Weissert 1 Cost-Benefit, Cost-Effectiveness Analysis, and An Application to Home Care William Weissert Professor and Chair Department of Health Management and Policy, School of Public Health University of Michigan Ann Arbor

Weissert 2 Outline Key concepts and examples –Types of cost-analysis An application of cost-benefit analysis to home care budgeting Take away points on Cost Effectiveness Analysis (CEA)

Weissert 3 Cost-Benefit Ratio $Cost Intervention - $Cost Comparison $Benefits Intervention - $Benefits Comparison

Weissert 4 Compared to What? What’s the intervention? Expanded home care benefits What’s the comparison group? Usual care –What they’re already getting: not nothing What’s the marginal cost? How much additional spending is made What’s the marginal benefit? What are the additional benefits –Over what they would have been without the intervention?

Weissert COST EFFECTIVENESS ADOPTCEA REJECT ADOPT? REJECT? ADOPT? REJECT? Source: Cliff Goodman, Lewin Assoc.

Weissert 6 Whose Costs, Who’s Benefits Patient Family Provider Medicaid Medicare or other payer Society at large

Weissert 7 Types of Economic Analysis Cost - Minimization: $ vs. $ (same outcome) Cost - Effectiveness: $/ Outcome units Cost - Utility: $/Quality units Cost - Benefit: $/$ or ($-$)

Weissert 8 Cost-Minimization Analysis (Hospvisits 2 *Hospcosts 2 )+(ERvisits 2 *ER$ 2 )+(OPvisits 2 *OP$ 2 )+ (HCvisits 2 *HC$ 2 )+(Trans 2 *Trans$ 2 )+(Nhadmits 2 *NHdays 2 *NH $/day 2 )+(Infhrs 2 *Inf$ 2 )+(DMEunits 2 *DME$ 2 )+(Prescribe 2 *Pres cribe$ 2 )+(Disposunits 2 *Disposunits$ 2 )+(Housingdays 2 *Housing $ 2 )+(Meals 2 *Meals$ 2 )+or(Copay 2 *Copay$ 2 ) + (NewTreat 2 *NewTreat$ 2 ) minus (Hospvisits 1 *Hospcosts 1 )+(ERvisits 1 *ER$ 1 )+(OPvisits 1 *OP$ 1 )+ (HCvisits 1 *HC$ 1 )+(Trans 1 *Trans$ 1 )+(Nhadmits 1 *NHdays 1 *NH $ 1) +(Infhrs 1 *Inf$ 1 )+(DMEunits 1 *DME$ 1 )+(Prescribe 1 *Prescribe $ 1 )+(Disposunits 1 *Dispos$ 1 )+(Housingdays 1 *Housing$ 1 )+(Mea ls 1 *Meals$ 1 )+or-(Copay 1 *Copay$ 1 ) equals Net cost difference (+ or -)

Cost-Minimization Example Weissert 10

Weissert 10 Cost-Effectiveness Analysis [(Hospvisits 2 *Hospcosts 2 )+(ERvisits 2 *ER$ 2 )+(OPvisits 2 *OP$ 2 )+(HCv isits 2 *HC$ 2 )+(Trans 2 *Trans$ 2 )+(Nhadmits 2 *NHdays 2 *NH$ 2) +(Infhrs 2 *Inf$ 2 )+(DMEunits 2 *DME$ 2 )+(Prescribe 2 *Prescribe$ 2 )+(Disposunits 2 *Dispos$ 2 )+(Housingdays 2 *Housing$ 2 )+(Meals 2 *Meals$ 2 )+or- (Copay 2 *Copay$ 2 ) +(NewTreat2*NewTreat$2)] minus [(Hospvisits 1 *Hospcosts 1 )+(ERvisits 1 *ER$ 1 )+(OPvisits 1 *OP$ 1 )+(HCv isits 1 *HC$ 1 )+(Trans 1 *Trans$ 1 )+(Nhadmits 1 *NHdays 1 *NH$ 1 )+(Infhrs 1 *Inf$ 1 )+(DMEunits 1 *DME$ 1 )+(Prescribe 1 *Prescribe$ 1 )+(Disposunits 1 *Dispos$ 1 )+(Housingdays 1 *Housing$ 1 )+(Meals 1 *Meals$ 1 )+or- (Copay 1 *Copay$ 1 )] divided by [Units of a Single Outcome 2 (such as %Satisfied or Days in Community) minus Units of the same Single Outcome 1 ] equals Net cost per increased unit of Same Single Outcome (+ or -)

Cost-Effectiveness Example Weissert12

Weissert 12 Measuring Utiles Utiles are usually measured in QALYs QALYs are Quality Adjusted Life Years – (1 year of life at full health minus adjusted for reduced quality) –e.g., if one year of full health equals 1 QALY –and having one ADL dependency reduces the value of life by 20% –then prevention of loss of independence in one ADL=.2QALY %reduction is arbitrary, or preference based –I used, 5ADL dependency=0 Quality of Life (0 QUALYs) May understate value of 5ADL dependent life - and thus overstates value of preventing a single ADL decline

