Cost-Effectiveness Analysis in Health Care
More on Value of Life and CBA
Use of CBA in Health
Problems with Willing-to-Pay for lives
VSL vs. VSLY
Is Modern medicine worth its cost?
Slides on Other VSL topics
RAND
1
© 2006 Emmett Keeler
Key Points
•
•
•
•
We use WTP to get the Value of a statistical life
(VSL), but there are problems in doing so.

Contingent valuation can help.
“Lives saved” and QALYs can lead to different
decisions
How should VSL vary with age, wealth?
Cutler: the health gains from technical
progress makes higher medical costs
worthwhile.
RAND
2
© 2006 Emmett Keeler
Summary Table of Costs and Effects
Measures of Effects
Options
Direct
Cost,
millions
Indirect
Cost
Years of Restricted SatisLife Exp. Activity
faction
Days
A
4
100
B
1
50
C
10
200
1000
RAND
3
© 2006 Emmett Keeler
Cost Effectiveness and Cost Benefit
•
Cost-Effectiveness Analysis (CEA)


•

Focuses on a single effect
• e.g. number of kids vaccinated
or aggregates all health effects into QALYs
gives efficient way to allocate fixed budget
Cost-Benefit Analysis (CBA)


Aggregates all effects into dollars
• even living longer or better
answers “ Is a program worth it”
RAND
4
© 2006 Emmett Keeler
Willingness to Pay for a statistical life
(VSL)
•
•
•
•
So CBA needs a value for health or life-saving gains.

“lost wages” was the historic measure, but
WTP is now the economist’s favorite approach

comes from observed behavior, or surveys
VSL is an estimate of an individual’s willingness to
pay to avoid a small risk of death, scaled up to 1
death.
VSL = WTP for risk reduction/(size of risk reduction)
RAND
5
© 2006 Emmett Keeler
Example of WTP for safety
•
•
•
So suppose airbags reduce chances of dying in
an car accident over the life of a car from
1/5,000 to 1/10,000 = .0002-.0001 = .0001
Air bags save the life of 1 driver per 10,000 cars
10,000 car buyers each paying $300 for an air
bag is like paying $300 x 10,000 = $3 million for
each life saved


if laws reflect values,
then those buyers value life >= $3 million
RAND
6
© 2006 Emmett Keeler
More Sophisticated Estimates
•
•
•
Use change in income needed to tolerate a change in
risk as a measure of WTP
Use data on job risks and wages to estimate the
compensation wage necessary to induce someone to
take a risky job.
Regress wages on risk, other characteristics


but personal risk tolerance is unobserved and effects
job choice
search for papers, books by Kip Viscusi on this.
RAND
7
© 2006 Emmett Keeler
Summary: WTP Values for a statistical life
•
$/life comes from scaling up $/fraction of life.

•
•

appropriate because most life-saving programs
change risks only slightly.
allows us to compare values from different risks
Surveys, wage premia, prices of safer products
Range VSL = $3-15 million /life
5-10 times larger than lost wages
 EPA now uses $6 million.
Reference. Hirth et al. Med Dec Making, 2000

RAND
8
© 2006 Emmett Keeler
Problems with Willingness-to-Pay
•
People find it hard to guess

•

List paradox: What are you WTP for cutting
your chance of getting breast cancer in half?

•
what to do with bad answers?
caused by confusion, gaming, distaste

of US age-specific incidence of breast cancer
in half?
of all US cancers in half?
Each charity wants to be first in line.
RAND
9
© 2006 Emmett Keeler
Contingent Valuation
•
•
A method to get better WTP answers
Forced choice: are you WTP $X for better school?

•
•
•

vary X randomly from 5-100 in large survey.
fit logistic regression line, find 50% value
Say they must pay in taxes
Mention substitutes, the full list
Use telephone or face to face to reduce bad
answers by help from interviewer
References: see Hammitt handout
RAND
10
© 2006 Emmett Keeler
Logistic regression of NOs ---> WTP
Would not pay
1.0
50%
X
$ for program
RAND
11
© 2006 Emmett Keeler
Problems with Willingness-to-Pay -2
•
•
Willingness-to-Pay (WTP) higher for rich

Could value outcome by % of income
Also high for old due to

“dead anyway” effect ( Pratt & Zeckhauser,1996)
• Money has fewer other good uses
RAND
12
© 2006 Emmett Keeler
WTP and utility: Bill Gates’ headache
utility = f(health, w)
wtp is not aligned with utility,
because MV $ lower for rich
Good health
∆U
A
B
b
headache
paraplegia
∆U
a
wtp
wtp
wealth
RAND
13
© 2006 Emmett Keeler
Measuring the value of life year (VSLY)
•
•
•
To base decisions on LE gains using BCA, we
need to estimate VSLY.
Harder to think of hedonic measures or
realistic scenarios for VSLY than for VSL.
In practice, VSLY = VSL / E(discounted QALE)

for example, all 42 studies reviewed in Hirth et
al. “Willingness to pay for a QALY”
MedDecMaking 2000 had estimated a VSL
from which Hirth computed a VSLY
RAND
14
© 2006 Emmett Keeler
Using Lives vs QALYs in CBA
•
•
Historically EPA, NHTSA and other government
agency have used CBA and “lives” valued at $6 million
in fine-tuning regulations.
Compared to using QALYs gained, “lives” gives more
weight to people who:

