Cost and Cost-Effectiveness Analysis



Public and private resources limited. Decisionmakers make choices about resource allocation; it
is only a question on what basis such choices
made.
In public sector, policymakers often focus
exclusively on costs or even on one type of cost,
e.g., for drugs
Private sector not better, e.g., cover if drug is safe
and effectiveness or non-experimental or set copays to favor generic even if branded drug more
cost-effective



CBA/CEA provides a consistent framework for
evaluating alternatives
Helps separate use of objective empirical evidence
from subjective value judgments
Underlying calculations far too complex to be done
in decision-maker’s head



CBA/CEA are formal methods for comparing costs
and benefits of a medical intervention to
determine whether the intervention worth doing
CEA measures benefit in terms of clinical
outcome, e.g., mortality, blood pressure, time to
reoccurance of cancer, quality-adjusted life years
(QALYs)
CBA measures benefit in terms of money, e.g,
value of life-years saved, dollar outlays averted
(value of reductions in readmissions to hospitals)




Analysis does not give decision maker full
evidence on alternatives
Populations are heterogeneous: evidence on
which CBA/CEA is based may not apply to
decision-maker’s population
Long-run effects not adequately documented
Outcomes measured not relevant to decisionmaker



Decision-maker does not have adequate technical
knowledge to evaluate strengths and weaknesses
of studies
Quality of evidence underlying calculations
question
Study uses wrong perspective for decision-maker
(relevant costs, benefits excluded, irrelevant costs,
benefits included). Study method insufficiently
transparent to make corrections






Define the intervention
Identify relevant costs
Identify relevant benefits
Measure costs
Measure benefits
Account for uncertainties

Societal perspective
◦ all costs and effects (benefits) included no matter
who pays costs or receives effects (benefits)

Patient and patient family perspective

Self-insured employer perspective

Public or private insurer perspective

Hospital perspective


CEA seen as more practical, willingness to pay hard
to measure accurately, and CBA violates distributional
decision-maker’s distributional objectives
CBA much more widely used in environmental
policy/economics. Why?


Benefit in CBA based on maximum willingness to pay
(WTP) for a particular outcome
More affluent likely to have higher WTP—irrespective
of how WTP measured (using revealed preference
approach or stated preference approach)

When does cost measure not equal opportunity cost?
◦ Hospital excess capacity (beds)


Patient out-of-pocket costs
Government agency receives services from another
agency


Not all direct costs need to be positive: consider cost
offsets
Direct costs include value of all goods and services
consumed in provision of the intervention or in
dealing with side effects or other current or future
consequences of intervention—health care costs and
non-health care costs (child care when attending
smoking cessation clinic, transportation costs to
clinic, time lost from work when receiving
intervention)




Indirect costs=productivity costs
Include morbidity costs, mortality costs, friction costs
associated with productivity changes=cost of
replacing an ill worker
Indirect costs logically belong in denominator of
cost-effectiveness ratio—danger of double-counting
In CBA, also have to avoid double-counting—need to
ask what is in willingness to pay measure




Transfer costs
Future costs
Sunk versus incremental costs
Joint costs/joint production




To compute benefit, need to know whether or not a
technology is effective and if so, how effective it is
Letting X be the level of the input and Y be the level
of the outcome, we need to evaluate Y=f(X)
Need to test the null hypothesis that X has no effect
on Y as well as evaluate magnitude of response
Evidence on effectiveness may be in form of a
probability of an effect of X on Y, difference in mean
values of Y for different X, a marginal effect of X on Y
from a regression, etc.



Effectiveness v. efficacy. Efficacy refers to the effect
of a technology when applied in optimal or ideal way.
Effectiveness gives effect of technology when applied
as people actually apply it.
Valid estimate. The estimate is an unbiased measure
of the technology’s true effectiveness.
Reliable estimate. The result can be reproduced.


Mortality
QALY: How derived? Rating scales; standard gamble
approach



Category scale: present rater with scenario; rate on
ladder from 0 (= to death) to 10 (=completely well), 5
(half way in between), etc.
Visual analogue method: rater shown line, 100
centimeters in length, with end points well defined.
Rater marks line to indicate where his or her
preference is.
Approach also applied to obtain subjective
probabilities (“On scale of 0 to 10, what would you
say is the likelihood that you will live to age 75?”
State of disability (Utility = Ud)
(Current Status)
Healthy (Utility = Uh)
(Success)
Dead (Utility = 0)
(Failure)


Subject given choice of living for a defined amount
of time in perfect health or a variable amount of
time in another health state that is less desirable
Reduce time in well state leaving time in suboptimal state fixed to establish point of
indifference
Fig. 14.2. Decision Making under
Time Trade-off
Utility Value
Option 2
Healthy
Uh
State of
disability
(Current status)
Ud
Dead
0
Option 1
Time
X
T



Yes
Results highly variable, but there are differences
among studies in health states valued, populations
surveyed, etc. (see Sloan, ed., Chapter 3, Table 3.1)
Recommend: select approach that makes most sense
conceptually, pretest questions, perform sensitivity
analysis



Economists complain that utilities must be derived
from explicit tradeoff questions which rating scale
approaches do not do
Psychologists say that approaches such as standard
gamble too complex for respondents, tradeoffs too
artificial. Cite some evidence validating their
approaches
Economists have spent less effort to date in
validation






DALYs
Days lost due to illness
Incidence of specific illnesses
Physical functioning: number of Activities of Daily
Living (ADL) limitations; Number of Instrumental
Activities of Daily Living (IADL) limitations
Cognitive impairment
Depression (CES-D)


Disability-adjusted life year (DALY): used to calculate
the global burden of disease. A DALY = is 1 lost year
of “healthy” life.
Summing DALYs for a given population provides
estimate of difference between current health status
and an ideal health situation in which the entire
population lives to an advanced age, free of disease
and disability

DALYs for a disease or health condition are calculated
as
◦ sum of the Years of Life Lost (YLL) due to premature
mortality in population and Years Lost due to Disability
(YLD) for incident cases of the health condition:
DALY =YLL + YLD
where YLL = number of deaths multiplied by the
standard life expectancy at the age at which death
occurs
YLD = product of



◦ the number of incident cases and disability weight for each
disease and mean duration of the case until remission or
death in years, (whichever occurs first)




Virtually all decisions to be analyzed involve costs
and benefits accruing over several years
Principle of discounting that costs and benefits
accruing later should receive less weight than those
accruing earlier
Process of discounting applies to all economic
decisions, of which medical decisions are subset
Issue is not whether or not to discount (little issue on
discounting health outcomes in CEA), but rather
which discount rates to use




Pharmaceutical products for treating hypertension
and cancer have long-run effects on health
As does choice of diet, exercise, smoking, excess
alcohol consumption
As do treatments for heart disease, e.g., coronary
bypass surgery
Consider accelerating approval of an AIDS drug



In perfectly competitive, risk-free, tax-free world in
which output can be perfectly traded across periods,
there would be only one interest rate.
This rate would reflect (1) marginal rate of time
preference—time trade-off rate for consumers and
(2) marginal rate of return on investment—time
trade-off in production (tangency).
Generally thought to be real rate of 1-3% (with truly
risk-free being 1% and allowing for some market but
no credit risk more nearly 3%)