1. Dr Rakesh Kumar Moderator- Dr PR Deshmukh
Cost Analysis
Dr Rakesh Kumar
Moderator- Dr PR Deshmukh

2. Framework Introduction What is cost analysis and economics analysis
Uses of Cost- Analysis
Steps in Cost- Analysis
Planning a cost analysis study
Calculating costs 
Measuring outcomes
Applying cost analysis methods
Analysis, interpretation & presentation
Strengths and limitations of cost- analysis
References

3. Some Questions ???
What has been expenditure and revenues on a project ?
What are the trend?
Does expenditure compares with the budget?
Distribution of costs
What is the average cost of providing a service?
Service type or activity
Facility or location
Input category

4. What is Cost Analysis Definition:-
It is the element-by-element examination of the expenditure to determine how resources have been spent.
A critical process needed to solve management problems
Helps to understand how funds have been used
Guides in optimal utilization of scarce resources

5. Uses of Cost Analysis Accountability- Keeping track
Assessing Efficiency
Assessing Equity
Assessing Priorities
Making cost projections
Considering cost recovery
Do not waste resources;
Produce each output at least cost;
Produce the types and amounts of output which people value most.

6. Economical And Financial Cost Analysis
Variable
Financial analysis
Economic analysis
Costs
Monetary cost.
Economic (“opportunity”) cost.
e.g, actual monetary payments for human resources, materials, or infrastructure
e.g, volunteer workers and donated goods
Valuation using market interest rates.
Valuation using a discount rate
Outcomes
Income; expenditure; cash flow; profit; end-of-period balance; internal financial rate of return; net present financial value.
Benefit–cost ratio; internal economic rate of return; net present value.
Financial consequences
Resource consequences

7. Steps for Cost-Analysis
Research Question
Plan Cost- Analysis study
Setting scope of study
Deciding on time trend
Selecting sample
Drawing iternary & checklist
Cost estimation
Identification and choice of costs
Quantification of costs
Valuation of costs
Adjustment for differential timing
Impact estimation
Identification and choice of impacts
Quantification of impacts
Valuation of impacts
Adjustment for differential timing
Types of Economic Evaluation
Cost of illness
Cost minimization
Cost-effectiveness
Cost-utility
Cost-benefit
Cost of Illness
Medical care for prevention
Medical care for treatment
Social services for rehabilitation
Productivity loss
􀃋Prevention
􀃋Treatment
􀃋During rehabilitation
􀃋From decreased workplace productivity as a result of the disease and death
Examples of Cost of Illness
What does cancer cost the United States?
What does heart disease cost the United States?
What does blindness cost the world?
Just because something has the highest cost of illness does not imply that it necessarily should have the most resources directed toward research or cure
􀃋Depends on how much it will cost to do something about it
Cost Minimization
Known and fixed objective
At least two ways of achieving the objective
Calculate the cost of the different methods of achieving the objective
Determine which alternative costs the least
Cost Minimization Example
Goal of eliminating incident cases of polio
􀃋Is it achievable?
􀃋If so, should we continue mass vaccinations or use targeted vaccination policies?\
These studies are difficult because they don’t focus on partial outcomes
􀃋Need a high degree of certainty that outcome can be obtained or else these studies are not particularly helpful
Cost-Effectiveness
Compare costs of at least two alternatives
􀃋Generally best if there is a single primary effect
Compare difference in costs with difference in effects
Outcomes can remain as clinical or even intermediate outcomes
􀃋Example—dollars per case of blindness averted or dollars per migraine avoided
Cost Effectiveness
Costs—dollars
Consequences—non-monetary unitsMortality/morbidityOnly compare programs with similar outcomes
Suitability of Cost-Effectiveness Studies
There is a single outcome associated with a condition
There is not enough information to assign a value to the outcome
􀃋Difficulty of asking nursing home residents about the quality of their own lives
Cost-Utility
Cost-effectiveness with a twist
Outcome is quality adjusted life year
Quality adjusted life year combines morbidity and mortality
Suitability of Cost-Utility Studies
There are morbidity and mortality effects
There are multiple types of morbidity effects
Health related quality of life is the primary outcome of interest in the first place
Cost- Benefit analysis
Net benefit is final productDifference between valuation of benefits and costs
Unique feature that can indicate explicitly whether benefits outweigh costs
Ratio of net benefit to dollars spent (rather than benefit to dollars spent) is sometimes used to rank programs
Value everything in terms of dollars
􀃋Not just costs avoided
Subtract costs from dollar value of benefits to obtain a measure of net benefit
Unique ability to determine whether or not a program is better than existing alternatives
Appropriate cost analysis methods
Assessment of Impact of uncertainty
Analysis, Interpretation and Presentation

8. Planning Cost- Analysis Study
Setting scope of study
Deciding on time trend
Selecting sample
Drawing iternary & checklist

9. Cost- Estimation Identification of main costs and their sources
Quantification of costs
Valuation of costs and discounting.

