1. 1 Cost-Effectiveness Analysis Life Years Analysis Scott Matthews Courses: 12-706 / 19-702

2. 2 Admin  HW 5 Due Wednesday  Project 2 Coming soon.  Due Monday Nov 24 (2 weeks)

3. 3 Specifics on Saving Lives  Cost-Utility Analysis  Quantity and quality of lives important  Just like discounting, lives are not equal  Back to the developing/developed example  But also: YEARS are not equal  Young lives “more important” than old  Cutting short a year of life for us vs  Cutting short a year of life for 85-year-old  Often look at ‘life years’ rather than ‘lives’ saved.. These values also get discounted

4. 4 Simple Example

5. 5 Cost-Effectiveness Testing  Generally, use when:  Considering externality effects or damages  Could be environmental, safety, etc.  Benefits able to be reduced to one dimension  Alternatives give same result - e.g. ‘reduced x’  Benefit-Cost Analysis otherwise difficult/impossible  Instead of finding NB, find “cheapest”  Want greatest bang for the buck  Find cost “per unit benefit” (e.g. lives saved)  Allows us to NOT include ‘social costs’

6. 6 The CEA ratios  CE = C/E  Equals cost “per unit of effectiveness”  e.g. $ per lives saved, tons CO2 reduced  Want to minimize CE (cheapest is best)  EC = E/C  Effectiveness per unit cost  e.g. Lives saved per dollar  Want to maximize EC  No practical difference between 2 ratios

7. 7 Interesting Example

8. 8 Lessons Learned  Ratios still tend to hide results  Do not take into account scale issues  CBA might have shown Option B to be better (more lives saved)  Tend to only consider budgetary costs  CEA used with constraints?  Minimize C s.t. E > E*  Min. effectiveness level (prev slide)  Find least costly way to achieve it  Minimize CE s.t. E > E*  Generally -> higher levels of C and E!  Can have similar rules to constrain cost

9. 9 Sample Applications  Cost-effectiveness of:  New drug/medical therapies* very popular  Pollution prevention  Safety regulations

10. 10 Definitions  Overall cost-effectiveness is the ratio of the annualized cost to the quantity of effectiveness benefit.  Incremental cost-effectiveness is the difference in costs divided by the difference in effectiveness that results from comparing one option to another, or to a benchmark measure.

11. 11

12. 12 Incremental CE  To find incremental cost-effectiveness :  Sort alternatives by ‘increasing effectiveness’  TAC = total annualized cost of compliance  PE = effectiveness (e.g. benefit measure)  CE = (TAC k – TAC k-1 ) / ( PE k – PE k-1 )  CE = incremental cost-effectiveness of Option k  Use zero values (if applicable) for base case

13. 13 Incremental CE Example  Inc CE here only relevant within control categories (metals v. oils v. org’s)  ** Negative CE means option has more removals at lower cost  Source: US EPA Office of Water EPA 821-R-98-018, “Cost Effectiveness Analysis of Effluent Limitations Guidelines and Standards for the Centralized Waste Treatment Industry”

14. 14 Definitions (2)  Marginal cost-effectiveness refers to the change in costs and benefits from a one- unit expansion or contraction of service from a particular intervention (e.g. an extra pound of emissions, an extra fatality avoided).

15. 15 Why is CEA so relevant for public policy analysis?  Limited resources!  Opportunity cost of public spending  i.e. if we spend $100 M with agency A, its $100 M we cannot spend elsewhere  There is no federal rule saying ‘each million dollars spent must save x lives’

16. 16 Gray Areas  How to measure cost-effectiveness when there is a single project cost but multiple effectiveness categories  E.g. fatalities and injuries, CO 2 and SO 2  Alternatives:  Keep same cost, divide by each benefit  Overstates costs for each  Keep same cost, divide by ‘sum of benefits’  Allocate cost, divide by each benefit separately  Weight the costs and/or benefits  Will see this more in next lecture

17. 17 Another CEA Example  Automated defribillators in community  http://www.early-defib.org/03_06_09.html http://www.early-defib.org/03_06_09.html  What would costs be?  What is effectiveness?

18. 18 Value of Life Analysis Scott Matthews Courses: 12-706 / 73-359 / 19-702

19. 12-706 and 73-35919 “Value of Life”  Economists don’t like to say they put a value on life  They say they “Study peoples’ willingness to pay to prevent premature mortality”  Translation: “how much is your life worth”?

20. 20 WTP versus WTA  Economics implies that WTP should be equal to ‘willingness to accept’ loss  Turns out people want MUCH MORE in compensation for losing something  WTA is factor of 4-15 higher than WTP!  Also see discrepancy shrink with experience  WTP formats should be used in CVs  Only can compare amongst individuals

21. 12-706 and 73-35921 Economic valuations of life  Miller (n=29) $3 M in 1999 USD, surveyed  Wage risk premium method  WTP for safety measures  Behavioral decisions (e.g. seat belt use)  Foregone future earnings  Contingent valuation  Note that we are not finding value of a specific life, but instead of a statistical life

22. 12-706 and 73-35922 DALY/QALY measures  Disability adjusted life years or quality- adjusted life years  These are measures used to normalize the quality-quantity tradeoff discussed last time.  E.g., product of life expectancy (in years) and the quality of life available in those years.

