4- COST BENEFITS ANALYSIS
“It is best to think of the cost-benefit approach as a way of organizing thought rather than as a substitute for it.”
— Michael Drummond
An individual will choose an action if: Benefits (B) > Costs (C) or Net Benefits (NB) = B - C > 0
A smoker will smoke if B > C For his , B’s are: taste/oral satisfaction, relaxation, diet control, and improved work performance. C’s are: expense, health consequences, value of time spent, discomfort/inconvenience of “smoking-allowed areas”, and disapproval of others. He will smoke the number of cigarettes which yield the greatest net benefits.
CBA is most commonly used for public decisions– policy proposals, programs, and projects, e.g., dams, bridges, traffic circles, riverfront parks, libraries, drunk driving laws, and anything else the government might fund. CBA can be used to rank alternative projects as well as evaluating the social value of one particular project. The benefit of a policy intervention is the sum of individual utilities, and the costs of a policy intervention are its opportunity costs.
Example: Knee Injury: Getzen, Thomas E., Health Economics, Second Edition New York: Wiley and Sons, 2004. Playing soccer, you injure your knee. Do you go to the emergency room (ER)? CBA usually takes the form of an explicit and formal presentation of a balance sheet, i.e., is it worth taking 3 hours and possibly $80 to go to the ER so that a doctor can alleviate pain and check for serious damage?
Outlining benefits and costs assists rational decisionmaking 1. Enumerate benefits and costs. 2. Quantify each benefit and cost as accurately as possible (usually expressed in dollars).
Time lost - opportunity cost of time commonly measured by the wage, e.g., $7/hour. Value of athletic image - what you are willing to pay to preserve your image, e.g., $40 for crutches Value of stopping pain with certainty -the highest amount you would pay to stop the pain for 10 days, e.g., by buying painkillers. Expected value of stopping pain by going to the ER = probability that the ER visit will result in stopping the pain X the value of stopping the pain with certainty.
Expected Value When values of costs or benefits are not known with certainty, but are known with probability, expected values are used.
Example: Mauskopf, J.A. et. al, “Economic Impact of Treatment of HIV-Positive Pregnant Women and their Newborns with Zidovudine: Implications for HIV Screening,� JAMA 276: 2, 132-8, July 10, 1996. Probability of maternal-to-fetal transmission when the mother is HIV-positive No Treatment With Zidovudine Treatment
= 25.5% = 8.3%
Lifetime cost of treatment of an infected child from birth = $98,915
Expected value of cost of a lifetime pediatric HIV infection = probability of transmission X lifetime treatment costs No Treatment With Treatment
= .255 X 98,915 = $25,223 = .083 X 98,915 = $ 8,210
Expected benefits of treatment = Expected costs averted by treatment = 25,223 - 8,210 = $17,013 Cost of Zidovudine treatment = $1,045 Expected Net Benefits = 17,013 - 1,045= $15,968 per HIV-positive pregnant woman
If medical expenses are paid privately, the woman will decide on for the treatment. If the child will be on public assistance for medical care (e.g., Medicaid) it benefits society to treat the mother with Zidovudine.
Cost-benefit Analysis (CBA) • It is an an economic evaluation in which all costs and consequences of a program are expressed in the same units, usually money. • CBA is used to determine allocative efficiency; i.e., comparison of costs and benefits across programs serving different patient groups.
• NB. CBA may be useful in some situations, but generally, it should be considered as a secondary analysis. • Even if some items of resource or benefit cannot be measured in the common unit of account; i.e., money, they should not be excluded from the analysis.
• A cost-benefit analysis values costs and outcomes in monetary terms. • Values are usually obtained through using a willingness-to-pay approach, such as contingent valuation or conjoint analysis. • The use of a CBA in health care decision making has been limited, despite a CBA being the only type of economic evaluation that directly addresses allocative efficiency (i.e., allocating resources between sectors). • The difficulties with using a CBA in health technology assessment relate to: methodological difficulties with measuring health outcomes in monetary terms, and • ethical issues arising from assigning monetary values to health outcomes. • In particular, willingness-to-pay approaches often depend on an individual’s ability to earn income.
