Valuation issues Jan Sørensen, Health Economist CAST – Centre for Applied Health Services Research and Technology Assessment University of Southern Denmark

Cost-benefit analysis of future energy plans Assess and compare the cost and benefits of different alternatives from a social perspective Assess and compare the cost and benefits of different alternatives from a social perspective CBA is based on well-established economic theory (welfare economics), which might serves as reference case when in doubt CBA is based on well-established economic theory (welfare economics), which might serves as reference case when in doubt Many reference books Many reference books  International guidelines  Ministry of Finance, Guidelines 1999 Many examples on applications within different other public sectors including the environmental area eg. Møller et al, 2000 Many examples on applications within different other public sectors including the environmental area eg. Møller et al, 2000

Important decisions Social perspective Social perspective  Include all relevant effects and resource use (cost)  Valued from a social perspective Long time horizon Long time horizon  Include long term consequences of the specified energy scenarios for one year e.g. 2010, 2020, 2050)  Analytical (scenario) horizon assumed to be one year  Consider the long term consequences of this year’s energy production Aim to express both the benefits and cost in monetary units (however, should also present intermediate results – eg. new cases of disease, life years lost, additional use of health services) Aim to express both the benefits and cost in monetary units (however, should also present intermediate results – eg. new cases of disease, life years lost, additional use of health services) Provide a transparent, comprehensive and reliable analysis Provide a transparent, comprehensive and reliable analysis In the following: Restricted focus on the cost and benefits relating to the health effects of pollution associated with changes in energy production In the following: Restricted focus on the cost and benefits relating to the health effects of pollution associated with changes in energy production

Additional incidence of diseases – new cases by sex and age Impact on health status: death, time with illness, QALY Additional use of resource: Hospitals, primary care, medicine, social service, voluntary services, time Value of avoided death, time with illness, QALY Productive time Consumption Unit cost per resource Net present value of the benefits Net present value of the resource use (costs) * ~ * ~

Which value ? Economic theory: Economic theory:  The opportunity cost i.e. the utility of the second best application of the resources  Valued from the perspective of society – usually as the aggregation of the values of each individual in the society  Marginal (inkremental) analysis i.e. the cost and benefit of the last unit/difference Difficult to make operational outside a perfect market situation Therefore often approximated as the long term average cost, i.e. variable cost with reasonable contribution to the fixed cost

Example A 55 year old man who becomes ill with a stroke and survive the immediate period A 55 year old man who becomes ill with a stroke and survive the immediate period Additional resource use Additional resource use  Hospital care in the immediate period (e.g. first 1 month)  Rehabilitation period (additional training)  Maintenance period (home improvement, ongoing support, GP and nursing service, medication, meals on wheels etc.) in own home  Admission to nursing home until rest of life time NPV of the additional resource use each year in the remaining life time (x euro per case with a specific age and sex group) NPV of the additional resource use each year in the remaining life time (x euro per case with a specific age and sex group)

Method - Register study Identify population with new disease and suitable controls Identify population with new disease and suitable controls Assess the expected life time with the disease Assess the expected life time with the disease Assess additional resource use (attributable cost= difference between diseased and controls) in each year Assess additional resource use (attributable cost= difference between diseased and controls) in each year  e.g. hospital, primary care and medicine  e.g. valuation through DRG-system, fees paid by primary care funding body, and pharmacy sales prices  NPV (Unit cost) per new case = Σ t qt * pt(q) * δt

Time cost of seeking treatment Patient and relatives Alternative cost Alternative cost  Value of missed employment: missed income (net of tax)  Leisure time: missed leisure time

Valuation of benefit - 1 Avoided death/life years lost/lost time without illness Avoided death/life years lost/lost time without illness  Different valuation methods  Contingent valuation  Discrete choice

Valuation of benefit - 2 Production loss Production loss  Human capital method: lost time => retirement age  Friction cost method: lost time => replaced at labour marked (6 mths)  Valuation: gross salary before tax  Note risk of double counting!

Valuation of benefit - 3 Future consumption (hospital and other resources) Future consumption (hospital and other resources)  People living longer have more consumption eg. food, housing, holidays  Represent a use of social resources  Arise in the gained life time

Deliverables Tables of aggregated NPV net benefit (cost) of new illnesses (defined by the WP3 group) by age and sex groups (as defined by the detailed CEEH model) under different sets of assumptions regarding discount rates Tables of aggregated NPV net benefit (cost) of new illnesses (defined by the WP3 group) by age and sex groups (as defined by the detailed CEEH model) under different sets of assumptions regarding discount rates Documentation of details in deriving such figures Documentation of details in deriving such figures Activities Activities  Register study  Survey of population values (health, life years /QALY gain)  Perhaps survey of population values of environmental consequences

Examples of earlier unit costs Frohn et al, PP-presentation, May 2007