Health Economics & Policy 3 rd Edition James W. Henderson Chapter 4 Economic Evaluation in Health Care

The Inevitability of Trade-Offs l The value of a medical intervention l The inclusion of a drug on the formulary l Paying for an experimental procedure l Investing in new technology l Is it worth it? How do we measure value to insure we get value for spending?

Economic Evaluation l Reality of opportunity cost l Useful alternatives compete for resources l Making choices is sometime unpleasant l Options for colorectal cancer screening –Fecal blood test –Barium enima –Sigmoidoscopy –Colonoscopy l Is it worth the extra money?

What is Economic Evaluation? l A comparative analysis l Evaluating alternative courses of action l Examining both costs and consequences –Identify –Value –Measure –Compare

Types of Economic Evaluation l Cost of illness studies l Cost-benefit analyses l Cost-effectiveness studies

Cost of Illness Studies l What does it cost? l Burden of a disease l Burden of 5 chronic conditions in US (Druss et al., 2001) –Mood disorders, diabetes, heart disease, asthma, and hypertension –Direct cost of treatment - $62.3 billion] –Cost of treating coexisting conditions - $270 billion –Lost productivity - $36.2 billion l Role in analysis – increased awareness

Cost-Benefit Analysis l Simple extension of capital budgeting l Developed to help public sector make decisions that maximize public welfare from tax spending l Optimization in the absence of market pressure

Benefit-Cost Criterion l If ratio is greater than one, project is acceptable l If net benefit stream is positive, project is acceptable.

Challenges of Cost-Benefit Analysis Challenges of Cost-Benefit Analysis l Valuing benefits –How do you place a value on a human life? –Willingness-to-pay approach l When applied to health depends on –wealth –life expectancy –current health status –possibility of substituting current consumption for future consumption l Choosing a discount rate

Cost-Effectiveness Analysis l Developed outside traditional welfare economics framework l Measures health benefit by health outcome, not the dollar value of life l Using the decision makers approach –Maximize the level of health for a given population subject to a budget constraint –Practical guide for choosing between programs or treatment options when budgets are limited

Incremental Cost-Effectiveness Ratio l If C A > C B and E A C B and E A < E B, B dominates. l If C A E B, A dominates. l If, however, C B > C A and E B > E A, choice is not obvious. Use CE.

Graphical Presentation of CE

Interpretation of CE Graph l Strategies that form the solid line connecting the points lying left and above are the economically rational subset of choices l Points like C and E are strictly dominated alternatives l The inverse of the slope between any two points represents the incremental CE ratio l As the slope gets flatter, the CE ratio gets higher – giving literal meaning to “flat-of-the-curve”

Measuring Costs l Direct – associated with use of resources –Medical –Non-medical l Indirect – related to lost productivity –Medical –Non-medical l Intangible – associated with pain and suffering, grief, anxiety, and disfigurement

Measuring Effectiveness – Improvements in Health l Surrogate measures stated in terms of clinical efficacy –Blood pressure, cholesterol levels, bone mass density, or tumor size l Intermediate measures stated in terms of clinical effectiveness –Events, scores on exams l Final outcomes measure economic effectiveness –Events avoided, disease-free days, life-years saved, quality-adjusted life years saved

Improved Life Expectancy Due to Clinical Treatment

Quality of Life Measures l Attempt to measure value of life in terms of quality and quantity l View QALY as life expectancy with a preference weight for perfect health attached to each year l Measured on a preference scale anchored by death (0) and perfect health (1)

Calculating QALYs Using Preferences for Health States

Standard Time Trade-Off for Calculating QALYs l Standard time tradeoff offering 2 options: –chronic health state i for t years, followed immediately by death –Perfect health for x years (where x is less than t), followed immediately by death l Vary length of x until individual is indifferent between two options l Value of one year in chronic health state is x/t

Standard Gamble for Calculating QALYs l Direct approach based on fundamental axioms of utility theory –A treatment is available for individuals in chronic disease state –When it works, the treatment provides a permanent cure. When it does not work, the result is immediate death –How high does the risk of dying have to be before the patient refuses treatment? –The utility value of each year in the chronic disease state is equal to the associated probability that the treatment works

Performing an ICER l Rank the alternative treatment options by health benefit (beginning with the one with the lowest benefit). l Eliminate treatment alternatives that are strictly dominated. l Calculate the ICER between each treatment option and the next most expensive option. l Eliminate treatment options that display extended dominance. l Determine which treatment options have an ICER that is below the cut-off ICER.