1. HEALTH ECONOMICS BASICS
M.MHLANGA

2. Learning objectives Principles of Health Economics
Meaning of a cost per QALY
Role of health economics in patient access to new medicines
Key challenges facing application of Health Economics

3. HEALTH ECONOMICS What is Health Economics? Why do we need it?
What is it?
Cost Effectiveness analysis
How is Health Economics applied in the NHS?
What is a Cost per QALY?
Calculating a cost per QALY
Health Economics
Key challenges
Recent Developments

5. Context: Provision of Health Care
3 distinct issues are raised when discussing the provision of health care:
Ageing population
New technologies
Patient expectation
UK has a tax-funded healthcare system and therefore finite resources
Key objectives of healthcare provider:
Ensure equality of access to healthcare
Generate the greatest health benefit from finite set of resource
Health economics provides the tools and the analytical framwork to address health objectives

6. What is Health Economics?
Study of the allocation of scarce resources
Health Economics
Economic principles applied to healthcare
Pharmacoeconomics
Economic principles applied to drug therapy
Economic Evaluation
main decision making tool in economics
Economic evaluation is about efficiency and is: ‘the comparative analysis of alternative courses of action in terms of both their costs and consequences’ (Drummond, 1997)

7. Types of economic evaluation
Cost minimisation analysis
Equal outcomes / clinical benefit assumed
Which has lowest overall total costs?
Cost Benefit analysis
Both costs and outcomes expressed in monetary value
Difficult to value all health benefits in monetary terms
Cost Effectiveness analysis
Outcomes expressed in natural units
Cost per “% drop in blood pressure” / SRE avoided / cure
Cost Utility analysis
Outcomes expressed in QALYs
Cross disease comparisons possible
What NICE use!
Considered current gold standard measure

8. Principles and methods of Cost Effectiveness analysis
Gold standard method:
Cost Utility analysis which utilises the “cost per QALY” or “incremental cost per QALY” (ICER)
Methodology to formally evaluate the value for money of a given healthcare technology
Value for money = “Efficiency”
A misunderstood phrase……

9. What is efficiency?
“Government announces reduction in number of civil servants, saving £50m as part of drive for greater efficiency”
“Payment by Results may reduce total costs of delivering healthcare thus improving the efficiency of the NHS”
Statements ignore impact on outcomes
E.g. PBR could reduce costs but increase mortality, is this efficient?
”Cost-reducing” is not the same as efficiency!!
Only if achieve same outcomes from reduced resources = improved efficiency.
Need to synthesise both costs and outcomes to evaluate value for money
Cost effectiveness analysis

11. The cost-effectiveness plane
£40,000
Area of rejection
Incremental Costs
Willingness to pay threshold
£30,000 A
£20,000
Area of acceptance
£10,000 B
0.5 1
1.5 2
Incremental Drug Benefit (QALYs)
HCMR00008 / Date of Preparation October 2009

12. Cost Effectiveness Threshold
Defines how much society is “willing to pay” to obtain a gain in health outcome (1 additional QALY)
Too high: displace more CE interventions with greater health benefit for same money
Too low: inhibit health improvements / innovation

13. What is a Cost per QALY? Quality adjusted life year”
Way of capturing Quality of Life in Cost Effectiveness Analysis
Measured on a scale of 0 to 1
1 = Perfect Health
0 = Death
Negative values possible
Captured through patient reported generic quality of life instruments
EQ-5D, SF-36
Can be applied across all disease areas and variety of health states

14. Cost per QALY
Standardised measure to assess the value for money of a health intervention
“How much additional NHS money is required to produce an additional QALY using the intervention under question?”
Cost per QALY is therefore a COMPARATIVE measure
Additional costs and benefits relative to chosen comparator

15. Calculating a Cost per QALY:
(Total Costs Drug A) – (Total Costs Drug B)
(Total QALYs Drug A) – (Total QALYs Drug B)
(Total Costs Drug A) – (Total Costs Drug B)
(Total QALYs Drug A) – (Total QALYs Drug B)
Total Cost = Drug cost + NHS Resource costs
Total QALY = (Survival)*(Utility score)
Period of survival is often stratified into discrete “health states”
Response versus Progression
Cure versus Active disease
HCMR00008 / Date of Preparation October 2009

16. The Cost per QALY, an example.
Current Practice
New Drug
Difference
Total NHS Cost
per patient
£10,000
£18,000
£8,000
Total QALYs
6.20
6.90
0.70
Cost Per QALY
£11,429
“How much additional cost is required to generate an additional quality adjusted life year compared to current practice?”
HCMR00008 / Date of Preparation October 2009

17. What influences Cost per QALY?
Drug Price
Patient Survival
Patient Quality of Life
Related NHS resources
Drug Administration
Nurse / Pharmacy time
Side Effect management
Medical Supplies
We can not judge the merits of treatments in isolation from current alternatives

18. Health care: Costs Three goals guide the health care delivery system :
Quality
Access
Cost Containment

19. Health care: Costs Increase the quality of health care.
This is an expensive proposal because of:
Greater demand for health care (aging population).
Greater demand for “exceptional” health care.
Greater regulatory control over health care.
Increase access to health care (universal health care).
This proposal will be difficult to implement because:
The functional needs of society require a competitive marketplace.
Powerful segments of the economy have a vested interest in maintaining the status quo.
Cultural expectations favor self-sufficiency.

20. Health care: costs Proposed Solutions to Improving Health Care
Reduce the costs of health care by:
Reducing services to patients.
People are demanding more, not fewer services.
Instituting cuts in the prices we pay for health services.
This option sounds popular to the public, but is the least promising approach to cutting costs.
If profits to pharmaceutical companies were reduced by 50 percent, for example, health care expenditures would decrease by less than 1 percent because expenditures for medicines, although very high, represent a small percentage of total health care costs.
It would be difficult to lower salaries for physicians, nurses, technicians, and other highly trained staff.