HMGT 435 WEEK 7 DISC 7

CHAPTER

219

14ECONOMIC ANALYSIS OF CLINICAL AND MANAGERIAL INTERVENTIONS

Learning Objectives

After reading this chapter, students will be able to

• identify when a cost-minimization analysis is appropriate, • distinguish between cost–benefit analysis and cost–utility analysis, • explain why economic evaluation is necessary in healthcare, and • discuss the importance of comparing the best alternatives.

Key Concepts

• Analyses of interventions are designed to support decisions, not make them.

• Comparing the most competitive alternatives is vital. • Four types of analysis are common: cost-minimization analysis, cost-

effectiveness analysis, cost–utility analysis, and cost–benefit analysis. • The simplest and most productive type of analysis is cost-minimization

analysis. • Cost–benefit analysis and cost–utility analysis are potentially more

powerful, but their validity is uncertain. • Modeling costs entails identifying the perspective involved, the

resources used, and the opportunity costs of those resources. • Focusing on the direct costs of interventions is best. • Modeling benefits is the most difficult part of economic evaluation of

clinical interventions.

14.1 Introduction

Until recently, economic analyses of clinical interventions were uncommon. Healthcare decision makers had little or no incentive to assess whether

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Economics for Healthcare Managers220

procedures were worth their costs, or even whether those procedures could be done more efficiently. A fee-for-service payment system tells decision makers what procedures are worth. Practical managers in a fee-for-service environment will not worry about genuinely balancing value and cost.

The emergence of bundled payment systems and the growth of capi- tation have made economic analyses of clinical interventions more relevant. In either system, getting the same outcome at lower cost directly increases profits. In a capitated system, the options are even greater: Getting the same outcome more cheaply still increases profits, but strategies such as increasing prevention, self-care, or adherence to clinically effective protocols can also have a significant payoff. In short, the value of analyzing clinical interventions has risen sharply.

Analyses of clinical interventions ask deceptively simple questions, such as “Are the benefits of this intervention greater than its costs?” and “Is this intervention better than the alternatives?” Such questions are often difficult to answer because assessing the benefits of clinical interventions is difficult. While the second question may sound much like the first, it is easier to answer because it does not require assigning the benefits an explicit value.

These questions must be asked because, even in a wealthy society, resources are limited. When individuals choose to purchase a drug or be screened for a condition, they cannot use those resources for other purposes. The same is true for society. If money spent on an electrocardiogram could be used to greater benefit elsewhere, the resources should be reallocated to those other uses. Ideally, we would like to use resources to maximum ben- efit. Practically, we seek to avoid pure waste and interventions in which the benefits are smaller than the costs.

Why are economic analyses of clinical interventions needed? Public and private insurers need information on which to base coverage decisions. Patients seldom are familiar with all the potential outcomes of therapy, their experience may not be typical, and their perceptions of costs are distorted by insurance. In addition, providers often need information to make the case for a new form of treatment. Because the stakes can be high, patients and provid- ers are reluctant to innovate without evidence.

Analyses of clinical interventions are designed to support decision making, not to make decisions. By providing a framework for synthesizing and understanding information, economic analyses can help decision makers avoid bad decisions.

Four types of analysis are common. Cost-minimization analysis (CMA), cost-effectiveness analysis (CEA), cost–utility analysis (CUA), and cost–benefit analysis (CBA) all compare the costs and benefits of

cost-minimization analysis An analysis that measures the cost of two or more innovations with the same patient outcomes.

cost-effectiveness analysis An analysis that measures the cost of an innovation per unit of change in a single outcome.

cost–utility analysis An analysis that measures the cost of an innovation per quality- adjusted life year.

cost–benefit analysis An analysis that compares the value of an innovation with its costs. (Value is measured as willingness to pay for the innovation or willingness to accept compensation to not use it.)

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 221

alternative interventions. All four use the same methods to measure costs, but they use different strategies for assessing benefits.

CMA is the most useful for managers. Although it is more limited in scope than the others, it is simpler to apply. CMA answers our second question, “Is this intervention better than the alternatives?” Unfortunately, it cannot answer it in every case. If the better alternative also costs more or if the least expensive alternative does not work as well, CMA is not helpful.

CEA extends CMA somewhat. When the better strategy costs more, CEA answers the question “What is the cost per unit of this gain?” This sim- ple piece of information is likely to be of genuine value to managers because it will validate strategies with a small cost per unit and negate those with a large cost per unit. CEA does not, however, directly compare the costs and benefits of a strategy as CUA and CBA do.