•

won’t live long
are already sick
So reducing air pollution, which primarily kills people
with COPD, is weighted heavily using lives compared
to reducing environmental lead which affects kids.
RAND
15
© 2006 Emmett Keeler
Young old lifesaving tradeoffs
age
prevent.
deaths
life years
QALYs
QALYs
disc at 7%
5
1
73
65
13
35
1
44
37
12
75
1
12
9
6.1
Ratio 5/75
1
6.1
7.1
2.1
RAND
16
© 2006 Emmett Keeler
Cutler: Is Technology Worth it?
•
•
•
•
Even if medical spending is rising, social welfare
is enhanced if the benefits exceed the costs
Cutler paper estimates the RoR from 4 clinical
areas that have experienced rapid technological
change
Estimating medical spending is easy

See Levitt et. al. 2004
Benefits are harder to estimate
Your money or your life, Oxford UP 2004 has more
RAND
17
© 2006 Emmett Keeler
Outline of Cutler’s Approach
For each disease area,
• Measure Years of life added in QALYs
• Assume value of a current QALY = VSLY =
VSL/LE = $4 million/ 40 years = $100,000*
• Compute all discounted costs and benefits

3% discount rate
* How does this VSLY compare to a value of a
discounted QALY in theory?
RAND
18
© 2006 Emmett Keeler
Advances in Treatment of CVD
•
•
Roosevelt dies of hypertension

Eisenhower heart attack

•
Largely untreatable in 1945

Bed rest recommended
No treatment except anticoagulant
Mortality from CVD has fallen by ½ since 1950
RAND
19
© 2006 Emmett Keeler
Case 1: Heart Attacks
•
•
•
•
•
•
Thrombolytic drugs to dissolve clots
Coronary Artery Bypass Graph (CABG)
Angioplasty
Use of stents to open blockages
Drugs for CHD (e.g. ACE inhibitors)
Statins to lower cholesterol (e.g. Lipitor)
RAND
20
© 2006 Emmett Keeler
Calculations for CVD
•
•
•
•
Average 45 year old can expect to live 4.5 years longer
relative to 1950
 2/3rds attributable to medical treatment (2.8 years)
 PV of these three years is $108,000
Cost of keeping folks alive in non-working years is
$10,000 more than in 1950
PV of costs for CVD medical care is $30,000 (zero
costs in ’50)
Net return = 260%
 Or $3.60 gained for every $1 invested
RAND
21
© 2006 Emmett Keeler
Value of LBW Medical Care
•
Low birthweight


•
•

Since 1950, LBW babies live 15 more years
About .04 of all infants are LBW
So 0.6 years saved per infant (.04*15)
NICU, CVD Tx have increased lives by 3.4 years
Do the results generalize, i.e.


Is it true (generally) that the benefits of medical
spending have been worth it?
Cutler et al. NEJM 2006 says yes for young
people, maybe not for those over 65.
RAND
22
© 2006 Emmett Keeler
Summary: Is technical progress
worth its cost?
•
David Cutler looked at changes in life expectancy
in the US since 1960.


•
•

multiplied by a value of QALY or life year
Compared them to the estimated change in
medical costs.
On average, benefits are bigger than costs.
Others have done similar analyses for new drugs.
Still, US could do much better at the margin.

I.e. there is a lot of waste in the system
RAND
23
© 2006 Emmett Keeler
Supplementary slides
RAND
24
© 2006 Emmett Keeler
Setting Treatment cutoffs
Let A(x) = E(b(c) | c > x)
Let Strategy 1 be treat one more
Strategy II be screen more, treat if above x
Discounted
Years saved by
treatment b(x)
Let (x) be cdf of X
= P(c < x)
contains (x)
X
contains 1- (x) of kids
Nordhaus’: fun vs. health and VSLY
•
Suppose you’re offered a choice between


•
•
All the consumption gains since 1950 (better
cars, computers, TV’s, veggies etc…) OR
All the health improvements (9 years of life and
better health while alive).
Difficult choice based on informal surveys
Nordhaus estimates it’s $750,000/9 years

Just under $100,000 per year
RAND
26
© 2006 Emmett Keeler
Reconciling lifetime wages with
willingness to pay for safety.
•
•
•
Young adults will work 10-20% of their future
living hours
So if they value leisure hours like work hours,
Value of life = 5-10 times future lifetime wages
Keeler, The value of remaining lifetime is close to estimated
values of life, J Health Econ, (20) 141-3 (2001)
RAND
27
© 2006 Emmett Keeler
Discounting as decreasing returns?
half of discounted 50 years
30
25
20
15
10
5
0
discount rate
0
.01
.03
.05
.07
How many years for sure are equivalent to a SG with a
50% chance of living 50 years + a 50% chance of living 1 week?
WTP for a QALY studies
•
•
Researchers have patients rate their current
HRQL, and give their WTP for a lifetime cure
This gives low values of WTP/QALY, e.g.



$12,500 - $32,000/QALY in VA patients facing
possible neurosurgery King et al MDM 2005
average HRQL ~ .7, WTP ~ $100,000
• use of average lifetime, income effects?
5 other such studies gave similarly low values.
RAND
29
© 2006 Emmett Keeler
Estimating waste using CBA
•
Waste is defined as resources spent
unnecessarily in US health care system



Inefficient production of given services
In producing the wrong things
• whose value < the cost of producing
them.
• Artificial heart
Preventable asthma hospitalizations?
We just finished a paper on this.
RAND
30
© 2006 Emmett Keeler