HEALTH CARE ASSIGNMENT 2
Chapter 3
Cost and Benefit Evaluation Methods
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Cost Identification Analysis
- Cost identification studies
- Measure the total cost of a given medical condition or type of health behavior on the overall economy
- Also called cost illness studies
- Three major components
- Direct medical care costs
- Direct nonmedical costs
- Indirect costs
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Cost Identification Analysis
- Direct medical care costs
- All costs incurred by medical care providers, including:
- Necessary medical tests and examinations
- Administering medical care
- Any follow-up treatments
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Cost Identification Analysis
- Direct nonmedical costs
- All monetary costs imposed on any nonmedical care personnel, including patients
- Transportation to and from the medical care provider
- Any other costs borne directly by the patient
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Cost Identification Analysis
- Indirect costs
- Time costs associated with implementation of the treatment
- Opportunity cost of the patient’s (or anyone else’s) time that the program affects
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Cost-Benefit Analysis
- Resource scarcity
- Forces society to make choices
- Economics - Social science
- Analyzes the process by which society makes these choices
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Cost-Benefit Analysis
- People - Rational decision makers
- Rationality: People know how to rank their preferences from high to low or best to worst
- People never purposely choose to make themselves worse off
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Cost-Benefit Analysis
- Make choices based on their self-interests
- Choose those activities they expect will provide them with the most net satisfaction
- Decision rule
- If expected benefits exceed expected costs for a given choice, it is in the economic agent’s best interest to make that choice
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Cost-Benefit Analysis
- Optimizing rule: NBe(X) = Be(X) – Ce(X)
- X: A particular choice or activity under consideration
- Be: Expected benefits associated with the choice
- Ce: Expected costs resulting from the choice
- NBe: Expected net benefits
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Cost-Benefit Analysis
- If NBe > 0
- Economic agent’s well-being is enhanced by choosing the activity
- Formal cost-benefit analysis
- Utilizes the same net benefit calculus to establish the monetary value of all the costs and benefits associated with a given health policy decision
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Cost-Benefit Analysis
- Surgeon general
- Maximize the social utility of the population by choosing the best aggregate mix of goods and services to produce and consume
- Allocate land, labor, and capital resources to any and all uses
- Maximize the total net social benefit (TNSB) from each and every good and service produced in the economy
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Cost-Benefit Analysis
- TNSB = TSB – TSC
- TSB - Total social benefit in consumption
- Money value of the satisfaction generated from consuming the god or service
- TSC - Total social cost of production
- Money value of all the resources used in producing the good or service
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Cost-Benefit Analysis
- TNSB from medical services
TNSB(Q) = TSB(Q) - TSC(Q)
- Q – Quantity of medical services
- Maximize TNSB(Q)
- Choose Q at which the difference between TSB and TSC reaches its greatest level
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Figure 3.1 - Determination of the Efficient Level of Output
The TSB curve represents the monetary value of the total social benefit generated from consuming medical care. The curve is positively sloped to reflect the added monetary benefits that come about by consuming more medical care. The curve bows downward to capture the fact that society experiences diminishing marginal benefit with regard to medical care.
TNSB is maximized when the vertical distance between the two curves is greatest and that occurs at Q0 level of medical services.0
The TSC curve represents the TSC of producing medical care and is upward sloping because total costs increase as more medical care is produced. The curve bows toward the vertical axis because the marginal cost of producing medical care increases as more medical care is produced.
Quantity of medical services (Q)
TSB
Q0
A
TSC
B
Costs and benefits
of medical services
0
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Cost-Benefit Analysis
- TSB - Increases at a decreasing rate
- Diminishing marginal benefit
- Successive incremental units of medical services generate continually lower additions to social satisfaction
- Slope: MSB(Q) = ΔTSB/ΔQ
- MSB - Marginal social benefit from consuming a unit of medical services
- MSB decreases with quantity since the slope of the TSB curve declines due to diminishing marginal benefit
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Cost-Benefit Analysis
- TSC - Increases at an increasing rate
- Increasing marginal costs of producing medical services
- Slope: MSC(Q) = ΔTSC/ΔQ
- MSC - Marginal social cost of producing a unit of medical services
- MSC increases with output as the slope of the TSC curve gets steeper due to increasing marginal cost
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Cost-Benefit Analysis
- Maximize TNSB
- Slope of TSB = slope of TSC
- MSB(Q) = MSC(Q)
- At output level Q0
- Allocative efficiency - Best quantity of medical services
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Cost-Benefit Analysis
- MSB curve - Negatively sloped
- Diminishing marginal benefit
- MSC curve - Positively sloped
- Increasing marginal costs
- Efficient amount of medical services: Q0
- where MSB = MSC
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Figure 3.2 - Under- and Overprovision of Medical Services
If QL amount of medical care is produced, then the MSB exceeds the MSC and society would be better off if more medical services were produced. If QR amount of medical care is produced, then the MSB is less than the MSC and too much medical care is produced.