10. Identification of costs and their sources
Intervention
Direct Cost
Indirect Costs
Wider cost implications to society
eg. lost production.
Time receiving medical care
Non-health services Eg. Patient transportation,
Administration
Research & Development
Health services resource use. Eg. Inpatient, outpatient, tests, drugs
Costs to family
and friends.
Perspective is important
Range of costs justified by perspective 93

11. Sources of cost data Routine Information Survey :
Market prices & Labor statistics
Periodic information sources-
contracted company,
government ministry or
NGO
Specialist surveys or studies
Household surveys
scientific studies
Expert opinion
Before beginning a cost analysis, the availability of data from different sources should be
assessed. The information that should be collected is actual expenditure rather than planned
expenditure because this information shows what was actually spent rather than allocated. 12
Usually the information on expenditures will need to be obtained from more than one set of
accounting records. Some of the information is likely to be available from the central MOH
offices. For example, data on personnel salaries may be available at one of the central MOH
offices. Other information such as expenditures on transport and supplies may only be available
at regional or district offices. The data will need to be collected at either health management
offices or at facilities.
Other information such as the time that personnel spend on immunization services can be
obtained either through direct observation of health workers as they work or through conducting
interviews with these persons.
Some field visits to regional and district facilities should be conducted to verify the information
that is provided at the central level.
During the assessment of available financial data, inadequacies in the existing data are sure to
become apparent. This is because the structure of financial systems is not usually set up for
estimating program costs, but rather for checking that funding is being received and dispersed.
These systems do not usually categorize expenditures by the activity for which they are being
used. In addition, they usually record expenditures but not the value of the resources that were
used in a specific time period. As a consequence, it will be important to examine how to best
reassign the accounting data so that they can be used to calculate costs. 93

12. Quantification of cost data
Need to quantify resource use in appropriate physical and natural units
hours, days, miles etc
Direct costs are mostly assessed, and categorised as:
Capital costs (buildings, equipment)
Overheads (jointly used resources, such as heating and lighting, administration and catering)
Labour (medical and non-medical staff)
Consumables (disposable items, such as drugs, bandages etc)
Need to distinguish between fixed, variable and total cost, and average, marginal costs and incremental cost 93

13. Fixed, variable and total cost
Total cost: all costs incurred while
producing a service
Cost
Variable cost : vary with level
of service. E.g. consumables
Fixed cost - do not vary with
quantity in short run e.g. Capital costs
Quantity 93

14. Average and marginal cost curves
cost of producing an extra unit
Average cost
cost per unit of output
Marginal costing examines the additional cost incurred for the production of one additional unit
of output. For example, the cost of increasing immunization coverage by one percentage point
can be estimated. This information informs program managers or policymakers of how much it
will cost to reach a goal of increasing coverage or reaching more children in harder-to-reach
areas. In addition, it will provide information on whether costs will increase, stay the same, or
decrease as coverage increases. This relationship can change over time since marginal costs may
decline as fixed costs are shared as more immunization services are provided, and then increase
as more immunizations are provided in hard-to-reach areas.
Quantity 14

15. Marginal versus incremental cost
TC of Prog A
Cost
TC of Prog B
ICA-B, Q
MCA, Q Q
MCB, Q
Incremental or additional costing analyses should be used by program managers when they want
to estimate the cost of adding an activity to their program. This analysis provides information on
the extra costs of changing program activities or adding additional activities to existing ones.
Program managers may do incremental costing in order to make decisions about the benefits and
costs of undertaking additional activities, such as introducing auto-destruct syringes or
introducing Hepatitis B vaccine to the existing program. This cost information can be used to
make informed decisions about future costs to the program as a whole.
Calculation of average incremental costs is also useful when comparing program options. That is,
a program manager may want to compare the incremental cost of introducing auto-destruct
syringes or a new vaccine at different levels of coverage. In making these estimates, a program
manager can anticipate some of the additional costs that could be incurred if coverage changes. It
is also possible that the average incremental cost will decrease if such factors as vaccine wastage
decline as coverage increases.
It is preformed for greater insight and a more meaningful comparison in clinical
economics. These evaluations determine the extra cost per extra unit of outcome when
switching from one health care alternative to another. 76
Marginal cost effectiveness refers to the change in cost and health benefit from a one unit
expansion or contraction of service from particular health care intervention (e.g. an extra
day in hospital or extra dose of medication per day).
Incremental cost-effectiveness represents the change in costs and health benefits when one
health care intervention is compared to an alternative one (e.g. outpatient surgery vs.
short-stay surgery).
Quantity 93

16. Discounting
To allow for differential timing of costs (and benefits) between programmes all future costs (and benefits) should be stated in terms of their present value using discount rate
Prefer to have benefits now and bear costs in the future – ‘time preference’
‘Rate’ of time preference is termed ‘discount rate’ 93

17. Discounting example 93

18. Valuation
Resources should be valued according to their opportunity cost
Method of valuation needs justification
(Market prices or ‘Shadow’ price )
Health care provision is rarely subject to market valuations
Alternative ‘shadow’ prices may need to be used
Unit cost data may need to be adjusted for
Price inflation (costs from different years)
weighted average of Pay Cost Index (PCI) and Health Service Cost Index (HSCI)
International currencies (costs from different countries)-
Purchasing Power Parities (PPPs) and exchange rates
PPPs are more appropriate
than exchange rates as these eliminate the difference in price levels between countries 93

19. Measuring Outcome/ consequences
Identification
Depends upon viewpoint (govt., societal )
Depends on the objective of the evaluation
Measurement-
Measure outcome in natural physical units
Valuation- in terms of:
Utility (eg QALY)
Money (eg WTP) 93

20. Cost Analysis Methods Cost-effectiveness analysis (CEA):
Cost-utility analysis (CUA)
Cost-benefit analysis (CBA):
Cost-of-illness analysis:
Cost-minimization analysis:
Cost-consequence analysis:

