Economic evaluation in health care -I

Zahidul Quayyum
Health Economic Research Unit
 Outline

• Economic Evaluation Priorities Setting in Health

Care
• Decision problem we face
• What is economic Evaluation
• Steps in economic evaluation
• Types of Economic Evaluation
• Measures and Valuation of Costs: Cost Analysis
• Measures of Health Effects
Economic Evaluation and Priority Setting

• Economic Approach of Level of spending

• Back to the concept of opportunity costs
– The opportunity costs of committing resources to produce
a good or service is the benefits forgone from those same
resources not being used in their next best alternative
• Spending on health care is worthwhile as long as benefits
are greater than opportunity costs
• Requires information on benefits of all possible uses of
nation’s resources!
• Improving public expenditure management essentially would
essentially require cost-effectiveness analysis
 Decision problem we face in health care
The principles of economic evaluation

• Should a new drug or new surgical procedure be adopted or whether a

particular medical procedure/health intervention worth undertaking?

• Should one form of treatment be expanded (while another is contracted)?

• After clinical effectiveness has been demonstrated, need to look to the

balance of benefits and costs; identification and estimation of the health
outcomes or benefits and costs of health care.

• A specialist hospital requests a license to establish a kidney transplant

programme as claims it is cheaper than constant dialysis
 What is Economic Evaluation

• Economic Evaluation compare the costs and

consequences of two (or more) alternative health
care interventions. It is a way of thinking which is
backed up by a set of tools, that are designed to
improve the value for money from investments in
health care and welfare (Fox-Rushby and Cairns,
2005).
• Concerned with EFFICIENCY not just effectiveness
 Economic evaluation

Intervention A Costs A
Total costs A Total effects A
(e.g. current practice) Effects A

Intervention B Costs B
Total costs B Total effects B
Effects B
(e.g. new treatment)

Difference in costs: Difference in effects:

Costs B - Costs A Effects B - Effects A

Costs B - Costs A
ICER:
Effects B - Effects A
 Example 1

Current New Difference

practice medication [B-A]
Effects 25 life-years 25.5 life-years +0.5
(average per patient) [Effect A] [Effect B]

 New medication more effective so implement new

medication………….. but what about costs?
 Example

Current New Difference

practice medication [B-A]
Costs £2000 £4000 +£2000
(average per patient) [Cost A] [Cost B]
Effects 25 life-years 25.5 life-years +0.5
(average per patient) [Effect A] [Effect B]

 ICER = £2,000/0.5= £4,000 per life-year

 It costs an additional £4,000 to obtain 1 additional life year
 Example -2

Current New Difference

practice medication [B-A]
Costs £3000 £2000 -£1000
(average per patient) [Cost A] [Cost B]
Effects 25 life-years 25.5 life-years +0.5
(average per patient) [Effect A] [Effect B]

 New medication dominates

 Economic Evaluation and Efficiency

Each of the techniques is aimed at answering different

questions: technical efficiency, allocative efficiency

• Technical efficiency:
– choice of how to provide health care
– minimize input for a given output

• Allocative efficiency:
– choice of what health care to provide
– maximize benefits subject to given resources
 Technical efficiency

• Producing a given level of output at a minimal cost or

producing the maximum amount of output for a given cost
• Concerned with efficiency ‘within’ a programme

Examples:
• When providing hernia repair surgery, is it best to provide
conventional surgery or laparoscopic surgery?
• When providing rheumatology clinics, is it best to provide a
nurse practitioner services or a consultant based service?
 Allocative efficiency

• Programmes compete for the allocation of scarce resources

• Comparison across programmes such as gynaecology,
intensive care services, renal services, etc.

Example:
• Should there be an expansion of surgery for rheumatology
clinics or renal services?
 Economic evaluation and its application

• Tool to aid priority setting and resource allocation

• Is increasingly being used
• National Institute for Health and Clinical Excellence (NICE)
– Provides recommendations on the use of new and
existing medicines and treatments within the NHS
– Recommendations are based on a review of clinical and
economic evidence
• Scottish Medicine Consortium
How are Economic Evaluation conducted?

Two approaches:
1. Conducted alongside RCT (Randomized Controlled Trial) or
non-randomised studies (such as before and after studies)
– Collect primary (new) data
2. Rely on existing (secondary) data or existing studies
– Technology Assessment Reviews (TARs) for NICE
 Types of Economic Evaluation

Identification of different types of costs and their

subsequent measurement and valuing are similar, the
nature of consequences varies
– Cost-minimization Analysis
– Cost-Effectiveness Analysis - 1970s
– Cost-Utility Analysis - 1980s
– Cost Benefit Analysis - 1960s and 1990s
CMA and CEA answer narrower questions, CUA and CBA
answer broader questions
 Types of Economic Evaluation
• Methods:
– Cost-effectiveness: benefit in natural units (life-
years)
– Cost-utility: benefit in utility values (QALY)
– Costs benefit: benefit in monetary value
• Based on the notion of opportunity cost
• Incremental cost-effectiveness ratio (ICER)
 CMA & CEA

• Concerned with technical efficiency

• “Given that it is decided that a goal/policy will be pursued,
what is the best way of achieving it?”
OR
• “What is the best way of spending a given budget?”