14.2 Cost Analysis

Before examining these four types of analysis in more detail, we will briefly review the basics of cost analysis. Measuring costs involves three tasks:

1. identifying the perspective involved, 2. identifying the resources used, and 3. identifying the opportunity costs of those resources.

Costs are often poorly understood (and poorly measured), even though the issues are seldom very complex.

14.2.1 Identifying a Cost Perspective Identifying a cost perspective is an essential first step. Confusion about costs usually arises because the analyst has not been clear about the perspective. Decision makers usually respond to the costs they see, and different decision makers typically see different portions of the cost. This notion may seem abstract, so here is a simple example. An insurance plan (an HMO) wishes to increase use of a generic drug in place of the brand-name equivalent. The generic product costs $50, of which $4 is paid by the patient and $46 is paid by the plan. The branded product costs $100, of which $5 is paid by the patient and $95 is paid by the plan. From the plan’s perspective, switching to the generic saves $49. From the consumer’s perspective, switching to the generic saves $1. From the perspective of society as a whole, switching to the generic saves $50. These different perspectives are all valid, yet they may lead to different choices.

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Economics for Healthcare Managers222

Another example shows how differences in cost perspectives can lead to different perceptions of the cost of a good or service. Suppose the same HMO encourages use of an over-the-counter drug because the drug is not a covered benefit. The over-the-counter product costs $10, of which $0 is paid by the plan. The prescription product costs $15, of which $5 is paid by the patient and $10 is paid by the plan. From the consumer’s perspective, the switch increases costs from $5 to $10. Because consumers share the costs of covered medications with many other beneficiaries, they will want to switch to over-the-counter medications only if those medications are more effective or more convenient than prescription medications. From the insurer’s per- spective, the switch reduces costs from $10 to $0. The switch makes sense for the insurer as long as the prescription medication is not “too much better” than the over-the-counter medication. From the perspective of society, the switch reduces costs from $15 to $10 and makes sense only if the over-the- counter medication is “nearly as good” as the prescription medication.

A societal perspective on costs is usually the right perspective for two reasons. The societal perspective recognizes all costs, no matter to whom they accrue. Other perspectives typically fail to consider important costs, which is seldom a good long-run strategy. Those to whom costs have been shifted try to avoid them and try to avoid contracting with organizations that shift costs to them.

14.2.2 Identifying Resources and Opportunity Costs Cost equals the volume of resources used in an activity multiplied by the opportunity cost of those resources. Keeping these two components of cost separate is useful because either can vary. A clinical understanding of a pro- cess helps a manager to identify the resources used in an intervention; a well- documented clinical pathway is even more helpful.

Most of the time the opportunity cost of a resource simply equals what you paid for it. The opportunity cost of $100 in supplies is $100. The opportunity cost of an hour of nursing time is $27 if the total compensation of a nurse is $27 per hour. Calculating the opportunity cost is more complex when the cost of a resource has changed since you bought it and you would not buy it at its current price. In these cases you have to calculate the value of the resource in its best alternative use.

Economic theory provides a powerful tool for simplifying cost analy- ses. It says to focus on the resources you add (or do not need) as a result of an intervention. In other words, focus on incremental costs. This task can be difficult but is less complex than pondering, for example, exactly what pro- portion of the chief financial officer’s compensation should be allocated to a triage process in the emergency room.

societal perspective A perspective that considers all costs and benefits, no matter to whom they accrue.

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 223

14.2.3 Direct and Indirect Costs Implicit in this advice is a recommendation to focus on the direct costs of interventions, or those costs that result because an intervention has been tried. For example, the costs of a drug and its administration are direct costs of drug therapy. The costs of associated inpatient and outpatient care are also direct costs. If healthcare costs associated with ineffectiveness or adverse outcomes are present, those should be counted as well. By the same token, costs the patient incurs as a result of undertaking the treatment are direct costs. Added childcare, transportation, and dietary costs that result directly from therapy should be counted from a societal cost perspective. From the perspective of the healthcare system, however, these added costs for patients would not be counted. (Of course, as noted earlier, a cost perspective that ignores the effects on customers is likely to result in poor decisions.)