21. Cost-Effectiveness Analysis
A comparison of costs in monetary units with outcomes in quantitative non-monetary units, e.g., reduced mortality or morbidity
Target and output indicators pre-decided
Most appropriate if the important outcome is uni- dimensional
Compare costs of at least two alternatives
Cost- Effectiveness Ratio:
CE Ratio = ($ Cost Int - $ Cost Comp) / ($ Effect Int - $ Effect Comp)
For example: “$45,000 per life- year saved” or $10,000 per lung cancer case averted”
1.9 When to Use Which Technique
When should one use which technique? Cost-effectiveness analysis is only suitable to compare programs that have homogeneous outcomes and where there is a clearly dominant outcome of primary interest. This requirement is often quite restrictive, as noted earlier in the context of the desperate health initiatives being considered by the Committee. It may not be unreasonable, however, in comparing different kinds of live-saving programs (e.g. kidney dialysis and transplantation, emergency air ambulance system, trauma care), by using lives saved, or more likely, life years gained as the common measure of effect. However, even this is problematic if any of the programs have an effect on quality of life as well as quantity of life.
When there are multiple outcomes or when there are significant consequences related to both quantity and quality of life, cost-utility or cost-benefit may be the preferred analysis in order to be able to make broader comparisons. However, both of these techniques pose significant measurement challenges in valuing the outcomes. Cost-utility analysis, until recently, required the analyst to measure the preferences for each study using the standard gamble or some alternative time-consuming procedure. Recently, with the development of pre-scored multi-attribute health status classification systems (eg. Quality of Well-Being, Health Utilities Index, EuroQol) the task has become easier, but one still has to select the appropriate system for the problem at hand. Cost-benefit analysis requires the analyst to measure the preferences using Willingness-To-Pay (WTP; see next page), and the methods are not yet well developed in health-care applications.
Cost-benefit and cost-utility analysis have different theoretical roots. Cost-benefit analysis is derived directly from welfare economics and the Kaldor-Hicks Potential Pareto criterion that sets as a goal maximizing net benefit (benefit - cost). Cost-utility analysis can also be linked to a welfare economics foundation (Garber et al., 1996), but more commonly it is seen as founded on an extra-welfarist approach where the goal of the health system is seen as maximizing health as measured in QALYs (Culyer, 1989).
Click on the image for a technical note about the different viewpoints of economic evaluations
Click on the image for a technical note about the use of discounting in economic evaluations
Because of the different viewpoints as well as the different ways to measure and value consequences, it is useful to view the various costs and consequences of health care programs as building blocks, which can be assembled in the evaluation in different ways. We will look at this on the next page.
Cost-effectiveness analysis (CEA):
benefits from a decision60 Cost-effectiveness analysis assumes that a certain benefit or
and effects of a particular economic action. It is a way to measure the costs and the
Cost Effectiveness analysis looks at economic decision making to weigh up the costs
The assessment of effectiveness mainly depends on the pre-decided target and output
􀂾 Method of doing cost effectiveness analysis61
outcome is desired, and that there are several alternative ways to achieve it.
in combination, with respect to the counterfactual case that those interventions are not in
1) The costs and health benefits of a set of related interventions are evaluated, singly and
indicators, during the planning of the program. Generalized CEA does this in two ways:
place (a reference situation referred to as the null scenario).
traditional league table approach.
very cost-effective, cost-ineffective, and somewhere in between rather than using a
2) Cost effectiveness analysis results are used to classify interventions into those that are
2) Real is modified (cases) by total load (all case –utilization).
1) Potentional is possible modification (cases) by total load (all case –utilization).
The effectiveness could be calculated in traditional way:
Effectiveness is the extent to which objectives appear to be attended and the target
of interventions, but considers only the efficiency of small changes (usually increases) in
Traditional cost-effectiveness analysis does not evaluate the efficiency of the current mix
met.
one but avoids the question of whether the current procedure was worth doing, implicitly
usual care). This shows whether a new procedure is more cost-effective than the existing
resource use at the margin (i.e. the starting point for analysis is the current situation of
taking it as given that something would have to be done in that particular area.
of interventions to be included in the analysis, including a clear description of the target
1. Specification of interventions: The first step involves the specification and definition
􀂾 Calculating cost –effectiveness analysis by ‘WHO Choice’(figure 9)63
different interventions is measured in terms of DALYs averted per year, relative to the
2. Contextualization of intervention effectiveness: The population-level impact of
population, population-level coverage and where applicable, the treatment regimen.
situation of no intervention for the disease(s) or risk factor(s) in question. Key input
State Valuations ( HSV) the valuation of time spent in a particular health state, such as
epidemiological rates (incidence, prevalence, remission and case fatality) and Health
parameters underlying this include the population's demographic structure,
epidemiological sub-regions of the World have been expressed in international
4. Contextualization of intervention costs: Intervention costs at the level of
being blind or having diabetes, relative to full health.
dollars (I$). This captures differences in purchasing power between different
also be expressed in local currency units, which can be approximated by dividing
inappropriate using official exchange rates. For country-level analysis, costs would
countries and allows for a degree of comparison across sub-regions that would be
existing cost estimates by the appropriate purchasing power parity exchange rate. A
cost of an outpatient attendance). In addition, the quantities of resources consumed
specific resource inputs in the Cost-it template (e.g. the price of a drug or the unit
more accurate and preferable method is to substitute new unit prices for all the
can easily be modified in line with country experiences (reflecting, for example,
structures, effectiveness levels and unit costs and quantities. This provides country
5. It requires minimum adjustments, limited to adjusting population numbers and
differences in capacity utilization).
such data at a national level, it may be necessary to use expert opinion for this task. The
population health if they were undertaken efficiently. Depending on the availability of
policy-makers with the ideal mix of interventions – the mix that would maximize
WHO-CHOICE database can be contextualized to the country level in three ways. 58
scarcity of health personnel. In this case, the analysis would need to ensure that the
6. The second steps allow the analyst to capture some local constraints – for instance,
7. Modify the analysis assuming according to the current levels of capacity utilization in
available supply.
personnel requirements imposed by the selected mix of interventions do not exceed the
the country and look for local constraints on the availability of infrastructure. Include
• The output the process is a revised, population-specific set of average and
international prices of generic drugs.
the prices locally using prices of generic drugs instead of using off-patented
information is for health policy and planning.
contributors to national disease burden. The potential usefulness of this
incremental cost-effectiveness ratios for interventions addressing leading
• The contribution of generalized CEA to national-level priority-setting: Establish
Indeed, Generalized CEA has been specifically developed as a means by which
health system, including improved responsiveness and reduced inequalities.
combinations of cost-effective interventions that best address stated goals of the
􀂾 Advantages of cost effectiveness analysis: 64
efficiency) of their health systems.
decision makers may assess and potentially improve the overall performance (or
1. Useful to know the cause of failure to attend the objective and the unmet demand.
number of children whose nutritional status has improved following the
country is to improve the child nutrition, the output indicators could be the
2. To review the adequacy of corrective action taken, for example, if a program in a
preschool children with an adequate nutritional status.
introduction of the program, could be assessed in terms of the percentage of 59
3. In a cost effectiveness analysis, changes in health status will be expressed in
after a six week course." Treatments could be compared according to the cost per
by two different drugs might measure outcome as "proportion of ulcers healed
natural units For example, the economic analysis of the treatment of peptic ulcer
outcome measure here might be "ulcers that remained healed at one year."65
drug A might be falsely deemed "more cost effective" than drug B. A better
ulcer healed. However, if the relapse rates on the two drugs were very different,
􀂾 Limitations of cost effectiveness analysis:
different settings has complicated both the synthesis and the interpretation of costeffectiveness
measures used in economic evaluations conducted by different investigators in
1. Methodological inconsistency: The heterogeneity of methods and outcome
to address issues of allocative efficiency in the health sector. as there are gaps in
2. Data unavailability: Data unavailability has limited the ability of policy-makers
results.66
the cost-effectiveness evidence base, particularly for historically marginalize
3. Lack of generalizability: Borrow results from other settings as countries are not
developing countries) 66
services and for currently under-served populations (e.g. mental health care in
able to under take cost effectiveness comparison studies on interventions in their
4. Limited technical or implementation capacity: There is a shortage of technical 60
setting. 66
management capacity or political will to translate and implement the findings. 
expertise to undertake economic evaluations also in terms of health service

