Health Economics & Policy

3rd Edition
James W. Henderson

Chapter 4
Economic Evaluation in Health Care
The Inevitability of Trade-Offs
 The value of a medical intervention
 The inclusion of a drug on the formulary
 Paying for an experimental procedure
 Investing in new technology
 Is it worth it? How do we measure value to
insure we get value for spending?
 Economic Evaluation
 Reality of opportunity cost
 Useful alternatives compete for resources
 Making choices is sometime unpleasant
 Options for colorectal cancer screening
– Fecal blood test
– Barium enima
– Sigmoidoscopy
– Colonoscopy
 Is it worth the extra money?
What is Economic Evaluation?
 A comparative analysis
 Evaluating alternative courses of action
 Examining both costs and consequences
– Identify
– Value
– Measure
– Compare
Types of Economic Evaluation
 Cost of illness studies
 Cost-benefit analyses
 Cost-effectiveness studies
 Cost of Illness Studies
 What does it cost?
 Burden of a disease
 Burden of 5 chronic conditions in US (Druss et al.,
2001)
– Mood disorders, diabetes, heart disease, asthma, and
hypertension
– Direct cost of treatment - $62.3 billion]
– Cost of treating coexisting conditions - $270 billion
– Lost productivity - $36.2 billion
 Role in analysis – increased awareness
 Cost-Benefit Analysis
 Simple extension of capital budgeting
 Developed to help public sector make
decisions that maximize public welfare
from tax spending
 Optimization in the absence of market
pressure
 Benefit-Cost Criterion
n
Bt n Ci
B/C   t 
/ t
t 1 (1  r ) t 1 (1  r )
 If ratio is greater than one, project is acceptable
n
Bt  Ct
NB  
t 1 (1  r ) t
 If net benefit stream is positive, project is
acceptable.
 Challenges of Cost-Benefit
Analysis
 Valuing benefits
– How do you place a value on a human life?
– Willingness-to-pay approach
 When applied to health depends on
– wealth
– life expectancy
– current health status
– possibility of substituting current consumption for future
consumption
 Choosing a discount rate
 Cost-Effectiveness Analysis
 Developed outside traditional welfare economics
framework
 Measures health benefit by health outcome, not
the dollar value of life
 Using the decision makers approach
– Maximize the level of health for a given population
subject to a budget constraint
– Practical guide for choosing between programs or
treatment options when budgets are limited
Incremental Cost-Effectiveness
Ratio
CB  C A
ICER 
EB  E A

 If CA > CB and EA < EB, B dominates.

 If CA < CB and EA > EB, A dominates.
 If, however, CB > CA and EB > EA, choice is
not obvious. Use CE.
Graphical Presentation of CE

Effectiveness

F G
D

B C

A Cost
 Interpretation of CE Graph
 Strategies that form the solid line connecting the
points lying left and above are the economically
rational subset of choices
 Points like C and E are strictly dominated
alternatives
 The inverse of the slope between any two points
represents the incremental CE ratio
 As the slope gets flatter, the CE ratio gets higher –
giving literal meaning to “flat-of-the-curve”
 Measuring Costs
 Direct – associated with use of resources
– Medical
– Non-medical
 Indirect – related to lost productivity
– Medical
– Non-medical
 Intangible – associated with pain and
suffering, grief, anxiety, and disfigurement
 Measuring Effectiveness –
Improvements in Health
 Surrogate measures stated in terms of clinical
efficacy
– Blood pressure, cholesterol levels, bone mass density,
or tumor size
 Intermediate measures stated in terms of clinical
effectiveness
– Events, scores on exams
 Final outcomes measure economic effectiveness
– Events avoided, disease-free days, life-years saved,
quality-adjusted life years saved
Improved Life Expectancy Due
to Clinical Treatment
Survival
Survival Function for
A
Treatment Group
100% B
90%

77%
C

Survival Function for

Non-treatment Group
D

18 6.5 yrs
months
 Quality of Life Measures
 Attempt to measure value of life in
terms of quality and quantity
 View QALY as life expectancy with a
preference weight for perfect health
attached to each year
 Measured on a preference scale
anchored by death (0) and perfect
health (1)
 Calculating QALYs Using
Preferences for Health States
Utility

U(h1)

U(hi)

Time in years
0 6 15
 Standard Time Trade-Off for
Calculating QALYs
 Standard time tradeoff offering 2 options:
– chronic health state i for t years, followed immediately
by death
– Perfect health for x years (where x is less than t),
followed immediately by death
 Vary length of x until individual is indifferent
between two options
 Value of one year in chronic health state is x/t
 Standard Gamble for
Calculating QALYs
 Direct approach based on fundamental axioms of
utility theory
– A treatment is available for individuals in chronic
disease state
– When it works, the treatment provides a permanent cure.
When it does not work, the result is immediate death
– How high does the risk of dying have to be before the
patient refuses treatment?
– The utility value of each year in the chronic disease state
is equal to the associated probability that the treatment
works
 Performing an ICER
 Rank the alternative treatment options by health benefit
(beginning with the one with the lowest benefit).
 Eliminate treatment alternatives that are strictly
dominated.
 Calculate the ICER between each treatment option and
the next most expensive option.
 Eliminate treatment options that display extended
dominance.
 Determine which treatment options have an ICER that is
below the cut-off ICER.