Most “indirect” costs represent a confusion of costs with benefits. Healthier people typically spend more on food, recreation, entertainment, and other joys of life, but this additional spending is not a part of the costs of interventions that restored health. (Individuals have independently made the judgment that this additional spending is worthwhile.) By the same token, we should not treat a recovered patient’s future spending as a cost of the intervention that permitted the recovery—unless, as with transplant patients’ immunosuppressive drugs, these costs are an integral part of the intervention. That a transplant patient feels healthy enough to play tennis certainly signals that the operation was a success, but if the overenthusiastic athlete suffers an on-court injury, the cost of knee surgery should not be considered a cost of the transplant.

14.3 Types of Analysis

We have identified four types of analysis: CBA, CEA, CUA, and CMA. Be aware that mislabeling is the norm, not the exception. A “cost–benefit analy- sis” could be anything, and the meaning of “cost-effectiveness analysis” has changed over the years. Exhibit 14.1 shows when each type of analysis is needed.

If deciding which strategy is best is difficult, the choice of strategy should not matter because they all support decision making. If the options look so similar that choosing the best one is difficult, do not do a detailed analysis. A coin flip will suffice. Of course, when populations are large, even small differences in cost or benefit per case can result in significant differences from society’s perspective. However, for working managers, small differences are not worthy of attention.

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Economics for Healthcare Managers224

14.4 Cost-Minimization Analysis

The simplest and most productive type of analysis is CMA, which identi- fies the intervention with the lowest costs. As long as the intervention has outcomes at least as good as those of the alternatives, CMA is the analysis of choice. While CMA avoids most of the problems associated with measuring benefits, it does not escape them entirely. The most common problem in CMA is a lack of evidence that the least-cost option has outcomes at least as good as the other choices.

EXHIBIT 14.1 Using Decision-

Support Tools

Steps in Cost-Minimization Analysis

1. Estimate the expected costs for each option.

2. Show that the least-cost option has outcomes at least as good as higher-cost alternatives.

An Example of Cost-Minimization Analysis

Treatment guidelines for patients hospitalized with community-acquired pneumonia recommend antibiotic therapy for eight days. The scientific basis for eight days of antibiotics is limited, and some researchers have suggested that briefer treatments may be appropriate. Because community- acquired pneumonia is a common problem, substantial sav- ings might be possible with briefer treatments (Scalera and File 2013).

(continued)

Incremental Effectiveness of Intervention

In cr

em en

ta l C

os t

of

In te

rv en

ti on

More Same Less

More CBA, CEA, CUA CMA

Same Coin Flip

Less CMA CBA, CEA, CUA

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 225

14.5 Cost-Effectiveness Analysis

CEA recognizes that measuring the incremental cost of improving outcomes may be useful when a more effective intervention costs more. In at least some cases, the incremental cost will be so high or so low that a decision can be based on it.

In some cases, CEA is not helpful. If the cost per life year saved is $35,000 or if the cost per injury prevented is $10,000, the answer will not seem obvious. In these cases CBA or CUA may be needed.

Steps in Cost-Effectiveness Analysis

1. Estimate the expected costs for each option.

2. Establish how much the higher-cost option improves outcomes.

3. Calculate the cost per unit of improvement in outcome (e.g., the cost per life year gained or the cost per infection avoided).

An Example of Cost-Effectiveness Analysis

Pregnant women should stop smoking for many reasons, but 17 per- cent of low-income women smoke during pregnancy (Li et al. 2018). Trying to increase quit rates, Essex and colleagues (2015) added nico- tine replacement patches to the standard care for pregnant smokers

(continued)

Uranga and colleagues (2016) conducted a randomized controlled trial to compare five-day treatment with longer antibiotic therapies. At day five of treatment, patients with community-acquired pneumonia who had significantly improved were randomly assigned to discontinue antibiotics or complete the course of treatment prescribed by their physician. Patients were then followed for 30 days. Shorter treatments also led to less antimicrobial resistance, fewer adverse effects, lower cost, and improved adherence.

(continued)

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Economics for Healthcare Managers226

14.6 Cost–Benefit Analysis

CBA is also relatively simple, but its validity is unknown. CBA is appropriate when the option with the best outcomes costs more. CBA begins with a com- parison of two or more options to find out how their costs differ, followed by an attempt to estimate the difference in benefits directly. Two different strategies are used for estimating benefits. One uses statistical techniques to infer how much consumers are willing to pay to avoid risks. The other uses surveys of the relevant population to determine whether the added benefits are worth the cost.

