Health Economics

Session 3
Chapter 10, 11 and 12
 Back UP:

 We are examining economic evaluation and we have looked at the

notion of utility maximization, lowest cost, CBA and data
envelopment so far.

 In context: Economic evaluation of health care programmes is

directed at assisting decision makers in making choices about the
allocation of resources in general and health resources in particular.

 Its aim is to make explicit the advantages and disadvantages of

different courses of action, and is designed to aid decision makers
in making choices.

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Chapters 10, 11 and 12
 Now, the choice of What health services should be provided is
what economist refer to as allocative efficiency.

 So we try to maximize benefits subject to limited resources.

It is about finding the optimal mix of services that delivers
the maximum possible benefit.

 The choice of how to provide health care is what economist

refer to as technical efficiency. Minimum inputs for a given
output. The output is fixed but the inputs will differ
depending on which policy is adopted.

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Chapters 10, 11 and 12
 Drummond et al (1997): Methods for the Evaluation of Health
Care Programmes; defines economic evaluation as “the
comparative analyses of alternative courses of actions in
terms of both their costs and consequence”.
FIGURE 1 – Defining An Economic Evaluation

Health Evaluations
Are both costs and consequence of the alternatives examined
Is there NO YES
comparison Outputs only Costs only
of two or 2 PARTIAL EVALUATION
more
NO 1A PARTIAL EVALUATION 1B Cost-outcome description
alternatives? Outcome Cost
description description
3A PARTIAL EVALUATION 3B 4. FULL ECONOMIC
Efficacy or Cost analysis EVALUATION
YES c-e-a
effectiveness
evaluation c-u-a
c-b-a

Note: c-e-a = cost effectiveness analysis

c-u-a = cost utility analysis
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c-b-a = cost benefit analysis
Chapter 10, 11 and 12
 Costs: can be defined in many ways but they can be
categorized as direct (immediately associated with the
intervention, staff time, medicines consumed), indirect
(patients work loss due to treatment) and intangible
(pain, anxiety quality).

 Now all types of economic evaluation deal with costs in

the same way or at least in the same units (i.e.,
monetary).

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Chapters 10, 11 and 12
 But benefits are analyzed in at least three different ways
reflecting the different types of economic analysis used in the
evaluation.

 It can be examined from the standpoint of the immediate

(direct) effect on health; e.g, lives saved, reduction in tumor
size, lowering of blood pressure.

 Benefits from an intervention can be more generically

examined as in the impact on general well-
being/happiness/satisfaction. And, these are labelled as
“utilities”. The utility of an intervention to an individual is
the benefit to that individual.
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Chapters 10, 11 and 12
 A third way benefits can be looked at is on the same terms as
costs; meaning, that benefits are valued in monetary terms
by some means.
Figure 2 – Evaluation Costs and Consequences

ECONOMIC EVALUATION
Resources Consumed HEALTH CARE PROGRAMME Health Improvement

→ →
Cost ( C ) Effects (E) Utilities (U) Benefits (B)
C1 = Direct Costs Health effects in Health effects in B1 = Direct benefits
C2 = Indirect Costs natural units QALYs B2 = Indirect benefits
C3 = Intangible Costs B3 = Intangible benefits

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Chapters 10, 11 and 12
 Regardless of the approach used we must go through three
stages. All costs and benefits must be 1) identified, 2)
quantified, and 3) valued.

 We must first identify the costs and benefits that are

sufficiently important to warrant inclusion in the evaluation.
That will define the variables of interests to us. These can be
broadly classified into changes in resource use, changes in
productive output and changes in health state.

 The next stage is to measure changes in the identified

variables generated by the intervention.
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Chapters 10, 11 and 12
 This should be done before the evaluation because it's necessary to
know the magnitude of gains or losses before values are attached.

 Variables can be presented in terms of “natural” quantities or

frequencies; e.g., hours worked, clinical units.

 Quantification of changes easier with labour and raw material

(consumables) but could be difficult with the share of shared
resources (capital stock, land).

 Then comes valuation. Recall discounting as costs and benefits

today will have a different value in the future.
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 Types of Economic Evaluation: four basic ones.

 1. Cost-effective analysis: concern with technical efficiency

issues; what is the best way of achieving a given goal or what
is the best way of utilizing a given budget.

 So alternatives are compared where the outcomes measured

are of the same type but of different magnitudes.

 It examines costs and a single consequence in its natural unit

such as hospital length of stay or frequency of adverse events
as a percentage.
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Chapters 10, 11 and 12
 So comparisons can be made between different health
programmes in terms of their cost effectiveness ratio: cost
per unit of effect. (data envelopment analysis).

 With CEA effects are measured in terms of the most

unidimensional natural unit. Thus the addressed question is:
what is the best way of treating renal failure?

 Then the most appropriate ratio with which to compare

programmes might be “cost per life saved”

 CEA is relatively straightforward to carry out but not

comprehensive.
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 The analysis compares one intervention with another, so it
calculates cost-effectiveness as the difference in cost
between two interventions divided by the difference in health
benefit obtained. This gives us the incremental cost-
effectiveness ratio.

 C1 and E1 are the cost and effect in the intervention group

while C0 and E0 are the cost and effect in the control care
group.