22. Cost-Effectiveness Analysis cont…
Advantages
Useful to know the cause of failure to attend the objective and the unmet demand.
Adequacy of corrective action taken, can be reviewed
Disadvantage
Only compare programs with similar outcomes
There is not enough information to assign a value to the outcome
Methodological inconsistency
Ambiguity in assessing overall improvement or decrement in health
Cannot address the issue of allocative efficiency
If an external body (e.g. government agency) has set a maximum cost-per-QALY standard for programs to be considered socially worthwhile (e.g. $20,000 per QALY gained), then cost-utility analysis can also inform questions of allocative efficiency 93

23. Cost-Utility Analysis
A type of cost-effectiveness analysis
It compares costs in monetary units with outcomes in terms of their utility, usually to the patient, measured, e.g., in QALYs
Measures of different effects are consolidated into a common abstract scale
Example; Quality adjusted life year (QALY), Disablity adjusted life years (DALYs)
Most appropriate if the important outcome is multidimensional
Disadvantage
Difficult to assign utility weights
Cost- Utilty Ratio:
CU Ratio = ($ Cost Int - $ Cost Comp) / ($ Utile Int - $ Utile Comp)
For example: “$10,000 per QALY gained”
4 . Cost-utility Analysis :
Cost-utility analysis (CUA) is a form of economic analysis used to guide procurement
decisions. The most common and well-known application of this analysis is in pharmaco
economics, especially Health Technology Assessment (HTA).73 Analysis looks at an
action to be undertaken. It considers the cost of the action compared to the increase in
utility. For example, cost utility analysis may be used in health care to decide whether
someone should be treated. The cost of treating someone with a rare cancer may be
£400,000. If this leads to an increase in life expectancy of 1 year, it is said to be cost
utility of this treatment is £400,000 per year.74 Cost–utility analysis allows the
comparison of different health outcomes (such as prolongation of life, prevention of
blindness or relief of suffering) by measuring them all in terms of a single unit — the
Quality-Adjusted Life-Year (QALY).
􀂾 Steps of cost utility analysis:
1. The outcome of any health intervention can be calculated as the product of
increase in utility that it may cause and the enjoyed time in years.
2. When allocating scarce resources, those interventions that are expected to produce
fewer QALYs for any given cost are given a lower priority.
In cost-utility analysis, life-years gained are typically adjusted by a series of "utility" or
quality-of-life weights to reflect the relative value or worth that individual’s places on
various states of health. Essentially, cost-utility analysis can be thought of as a special
form of cost-effectiveness analysis in which a set of effects is measured in units of health 64
status instead of natural clinical units. With cost-utility analysis, measures of different
effects are consolidated into a common abstract scale.61
􀂾 Measurement of cost utility analysis:
Quality -Adjusted Life -Year (QALY): The cost - utility ratio is expressed as cost per
QALY gained. The QALY measure encompasses various attributes of the given
alternatives and adjusts years of life according to the quality of those years as reflected by
the presence of intangible outcomes (e.g. disability, pain). A utility score can be
generated for any combination of outcomes to yield a value for the overall impact of an
alternative.75

