1. AGEC 608 Lecture 17, p. 1 AGEC 608: Lecture 17 Objective: Review the main aspects of cost- effectiveness analysis (CEA) and cost-utility analysis (CUA). Readings: –Boardman, Chapter 17 Homework #5: Chapter 13, problem 3 Chapter 14, problem 3 Chapter 17, problem 1 due: next class - April 24

2. AGEC 608 Lecture 17, p. 2 Cost-effectiveness analysis Cost effectiveness analysis (CEA) compares (mutually exclusive) alternatives on the basis of the ratio of their costs and a single (but not monetized) effectiveness measure. Most useful when outcomes can be quantified but not easily converted to dollar terms.

3. AGEC 608 Lecture 17, p. 3 Cost-utility analysis Cost-utility analysis (CUA) usually relates costs to a benefit construct consisting of (usually two) benefit categories reflecting both quantity and quality. Again, most useful when outcomes can be quantified but not easily converted to dollar terms, and where outcomes have both a quantity and quality aspect: Example: length and quality of life quality-adjusted life years (QALY) CUA is closer to CBA than CEA

4. AGEC 608 Lecture 17, p. 4 Cost-effectiveness analysis CEA involves two metrics: cost measure of effectiveness As a result, one cannot obtain a single measure of social net benefit, only the ratio of the two. Two approaches: CE i = C i /E i (avg cost per unit of effectiveness) smaller is better EC i = E i /C i (avg effectiveness per unit cost) larger is better

5. AGEC 608 Lecture 17, p. 5 Cost-effectiveness analysis CEA is a measure of technical efficiency: ratio of input to output, or ratio of output to input Not a good measure of allocative efficiency: “is this the best use of scarce resources?”

6. AGEC 608 Lecture 17, p. 6 Measurement of costs Measures of costs in CEAs are highly variable. Although it is preferable to include all social costs in a CEA, the costs that are constant across alternatives will not change the rankings, only the CE ratio. CEA may not give the same ranking as CBA.

7. AGEC 608 Lecture 17, p. 7 Omitted impacts Most CEAs only include “budgetary” costs. CEA considers only one measure of effectiveness, but some interventions may have multiple impacts. Example: new drug development may save lives and also produce fewer side effects. Adjusted CE ratio: ACE = social costs – other social benefits effectiveness

8. AGEC 608 Lecture 17, p. 8 Scale issues CEAs do not take into account different scales of projects If all alternatives have the same cost, or if all alternatives have the same level of effectiveness, then this will not matter. But if scales differ, it is impossible to say which project is best. See Table 17.3

9. AGEC 608 Lecture 17, p. 9 Constraints in CEA One way to account for scale in a CEA is to impose a constraint on the project, e.g. maximum cost or minimum effectiveness. Alternatives: Minimize cost subject to effectiveness target Maximize effectiveness subject to budget constraint See Table 17.4

10. AGEC 608 Lecture 17, p. 10 Cost-utility Analysis Most often used in the area of health care Common measure of effectiveness: quality-adjusted life years (QALY) QALY combines notion of health status (quality) and years of life (quantity) Ambiguities still arise: see Table 17.5

11. AGEC 608 Lecture 17, p. 11 QALY Three common approaches: 1. Health rating method experts or others assign scores 0-1 to various states 2. Time trade-off method respondents rank length and quality of life combinations 3. Standard gamble method decision tree with alternatives (see Figure 17.2)

12. AGEC 608 Lecture 17, p. 12 Caveats on CUA Two main problems: 1. Discounting is problematic can’t tradeoff health now and later 2. Methods are based on questionnaires sample selection, framing bias, etc.

13. AGEC 608 Lecture 17, p. 13 Phamacoeconomics Use of economic methods to evaluate pharmaceutical products. Amount spent on drug development is large and growing… Funds for drug development are often public funds… How to decide how to allocate scarce resources? CEA and CUA often used.

14. AGEC 608 Lecture 17, p. 14 League Tables CEA and CUA usually compare mutually exclusive alternatives (drug A vs. drug B) How to compare non-exclusive alternatives? (e.g. policies aimed at saving lives in general) League tables rank multiple CEAs or CUAs that share a common cost-effectiveness measure. They can be used to compare investments in different kinds of health treatments. Cost per life saved (Morrall): steering column regulation ($160,000) cattle feed regulation ($212 Million)

15. AGEC 608 Lecture 17, p. 15 CEA vs CBA CEA does not measure allocative efficiency CEA is closest to CBA when: 1. All social costs are included 2. The measure of effectiveness capture all benefits 3. Alternative projects are of similar scales