23. 12-706 and 73-35923 Risk Analysis  Study of the interactions between decision making, judgment, and nature  Evidence : cost-effectiveness of risk reduction opportunities varied widely - orders of magnitude  Economic efficiency problems

24. 12-706 and 73-35924 Example - MAIS scale  Abbreviated Injury Scale (AIS) is an anatomically based system that classifies individual injuries by body region on a six point ordinal scale of risk to life.  AIS does not assess the combined effects of multiple injuries.  The maximum AIS (MAIS) is the highest single AIS code for an occupant with multiple injuries.

25. 12-706 and 73-35925 MAIS Table - Used for QALY Conversions Comprehensive Fatality / Injury Values Injury Severity1994 Relative Value MAIS1.0038 MAIS2.0468 MAIS3.1655 MAIS4.4182 MAIS5.8791 Fatality1.0

26. 12-706 and 73-35926 Sample QALY comparison  A: 4 years in a health state of 0.5  B: 2 years in a health state of 0.75  QALYs: A=2 QALY; B=1.5 QALY  So A would be preferred to B.

27. 12-706 and 73-35927 Cost-Effectiveness of Life-Saving Interventions  From “500 Life-saving Interventions and Their Cost-Effectiveness”, Risk Analysis, Vol. 15, No. 3, 1995.  ‘References’ (eg #1127) are all other studies  Model:  Estimate costs of intervention vs. a baseline  Discount all costs  Estimate lives and life-years saved  Discount life years saved  CE = C I -C B /E I -E B

28. 12-706 and 73-35928 Specific (Sample) Example  From p.373 - Ref no. 1127  Intervention: Rear outboard lap/shoulder belts in all (100%) of cars  Baseline: 95.8% of cars already in compliance  Intervention: require all cars made after 9/1/90 to have belts  Thus costs only apply to remaining 4.2% (65,900) cars  Target population: occupants over age 4  Others would be in child safety seats  What would costs be?

29. 12-706 and 73-35929 Example (cont)  1986 Costs (from study): $6 cost per seat  Plus added fuel costs (due to increased weight) = total $791,000 over life of all cars produced  Effectiveness: expect 23 lives saved during 8.4 year lifetime of fleet of cars  But 95.8% already exist, thus only 0.966 lives saved  Or 0.115 lives per year (of use of car)  But these lives saved do not occur all in year 0 - they are spread out over 8.4 years.  Thus discount the effectiveness of lives saved per year into ‘year 0’ lives..

30. 12-706 and 73-35930 Cost per life saved  With a 5% discount rate, the ‘present value’ of 0.115 lives for 9 years = 0.817 (less than 0.966)  Discounted lives saved =  This is basically an annuity factor  So cost/life saved = $791,000/0.817  Or $967,700 per life (in “$1986/1986 lives”)  Using CPI: 145.8/109.6 -> $1,287,326 in $1993  But this tells us only the cost per life saved  We realistically care more about quality of life, which suggests using a quality index, e.g. life- years saved.

31. 12-706 and 73-35931 Sample Life Expectancy Table 35-year old American expected to live 43.6 more years (newer data than our study) Source: National Center for Health Statistics, http://www.cdc.gov/nchs/fastats/lifexpec.htm

32. 12-706 and 73-35932 Cost per life-year saved  Assume average age of fatality in car accident was 35 years  Life expectancy tables suggested a 35 year old person would on average live to age 77  Thus ‘42’ life years saved per fatality avoided  1 life-year for 42 yrs @5%= 17.42 years (ann. factor)  $1993 cost/life-year = $1,287,326/17.42  With 2 sig. figures: ~$74,000 as in paper  Note $1,287,326 is already in cost/life units -> just need to further scale for life-years by 17.42

33. 12-706 and 73-35933 Example 2 - Incremental CE  Intervention: center (middle) lap/shoulder belts  Baseline: outboard only - (done above)  Same target population, etc.  Cost: $96,771,000  Incremental cost : $96,771,000 - $791,000  Effectiveness: 3 lives/yr, 21.32 discounted  Incremental Effectiveness: 21.32 - 0.817= 20.51  Cost/life saved = $95.98 million/20.51 = $4.7 million ($1986) => $6.22 million in $1993  Cost/life-year = $6.22 million/17.42 = $360,000

34. 12-706 and 73-35934 Overall Results in Paper  Some had $10B  Median $42k per life year saved  Some policies implemented, some only studied  Variation of 11 orders of magnitude!  Some maximums - $20 billion for benzene emissions control at tire factories  $100 billion for chloroform standards at paper mills

35. 12-706 and 73-35935 Comparisons

36. 12-706 and 73-35936 Agency Comparisons  $1993 Costs per life year saved for agencies:  FAA (Aviation): $23,000  CPSC (Consumer Products): $68,000  NHTSA (Highways):$78,000  OSHA (Worker Safety): $88,000  EPA (Environment): $7,600,000!  Are there underlying causes for range? Hint: are we comparing apples and oranges?