Neither method’s validity has been clearly established. The funda- mental challenge arises from concerns about consumers’ abilities to make decisions involving small probabilities of harm. If consumers do not assess these probabilities accurately, their life choices and their responses to surveys will not be reliable. In addition, multiple challenges to the validity of sta- tistical inferences are always present, and statistical estimates of benefits are imprecise. Surveys may not give us valid measures of willingness to pay or willingness to accept compensation. First, they ask consumers to make com- plex assessments of services they have not yet used. Answers to hypothetical, complex questions are suspect. Second, consumers may misrepresent their preferences, believing they will have to pay more out of pocket if they answer willingness-to-pay questions accurately. Therefore, even though CBA can provide invaluable information to decision makers, its accuracy is not clear.

Two other criticisms are worth noting. Early CBA studies based estimates of benefits on estimates of increases in labor market earnings. A few minutes of

(which consisted of behavioral support to encourage quitting and reminder phone calls).

Adding nicotine replacement patches increased costs by $71. It also increased quit rates by 1.8 percent. Taking into account changes in cesarean section rates, prenatal hospital admission rates, and neo- natal unit admission rates, the authors estimated an incremental cost per quitter of $6,896. This estimate is unsatisfying for two reasons. First, because treatment costs vary so much, the estimate is highly variable. (The 95 percent confidence interval ranges from −$159,779 to $177,446.) Second, the most substantial costs of maternal smoking are due to the child’s increased probabilities of impairment over a lifetime.

(continued)

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 227

reflection will reveal problems with this approach. Is improved health for retired persons of no value? Does people’s willingness to pay out of pocket for the care of their pets (who have no earning power) mean that changes in earnings are a poor guide to the value of medical interventions? Earnings-based estimates of benefits have left a legacy of skepticism of CBA among healthcare analysts. A second complaint is that willingness to pay usually rises with income. This find- ing is profoundly troubling to analysts who would prefer a healthcare system that is more egalitarian than the current system in the United States. (While this complaint is not really a criticism of CBA, it is sometimes presented as such.)

For an illustration of how CBA works, return to the example of the switch from a branded product to a generic one. Recall that the branded drug costs $100 and the generic drug costs $50. Uninsured consumers would buy the branded product only if its benefits were large enough for them to be willing to pay $100. Few consumers would be willing to pay this much to get the branded product because branded and generic drugs seldom differ. Current users of a branded drug, however, face both real and perceived risks to switching, such as the risk of an allergic reaction to differ- ent inert ingredients. Remember that from the insured consumer’s perspec- tive, the cost differential is only $1, from $5 for the branded product to $4 for the generic. Current users of the drug may be willing to pay $75, in which case the marginal benefit of the branded drug will appear larger than its marginal cost. Current users have an incentive to make sure others bear the financial risk of higher costs. Asking people who are not current users is also problematic. The opinion of someone who does not have a disease the drug is intended to treat or who has not used both drugs is not likely to hold much value.

Steps in Cost–Benefit Analysis

1. Estimate the expected incremental costs of the more expensive option.

2. Survey consumers to find out if they would be (a) willing to pay enough to cover the added costs of an option with better outcomes or attributes or (b) willing to accept payment that would be less than the cost savings of an option with worse outcomes or attributes. Alternatively, use market data to estimate how much consumers are willing to pay to avoid risks or willing to accept to take on risks.

3. Compare the incremental benefits and costs.

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Economics for Healthcare Managers228

14.7 Cost–Utility Analysis

CUA rivals CBA as a complete comparison of alternative interventions (note that a number of analysts do not distinguish between CEA and CUA). CUA seeks to measure consumer values by eliciting valuations of health states. This information is then used to “quality adjust” health gains, so that decision makers can consider the cost per quality-adjusted life year (QALY) saved (we will explain how QALYs are calculated later).

An Example of Cost–Benefit Analysis

Type 2 diabetes often causes workers to retire. A recent study mea- sured willingness to pay for work accommodations for people with type 2 diabetes (Nexo et al. 2017).

Time off with pay was by far the most highly valued option, but being able to work part time was a close second. Interestingly, people with type 2 diabetes systematically viewed work accommodations as less valuable than did a matched sample of other people. People with type 2 diabetes viewed paid time for medical visits as more valuable than part-time work, customized work, or additional paid breaks. One would need to calculate the costs of the options to determine which offered the highest net benefit (benefit minus cost), but the study clearly warned against making inferences about value based on the opinions of individuals who have not experienced the illness.