• involves the comparison of at least two options

 Cost minimisation analysis (CMA)

• Not a full form of economic evaluation

• Know (or assume) health effects to be equal

Two possibilities
1. Evidence suggests there is no difference in outcomes
• But uncertainty surrounding the estimates
2. Prior view that health effects are equal
• What is basis of this view?
 Cost-effectiveness analysis (CEA)

Effects are measured in terms of the most appropriate

uni-dimensional natural unit
 Cost per unit effect

Examples:
• Renal failure  cost per life saved
• Screening for Down’s syndrome  cost per Down’s syndrome foetus detected
• Location of Long-term care  cost per disability day avoided
 CEA

 Straightforward to carry out

x Cannot compare disparate alternatives

x Narrow, uni-dimensional measure of effect
• Interventions often produce multiple outcomes
 Cost-utility analysis (CUA)

• Effects are multi-dimensional

• Combines life years gained with some judgment (or value or
preferences) on the quality of those lifeyears
• Most popular measure:
– quality adjusted life years (QALYs)
• Can address technical efficiency and allocative efficiency
within the health care sector
 Cost Utility Analysis

• CUA is a special case of CEA where QALYs are employed as

the measure of health status

• CUA uses cost per QALY as means of ranking alternatives

• Alternatives can be close substitutes, as in CEA, but need

not be

• Alternatives need not even be health care measures

 Cost Utility Analysis
• Maynard (1991) ranks seven courses of action by cost per QALY:

Home renal dialysis £17300. Heart transplant £8000

Kidney transplant £3500. Heart bypass £2000
Hip replacement £1000. Stroke prevention £750
Anti smoking campaign £250

• Allan Williams (1985, converted in 1989-90 prices)

GP advice to stop smoking £260 Hip replacement £1140

CABG for severe angina LMD £1590 Breast Cancer Screening £5340
GP control of total serum cholesterol £ 2600
Hospital haemodialysis £21500
 Cost Utility Analysis

• CUA have important implications for allocation of resources

• CUA is still generally restricted to efficiency with which

health service resources are used; tends to neglect costs
borne by others (such as patients)

• CUA may be used to rank alternatives but it cannot say with

certainty whether any option yields positive net benefits, this
is because costs and benefits are measured in different
terms
 Measuring Health and Life

• Types of Health Measures:

– Mortality: Death averted, Life years gained
– Morbidity: prevalence and incidence
– Disease Specific Measures: disease profile (chronic
respiratory distress questionnaire)
– Disease indices (Arthritis Impact Measurement
Questionnaire- AIMS)
– Generic health measures: Health Profiles (NHP),WHO
Quality of Life(WHOQOL- low & middle income countries)
– Health Indices: Non-preference based: SF-36, Preference
Based: EQD5(international), HUI, QWB index
 Measures of health effects

• Some studies use unidimensional measures of health such

as lives saved, pain relieved, a condition cured, mobility
restored

• The problem with such measures is that they cannot be

used to compare changes in health status where more than
one aspect of health shows changes – the majority of cases

• Most popular multidimensional measure of health is QALYs

in which two aspects of health – duration of life and quality
of life – are combined in a single index
 Measures of health effects

• In principle, duration of life is fairly easily quantified

although, in practice, estimating life expectancy is not an
exact science

• Measuring quality of life is much more difficult – in theory

and practice

• Most techniques involve attaching ratings to different states

of health between two extremes: 1 = “good health” and 0 =
death
QALY – Measure for Health Effects in CUA

• The method employs mobility, physical activity and social

activity as criteria; another common method employs
disability and distress as criteria

• Life expectancy is then multiplied by the quality of life rating

to yield QALYs, i.e. adjusting the length of time affected
through the health outcome by the utility value (on a scale
of 0 to 1)

• QALYs- Other names Years of Healthy Life (YHL – US),

Health Adjusted Person Years (HAPY) , Health Adjusted Life
Expectancy (HALE)- Canada
 Quality Adjusted Life Years (QALY)
Perfect Health

1.0
2. With Programme

Shaded area: Quality Adjusted Life Years

A
QALY
Weights

1. Without B
Programme

0.0

Dead
Death 1 Death 2
 Quality Adjusted Life Years (QALY)

Perfect health

1 Without surgery:
0.9 0.23 = 0.6 QALYs
0.8
0.7 With surgery:
Quality

0.6
0.5 0.910 = 9 QALYs
0.4
0.3  QALYs gained = 8.4
0.2
0.1
0
0 2 4 6 8 10
Worst imaginable health Life Years
 QALY league tables

• Rank procedures based on marginal cost per QALY gained

• Procedures with lowest cost per QALY receive higher priority
• Disadvantages
– Assumptions underlying ratios not considered
– Is QALY maximization really the end goal?
– List based approach: opportunity cost and the margin again
ignored
QALY – Measure for Health Effects in CUA

However, various problems with QALYs

• The use of QALYs implicitly assumes that there are no other

objectives to health care than health maximization

• There are other aspects people care about – such as

information or the process of treatment – which QALYs do
not cover
QALY – Measure for Health Effects in CUA

• The QALY weights should be based on preference for the

health states - more desirable health sates receive greater
weights and will be favored in an analysis

• The scale of QALY weights may contain many points, but

two points must be on scale- perfect health and death.