24. Quality-adjusted life years (QALYs)
Adjust quantity of life years saved to reflect a valuation of the quality of life
If healthy QALY = 1
If unhealthy QALY < 1
QALY can be <0
Procedure
Identify possible health states - cover all important/relevant dimensions of QoL
Derive utility ‘weights’ for each state
Multiply life years (spent in each state) by ‘weight’ for that state.
Quality adjustment utility “weights” should
(1) be preference-based
(2) be interval-scaled
(3) contain both perfect health and death on the same scale
Quality-Adjusted Life Years (QALYs)
For cost-utility analysis the multiple effects (i.e. quality and quantity of life) are combined, using preferences, into a composite single effect. Often this is a QUALITY-ADJUSTED LIFE YEAR (QALY), or some variation of it, as this basic concept also goes by other names. For example, the World Bank and World Health Organization have adopted the concept under the rubric Disability-Adjusted Life Year (DALY) (Murray and Lopez, 1996). In addition, there are close cousins to the QALY concept. One of these is the Healthy Years Equivalents (Mehrez and Gafni, 1989; Weinstein and Pliskin, 1996); another is the Person Trade-Off approach (Nord, 1995; Prades, 1997).
The quality adjustment weights for QALYs should (1) be preference-based, (2) be interval-scaled, and (3) contain both perfect health and death on the same scale (Gold et al., 1996). There is a variety of approaches available that meet these requirements. The approaches can be divided into two basic groups: direct and indirect measurement of preferences.
Table 3.2 provides an example of such a system of attributes.
Click on the image to view sample tables of weights used in compiling QALYs

25. Techniques to ‘weight’ utility
Direct methods -
Measure the preferences of individuals directly using general instruments like the visual analogue scale, the time trade-off method, and the standard gamble technique
Widely applied
Costly & time consuming
Indirect methods 
Simpler to use (though difficult to develop)
Based on multi-attribute health status classification systems.(consist of a set of attributes of health status (e.g., pain and discomfort, visual acuity, ambulation, cognitive function, etc.), and levels of function associated with each attribute from full function to impaired function (e.g. perfect vision — totally blind)
Quality-Adjusted Life Years (QALYs)
For cost-utility analysis the multiple effects (i.e. quality and quantity of life) are combined, using preferences, into a composite single effect. Often this is a QUALITY-ADJUSTED LIFE YEAR (QALY), or some variation of it, as this basic concept also goes by other names. For example, the World Bank and World Health Organization have adopted the concept under the rubric Disability-Adjusted Life Year (DALY) (Murray and Lopez, 1996). In addition, there are close cousins to the QALY concept. One of these is the Healthy Years Equivalents (Mehrez and Gafni, 1989; Weinstein and Pliskin, 1996); another is the Person Trade-Off approach (Nord, 1995; Prades, 1997).
The quality adjustment weights for QALYs should (1) be preference-based, (2) be interval-scaled, and (3) contain both perfect health and death on the same scale (Gold et al., 1996). There is a variety of approaches available that meet these requirements. The approaches can be divided into two basic groups: direct and indirect measurement of preferences.
Table 3.2 provides an example of such a system of attributes.
Click on the image to view sample tables of weights used in compiling QALYs

26. Cost-Benefit Analysis
It compares costs and benefits, both of which are quantified in common monetary units
Unique feature that can indicate explicitly whether benefits outweigh costs
Advantage:
Can address allocative efficiency
Can compare disaperate technologies
Disadvantage:
Difficult to assign monetary value to outcomes
n the third approach to assessing efficiency, COST-BENEFIT ANALYSIS (CBA), the consequences are measured and valued in monetary units, most commonly by asking relevant individuals how much they would be willing to pay to obtain the consequences: health improvement. This is most frequently done using a method called CONTINGENT VALUATION. Hence, for the malaria prevention and treatment program, or the dialysis program, the analyst would describe to an individual both how many life years the program could be expected to add and what their health would be during those years, and then ask the person how much they would be willing to pay to obtain those health benefits. In cost-benefit analysis both the costs and the consequences of a program are measured in the same units, i.e. money units, and thus CBA is the only technique that can determine in and of itself whether a program is worth doing (benefits exceed the costs, generating positive net benefit). Note also that because the value of all consequences are expressed in money limits, it allows the comparison of not only health programs that produce different consequences (e.g. malaria and dialysis), but also health and non-health programs (e.g. malaria prevention and a network of feeder roads), though there are significant practical challenges involved in comparing such disparate programs (see, a.o., Drummond and Stoddart, 1995). In this way, cost-benefit analysis is the only technique that can, on its own, fully address the allocative efficiency question, and it does so on the basis of the criterion of a Potential Pareto improvement discussed previously in this module.
Definition:
program on the population 67
development and also the related social and economic development .i.e. effect of the
It is the positive effect of the program, service or the institution and the over all health
1. Benefit-to-cost ratio: It is the total monetary cost of the benefits or outcomes
􀂾 Two important tools for the cost –benefit analysis are 68
Steps of doing cost benefit analysis:69
2. Net rate of return: It is basically total costs minus the total value of benefits.
divided by the total monetary costs of obtaining them.
the point of view from which costs and benefits will be assessed.
1. Examine needs, consider constraints, and formulate objectives and targets. State
that the base case is optimized.
compare them fairly. If one option is being assessed against a base case, ensure
2. Conduct Cost Analysis: Define options in a way that enables the analyst to
3. Analyze incremental effects and gather data about costs and benefits. Set out the 61
5. Run the deterministic model (using single-value costs and benefits as though the
4. Express the cost and benefit data in a valid standard unit of measurement.
costs and benefits over time in a spreadsheet.
(NPV).
values were certain). See for the deterministic estimate of net present value
of these variables could be obtained to limit the uncertainty, or whether action can
most influence on the NPV. Consider whether better information about the values
6. Conduct a sensitivity analysis to determine which variables appear to have the
7. Conduct Sensitivity Analysis: This step involves identifying the assumptions
limit the uncertainty
conditions change during the time of your study, will that change your whole
calculations. If one of your assumptions turns out not to be accurate, or if
behind your cost estimates, and considering how critical they are to your
8. Discuss the Qualitative Residual: Since there are almost always some things that
conclusion, or is the effect strong to effect your conclusion.
conclusion.
include some discussion of these issues so that it will be helpful for final
can't be quantified or given monetary values, it is important that your report
• A sound epidemiological research and the good clinical trial are needed to provide
􀂾 Limitations of cost benefit analysis: 70
reliable in formation.