The MSB curve stands for the marginal social benefit generated from consuming medical care and is downward sloping because of the notion of diminishing marginal benefit.
The MSC curve stands for the marginal social cost of producing medical care and is upward sloping because of increasing marginal costs.
TNSB is maximized at Q0 level of medical care where the two curves intersect. At that point, the MSB of consuming medical care equals the MSC of production.
Quantity of medical services (Q)
Q0
Costs and benefits of medical services
MSB
A
MSC
B
C
QR
QL
G
F
E
H
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Cost-Benefit Analysis
- TNSB
- Area below MSB curve but above MSC curve
- Sum of net marginal social benefits
- Area ABC = Maximum TNSB that society receives if resources are allocated efficiently
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Cost-Benefit Analysis
- If QL units of medical services are produced instead of Q0 units:
- Society fails to receive the part of the TNSB indicated by area ECF
- Deadweight loss: ECF
- Lost amount of net social benefits
- Cost associated with an underallocation of resources to medical services
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Cost-Benefit Analysis
- QR units of medical services are produced instead of Q0 units:
- Results in deadweight loss GCH
- Indicates net cost to society from producing too many units of medical services and therefore too few units of all other goods and services
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Cost-Benefit Analysis
- NMSB(Q) = MSB(Q) - MSC(Q)
- NMSB - net marginal social benefit the society derives from consuming a unit of the good
- If NMSB > 0
- Total net social benefit increases if an additional unit of the good is consumed
- If NMSB < 0
- Society is made worse off if an additional unit of the good is produced and consumed
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Practical Side of Using Cost-Benefit Analysis - Health Care Decisions
- Benefits, or diverted costs, of a medical intervention - four broad categories:
The medical costs diverted because an illness is prevented
The monetary value of the loss in production diverted because death is postponed
The monetary value of the potential loss in production saved because good health is restored
The monetary value of the loss in satisfaction or utility averted due to a continuation of life or better health or both
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Discounting
- A benefit (or a cost) received today
- Has more value than one received at a future date
- Present value, PV,
- Of a fixed sum of money, F, to be received a year from now
- r - annual rate of interest (discount rate)
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Discounting
- PV of a fixed sum
- Inversely related to the rate at which it is discounted
- PV of sums of money received over a number of years, T:
- Ft (t = 1, 2, 3, . . . , T) equals the payment, or net benefit, received annually for T years
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Discounting
- Present value in terms of benefits and costs over time
- NB - the PV of net benefits
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Discounting
- Choosing the interest rate
- Too high
- May result in choice of medical interventions that offer short-term net benefits
- Too low
- May result in choice of medical projects that provide long-term net benefits
- Should equal the rate at which society collectively discounts future consumption
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Human Capital Approach
- Used to determine the monetary worth of a life
- Value of a life = the market value of the output produced by an individual during his or her expected lifetime
- Involves estimating the discounted value of future earnings resulting from an improvement in or an extension of life
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Figure 3.3 - Present Value Of Lifetime Earnings, Males & Females, 2000
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Human Capital Approach
- Shortcomings
- Unable to control for labor market imperfections
- Gender, racial, other forms of discrimination
- Doesn’t take into account
- Value of any pain and suffering averted because of a medical treatment
- Value an individual receives from the pleasure of life itself
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Human Capital Approach
- A chronically unemployed person
- Has a zero or near-zero value of life
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Willingness-to-Pay Approach
- How much money people are willing to pay for small reductions in the probability of dying
- Deciding whether to purchase a potentially life-saving medical service
- Benefit = Reduced probability of dying, π, times the value of the person’s life, V
- Purchase if benefit just compensates for the cost, C
- π × V = C
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Willingness-to-Pay Approach
- π × V = C
- V = C / π
- Value of the human life lower-bound estimate
- Advantage
- Measures the total value of life and not just the job market value
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Should College Students Be Vaccinated?
