Cost Analysis in
Social Work Research:
How cost analysis can inform social work
research and increase likelihood that EBP’s will
be implemented by public human service
agencies
January 22, 2009
Charles A. Smith, PhD
2005 Graduate of UMB SSW
Montgomery County HHS
Data Analysis & Evaluation
Montgomery County HHS
Planning & Identification of EBP’s
Director Ahluwalia and Service Chief’s paying rapt
attention to Dr. Smith’s exposition on cost utility analysis
Born Again Economist
ADAM SMITH
CLASSICAL ECONOMICS THEORY
Born Again Economist
AMOS TVERSKY
BEHAVIORAL ECONOMICS THEORY
OUTLINE
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What is economic evaluation
Why is it important
Major economic concepts
Types of economic evaluations
Methodological Issues
DEFINITION
“comparative analysis of alternative
courses in terms of both their costs and
consequences” (Drummond et al., 1997, p. 8)
Core concept: Efficiency
So What: Part I
“value of cost-effectiveness is as a
framework that helps social-work
evaluators to cover all the bases and to
make inevitably subjective judgments as
explicit as possible” (Schreiner et al., 2006, p. 36)
So What: Part II
• Role of SW Research
– Production of knowledge to guide practice
– Implementation of that knowledge
• Barriers to implementation
– Knowledge not matching needs of consumers
(i.e., Practitioner/researcher divide)
Knowledge Production
Rosen et al., 1999
• Descriptive (36%)
• Explanatory (49%)
• Control/Intervention (15%)
Knowledge Consumption
“person-in-environment” of policy makers
1. Constraint
– Demand > Supply
– Work > Time
2. Trade-offs and comparisons
– Nothing exists in isolation
– Decisions often non-rational (i.e.., political)
Knowledge Void
Cost related information
• Amount of resources ($, time)
• Amount of benefit (with duration)
• Costs and benefits relative to other
options
Cost analysis < 1% of SW research
Primer on Economic Concepts
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Constraints
Opportunity costs
Loss aversion
Choices under conflict
Marginal utilities
Dosage
CONSTRAINTS
Constraint
Constraint
Constraint
Constraint
Constraint
Constraint
Constraint
Constraint
Constraint
Constraint
Constraint
Constraint
USA political system rebels against reality
of constraints, but they do exist and they
do influence policy decisions
Opportunity Cost
• Technical definition: Next best use
• Applied definition: Nothing is free!
Loss Aversion
• Prospect Theory (Behavioral Economics)
– “loss” and not “risk” is key issue
– “Endowment Effect”
• Losing A is 2x as painful as gaining A
• Status quo bias
• Sunk cost fallacy
Choices Under Conflict
• Relative not absolute position critical
• Too many options = decision paralysis
• Bad option bias’ toward closest parallel
option
• Examples:
• Study with choice over salary
• Money buying happiness
Marginal Utilities
• Definition: return on each additional input
• Non-linear
– Increasing marginal utilities
• Therapeutic dosage
• Economies of scale
– Decreasing marginal utilities
• Diminishing returns
• Toxicity
Dosage
• Inputs & outcomes occur in gradients
• Holy Grail = minimum effective dosage
– Ethical issue of horizontal equity given
constrained resources
• Limitation: EBP and sledgehammer effect
Types of Economic Evaluations
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Cost Benefit Analysis (CBA)
Cost Utility Analysis (CUA)
Cost Effectiveness Analysis (CEA)
Cost Minimization Analysis (CMA)
Choice of analysis depends on the
question being asked
Is It Worth Doing at All?
• CBA
– Is Net Present Value (NPV) > 0
– Limitation: monetarization of latent constructs
• CUA
– Quality Adjusted Life Year (QALY) as benefit
– Is QALY < threshold (e.g., $50K)
Which of Several to Pick
• Assumes allocation decision already made
• CEA
– Relative effectiveness of 2+ interventions
along 1+ comparable outcomes
– Incremental Cost Effectiveness Ratio (ICER)
• CMA
– If outcomes identical, then minimize cost
How to Become an Economist
• Classic texts (Drummond et al., 1997, Gold et al., 1996, Haddix et al., 2003)
• Collaborations (e.g., Kevin Frick)
• Articles and conferences (e.g., Pharmoeconomics )
Primer: Methodological Issues
• Formula
• “Rule of reason”
• Perspective
– Discounting
– Societal vs. Program
• Data sources
• Sensitivity analysis
• Interpretation
Formula
Costs
Benefits
• Direct + Indirect
• Expenditures - Savings
• Outcomes - Unintended consequences
• Essentially an accounting exercise … but …
Rule of Reason
“validity rests on whether its assumptions
are reasonable in light of the needs and
purposes of the decision maker and,
importantly, in light of whether, after close
examination, its implications make sense”
(Gold et al., 1996, p. 152)
Perspective
• Discounting & Time Horizon
– Future dollars (and benefits) have lower utility
– What is appropriate discount rate?
– Ethical issue: value of future generations
• Societal vs. Program
– Whose costs and whose benefits?
– Programs tend to care only about their own $
– Gold et al., recommend computing both
Data Sources
• Data can be collected in specific study or
estimated based on prior studies
– “rule of reason”
– cost modeling vs. micro-costing
• Implementation costs (i.e., real world)
• Constant dollar calculations
Sensitivity Analysis
– “varying key model parameters to evaluate
their impact on model outcomes” (Haddix et al.,
2003, p. 114)
– “interpretation of a sensitivity analysis is
essentially arbitrary because there is no
guidelines or standards as to what degree of
variation results in acceptable evidence that
the analysis is robust” (Drummond et al., 1997, p.
250)
COST
+
Intervention more costly
& less effective (easy
decision: NO)
Intervention more
costly & more
effective (tricky)
IV
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I
III
+
II
Intervention less
costly & less
effective (tricky)
Intervention less costly
& more effective =
dominates (easy
decision: YES)
-
Adapted from Drummond et al., 1997, Box 4.2, p. 40
EFFECT
EXAMPLE
Zahzle’s handy-dandy stochastic
probabilistic sensitivity generator
Example: Methodological Issues
• Learning from our mistakes
• Smith & Frick, 2008
– Benefits: EQ5D may not produce valid
indicator of QALY for aged population (i.e.,
anticipated vs. experienced utility),
– Costs: dosage of both interventions so high
that it may have distorted findings,
– Interpretation: $50K QALY threshold
debatable