• Certain situations appropriate to use a CBA, when: • a consequence of an intervention is difficult to value using QALYs (e.g., short-term symptom relief, patient reassurance or anxiety from screening) • an attribute of an intervention is difficult to value using any health outcome (e.g., shorter or less frequent treatment, a more convenient dose form) • a process outcome are major factors in analyzing an intervention (e.g., access to or satisfaction with care). • When using a CBA, the evaluation should explain the steps taken to convert the outcomes into monetary values. • Key assumptions should be thoroughly tested through a sensitivity analysis.
Review some of key costs and benefits of CBA Benefits
Costs
efficiency, efficient allocation, proper investment decisions,
measuring the benefit is challenging and obtaining data is problematic
efficient use of resources
difficult task to create values
proper investment decisions
not appropriate in some fields
good to measure outcomes
cost of the analysis may be higher than the benefit
use in performance-based budgets
ethical dilemmas about using CBA
integrate economic externalities
some services are only provided by the state
strengthens the social dimension of policies
analysis should not be carried out if the data is not reliable or the not applicable
produce well-analyzed policies
extends time needed for the policy process
for legislative amendments
-
to establish the right policy
-
to determine the net benefit
-
to agree on the policy
-
The logic of cost benefits analysis
Individual utilities; consequences This does not/cannot occur
Definition (only)
if all nonutility objectives ignored
Cost-Benefit Analysis Cost (C): monetary cost
â&#x20AC;˘ CBR = Benefit (B) :monetary saving if C/B<1: the program is socially valuable if C/B=1: then benefits equal costs if C/B>1: the program is not beneficial
Theory of Cost-Benefit Analysis
Public Policy Objective: Choose the level of output of a good or service to maximize net social benefits (NSB) NSB = TSB â&#x20AC;&#x201C; TSC where TSB = total social benefits TSC = total social costs
Marginal Social Benefit (MSB) = additional social benefits from one more unit of output Marginal Social Cost (MSC) = additional social costs of producing one more unit of output MSB = d TSB/d Q MSC = d TSC/d Q Q = quantity of a publicly provided good or service NSB are max when MSB = MSC Social Decision Rule: Choose Q for which MSB = MSC
Present Value Future, as well as present, benefits and costs must be included in the analysis. But costs and benefits that accrue in the future are worth less than costs and benefits today. Economic agents and society as a whole will maximize the present value of expected net benefits.
Present Value Worksheet $100 invested today at an annual interest rate (r) of 4% will be worth $104 in 1 year. Present value (PV) of $104 next year when r=.04 is $100. That is, $104 tomorrow is worth $100 today.
PV = F/(1 + r), where F is a fixed sum of money to be received next year.
Discount Rate What value of r should be used? r = rate of discount of future consumption or rate of time preference The higher the social discount rate, the higher the social value of consumption today relative to consumption tomorrow.
Conventional to use 3-5% or the T-Bill interest rate since it represents the cost of borrowing at virtually no risk. Results can be sensitive to the discount rate chosen.
Researchers often conduct a sensitivity analysis to see how sensitive the results are to changes in assumptions about the discount rate, costs, and benefits.
Value of life Does society view life as infinitely valuable?
CBA APPROECHES: 1. Human Capital Approach Value of life = present value of lifetime earnings (= lifetime productivity in competition) It represents productivity gains from extending life (benefit side) or productivity losses from early death (cost side) For society as a whole, value of life represents a loss in national output due to mortality
Method often used in court cases, e.g., court awards the family of a man who dies at 35 in a car accident the amount of his expected PV of lifetime earnings =
$650,000
Problems with human capital approach: People who are not working for pay (e.g., homemakers, students, retirees) are valued at 0! (Even for the employed, time away from the job is valued at 0.) Implies that people with higher wages have higher social value. Does not account for labor market imperfections, e.g., discrimination.
2. Willingness-to-pay (WTP) Approach Value of life is estimated from the amounts that people are WTP to reduce the probability of dying.