27. Cost-Benefit Analysis cont…
Two approaches:
Cost- Benefit Ratio: (Ratio Approach)
CB Ratio = ($ Cost Int - $ Cost Comp) / ($ Benefit Int - $ Benefit Comp)
For example: “Cost Benefit ratio of 1.5”
Cost- Benefit Ratio: (Net Benefit Approach)
CB Ratio = ($ Cost Int - $ Cost Comp) - ($ Effect Int - $ Effect Comp)
For example: “Net cost of $15,00”
n the third approach to assessing efficiency, COST-BENEFIT ANALYSIS (CBA), the consequences are measured and valued in monetary units, most commonly by asking relevant individuals how much they would be willing to pay to obtain the consequences: health improvement. This is most frequently done using a method called CONTINGENT VALUATION. Hence, for the malaria prevention and treatment program, or the dialysis program, the analyst would describe to an individual both how many life years the program could be expected to add and what their health would be during those years, and then ask the person how much they would be willing to pay to obtain those health benefits. In cost-benefit analysis both the costs and the consequences of a program are measured in the same units, i.e. money units, and thus CBA is the only technique that can determine in and of itself whether a program is worth doing (benefits exceed the costs, generating positive net benefit). Note also that because the value of all consequences are expressed in money limits, it allows the comparison of not only health programs that produce different consequences (e.g. malaria and dialysis), but also health and non-health programs (e.g. malaria prevention and a network of feeder roads), though there are significant practical challenges involved in comparing such disparate programs (see, a.o., Drummond and Stoddart, 1995). In this way, cost-benefit analysis is the only technique that can, on its own, fully address the allocative efficiency question, and it does so on the basis of the criterion of a Potential Pareto improvement discussed previously in this module.
Definition:
program on the population 67
development and also the related social and economic development .i.e. effect of the
It is the positive effect of the program, service or the institution and the over all health
1. Benefit-to-cost ratio: It is the total monetary cost of the benefits or outcomes
􀂾 Two important tools for the cost –benefit analysis are 68
Steps of doing cost benefit analysis:69
2. Net rate of return: It is basically total costs minus the total value of benefits.
divided by the total monetary costs of obtaining them.
the point of view from which costs and benefits will be assessed.
1. Examine needs, consider constraints, and formulate objectives and targets. State
that the base case is optimized.
compare them fairly. If one option is being assessed against a base case, ensure
2. Conduct Cost Analysis: Define options in a way that enables the analyst to
3. Analyze incremental effects and gather data about costs and benefits. Set out the 61
5. Run the deterministic model (using single-value costs and benefits as though the
4. Express the cost and benefit data in a valid standard unit of measurement.
costs and benefits over time in a spreadsheet.
(NPV).
values were certain). See for the deterministic estimate of net present value
of these variables could be obtained to limit the uncertainty, or whether action can
most influence on the NPV. Consider whether better information about the values
6. Conduct a sensitivity analysis to determine which variables appear to have the
7. Conduct Sensitivity Analysis: This step involves identifying the assumptions
limit the uncertainty
conditions change during the time of your study, will that change your whole
calculations. If one of your assumptions turns out not to be accurate, or if
behind your cost estimates, and considering how critical they are to your
8. Discuss the Qualitative Residual: Since there are almost always some things that
conclusion, or is the effect strong to effect your conclusion.
conclusion.
include some discussion of these issues so that it will be helpful for final
can't be quantified or given monetary values, it is important that your report
• A sound epidemiological research and the good clinical trial are needed to provide
􀂾 Limitations of cost benefit analysis: 70
reliable in formation.

28. Monetary Valuation Earlier “Human Capital’ method were used
Willingness To Pay Method
Done by Contingency valuation method
Assess individual ‘willingness-to-pay’ for (the benefits of) a good through either:
1. Observed wealth-risk trade-off (revealed preference)
Advantage – ‘real’ preferences/values
Disadvantage – difficult control for confounders
2. Direct survey (stated preference)
Advantage – direct valuation of good
Disadvantage – hypothetical/survey problems
Vast majority of CBA use direct survey
In this method, the health change was valued by determining its effect on labor force productivity as measured by changes in earnings. For example, if a malaria prevention program increased productivity by improving the strength and stamina of laborers, as well as extending their working life, the value assigned to the health improvement would be the increased earnings that the health improvement generated for the laborers. This method is clearly incomplete and biased as it ignores the effect of health changes on those who do not work in a paid employment—children, students, the elderly, women, the disabled, and so on. Moreover, for workers, the method is biased against those in low-paying jobs.

