2. Economics for Commissioning Angela Bate. IHS, Newcastle University UK

3. Session Outline Introduction to the concept of scarcity Introduction to the role of economics and economic principles in addressing and managing scarcity The application of economic principles to commissioning using programme budgeting and marginal analysis (PBMA)

4. Allocation of health care funds according to defined populations is a global phenomenon However, within a fixed funding envelope there are limited resources available (time, HR, money) to meet all need/demands/wants Scarcity Services = Claims on Resources Resources $

5. Scarcity

6. Recognising scarcity Decision makers (at all levels) have to make difficult choices about what (and what not), who and how to allocate resources to = priority setting and commissioning Whilst the aim of this is about maximising the amount of need met within a given funding envelope... …there are often more things (services/treatments) that will produce benefit than there are resources in the pot

7. Does the NHS manage scarcity? Managing scarcity through commissioning –PCTs are responsible for managing the local health care budget, and assessing population needs, purchasing and/or organising services to meet needs, and implementing national guidance = COMMISSIONING But how is commissioning happening? –How are competing claims on resources prioritised? –What structures are in place? –What frameworks or processes are in place? –What is the impact of health reforms?

8. Baltussen and Niessen, 2006

9. The Government response to scarcity 3 Global Phenomena: When in doubt, REFORM!

10. The Government response to scarcity 3 Global Phenomena: When in doubt, REFORM! and/or, CREATE A NATIONAL HTA BODY!

11. The Government response to scarcity 3 Global Phenomena: When in doubt, REFORM! and/or, CREATE A NATIONAL HTA BODY! But don’t, EXPLICITLY RECOGNISE SCARCITY AND MANAGE IT!

12. Addressing scarcity? Choices amongst competing claims on the limited resources must be made Non-economic approaches –unlikely to foster explicit comparisons of competing claims on resources in terms of their costs and benefits Economics is the study of choice –economic approach to priority setting may be useful

13. Economic approaches to managing scarcity International attempts to managing scarcity: –Cost Utility Analysis: NICE –QALY league tables: Oregon

14. Economic evaluation: CUA Comparison of two or more interventions or services on the basis of costs and benefits Benefit gained from one service is weighed out in comparison to benefit from alternative uses of resources Important tool but rarely provides the answer –Other issues in decision-making: equity, politics Incremental cost-effectiveness ratio (ICER) –Low cost per unit of benefit  ‘cost effective’ in allocative sense –Scarcity ignored

15. QALY league tables Ranking procedures based on marginal cost per QALY gained To produce more QALYs, items higher on list done in lieu of lower items –Assumptions underlying ratios not considered –Is QALY maximisation really the end goal? –Scarcity not fully considered

16. Economic approaches to managing scarcity International attempts to managing scarcity: –Cost Utility Analysis: NICE –QALY league tables: Oregon Economists have failed but economics has not!

17. Economics and scarcity “Economics is the study of how men and society end up choosing, with or without the use of money, to employ scarce productive resources that could have alternative uses, to produce various commodities and distribute them for consumption, now or in the future, among various groups in society. It analyses the costs and benefits of improving patterns of resource allocation.” (Samuelson, PA, 1976) Health economics study of health care choices and decisions.

18. Fundamental economic principles Resources are scarce. Every choice over the use of scarce resources has associated benefits and associated opportunity costs The objectives of any healthcare system are to maximise benefits and minimise the opportunity costs to society. Therefore resources should be deployed in such as way as to ensure efficiency in the choices made This means the costs and benefits of choices should be measured. This should be done at the margin Analysis at the margin accounts for opportunity costs and also the fact that benefits realised from the additional input of resources tend to increase at an ever decreasing rate according to the law of diminishing marginal returns

19. Principles I opportunity costs: = forgone benefits of the next best alternative use of resources in allocating resources to one option, some benefit will be lost because resources were not allocated to the forgone option goal is to minimise the opportunity costs

20. Principles II Efficiency: = The optimum social goal in any health care market can be defined as: maximise benefits and minimise costs. In allocating resources we can achieve efficiency by ensuring resources are deployed to maximise health gains to society. We can look at this two ways: Technical Efficiency - decisions to achieve certain objectives are taken as given; the problem is that there are different ways of achieving the same objective. The same group of people get care... a matter of how Allocative Efficiency - all objectives have to fight with each other; the problem is about whether (or how many) resources will be ALLOCATED to achieving each objective. One group of people will lose resources so that another gains

21. Principles III the margin: marginal cost = cost of one more unit of output marginal benefit = benefit from one more unit of output In allocating resources it is important to analyse the costs and benefits of any changes at the margin = marginal analysis

22. Principles IV Law of diminishing marginal returns: = Each extra unit of input yields less and less additional output In resource allocation terms: –the marginal benefits realised from additional units of input will diminish = diminishing marginal benefits –resources should be moved from programmes producing less marginal benefit per unit of cost to programmes producing more as the total benefit from the resources available would thus increase –this should continue until the marginal benefits per unit of cost produced by each programme are equal.