Monetary Valuation / CBA • CUA still does not address: – Allocative efficiency: is health gain ‘worth’ more than benefits those resources could yield elsewhere (health or non-health)? – Valuation of non-health benefits eg process, information, convenience – Valuation of non-use benefits i.e. externalities, option value
Costs versus benefits • C/B ratio = net cost/net benefits • Net cost = positive cost and negative cost – Negative cost = cost saving (eg reduced LoS) • Net benefit = positive benefit and negative benefit – Negative benefit = reduced health (eg side-effect) • Rule of thumb – anything related to resources on cost side, anything related to ‘health’ on benefits
Negative And Positive Benefits (and Costs!) C/B ratio
=
net cost/net benefits
Net cost
=
positive cost + negative cost
Net benefit
=
positive benefit + negative benefit
Negative cost
=
cost saving, eg reduced LoS
Negative benefit =
reduced health, eg adverse event
CBA: Valuing healthcare benefits
Methods of Monetary Valuation Assess individual ‘willingness-to-pay’ for (the benefits of) a good through either: • Observed wealth-risk trade-off (revealed preference) – Advantage – ‘real’ preferences/values – Disadvantage – difficult control for confounders • Direct survey (stated preference) – Advantage – direct valuation of good – Disadvantage – hypothetical/survey problems
• Vast majority of CBA use direct survey
Process of calculating monetary value of benefits using survey WTP • Provide ‘scenario’ describing benefits and all aspects of ‘market’ (eg payment vehicle) • Ask for respondents valuation using specific technique: – open-ended question - maximum WTP – payment card – chose from range of values – closed-ended/binary question
• Calculate mean/median WTP for sample ( ‘price’ in competitive market)
â&#x20AC;˘ Those techniques can be used to measure strength of preference, but there are two other ways that we can derive values or utilities to use in the denominator of a cost-utility analysis.
â&#x20AC;˘ As with clinical effectiveness we can use previously published data or we can use valued judgement
Health outcome measurement For example, the Quality of Well-Being Index assesses mobility, physical activity and social activity. An interviewer asks what the patient did as a result of illness during the last six days. Scoring for particular functions is based on preference weights derived from the normal population. The benefits represented by particular outcomes can be compared with the costs of doing so. 1. The goal of health care and action, to protect, promote and preserve health status: • requires standardized assessments. 2. To understand the concepts of health outcomes assessment, distinguish between: • efficacy • effectiveness • efficiency • process and outcomes.
3. Health: • is a multidimensional construct • health care is only one determinant of health. 4. The objectives of health outcomes assessment are based on: • equity and equality • quality of care (plan–do–check-assess cycle) • patient’s autonomy and choices • responsiveness to patients. Note: In future, explicit health rights will be more important.
5. Main domains of health outcomes include the six D’s: • disease, death, discomfort, disability • “dollars” • dissatisfaction. 6. Measurement of health status outcomes requires standardized instruments with: • proven psychometric properties, especially validity, reliability, sensitivity
• practical utility for a setting
Six ways in which there can be too much health care 1. Effective health care that is more costly than necessary. 2. Health that is more costly than necessary. 3. Health care that is valued below its cost. 4. Health that is valued below its cost. 5. Health care that is not effective. 6. Wellbeing that is more costly than necessary.
Three main elements of (economic) efficiency
• 1. Technical efficiency (do not waste resources). • 2. Cost–effectiveness (produce each output at least cost). • 3. Allocative efficiency (produce output which people value most): • the types of output • the amounts of output. • Note: (a) Equating costs and benefits at the margin: • may be met through prices and markets • often the required conditions are violated. (b) Technical efficiency and cost-effectiveness relate to production; allocative efficiency introduces consumption, thereby bringing together the supply side and the demand side.
â&#x20AC;˘ For example, the benefits of statin treatment provided to high-risk patients (for example, patients who have already had a heart attack) are far in excess of the benefits that arise when they are prescribed to low-risk patients. â&#x20AC;˘ Allocative efficiency therefore requires the highrisk patients to be targeted as a priority (primary prevention), resulting in an improved level of health associated with statin treatment.
â&#x20AC;˘ for example, identifying the least expensive way to effectively heal a peptic ulcer). â&#x20AC;˘ The prescribing of unnecessarily long courses of drugs or unnecessarily expensive drugs implies the existence of technical inefficiency
Criteria for judging whether a change is an improvement 1. The Pareto criterion: • measures allocative efficiency • is an individualistic notion • assumes a given distribution of income and wealth. 2. For most policies, there are both gainers and losers. 3. Potential Pareto criterion: • gainers could compensate losers • compensation not actually paid. 4. Allocative efficiency is not necessarily equal to social desirability.
