press, 2005
Sealy Center on Aging
 Distinguishing Characteristics of Health Care
Evaluation
Are both costs (inputs) and consequences (outputs) of the alternatives examined?
No Yes

Examines only Examines only

consequences costs
Is there No
comparison 1A Partial evaluation 1B
2 Partial evaluation
of two or
Outcome
more Cost description
description Cost-outcome description
alternatives?
3A Partial evaluation 3B
4 Full economic evaluation

Yes Efficacy or
effectiveness Cost analysis Cost-effectiveness analysis
evaluation Cost-utility analysis
Cost-benefit analysis
Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3rd Edition, Oxford University Press, 2005

Sealy Center on Aging

Measuring Costs and Consequences in Economic Evaluation

Type of study Measurement/ Identification of Measurement/

valuation of costs consequences/ valuation of
in both health outcomes consequences
alternatives
______________________________________________________________________________________________
Cost analysis Monetary units None None
…………………………………………………………………………………………………………………………………………
Cost-benefit Monetary units Single or multiple Monetary units
analysis effects, not necessarily
common to both
alternatives
…………………………………………………………………………………………………………………………………………
Cost-effectiveness Monetary units Single effect of Natural units
analysis interest, common (life-years gained,
to both alternatives, disability-days saved,
but achieved to points of blood
different degrees pressure reduction)
………………………………………………………………………………………………………………………………………….
Cost-utility Monetary units Single or multiple Healthy years
analysis effects, not necessary (typically measured
common to both as quality-adjusted
alternatives life-years)
______________________________________________________________________________________________

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition, Oxford University Press, 2005

Sealy Center on Aging

 Perspectives in Economic Evaluation

Society at large
Third-party payer (including Health Insurance company and Government
Agency)
Health care provider (HMO, Clinic, Hospital, Clinician)
– Health Outcomes — Evidence-Based Medicine
– Equality vs. Efficiency
– Cost (especially with Capitation)
– Ease of Obtaining Treatment
Patient
– Health Outcomes (Personal, Experiential)
– Out-of-Pocket Cost
– Ease of Obtaining Treatment

Health Economics, RTI Health Solutions, Research Triangle Park, 2006

Sealy Center on Aging

 Three categories of Costs

Direct
- medical, providers, health services, procedures, tests
Indirect
- value of lost productivity, volunteer time, patient and
caregiver time
Intangible
- pain, suffering, anxiety, stress

Model of Economic Analysis, Chapter 12: Clinical Economics, http://painconsortium.nih.gov/symptomresearch.htm

Sealy Center on Aging

Influences on Costs

The alternatives to which an intervention is compared

The type of analysis performed
Patient perspective Insurer perspective
Preferences of costs of costs
•Copayments •Fee schedules
•Deductibles •Allowable charges
•Out of pocket expenses •Diagnosis related group
(transportation, parking) payments

Allowance for differential timing of costs discounting

Model of Economic Analysis, Chapter 12: Clinical Economics, http://painconsortium.nih.gov/symptomresearch.htm

Sealy Center on Aging

 Various Definitions of Cost

Total cost (TC) = cost of producing a particular quantity of output

Fixed cost (FC) = costs which do not vary with quantity of output in
the short run (~1 year), e.g. rent, equipment lease
payments
Variable cost (VC) = costs which vary with the level of output, e.g.
supplies, food, fees for service
Cost function (TC) = f(Q), total cost as a function of quantity
Average cost (AC) = TC/Q, the average cost per unit of output
Marginal cost (MC)* = (TC of x + 1 units) – (TC of x units)
= the extra cost of producing one extra unit of output

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3rd Edition , Oxford University Press, 2005

Sealy Center on Aging

Presenting Summary Measure in Cost-Effectiveness Analysis
Comparing Marginal and Incremental Analysis
Marginal CE : change in costs and health benefits from a one-unit
expansion or contraction of service from a particular health care
intervention (e.g., an extra day in the hospital or an extra dose of
medication per day).

Incremental CE : change in costs and health benefits when one health

care intervention is compared to an alternative one (e.g., outpatient
surgery vs. short-stay surgery).

Types of analysis Considers the differences in costs and health benefits

Marginal cost-effectiveness Within a given alternative
Incremental cost-effectiveness Between alternatives

Model of Economic Analysis, Chapter 12: Clinical Economics, http://painconsortium.nih.gov/symptomresearch.htm

Sealy Center on Aging

Presenting Summary Measure in Cost-Effectiveness Analysis
Incremental Cost-Effectiveness Ratio (ICER)

Most commonly applied economic evaluation technique with

technologies, innovations, pharmaceuticals
• Facilitates comparisons across diseases
• Places decision in hands of decision-maker rather than
economist

ICER = Cost of Treatment A – Cost of Treatment B

Effect of Treatment A – Effect of Treatment B

Average CE Ratio = Cost of Treatment A / Effect of Treatment A

Model of Economic Analysis, Chapter 12: Clinical Economics, http://painconsortium.nih.gov/symptomresearch.htm

Sealy Center on Aging

Presenting Summary Measure in Cost-Effectiveness Analysis
The Cost-Effectiveness Plane

Annals of Internal Medicine 2009;151(9):662-W219, 7p, 1 Diagram, 1 Chart Diagram; p. 663.