23. Illustration of principles

24. Application to beer Quantity of beer benefit

25. Application to beer Quantity of beer benefit

26. Application to beer Quantity of beer benefit

27. Application to beer Quantity of beer benefit

28. Application to beer Quantity of beer benefit Quantity of beer Marginal benefit

29. Cases detected and costs of cancer screening with six sequential tests (Neuhauser and Lewicki) No. of testsTotal cases detectedTotal costs ($)Av. costs ($) 165.946977,5111,175 271.4424107,6901,507 371.9003130,1991,811 471.9385148,1162,059 571.9417163,1412,268 671.9420176,3312,451 Application to health: individual

30. Incremental cases detected and incremental and marginal costs of screening with six sequential tests No. of testsMarginal cases detected Marginal costs ($)Marginal cost per marginal benefit ($) 165.946977,5111,175 25.495630,1795,492 30.458022,50949,150 40.038217,917469,534 50.003215,0244,724,695 60.000313,19047,107,214 Application to health: individual

31. Lets extend that thought and think about how to switch resources from the cancer programme into another programme Objective is to make the most of resources available by deploying them across programmes so that potential benefit is maximised An efficient allocation of resources is achieved when no switching of resources from one service to another will result in an increase of total benefit

32. Application to health: population Benefits/costs (£) Quantity of service AB

33. Treat those who benefit most first Benefits/costs (£) Quantity of service A B MB A

34. Benefits diminish for each additional person treated Benefits/costs (£) Quantity of service A B MB A

35. Continuous downward sloping ‘curve’ Benefits/costs (£) Quantity of service A B MB A

36. Same for programme B but a different slope Benefits/costs (£) Quantity of service A B MB A MB B

37. Equal marginal costs Benefits/costs (£) Quantity of service A B MB A MB B MC A,B

38. Where do we go from here? Benefits/costs (£) Quantity of service A B MB A MB B MC A,B Starting point for A Starting point for B

39. Move resources from B to A Benefits/costs (£) Quantity of service A B MB A MB B MC A,B Starting point for A Starting point for B

40. Move resources from B to A, until ratios are equal Benefits/costs (£) Quantity of service A B MB A MB B MC A,B Starting point for A Starting point for B MB A,B

41. Move resources from B to A, until ratios are equal Benefits/costs (£) Quantity of service A B MB A MB B MC A,B Starting point for A Starting point for B MB A,B

42. A marginal analysis of two health care programmes Using these data alone, how far would you go in provision of A and B? Marginal benefits and costs of two sub-programmes Sub-programme ASub-programme B UnitMarginal costs £ Total costs £ Marginal benefits £ Total benefits £ Marginal costs £ Total costs £ Marginal benefits £ Total benefits £ 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 10 20 30 40 50 60 70 80 35 30 25 20 15 10 5 0 35 65 90 110 125 135 140 20 40 60 80 100 120 140 160 60 50 40 30 20 10 0 60 110 150 180 200 210

43. A marginal analysis of two health care programmes You now have a fixed budget of £100. What is the optimal allocation of this £100? Combinations of sub-programmes within the budget constraint (A + B) 100 245 200 180 200 4545 65 0 2020 100 200 245 260 60 110 150 123123 140 135 110 864864 Total cost £ Total benefit £ Benefit £ UnitsBenefit £ Units Total programme Sub-programme BSub-programme A

44. A marginal analysis of two health care programmes You now have a fixed budget of £100. What is the optimal allocation of this £100? Combinations of sub-programmes within the budget constraint (A + B) 100 245 200 180 200 4545 65 0 2020 100 200 245 260 60 110 150 123123 140 135 110 864864 Total cost £ Total benefit £ Benefit £ UnitsBenefit £ Units Total programme Sub-programme BSub-programme A

45. A marginal analysis of two health care programmes Going back to previous slide, is there anything you notice about the marginal costs and benefits of the options? Marginal benefits and costs of two sub-programmes Sub-programme ASub-programme B UnitMarginal costs £ Total costs £ Marginal benefits £ Total benefits £ Marginal costs £ Total costs £ Marginal benefits £ Total benefits £ 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 10 20 30 40 50 60 70 80 35 30 25 20 15 10 5 0 35 65 90 110 125 135 140 20 40 60 80 100 120 140 160 60 50 40 30 20 10 0 60 110 150 180 200 210

46. A marginal analysis of two health care programmes Going back to previous slide, is there anything you notice about the marginal costs and benefits of the options? Marginal benefits and costs of two sub-programmes Sub-programme ASub-programme B UnitMarginal costs £ Total costs £ Marginal benefits £ Total benefits £ Marginal costs £ Total costs £ Marginal benefits £ Total benefits £ 1 st 2 nd 3 rd 4 th 5 th 6 th 7 th 8 th 10 20 30 40 50 60 70 80 35 30 25 20 15 10 5 0 35 65 90 110 125 135 140 20 40 60 80 100 120 140 160 60 50 40 30 20 10 0 60 110 150 180 200 210

47. Shifting resources using marginal analysis: Rule: If MBA/MCA > MBB/MCB… –Transfer resources from programme B to A –Getting more benefit for pound spent at the margin in A so take resources out of B and put into A –Continue until ratios are equal

48. Operationalising economic principles in practice: PBMA

49. PBMA PBMA: operationalises economic principles of opportunity cost and marginal analysis A way of organising information explicitly as an aid to decision making Framework assists in directing resources so impact of health care on health needs of popn is maximised Aids comparison of alternative uses of limited resources available Hands-on and requires multiple inputs to support decisions

50. PBMA: 5 questions PBMA addresses priorities form the perspective of resources: What resources are available in total? In what ways are these resources currently spent? What are the main candidates for more resources (growth areas) and what would be their effectiveness? Can any exiting services be provided as effectively but with less resources, so releasing resources to fund growth areas (technical efficiency)? Are there services which, despite being effective, should have less resources because a growth area is more effective (per £ spent)? (allocative efficiency)?

51. Summary There will never be enough resources to meet all unmet need/demands/wants Resources are scarce Choices have to made and managed Economics is discipline founded on explicit recognition of scarcity and should provide some theory and solutions PBMA provides a vehicle for opertationalising economic principles in a systematic yet pragmatic way There may be difficulties with data but decisions still have to be made