29. Cost of Illness Analysis
A determination of the economic impact of an illness or condition .
Cost of Illness includes:
Medical care for prevention, treatment & Social services for rehabilitation
Productivity loss
Examples
What does cancer cost the India?
What does blindness cost the world?
Just because something has the highest cost of illness does not imply that it necessarily should have the most resources directed toward research or cure
Depends on how much it will cost to do something about it

30. Cost - Minimization Analysis
A determination of the least costly among alternative interventions
Calculate the cost of the different methods of achieving the objective
Needs at least two ways of achieving the objective
Example
Rabies vaccination: Intramuscular or Intradermal schedule?
Which is least costly?
If so, should we continue Intramuscular schedule or use intradermal schedule?
These studies are difficult because they don’t focus on partial outcomes
Need a high degree of certainty that outcome can be obtained or else these studies are not particularly helpful
Cost-minimization is the simplest of the pharmacoeconomics tools and is applied when
is used to compare net costs. In principle, this analysis requires clinical evidence to
the given health care interventions are observed to be similar, cost-minimization analysis
comparing two drugs of equal efficacy and equal tolerability.71 When relevant effects of
not important. When conducting the study, measure all costs (resource expenditures)
support the notion that differences in health effects between alternatives are minimal or
pharmacoeconomic perspective.7
inherent to the delivery of the therapeutic intervention that are relevant to the
Cost of illness
Types of Economic Evaluation
Cost-utility
Cost-effectiveness
Cost minimization
Cost of Illness
Cost-benefit
Medical care for prevention
Social services for rehabilitation
Medical care for treatment
Productivity loss
􀃋During rehabilitation
􀃋Treatment
􀃋Prevention
Examples of Cost of Illness
􀃋From decreased workplace productivity as a result of the disease and death
What does blindness cost the world?
What does heart disease cost the United States?
What does cancer cost the United States?
Just because something has the highest cost of illness does not imply that it necessarily should have the most resources directed toward research or cure
􀃋Depends on how much it will cost to do something about it
Cost Minimization
At least two ways of achieving the objective
Known and fixed objective
Calculate the cost of the different methods of achieving the objective
Determine which alternative costs the least
Goal of eliminating incident cases of polio
Cost Minimization Example
􀃋Is it achievable?
􀃋If so, should we continue mass vaccinations or use targeted vaccination policies?\
These studies are difficult because they don’t focus on partial outcomes
Cost-Effectiveness
􀃋Need a high degree of certainty that outcome can be obtained or else these studies are not particularly helpful
Compare costs of at least two alternatives
Outcomes can remain as clinical or even intermediate outcomes
Compare difference in costs with difference in effects
􀃋Generally best if there is a single primary effect
􀃋Example—dollars per case of blindness averted or dollars per migraine avoided
Consequences—non-monetary unitsMortality/morbidityOnly compare programs with similar outcomes
Costs—dollars
Cost Effectiveness
There is a single outcome associated with a condition
Suitability of Cost-Effectiveness Studies
Cost-Utility
􀃋Difficulty of asking nursing home residents about the quality of their own lives
There is not enough information to assign a value to the outcome
Cost-effectiveness with a twist
Quality adjusted life year combines morbidity and mortality
Outcome is quality adjusted life year
There are morbidity and mortality effects
Suitability of Cost-Utility Studies
Cost- Benefit analysis
Health related quality of life is the primary outcome of interest in the first place
There are multiple types of morbidity effects
Net benefit is final productDifference between valuation of benefits and costs
Value everything in terms of dollars
Ratio of net benefit to dollars spent (rather than benefit to dollars spent) is sometimes used to rank programs
Unique feature that can indicate explicitly whether benefits outweigh costs
Subtract costs from dollar value of benefits to obtain a measure of net benefit
􀃋Not just costs avoided
Unique ability to determine whether or not a program is better than existing alternatives