- Increase in number of reported cases of meningococcal disease
- Prompted a discussion as to whether college students should be vaccinated for the disease
- Jackson et al. (1995)
- Cost-benefit analysis of this policy
- Benefits - from a decrease in the number of cases of meningococcal disease
- Cost of implementing a vaccination program for all college students
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Should College Students be Vaccinated?
- Costs
- Cost of the vaccine ($30) multiplied by the number of doses needed
- 2.3 million freshmen
- 80% receive the vaccine
- Estimated cost of any side effects
- One severe reaction per 100,000 students vaccinated ($1,830 per case)
- $56.2 million a year
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Should College Students Be Vaccinated?
- Benefits include
- Medical costs diverted
- Treatment costs per case = $8,145
- Costs for cases occurring in the 2nd, 3rd, and 4th years of college - discounted at 4%
- $3.1 million at 15 times the baseline rate
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Should College Students Be Vaccinated?
- Estimated value of lives saved
- Human capital approach - Used to determine value of lost earnings
- Each life saved = $1 million
- $8.8 million for 2 times the baseline rate and $60.7 million for 15 times the baseline rate
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Table 3.1 - Estimated Benefits and Costs for the Vaccination of College Students against Meningococcal Disease (in millions of $)
| Baseline times 2 | Baseline times 15 | |
| Cost of the Vaccination Program Total Benefits Direct Medical Benefits Indirect Benefits—Value of Lives Saved Net Benefits—(Benefits – Cost) | $56.2 9.3 0.5 8.8 -46.9 | $56.2 63.8 3.1 60.7 7.6 |
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Costs and Benefits of New Medical Technologies
- Advances in medical technology
- Driving force behind rising medical costs
- Profound effect on health and well-being of millions of people
- Overall mortality and disability rates in the United States have fallen consistently since World War II
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Costs and Benefits of New Medical Technologies
- Impact of medical technology on health
- Improves health
- Total product curve - rotates upward
- Each unit of medical care consumed now has a greater impact on overall health
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Cost-Effectiveness Analysis
- Cost-effectiveness analysis (CEA)
- Estimates the costs associated with two or more medical treatment options or clinical strategies
- For a given health care objective
- To determine the relative value of one medical treatment or technology over another
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Cost-Effectiveness Analysis
- Incremental cost effectiveness ratio (ICER)
- Compare a new medical treatment (new) with an existing treatment (old)
- Cost of new treatment, Cnew
- Cost of existing treatment, Cold
- Medical effectiveness of new treatment, Enew
- Medical effectiveness of existing treatment, Eold
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Cost-Effectiveness Analysis
- New treatment dominate the old
- New treatment is less costly than the old
- New treatment is more effective than the old
- Adopt new treatment
- Old treatment dominate the new
- New treatment is more costly
- New treatment less effective
- Don’t adopt new treatment
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Cost-Effectiveness Analysis
- New treatment - More effective & more costly than the old
- Is the gain in improved health brought about by the new treatment worth the additional cost in dollars?
- If the cost of a new medical treatment is less than $50,000 per additional year of life saved it is generally viewed favorably
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Cost-Effectiveness Analysis
- New treatment - Less effective & less costly than the old
- Is the decrease in health worth the cost savings?
- CEA – provide relative cost savings per life-year
- New medical treatment / technology
- Where none previously existed
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Figure 3.4 - The Cost-Effectiveness Plane
I
Review relative costs and benefits
II
Old treatment dominates
III
Review relative costs and benefits
IV
New treatment dominates
The horizontal axis measures the net impact of a new medical treatment or technology on health outcomes.
In quadrant II, the new option is less effective and more costly than the current one. In this case, the current medical option should be retained. Moving counterclockwise, quadrant III shows the case in which the new medical option is less costly and less effective than the current one. The relevant question is whether the reduction in cost is worth the loss in health associated with the new medical option. In quadrant IV the new medical option dominates the old one because it is more effective and less costly.