Weissert 13 Cost-Benefit Analysis [(Hospvisits 2 *Hospcosts 2 )+(ERvisits 2 *ER$ 2 )+(OPvisits 2 *OP$ 2 )+(NHadmits 2 *NHdays 2 *NH$ 2 )+(Trans 2 *Trans$ 2 )+(Infhrs 2 *Inf$ 2 )+(DMEunits 2 *DME$ 2 )+( Prescribe 2 *Prescribe$ 2 )+(Disposunits 2 *Dispos$ 2 )+(Housingdays 2 *Housing$ 2 ) +(Meals 2 *Meals$ 2 )+or-(Copay 2 *Copay$ 2 ) +(NewTreat 2 *NewTreat$ 2 ) minus (Hospvisits 1 *Hospcosts 1 )+(ERvisits 1 *ER$ 1 )+(OPvisits 1 *OP$ 1 )+(NHadmits 1 * NHdays 1 *NH$ 1 )+(Trans 2 *Trans$ 1 )+(Infhrs 1 *Inf$ 1 )+(DMEunits 1 *DME$ 1 )+(P rescribe 1 *Prescribe$ 1 )+(Disposunits 1 *Dispos$ 1 )+(Housingdays 1 *Housing$ 1 )+ (Meals 1 *Meals$ 1 )+or-(Copay 1 *Copay$ 1 )] divided by [(Units of outcomeA 2 *$value per unit of outcomeA 2 )+(Units of outcomeB 2 *$value of outcomeB 2 )+ (Units of outcomeN 2 *$value per unit of outcomeN 2 ) minus (Units of outcomeA 1 *$value per unit of outcomeA 1 )+(Units of outcomeB 1 *$value of outcomeB 1 )+ (Units of outcomeN 1 *$value per unit of outcomeN 1 )] Outcomes are converted first to QALYs, Quality Adjusted Life Years (1 year of life at full health minus discount for reduced quality), then to $, e.g., if one year of full health is worth $200,000, and having one ADL dependency reduces the value of life by 20%, then prevention of loss of independence in one ADL=$40,000

Weissert 14 Value of Life Usually estimated by either human capital approach (lifetime earnings) but produces discrimination problems, or preferably willingness to pay (also called contingent valuation) – as revealed by extra pay for extra risky jobs, or population cost of life- saving products like air bags divided by lives saved in the population

Cost-Benefit Example 17Weissert

16 Discounting If costs and benefits flow over a different time, then discounting should be applied Often ignored on the assumption that most benefits are short term –Not a bad assumption in long-term care –Worse assumption for early prevention Requires applying a discount rate for each year of delay between costs and outcomes, –e.g. value of outcomes to come in 5 years might be discounted at 3%/year*5years –Or, if some costs or benefits are short term, and others long, apply discounting to both long term values

Weissert 17 An Application of Cost-Benefit Analysis to Home Care Budgeting

Problems with Home Care Not cost-minimizing –Utilization and cost results poor –Minimally reduced hospital use –Some nursing home reduction »But not enough to offset new costs –Net costs 15-20% higher Not cost-effective –Few outcome benefits, very high cost per benefit – No physical or mental benefits –ADL, IADL, activities, other measures – No increase in longevity – Contentment higher (though transient) in: »some patients »some family care-givers Weissert20

Weissert 19 Underlying Cause: Imperfect Agency Perfect agent requires: –Clear goals from principal –Good information Tools, procedures, resources, training, feedback –Appropriate incentives Rewards, constraints, sanctions

Observed Versus Predicted: Mean Rate of Hospitalization for Selected Subgroups  CharacteristicPredicted ActualRatio  Male  Age over  Human help toileting  Human help transfer  Human help eating  Human help w/mobil  Mental/Alz. dx  Respiratory dx  Nonhyperten. circ.dx Weissert32

Weissert 21 Resource allocation is random Figure 1. Per Capita Spending by Decile of Hospitalization Risk in ALTCS ’92-97

Weissert 22 Figure 2. Per Capita Spending by Decile of Nursing Home Admission Risk in ALTCS ’92-97

Weissert 23 Figure 3. Per Capita Spending by Decile of Risk of Death in ALTCS ’92-97

Weissert 24 Figure 4. Per Capita Spending by Decile of Functional Decline Risk in ALTCS ’92-97

Weissert 25 Reform Agenda: Improve Agency Clarify goals –Focus on patient specific outcome goals Improve information Provide risk assessment tools –Reduce false positives in selection Replace single, categorical eligibility with multistage process –Create demand for dose-response data Create incentives for efficiency, effectiveness –Impose budget constraint binding on every patient –Focus care planning on marginal benefit for marginal cost

Weissert 26 Effectiveness, Risk, Value (ERV) Budget Model Clarifies goals –Emphasizes patient-specific outcomes Accommodates broad range of outcomes Improves information –Provides better risk assessment methods –Employs two-stage needs assessment –Implies care plan evaluation criteria Creates incentives for marginal benefit- marginal cost trade-offs –Sets binding constraint on care plan costs –Shifts funds from low risk to high risk patients –Rewards improved effectiveness

Weissert 27 ERV Example for One Risk If… –Hospital risk for a given patient = 25%, and, –Cost of hospitalization would be = $10,000, and –Effectiveness of home care in mitigating hospital risk = 20%, –Then, monthly ERV= $500 »(500=.20*.25*10,000) Note incentives: – Higher effectiveness=more money –Spending reallocated to highest risk-benefit potential –Process, outcome evaluation criteria implied

Weissert 28 Some Case Examples

Weissert 29 Take-Away Points About Cost- Effectiveness Analysis Central purpose of CEA: –Compare relative value of marginal costs of new policy to marginal value of health benefits produced Specify all current costs and new costs For a single outcome, subtract old costs from new, and Subtract old benefit levels from new –Divide net cost by number of clients benefiting For multiple outcomes, convert all outcomes to QALYs QALYs must be valued to produce value of benefits CEA doesn’t render decisions, only input –Just trying it will improve your decision process Makes you clear about what you’re likely to get and costs –May help you think about what’s feasible and what’s not