What are costs and benefits estimated against? The ‘counterfactual’ is: The position against which costs and consequences are compared The position to which costs and consequences are incremental (or marginal)
Relevant s might include: Best practice Current practice (the status quo) ‘Do nothing’ (e.g. best supportive care)
Data Analysis –Point Estimate • Difference in mean costs •Difference in mean effects •Cost-effectiveness ratio –(C1-C2)/(E1-E2) • Incremental Net Benefit •
–(B2-C2) –(B1-C1)
Exercises
• Value of life; Participants should draw out potential differences between the professional’s, the individual patient’s, and society’s points of view, and discuss which view is predominant • Consider the following scenario: A 70-year-old person presents to his/her doctor with incurable cancer. Treatment with a toxic course of chemotherapy and radiation adds an average six months to life. Without treatment, average life expectancy is four months. End-of-life symptoms are the same with or without treatment (in other words, the final course of the illness is neither better nor worse with treatment). Treatment is unpleasant, may cause complications and involves periods in hospital. It lasts for three months. Treatment accelerates death in 10% of cases.
(a) marginal benefits differ from a whole-life benefits approach (b) practical consequence
(c) any differences between whole-life and marginal approaches in the real world
Health Economics Evaluation
Why conduct economic evaluations? â&#x20AC;˘ Economic evaluations are used to assist in setting priorities, making resource allocation decisions and designing services when there are competing health interventions and limited resources. â&#x20AC;˘ Economic appraisals evaluate efficiency, sustainability, and cost-effectiveness. â&#x20AC;˘ More specifically, they assist health program managers and policy makers in a number of ways:
• To guide decisions about the most appropriate mix of strategies and the best way to allocate scarce resources. • To provide an overview of the total amount of resources that will be needed to start or expand a project. • To assist discussions about the relative efficiency and equity of projects. • To assist managers in deciding on the most appropriate way to deliver a particular health intervention. • To provide information for the advocacy of new health interventions and technologies. • To provide evidence-based information to donors and policy makers that funding decisions resulted in cost-effective allocation of resources.
THE â&#x20AC;&#x2DC;IDEALâ&#x20AC;&#x2122; ECONOMIC EVALUATION
Be based on high-quality effectiveness data; Conform to stringent economic criteria; Be internally valid; Be externally valid, i.e., generalizable to other settings/countries.
Drummondm’s Checklist (i) The study question should be clearly stated. In particular, it should be clear whose point of • view is being considered when costs and consequences are assessed. • (Possible viewpoints are those of the hospital, health care system, government or third party payer, patient and family, or society as a whole.) • Normally the viewpoint of society as a whole is preferred
(ii) The alternatives for evaluation should be clearly described. Normally a new health care treatment or programme should be compared with current practice or a widely used existing treatment. • Comparisons can be made in terms of health, money or utility. (iii) The effectiveness of the alternatives being compared should be reliably assessed. In the case of • health care treatments, the most reliable evidence comes from randomized clinical trials, although some modelling may be required • clinical trial results to reflect regular practice or to extend results beyond the end of the trial (e.g. • to lifetime).
(iv) The costing should reflect the viewpoint adopted. The relevant costs should first be estimated in • physical units of resources consumed (e.g. hospital days, visits to a physician) before being valued using a set of prices or unit costs relevant to the setting concerned. In some settings (e.g. hospitals) certain resources are used to produce a number of joint outputs. • For example, the heating plant of the hospital services a number of clinical departments. Therefore, when costing a particular clinical intervention or treatment, only some of the resources will be unambiguously attributable to that intervention. Others will be shared resources, sometimes called “overheads”. • Therefore, in costing a given treatment, either a method for allocating shared resources (or overheads) is required, or attention should be focused on the additional resources, at the margin,that are required to provide the intervention concerned. (Benefits can also be wider than health narrowly defined: for example, externalities or health and development
(v) The study should allow for differential timing in costs and consequences, through discounting to present values, and for uncertainty in estimates, either through sensitivity analysis or statistical test. (vi) The presentation of results should include an incremental analysis of costs and consequences, comparing one alternative with another, and comments on the major weaknesses in the study. If comparisons of costâ&#x20AC;&#x201C;effectiveness are made with other studies, care must be taken to ensure that they employ similar methodologies.