Net costs are measured on the vertical axis with positive net costs scored above the origin and negative net costs scored below the origin.
The cost-effectiveness plane shows how CEA can be used to determine whether a new medical technology or treatment should be adopted.
Quadrant I depicts the situation in which a new medical option is more effective and more costly than the current procedure.
To the right of the origin, the new treatment enhances health or life expectancy, and to the left of the origin it diminishes health when compared to the current treatment.
Net Cost +
(Cnew > Cold)
Net Cost -
(Cnew < Cold)
Net Effect +
(Enew > Eold)
Net
Effect -
(Enew < Eold)
Santerre and Neun, 5th edition, Copyright (c) 2010 Cengage. All rights reserved.
*
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Cost-Utility Analysis
- Considers number of life-years saved
- Quality of life
- Adjusts the number of life-years gained by some type of index that reflects health status, or quality of life
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Cost-Utility Analysis
- Rating scales
- Quality-adjusted life-years (QALYs)
- Life expectancy ˣ Health-utility index
- Health-utility index = Measure of the quality of remaining life-years
- Scale: 1 to 0
- 1 = one year of full health
- 0 = death
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Survey Techniques
- Rating scale
- Individuals rate various health outcomes
- Scale 0 to 1
- Standard gamble
- Two hypothetical health alternatives
- Choose π that generates an indifferent response between the two alternatives
- Health-utility index = π
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Cost-Utility Analysis
- Time trade-off
- Hypothetical choice
- Live for x years in perfect health followed by death
- Live for y years with a particular chronic condition
- y>x
- Vary x until the person is indifferent between the two outcomes
- Health-utility index = x/y
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Cost-Utility Analysis
- Cost-utility ratio from a new medical treatment or technology
- QALYs – quality adjusted life-years
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Cost-Utility Analysis
- Critics
- Accuracy of survey techniques
- Discrimination
- Does not tell us whether the overall well-being of society is increased
- Just whether one medical treatment or technology is more cost effective than another
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Cost-Utility Analysis
- Digital vs. film mammography
- Digital - Superior in its ability to detect cancer for certain subpopulations
- Far more expensive
- Tosteson et al. (2008)
- Replacement of all-film mammography screening with all-digital = cost $331,000 per QALY gained
- Targeted-digital mammography screening
- Women 50 and younger - $26,500 per QALY
- Women 50 and younger plus women older than 50 with dense breasts - $84,500 per QALY
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Table 3.2 - An Example of Cost Effectiveness and Cost-Utility Analysis
| Treatment option | Cost | Life-years gained | Health-utility index | QALY |
| Current procedure New procedure | $20,000 $110,000 | 2 years 8 years | 0.7 0.4 | 1.4 3.2 |
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Autologous Blood Donations – Are They Cost Effective?
- Autologous blood donation
- Donor and recipient are the same person
- Allogeneic blood donation
- Donor and recipient are different people
- Autologous blood donation
- Safer
- More costly
- More administrative and collection expenses
- Higher discarding costs
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Table 3.3 - Estimated Cost Effectiveness of Autologous Blood Donations
| Total Hip Replacement | Coronary-artery Bypass grafting | Abdominal Hysterectomy | Transurethral Prostatectomy | |
| Additional cost per unit of autologous blood transfused QALY per unit transfused Cost effectiveness (row one/row two) | $68 0.00029 $235,000 | $107 0.00022 $494,000 | $594 0.00044 $1,358,000 | $4,783 0.00020 $23,643,000 |
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Patient Protection and Affordable Care Act (PPACA) of 2010
- Patient-Centered Outcomes Research Institute
- To provide people with the knowledge needed to make educated decisions regarding medical care
The development and dissemination of comparative effectiveness research (CER)
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Patient Protection and Affordable Care Act (PPACA) of 2010
- CER - “simply knowing what works and what doesn’t will improve productive efficiency by shedding” medical practices that are less efficient and possibly even harmful
- CER can be considered a public good
- the information it provides can be consumed simultaneously by more than one individual
- it is costly to exclude nonpayers from using the information
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1
()
(1)
T
tt
t
t
BC
NB
r
=
-
=
+
å
newold
newold
CC
ICER
EE
-
=
-
new
new
C
ICER
E
=
newold
newold
Cost - Cost
No. of QALYs - No. of QALYs