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1 Cost-Effectiveness Analysis (CEA) Scott Matthews Courses: 12-706 and 73-359 Lecture 16 - 11/3/2003
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12-706 and 73-3592 Administrivia PS 3 due next Monday Presentation schedule check - Mon after thanksgiving instead?
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12-706 and 73-3593 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
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12-706 and 73-3594 CEA - Another Type of Model Last few lectures dealt with ‘solving’ problems with multiple (more than 2) “criteria” Recall criteria could be cost, social values, … Also dealt with formulating these problems In simpler models, what happens when we cannot/will not monetize all aspects? Example: what if we are evaluating options/policies with cost, a benefit is lives or injuries saved? Do we place a value on these benefits? Are there other ways to ‘solve’ this?
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12-706 and 73-3595 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’
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12-706 and 73-3596 Why CEA instead of CBA? Similar to comments on MCDM Constraints may limit ability to perform Monetizing maybe difficult or controversial Easy to find lives saved, hard to judge value Monetizing can’t capture total social value or distorts its value
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12-706 and 73-3597 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
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12-706 and 73-3598 An Obvious Example
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12-706 and 73-3599 Another Obvious One
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12-706 and 73-35910 Comments on Obvious Examples Each had 2 dominated alternatives Could easily identify best CE/EC option Also had fixed scale Fixed cost scale in first Fixed effectiveness in second
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12-706 and 73-35911 Interesting Example Is “Lowest CE ratio” best decision rule?
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12-706 and 73-35912 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
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12-706 and 73-35913 Sample Applications Cost-effectiveness of: New drug/medical therapies Pollution prevention Safety regulations CEA used frequently in biomed field Helps show ‘better’ drugs
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12-706 and 73-35914 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.
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12-706 and 73-35915 Incremental CE To find incremental cost-effectiveness : Sort alternatives by ‘increasing effectiveness’ CE = (TAC k – TAC k-1 )/( PE k – PE k-1 ) CE = incremental cost-effectiveness of Option k TAC = total annualized cost of compliance PE = effectiveness (e.g. benefit measure) Use zero values (if applicable) for base case
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12-706 and 73-35916 Incremental CE Example ** 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”
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12-706 and 73-35917 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).
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12-706 and 73-35918 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’
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12-706 and 73-35919 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?
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12-706 and 73-35920 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
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