QALYA QALYB QALYB – QALYA

Discounted

NA UA NA × UA NB UB NB × UB

0% 3%

Year 1 outcomes 200 0.95 190.00 210 0.96 201.60 11.60 11.26

Year 2 outcomes 195 0.94 183.30 199 0.93 185.07 1.77 1.67

13.37 12.93

Cost per QALY (with a $300,000 cost difference between A and B): $22,438 $23,201

Note: N A and N

B refer to the number of participants. U

A and U

B refer to the average utility score of participants.

EXHIBIT 14.2 A Cost–Utility Analysis

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 229

CUA is complex, and its validity is unknown. It is appropriate when- ever CBA is, and at a formal level the two are essentially equivalent. At a practical level, however, the process of calculating benefits is different. CUA measures how alternative interventions change the health status of patients and how patients evaluate those changes.

Exhibit 14.2 walks through the calculations for a CUA. Suppose 215 people each get treatments A and B. At the end of one year the number of survivors differs for the two treatments (NA and NB), as does the average utility level (UA and UB). We use these data to calculate how many additional QALYs we get as a result of using treatment B. We then calculate the cost per QALY if we switch to treatment B.

Four uncertainties are associated with this calculation, aside from the usual problems of assessing the clinical effectiveness of treatments. First, should we limit our questions to patients? Family, friends, and strangers are sometimes willing to help patients afford care. Second, can patients answer questions about satisfaction adequately and accurately? Third, what discount rate should we use? While the example uses 3 percent, another rate might give us different answers, and we do not know what the right rate is. Fourth, assuming all other calculations are correct, at what cost per QALY should we draw the line? At the risk of sounding unduly negative, the validity of CUA hinges on finding satisfactory answers to these questions, which is not likely.

Unlike CMA or CBA, CUA requires that the analyst explicitly dis- count future QALYs. A technique commonly used in banking and finance, discounting reflects that benefits we realize far in the future are worth less than benefits we realize now. Discounting is valid because money can earn interest. To pay a bill that will come due in the future, one can set aside a smaller amount today. For example, if we invest $100 at an interest rate of 7 percent, we will have $160.58 at the end of ten years. We can reverse this calculation to show that the value of a guaranteed payment of $160.58 that we will get in ten years is $100.

As long as the interest rate is fixed, discounting is easy to figure on a spreadsheet. A single formula, PV × (1 + r)n = FV, lets us do all the necessary calculations. In this formula, PV refers to the present value of future costs or benefits, or the amount we are investing today; r refers to the interest rate; n refers to the number of time periods involved; and FV refers to the future value of future costs or benefits, or the amount we will have at the end of the investment period. We use the same formula to calculate the present value of future costs and benefits. The formula becomes PV = FV/(1 + r)

n . If we

knew the size and timing of an intervention’s costs and benefits and the right discount rate, calculating the present value of the QALYs associated with it would be a simple matter. In fact, we do not know the right discount rate and are not sure that the discount rate is constant for a given individual, let

discounting Adjusting the value of future costs and benefits to reflect the willingness of consumers to trade current consumption for future consumption. (Usually future values are discounted by 1/(1 + r)

n , with r

being the discount rate and n being the number of periods in the future when the cost or benefit will be realized.)

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Economics for Healthcare Managers230

alone for different individuals. Sensitivity analysis is the best we can do in this regard. This analysis entails varying the discount rate over a reasonable range (typically 0% to 10%) and seeing if the answer changes. If not, the result is insensitive to the value of the discount rate. But if the answer does change, we have to use our judgment.

In addition, many technical issues remain to be resolved in CUA. In particular, the validity of the quality adjustment that underlies QALYs is unknown. Of course, the core idea of CUA—that what happens to an indi- vidual patient is the only source of value for medical interventions—will not always be correct.

Steps in Cost–Utility Analysis

1. Estimate the expected costs for each option.

2. Estimate the number of people alive in each year in each cohort.

3. Using a survey of consumers, estimate the average utility score for each option for each person who is alive in each year.

4. Multiply the utility score (which will range from zero to one) by the number of people alive in each year for all the cohorts being compared. The product is the number of quality-adjusted life years (QALYs) for each cohort.