 Costs are expressed in monetary term(units of currency) while

effects are measured in terms of health status.
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Chapters 10, 11 and 12
 So we have the following formula;

 ICER = (C1 – C0)/ (E1 – E0)

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 2. Cost-Utility Analysis: concern with technical and allocative
efficiency. Can be viewed as a sophisticated CEA as it makes
comparisons between health programmes in terms of cost-
effect ratios.

 It differs in the way it considers effects. CUA tend to be used

when quality of life is an important factor involved in the
health programme being evaluated.

 It examines costs and a single consequence in the form of a

health related quality of life measure such as quality adjusted
life years.
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Chapters 10, 11 and 12
 The quality-adjusted life years (QALY) is an example of a
commonly used utility measure. It combines a person's well-
being with the additional years of life derived from the
intervention.

 Example: assume a patient who do not receive treatment has

a life expectancy of 3 years and the patient’s quality of life
has a value of 0.45 (range of 1 to 0; with 1 being the best
state of health and 0 the worst, even death).

 The patient then receives treatment and then has a life

expectance of 8 years and a quality of life for those years
with a value of 0.70.
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Chapters 10, 11 and 12
 The gain from the intervention can be determined as follows:

 With no treatment 1.35 QALYs (3 x 0.45) are produced. With

treatment 5.60 QALYs (8 x 0.70) are produced thus the gain of
4.25 quality adjusted life years.

 3. Cost-Benefit Analysis: its concern with allocative

efficiency. Costs and benefits are measured in monetary
terms. It compares alternatives where the outcomes are of a
different type and a different magnitude.

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Chapters 10, 11 and 12
 Whereas the other methods deal with relative efficiency, CBA
can be used to evaluate health programmes in a more
absolute way.

 It is possible to ask: is intervention X worthwhile per se?

 Are the benefits greater or less than the costs?

 So CBA can reveal the net economic gain or loss of an activity.

And only interventions that generate a net economic gain
might be given further consideration by comparing the
magnitude of the gain under different interventions.
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Chapters 10, 11 and 12
 CBA can be used to consider allocative efficiency in general
since once the benefits have been converted into monetary
terms then the net economic impact of different activities
can be compared.

 So for example, the gain from building a bridge can be

compared with prescribing a new pharmaceutical and
resources can be allocated on the basis of the results of the
CBA until you reach Pareto efficiency, or Pareto optimality.

 This is, no one could be made better off without making at

least one person worst off.
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Chapters 10, 11 and 12
 Problem with CBA is to measure or convert benefit from
health programme into monetary values.

 Two main techniques used for monetary valuation of benefits:

the human capital and the willingness to pay.

 With human capital the benefit of health programme is

measured by how much it helps a patient to return to, or
increase, his/her productive output.

 Productive out can be easily valued using actual or proxy

wage rates.
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Chapters 10, 11 and 12
 The willingness to pay assumes that the utility an individual
gains from an intervention is valued by the maximum amount
he or she is willing to pay for it out of pocket.

 Note that in the use of CBA if at the end of the trial the
outcomes of treatment are equal, then a cost-minimization
analysis will be undertaken.

 4. Cost Minimization Analysis: it compares alternatives

where the outcomes are identical, both in the type of
outcomes being measured and in their magnitude.

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Chapters 10, 11 and 12
 Where this is the case the analysis focuses of determining the
least costly alternative.

 Note that outcomes must be shown to be identical.

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 A Framework for Choice.

 Economic evaluation provides a framework to assist in

interpreting diverse information.

 The issue is not “Does it work: but rather “should we do it”.

 Do the benefits of this service or intervention justify the cost?

 Inefficiency can cause people to die, more people to become

or remain disabled and more people to suffer avoidable pain.

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Chapters 10, 11 and 12
 As such, economic evaluation must be clear, consistent,
emphatic of efficiency, and with a societal perspective. It
must seek to consider the whole picture.

 We have to assess existing policies as some health services

exist when they probable should not.

 An economic evaluation can assist in determining which

programs and services should be targeted as well as where to
allocate resources.

 At the same time it is difficult for many organizations to

change with the degree of rapidity required.
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Chapters 10, 11 and 12
 Ideas for development of health policies and services have
complicated origins.

 Policy makers are not always detached and clear-thinking. They

also seek to maximize their benefits.

 When faced with the demand for new services they will prefer
positive findings in an evaluation or may want it to be negative to
justify inaction.

 Therefore analyst must be conscious of the fact in many cases

policymakers commission evaluations in the hope of a particular
outcome and not merely to inform choices.

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 Even when analyst are “neutral” there can be prone to errors
and risks that can lead to bad decisions.

 There are the risk of:

 1. double counting costs and benefits
 2. omitting costs
 3. placing inaccurate economic value
 4. using flawed assumptions
 5. limiting choice alternatives
 6. loving the project too much.
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Chapters 10, 11 and 12
 So we have to consider the perspective of the analyst and
asked the following:

 1. Have all the options been considered?

 2. Are the costs representing opportunity costs?

 3. How were the benefits assessed and calculated?

 4. have costs and benefits been discounted in terms of NPV?

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Chapter 10, 11 and 12
 In all, we must understand the limitations of EE in terms of
theoretical assumptions and implementation.

 We need to:

 1. think clearly.

 2. measure carefully

 3. interpret sensibly.
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Break Out

 Discuss the notion of EE. Its objective. The

different types. To what extent do you think
they are useful?

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