Sealy Center on Aging

Components of Cost-Utility Analysis
Methods of Measuring Preferences (utility, value)
Response method Question framing
__________________________________________________________
Certainty (values) Uncertainty (utilities)
__________________________________________________________
1 2
Scaling Rating scale
Category scaling
Visual analogue scale
Ratio scale
……………………………………………………………………………………
3 4
Choice Time trade-off Standard gamble
Paired comparison
Equivalence
Person trade-off

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3rd Edition, Oxford University Press
Sealy Center on Aging
Cost-Utility Analysis
Generic Types of Relative Risk Attitude

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition, Oxford University Press

Sealy Center on Aging

Cost-Utility Analysis
What is a Health State?

Each of the 5 dimensions

comprising the EQ-5D descriptive
system is divided into 5 levels of
perceived problems:

Level 1: indicating no problem

Level 2: indicating slight problems
Level 3: indicating moderate
Problems
Level 4: indicating severe problems
Level 5: indicating extreme
problems

www.euroqol.org

Sealy Center on Aging

Components of
Cost-Utility Analysis

Measuring
Quality of
Well-Being
Using Rating Scale
EQ-5D (EuroQol)
classification system

www.euroqol.org

Sealy Center on Aging

Components of We would like to know how good
Cost-Utility or bad your health is TODAY.

Analysis • This scale is numbered from 0

to 100.
Measuring • 100 means the best health
Quality of you can imagine.
Well-Being
0 means the worst health
Using Rating Scale you can imagine.

EQ-5D (EuroQol) • Mark an X on the scale to

classification system indicate how your health is
TODAY.

• Now, please write the number

you marked on the scale in the
box below.
www.euroqol.org

YOUR HEALTH TODAY =

Sealy Center on Aging
CUA: Other Instruments to Measure Preferences
SF-6D

physical functioning, role limitations, social functioning, pain, mental

health, vitality

Health utilities index (HUI) mark 2

sensation, mobility, emotion, cognition, self-care, pain, fertility

HUI mark 3

Vision, hearing, speech, ambulation, dexterity, emotion, cognition

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3rd Edition , Oxford University Press,
2005

Sealy Center on Aging

Cost-Utility Analysis: Measuring Preferences
Time Trade-Off (TTO) for a Chronic Health State Preferred to Death

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition, Oxford University Press

Sealy Center on Aging

Cost-Utility Analysis: Measuring Preferences
Standard Gamble for a Chronic State Preferred to Death

Gamble

Certainty

Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition, Oxford University Press

Sealy Center on Aging

Presenting Summary Measure in Cost-Utility Analysis
Quality-Adjusted Life-Years Gained from an Intervention

Perfect
Health
QUALITY OF LIFE (Weights)
HEALTH-RELATED

Dead 0.0 Death 1 Death 2

Intervention
DURATION (Years)
Drummond MF et al. Methods for Economic Evaluation of Healthcare Programmes, 3 rd Edition , Oxford University Press
Sealy Center on Aging
Economic Evaluation using Decision Analytic Model

The impact of patient’s preferences on the treatment of arterial fibrillation study of patient based decision
analysis. BMJ 2000;320:1380.

Sealy Center on Aging

Economic Evaluation using Markov Model

Stewart SB et al. Does variation in either age at start of therapy or duration of therapy make chemoprevention with finasteride cost-effective?
Fig. 1 Prostate Cancer Prostatic Dis 15: 380-385; advance online publication, July 10, 2012; Nature Publishing Group

Sealy Center on Aging

Conclusions
It is important to present results in a transparent manner.

It is important to explore costs and consequences that vary from one

setting to another.

No one correct approach

Disagreement about the overall philosophy of economic evaluation.

In United States, very little is known about decision-makers attitudes and

the way in which results of economic studies are used in decision-
making. This is likely to be a priority for research in the future.

The ultimate test of economic evaluation will be whether it improves the

quality of decision-making about pricing and reimbursements in
medicine and health technologies.

Sealy Center on Aging

 Thank You for your Attention!

Methods in Economic Evaluation in Health

& Medicine

Preeti Zanwar, Ph.D., M.P.H., M.S.

NIH/NRSA Post-Doctoral Trainee
Sealy Center on Aging
March 12, 2013

Sealy Center on Aging

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