A check-list for assessing economic evaluations 1. Was a well defined question posed in answerable form? 1.1 Did the study examine both the costs and effects of the service(s) or programme(s)? 1.2 Did the study involve a comparison of alternatives? 1.3 Was a viewpoint for the analysis stated and was the study placed in any particular decision making context? 2. Was a comprehensive description of the competing alternatives given (i.e. can you tell who did what to whom, where, and how often)? 2.1 Were any important alternatives omitted? 2.2 Was (should) a â&#x20AC;&#x153;do-nothingâ&#x20AC;? alternative (be) considered? 3. Was the effectiveness of the programmes or services established? 3.1 Was this done through a randomized, controlled clinical trial? If so, did the trial protocol reflect what would happen in regular practice? 3.2 Was effectiveness established through an overview of clinical studies? 3.3 Were observational data or assumptions used to establish effectiveness? If so, what are the potential biases in results? 4. Were all the important and relevant costs and consequences for each alternative identified? 4.1 Was the range wide enough for the research question at hand? 4.2 Did it cover all relevant viewpoints? (Possible viewpoints include the community or social viewpoint, and those of patients and third-party payers. Other viewpoints may also be relevant depending upon the particular analysis.) 4.3 Were capital costs, as well as operating costs, included?
5. Were the costs and consequences measured accurately in appropriate physical units (e.g. hours of nursing time, number of visits to physicians, lost work-days, gained life-years)? 5.1 Were any of the identified items omitted from measurement? If so, does this mean that they carried no weight in the subsequent analysis? 5.2 Were there any special circumstances (e.g. joint use of resources) that made measurement difficult? Were these circumstances handled appropriately? 6. Were the costs and consequences valued credibly? 6.1 Were the sources of all values clearly identified? (Possible sources include market values, patients’ or clients’ preferences and views, policy-makers’ views and health professionals’ judgements.) 6.2 Were market values employed for changes involving resources gained or depleted? 6.3 Where market values were absent (e.g. voluntary labour), or market values did not reflect actual values (such as clinic space donated at a reduced rate), were adjustments made to approximate market values? 6.4 Was the valuation of consequences appropriate for the question posed (i.e. has the appropriate type or types of analysis – cost–effectiveness, cost–benefit, cost–utility – been selected)? 7. Were the costs and consequences adjusted for differential timing? 7.1 Were the costs and consequences which will occur in the future “discounted” to their present values? 7.2 Was any justification given for the discount rate used?
8. Was an incremental analysis of costs and consequences of alternatives performed? 8.1 Were the additional (incremental) costs generated by one alternative over another compared to the additional effects, benefits or utilities generated? 9. Was allowance made for uncertainty in the estimates of costs and consequences? 9.1 If data on costs or consequences were stochastic, were appropriate statistical analyses performed? 9.2 If a sensitivity analysis was employed, was justification provided for the ranges of values (for key study parameters)? 9.3 Were study results sensitive to changes in the values (within the assumed range for sensitivity analysis, or within the confidence interval around the ratio of costs to consequences)? 10. Did the presentation and discussion of the results of the study include all issues of concern to users? 10.1 Were the conclusions of the analysis based on some overall index or ratio of costs to consequences (e.g. costâ&#x20AC;&#x201C;effectiveness ratio)? If so, was the index interpreted intelligently or in a mechanistic fashion? 10.2 Were the results compared with those of others who have investigated the same question? If so, were allowances made for potential differences in study methodology? 10.3 Did the study discuss the extent to which the results could be generalized to other settings and patient/client groups? 10.4 Did the study allude to, or take account of, other important factors in the choice or decision under consideration (e.g. distribution of costs and consequences, or relevant ethical issues)? 10.5 Did the study discuss issues of implementation, such as the feasibility of adopting the preferred programme given existing financial or other constraints, and whether any freed resources could be redeployed to other worthwhile programmes?