5. Discount the QALYs using rates of 2 to 5 percent.

6. Add the QALYs for each option, then find the difference.

7. Divide the difference in cost between options by the difference in QALYs.

8. Decide whether the cost per QALY is too high.

An Example of Cost–Utility Analysis

Are stents cost-effective for patients with stable angina (chest pain resulting from an inadequate supply of blood to the heart)? Stents come in two forms: bare metal and drug eluting. A bare-metal stent is a mesh tube of thin stainless steel or cobalt-chromium alloy wire. A drug-eluting stent has a coating that slowly releases a medication that slows the rate of restenosis (the blood vessels narrowing again after the treatment). Since their introduction in the late 1970s, stents have

(continued)

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 231

been shown to be highly effective in treating angina. During this same period, however, medical therapy has also improved dramatically. Hence a team of researchers asked which approach was best given the options available as of 2011 (Wijeysundera et al. 2013).

The lifetime cost for medical therapy averaged $22,952, the life- time cost for a bare-metal stent averaged $25,952, and the lifetime cost for a drug-eluting stent averaged $25,536. Patients who got medical therapy were forecast to have a quality-adjusted life expec- tancy of 10.10 years. The forecast was 10.26 years for patients who got a bare-metal stent and 10.20 years for patients who got a drug- eluting stent. Because the bare-metal stent cost less and led to a longer quality-adjusted life expectancy, it dominated the drug-eluting stent. Compared to medical therapy, a bare-metal stent cost a little more than $13,000 per QALY. This calculation, which is called the incremental cost-effectiveness ratio, divides the cost difference by the QALY difference. On the basis of this calculation, the team con- cluded that bare-metal stents were cost effective for most patients. The team also concluded that drug-eluting stents were cost effec- tive only for certain patients with diabetes, who were at high risk of restenosis.

This analysis used data from multiple sources. The analysis also had to rely on a number of assumptions. In recognition of these fac- tors, the team conducted a wide array of sensitivity analyses, which entailed redoing their calculations using different data or assumptions. Not surprisingly, their forecasts of how long patients survived were the key factors in their conclusions. Modest changes in costs, quality of life, or survival could change the conclusions. And such changes are likely, meaning that any conclusion is likely to change as technology changes.

(continued)

Teledermatology

Most dermatologists reside in metropolitan areas, so teledermatology should be considered as an

access option for individuals living outside these areas. However, two questions must be answered. How much does it cost? How valuable is

Case 14.1

(continued)

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Economics for Healthcare Managers232

it? A team of Veterans Administration researchers attempted to answer these questions (Datta et al. 2015).

The team used two cost perspectives. One examined costs from the perspective of the Veterans Administration, estimating how much it costs to produce teledermatology care and how much it costs to produce a face-to-face visit. Two challenges emerged from this effort. First, costs varied considerably. From the Veterans Administration perspective the average cost of a teledermatology consult was $308, but the standard deviation was $298. The average cost of a face-to- face consult was $338, but the standard deviation was $291. Second, the authors chose not to include the cost of equipment used to take images of the patient’s skin, arguing that the incremental cost of an image was negligible.

In looking at costs from a societal perspective, the team added spending for dermatologic care from providers who did not work for the Veterans Administration, travel costs, and patient time costs. From a societal perspective the average cost of a teledermatology consult was $460, but the standard deviation was $428. The average cost of a face-to-face consult was $542, but the standard deviation was $403.

This study was a CUA, so the team measured utility before and after treatment. They used a time trade-off technique to measure patients’ quality of life. This technique presents respondents with directions such as “Imagine that you have ten years left to live. You can choose to live these ten years in your current health state, or you can choose to give up some life years to live for a shorter period in full health. Mark the timeline with the number of years in full health that you think is of equal value to ten years in your current health state.”

1 2 3 4 5 6 7 8 9 10

At baseline, average quality of life was 0.90 for both samples. Over nine months the teledermatology groups’ average increased by 0.03 and the face-to-face visit groups’ average increased by 0.02.

Case 14.1 (continued)

(continued)

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 233

14.8 Conclusion

Except for CMA or possibly CEA, our advice is “Don’t try this at home.” When you need evidence to make a decision, turn to the literature. If no guidance is to be found there, do CMA or CEA (or modify existing studies using your costs). If these tools do not provide a clear direction, use clini- cal judgment. CBA and CUA are research tools, not management tools. Still, these techniques can help make your organization more efficient. Applied judiciously, they will help your organization identify and provide the most efficient therapies, which will reduce your costs and increase your options.