• Life expectancy is multiplied by the quality of life rating to

yield QALYs, i.e. adjusting the length of time affected
through the health outcome by the utility value (on a scale
of 0 to 1), with or without discounting
QALY – Measure for Health Effects in CUA

• To assess the preferences for health states- individual need

to be given information on symptoms, physical functioning,
ability for work and social activity, and mental and social
well being.

• The scores are based on people’s preference or arbitrary

procedure
 QALY – Measure for Health Effects in CUA
• Three most widely used techniques to measure directly the
preference of individuals for health outcome are

– Scale: Rating Scale – rank the health outcome, Category rating,

Visual analogue scale, Ratio scale

– Standard Gamble- measuring cardinal preferences: choosing

between two alternatives, with probability attached to the states

– Time trade off

• Health state i for time t (life expectancy of an individual with
chronic condition) followed by death
Or
. Health from time x<t followed by death.
 Valuing Health Outcome/Effects
• Putting money values on benefits (and costs) of health and health care

• Various ways of valuing benefits and costs:

economists: benefit = net benefits; costs= opportunity costs

• Time is an important cost in health

- often valued by a person’s hourly wage rate

- however, this infers the non working time of workers (and all the time of
non workers) is valued less or not at all
- alternative is to apply an average wage to all time

• Measure of Productivity Changes – debate- double counting, often

included in QALY or WTP, if equity included in policy objectives, than
estimation of productivity costs may introduce unwanted biasness
 Valuing Health Outcome/Effects

• There have been attempts to place money values on human

life through analysis of:

- fatal accident compensation awards, and

- life insurance cover

• However, estimates vary enormously and are systematically

linked to income and wealth
Willingness to Pay (WTP) as Valuing Health and Health
Care

• WTP is a technique which can potentially be used to place monetary

values on any aspect of health or health care
- including the value of human life

• In WTP, a course of action and its benefits are described and people
are asked how much they would be willing to pay for that course of
action
• A monetary value of benefit is derived; benefits and costs are now
directly comparable and (positive or negative) benefits can be
calculated

• WTP can be used to value close substitutes (as in CEA) and broader
alternatives (as in CUA)
 Economic Evaluation : Case Study

• The clinical effectiveness and cost-effectiveness of laparoscopic surgery

for inguinal hernia repair: A case study of a typical NICE economic
evaluation. (Technology Appraisal 83, McCormick, K. et al, September
2004: www.nice.org.uk)

• A systematic review of 37 RCT to study the clinical advantages of

laparoscopic repair (compared to open mesh repair)

Outcomes of interest, and economic evaluation methods examined:

– Primary outcomes- persistent pain

– Secondary outcomes- rates of complications and persistent
numbness durations of operations, length of hospital stay, time to
return to normal activity- QALY
– Cost per QALY, Incremental Cost Effectiveness Ratios
 Economic Evaluation : Case Study

Evidence and findings : Different types of surgery and repair compared

– Clinical disadvantages: longer operation times and a higher rate of
serious complications, especially bladder injuries

– There is no apparent difference in the rate of hernia recurrence

– Laparoscopic repair is more costly to the health service: by about

£300-£350 per patient

– Laparoscopic surgery was not cost-effective, with ICER –

incremental cost per QALY gain £46000-£606,000 when compared
with OPM repair, but cost-effective compared to OFM repair

– For unilateral hernias, open mesh repair appears the least cost
option but provides fewer quality adjusted life years (QALYs)
 Economic Evaluation : Cases Study

• In terms of cost per QALY, open mesh repair is

cheaper but the difference is small, less than £10,000 per
QALY

• For symptomatic bilateral hernias, laparoscopic repair is the

more cost effective

• Differences in operation time (a key cost driver) are reduced

and differences in convalescence time increased, both
changes which favour laparoscopic repair
 Economic Evaluation : Cases Study

• All the results are sensitive to assumptions made about the

value placed on persisting pain and numbness, highly dependent
on the cost of the open repair comparator, the baseline recurrence
rate, hospital policy on use of reusable or disposable consumables

• Other issues, for patients: the increased adoption of laparoscopic

repair may allow patients to return to usual activities faster; this may
reduce the loss of income for some people

• Other issues, for the NHS: increased use of laparoscopic repair would
lead to a need for increased training which may be costly; during the
training period, laparoscopic repair is likely to have higher costs (and
hence be less cost-effective), regional variations may be there for
implementing it
 Summary Easiest
CMA Technical efficiency Effects (assumed
to be) the same

CEA Technical efficiency Uni-dimensional

outcome measure

CUA Technical efficiency Mulit-dimensional

Allocative efficiency within health sector outcome measure
(health only)
CBA Technical efficiency Broadest outcome
Allocative efficiency measure (£)

Difficult/
challenging