• Exercise • Select a published economic evaluation of health care treatments or programmes relevant to your own setting and assess its quality using the checklist given. In answer to each of the main ten questions give your response (yes/no/can’t tell) and provide a brief commentary on the major strengths and weaknesses of the study
Take home massage â&#x20AC;˘ Requirements for health economics evaluations â&#x20AC;˘ Study design 1. The research question is stated 2. The economic importance of the research question is stated 3. The viewpoint(s) of the analysis are clearly stated and justified 4. The rationale for choosing the alternative programmes or interventions compared is stated 5. The alternatives being compared are clearly described 6. The form of economic evaluation used is stated 7. The choice of form of economic evaluation is justified in relation to the questions addressed â&#x20AC;˘ Data collection 8. The source(s) of effectiveness estimates used are stated 9. Details of the design and results of effectiveness study are given (if based on a single study)
10. Details of the method of synthesis or meta-analysis of estimates are given (if based on an overview of a number of effectiveness studies) 11. The primary outcome measure(s) for the economic evaluation are clearly stated 12. Methods to value health states and other benefits are stated 13. Details of the subjects from whom valuations were obtained are given 14. Productivity changes (if included) are reported separately 15. The relevance of productivity changes to the study question is discussed 16. Quantities of resources are reported separately from their unit costs 17. Methods for the estimation of quantities and unit costs are described 18. Currency and price data are recorded 19. Details of currency of price adjustments for inflation or currency conversion are given 20. Details of any model used are given 21. The choice of model used and the key parameters on which it is based are justified
Analysis and interpretation of results 22. Time horizon of costs and benefits is stated 23. The discount rate(s) is stated 24. The choice of rate(s) is justified 25. An explanation is given if costs or benefits are not discounted 26. Details of statistical tests and confidence intervals are given for stochastic data 27. The approach to sensitivity analysis is given 28. The choice of variables for sensitivity analysis is justified 29. The ranges over which the variables are varies are stated 30. Relevant alternatives are compared 31. Incremental analysis is reported 32. Major outcomes are presented in a disaggregated as well as aggregated form 33. The answer to the study question is given 34. Conclusions follow from the data reported 35. Conclusions are accompained by the appropriate caveats Source: Derived from Durummond and Jefferson.
• Health economics is a relatively new sub-discipline of economics. • There is an international shortage of experienced health economists. • Economic evaluation is only one of many areas of research within the sub-discipline. • It is therefore unlikely that every guideline development committee will include a health economist and one may need to be identified for this stage.
Conclusions • Economic evaluation is valuable to decision-making and in setting health policy. • Economic evaluation is both art and science. • Economic evaluation can help prioritize resources.
• For researchers in public health and prevention, this is an important component of program evaluation. • Demand for these analyses is growing
REFERENCES: - Drummond, M.F., B, O’Brien, G.L. Stoddart y G.W. Torrance (2005). Methods for the economic
evaluation of health care programmes, Oxford University Press, Oxford - George B, Harris A and Mitchell A (1998). Reimbursement decisions and the implied value of life: cost effectiveness analysis and decisions to reimburse pharmaceuticals in Australia, 1993–1996. In: Harris AM (ed). Proceedings of the 19th Australian conference of health economists. Sydney School of Health Services Management, University of New South Wales - Drummond M, O’Brien B, Stoddart GL and Torrance GW (1997). Methods for the Economic Evaluation of Health Care Programmes. Oxford, Oxford University Press. - Health Economics: an introduction for health professionals , Ceri J. Phillips Published by Blackwell Publishing Ltd , BMJ Books - Briggs AH, Fenn P. Confidence intervals or sufaces? Uncertainty on the cost-effectiveness plane. Health Econ 1998; 7:723-740 - Cookson R. Willingness to pay methods in health care: a sceptical view. Health Econ 2003;12(11):891-4. - Coyle D, Buxton MJ, O'Brien BJ. Stratified cost-effectiveness analysis: a framework for establishing efficient limited use criteria. Health Econ 2003;12(5):421-7 - McPake B, Kumaranayake L, Normand C (2002), Health Economics: an International Perspective. London: Routledge..
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