The importance of comparing the right options is often lost in the dis- cussion of these analyses. Failing to compare reasonable alternatives renders CMA, CEA, CBA, and CUA useless. The best choice will usually be clear if the most plausible alternatives are compared. And if the best choice is not clear, either choice may be appropriate.

Discussion Questions • Would you be willing to use teledermatology?

Why or why not?

• Which perspective on costs seems more valid to you?

• Do you think that the costs of the imaging equipment should have been included?

• Did the team use the right approach to evaluation? Would a CMA have been acceptable?

• What is your reaction to the time trade-off technique?

• What is your recommendation for assessing the value of teledermatology?

• Would you be willing to adopt teledermatology for your health system?

• Should Medicare use economic evaluation in making coverage decisions?

• Congress has largely banned considering costs in making coverage decisions. Do you agree?

• Can you find published examples of CMA? CEA? CBA? CUA?

Case 14.1 (continued)

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Economics for Healthcare Managers234

Exercises

14.1 Why have economic analyses of clinical and administrative innovations become more important?

14.2 Why is cost-minimization analysis most likely to be useful for managers?

14.3 Why would an economist object to including overhead costs in cost- minimization analysis?

14.4 A clinic finds that it can reduce costs by eliminating appointments. The clinic is able to eliminate some telephone staff, and physicians become more productive. Patients wait until the physician is available, so the physician has virtually no downtime. Does this analysis adopt a societal view of costs? Why might this analysis result in a bad managerial decision?

14.5 Treating a patient with lung cancer with modern drugs increases average life expectancy by 0.25 years. The added cost of therapy is $24,000. What is the cost per life year? Should modern drugs be used?

14.6 A test for bladder cancer costs $100. If given to 1,000 individuals, it will reduce medical costs by $80,000 and increase average life expectancy from 15.0 to 15.1. What is the cost per life year? Should you screen this population?

14.7 Compared with a drip system, an infusion pump reduces the cost of administering chemotherapy from $25 per dose to $20 per dose. The complication rate of each system is 2 percent. Which should you choose? What sort of analysis should you do?

14.8 After choosing between the options in exercise 14.7, you discover that an infusion pump with a dosage monitoring system costs $15 per dose. Its monitoring functions reduce the complication rate to 1 percent. Which of the three options do you prefer? What principle does this illustrate?

14.9 Switching from one anesthesia drug to another reduces costs by $100 per patient. What additional information do you need to do a cost-minimization analysis?

14.10 A vaccine costs $200 per patient. Administration of the vaccine to 1,000 people is expected to increase the number of pain-free days for this population from 360,000 to 362,000. Calculate the cost per additional pain-free day due to vaccination. Is vaccination a good investment?

14.11 An acute care hospital has found that having geriatric nurse specialists take charge of discharge planning for stroke patients

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Chapter 14: Economic Analysis of Cl inical and Managerial Inter ventions 235

reduces the average length of stay from 5.4 days to 5.2 days. On average, the geriatric nurse specialist (who earns $27 per hour including benefits) spends 3.3 hours on discharge planning per patient. Supply and telephone costs are less than $10 per discharge plan. Your accounting staff tell you that the average cost per day is $860 and the incremental cost per day is about $340. Is this innovation financially attractive? Whether it is or not, what alternatives should the hospital consider?

14.12 The current cost function for a lab that evaluates Pap smears is C = 200,000 + 25 × Q. Q , the annual volume of tests, is forecast to be 30,000. The incremental cost is $25 because each evaluation requires $20 worth of a technician’s time and $5 worth of supplies. Calculate the average cost of an evaluation.

14.13 You are comparing replacing the current lab, which has a cost function of C = 200,000 + 25 × Q , with an automated lab that has a cost function of C = 300,000 + 20 × Q. Doing so would reduce the error rate from 1.5 percent to 1 percent. Your volume is expected to be 18,000 tests per year. Should you choose the automated lab? Briefly explain your logic.

14.14 The expected cost of Betazine therapy is $544. It is effective 57 percent of the time, with a 6 percent chance of an adverse drug reaction. The table shows data for Alphazine, a new treatment. Estimate the rate of adverse drug reactions and the expected cost of treatment. Use Excel to construct a decision tree for this problem. Should you choose Alphazine or Betazine?

Probability Cost

Effective 63% Adverse drug reaction 5% $700

No adverse drug reaction 95% $500

Ineffective 37% Adverse drug reaction 5% $800

No adverse drug reaction 95% $600

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