31. Summary of Cost- Analysis Methods
Valuation of costs
(in Monetary units)
Valuation of outcomes
Comments
Cost Effectiveness $ ÷
Natural units
It can only compare technologies whose outcomes are measured in the same units
Cost Benefit
÷ or –
i.e, Ratio Approach or Net Benefit Approach
It enables comparison of disparate
technologies
Difficult to assign monetary
values to all pertinent outcomes
Cost Utility
Utilities (e.g., QALYs)
It enables comparisons of disparate technologies
Cost of Illness
vs.
None
A determination of the economic impact of an illness or condition .
Cost Minimization
Assume same outcome
A determination of the least costly among alternative interventions
Cost effectiveness analysis: Cost effectiveness analysis compares different costs and
different outcomes of two or more alternative each with common objective. Out comes
are measure in physical units. The objective of cost effectiveness analysis is to calculate
the cost per unit outcome achieved using the Incremental Cost Effectiveness Ratio
(ICER). The ratio related to incremental benefit to additional cost.
o Cost utility analysis: Cost utility analysis is more comprehensive (specific) form of cost
effectiveness analysis. Cost utility analysis is performing from the societal perspective.
Recommended outcome measure is quality of adjusted life year (QALY). It is used to
calculate the cost per unit outcome achieved incorporating patient preferences (utilities)
enables comparison of disparate technologies, e.g., coronary artery bypass graft surgery and screening for breast cancer. A drawback of CBA is the difficulty of assigning monetary values to all pertinent outcomes, including changes in the length or quality of human life. CEA avoids this limitation by using more direct or natural units of outcomes such as lives saved or strokes averted. As such, CEA can only compare technologies whose outcomes are measured in the same units. In CUA, estimates of utility are assigned to health outcomes, enabling comparisons of disparate technologies.  
When should one use which technique? Cost-effectiveness analysis is only suitable to compare programs that have homogeneous outcomes and where there is a clearly dominant outcome of primary interest. This requirement is often quite restrictive, as noted earlier in the context of the desperate health initiatives being considered by the Committee. It may not be unreasonable, however, in comparing different kinds of live-saving programs (e.g. kidney dialysis and transplantation, emergency air ambulance system, trauma care), by using lives saved, or more likely, life years gained as the common measure of effect. However, even this is problematic if any of the programs have an effect on quality of life as well as quantity of life.
When there are multiple outcomes or when there are significant consequences related to both quantity and quality of life, cost-utility or cost-benefit may be the preferred analysis in order to be able to make broader comparisons. However, both of these techniques pose significant measurement challenges in valuing the outcomes. Cost-utility analysis, until recently, required the analyst to measure the preferences for each study using the standard gamble or some alternative time-consuming procedure. Recently, with the development of pre-scored multi-attribute health status classification systems (eg. Quality of Well-Being, Health Utilities Index, EuroQol) the task has become easier, but one still has to select the appropriate system for the problem at hand. Cost-benefit analysis requires the analyst to measure the preferences using Willingness-To-Pay (WTP; see next page), and the methods are not yet well developed in health-care applications.
Cost-benefit and cost-utility analysis have different theoretical roots. Cost-benefit analysis is derived directly from welfare economics and the Kaldor-Hicks Potential Pareto criterion that sets as a goal maximizing net benefit (benefit - cost). Cost-utility analysis can also be linked to a welfare economics foundation (Garber et al., 1996), but more commonly it is seen as founded on an extra-welfarist approach where the goal of the health system is seen as maximizing health as measured in QALYs (Culyer, 1989).
Because of the different viewpoints as well as the different ways to measure and value consequences, it is useful to view the various costs and consequences of health care programs as building blocks, which can be assembled in the evaluation in different ways. We will look at this on the next page.

32. Dealing with uncertainty
Sensitivity analysis
Systematically examining the influence of uncertainties in the variables and assumptions employed on the estimated results
Steps:
Identifying the (uncertain) variables
All variables in the analysis are potential candidates
Give reasons for exclusion rather than inclusion
Specifying the plausible range over which they should vary
Reviewing the literature
Consulting expert opinion
Recalculating results based on combinations of the best guesses, most and least conservative, usually based on…
One-way analysis (each variable separately)
Multi-way analysis (number of variables together)
Threshold analysis (amount of variance needed to achieve specified result)
Let's say a cost-benefit analysis comes out as saying that hernia repair by day case surgery costs £1150 per QALY whereas traditional open repair, with its associated hospital stay, costs £1800 per QALY. But, when you look at how the calculations were done, you are surprised at how cheaply the laparoscopic equipment has been costed. If you raise the price of this equipment by 25%, does day case surgery still come out dramatically cheaper? It may, or it may not.
41 Uncertainty
Range of prices/quantities
Range of probability of certain events
Sensitivity analyses
Secondary data/expert opinion can fill in gaps
Sensitivity analysis can be used
To simplify models
To investigate the robustness of the model predictions
To play what-if analysis exploring the impact of varying input assumptions and scenarios
As an element of quality assurance (unexpected factors sensitivities may be associated to coding errors or misspecifications).
It provides as well information on:
Factors that mostly contribute to the output variability
The region in the space of input factors for which the model output is either maximum or minimum or within pre-defined bounds (see Monte Carlo filtering above)
Optimal — or instability — regions within the space of factors for use in a subsequent calibration study
Interaction between factors 93

33. Analysis, interpretation & presentation
Set up "dummy tables" and graphs at initial phase
Analysis should include interpretation-
i.e. What do the data mean?
Finally, Report the result
Stick to objective
Keep presentation simple and use tables & graphs
Write an executive summary
CBA—net benefit and ratio
􀂄CEA—reference case
􀂄Explicit assumptions
􀂄Sources of any secondary data
􀂄Intermediate results
􀂄Sensitivity analyses 93

34. Strengths & Limitations
a very useful tool for the manager and policy maker
In the absence of certainty, even approximations can help improve decision-making
Limitations
It's difficult to estimate "true costs" or opportunity cost
Allocation of costs; often very difficult
Shared costs: include the cost of inputs that are shared among multiple health services. Traditionally, shared costs include those for service delivery personnel, since they often perform multiple duties beyond immunization, making it difficult to separate out the share to be attributed to immunization. The process to separate the shared portion of certain costs is known as cost allocation. Specific methodologies are provided in the recommended FSP costing guidelines. Other shared costs are those associated with transportation and buildings.
True cost of volunteer, donated goods, freed space after the program ends. 93

35. References
Creese A, Parker D. Cost Analysis in Primary Health Care. A training manual for programme managers. Geneva: World Health Organization; 1994.
Torres T, Baltussen R, Adam T, Hutubessy R, Acharya A, EvansD, Murray C. WHO Guide to cost effectiveness analysis. Geneva: World Health Organization; 2003.
Hutton G, Rehfuess E. Guidelines for conducting cost–benefit analysis of household energy and health interventions. Geneva: World Health Organization; 2006.
Module E Cost and Sustainability analysis. Aga Khan Foundation
Cost Analysis Methods. Available from URL:

36. Thanks