1. Flagship Program on Health Sector Reform and Sustainable Financing

2. Cost-Effectiveness Technique in Health: Strengths and Limitations

3. R. Bitrán- Flagship Tehran- March 2004 3 Presentation Objectives To describe cost-effectiveness analysis (methodology) To discuss limitations and assumptions underlying CEA

4. R. Bitrán- Flagship Tehran- March 2004 4 Why a Benefit Package? Outcomes: –Use resources more rationally –Meet equity goals –Ensure accountability and transparency Process: –Clarify goals, priorities, choices, and opportunity cost –Mobilize consent through participation in design process

5. R. Bitrán- Flagship Tehran- March 2004 5 What Is a Basic Benefit Package? 3 defining features: –Limited set of services –Services included based on prioritization methods –Synergies among interventions/services included

6. R. Bitrán- Flagship Tehran- March 2004 6 Key Words: Limited & Prioritized Question: How best to choose the limited number of services that can be included in a benefit package? Answer: That depends... ? ? ?

7. R. Bitrán- Flagship Tehran- March 2004 7 How would An Objective Utilitarian Choose? Design your benefit package so that the population’s health status is maximized

8. R. Bitrán- Flagship Tehran- March 2004 8 But How? ? ? ? ? ?

9. R. Bitrán- Flagship Tehran- March 2004 9 Cost- Effectiveness Analysis!

10. R. Bitrán- Flagship Tehran- March 2004 10 What Is Cost-Effectiveness Analysis? One type of Economic Evaluation that focuses on outcomes, e.g., - Lives - DALYs

11. R. Bitrán- Flagship Tehran- March 2004 11 Economic Evaluation Choice Program A Comparator B Consequence B Consequence A Source: Drummond et al., 1997 Costs A Costs B

12. R. Bitrán- Flagship Tehran- March 2004 12 Economic Evaluation Choice Program A Comparator B Consequence B LIVES SAVED Consequence A LIVES SAVED Source: Drummond et al., 1997 Costs A $ Costs B $

13. R. Bitrán- Flagship Tehran- March 2004 13 Problem: How to compare: - costs - consequences Solution: Compare Cost-Effectiveness Ratios

14. R. Bitrán- Flagship Tehran- March 2004 14 Cost-Effectiveness Rati o Cost $ / Effectiveness C/E A vs. C/E B ==>Pick Program A if C/E A < C/E B Pick Program B if C/E B < C/E A Seems simple, but is that really the case?

15. R. Bitrán- Flagship Tehran- March 2004 15 First Issue: Effectiveness Need same measure of Effectiveness, E.g.: – Lives saved – DALYs Can’t compare “apples” and “oranges”

16. R. Bitrán- Flagship Tehran- March 2004 16 Second Issues: Costs Many different kinds of costs –Health care costs –Patient resources (time, $, other) –Costs in other sectors Which ones to include?

17. R. Bitrán- Flagship Tehran- March 2004 17 Example 1 COSTS: –Health Care Costs $1,000,000 –Patient/Family resources $5,000 –Costs in other sectors $50,000 CONSEQUENCES: –Lives Saved: 100 –Health care savings $250,000 –Savings in other sectors $20,000 –Savings in pat./fam. resources $12,000

18. R. Bitrán- Flagship Tehran- March 2004 18 Example 1: Cost-Effectiveness Ratio Summary: 1) C/E = 10,000 / life saved 2) C/E = 7,500 / life saved 3) C/E = 7,730 / life saved Question: Which one is right?

19. R. Bitrán- Flagship Tehran- March 2004 19 The “Right” C/E Ratio The “right” C/E ratio depends on your perspective and your objectives Economists argue for a societal perspective: ==> Include all costs and consequences C/E = $ 7730 / life saved

20. R. Bitrán- Flagship Tehran- March 2004 20 The “Right” C/E Net Costs / Effectiveness Net costs= Costs - Resources Saved = C - S C= C 1 + C 2 + C 3 +... S= S 1 + S 2 + S 3 +...

21. R. Bitrán- Flagship Tehran- March 2004 21 Cost and Effectiveness Are Difficult To Predict Both depend on how well the delivery system functions The incremental cost of any one service depends on what else is done Demand for a service may change when it is included in a benefit package

22. R. Bitrán- Flagship Tehran- March 2004 22 Determining Cost Effectiveness Requires Many Value Judgments To Create A Single Measure Of Gain The value of diminishing different kinds of disability Disability versus death Death at different ages Current versus future gains (discount rate) Attitude toward uncertainty (risk aversion)

23. R. Bitrán- Flagship Tehran- March 2004 23 Programs Lasting Multiple Years Differential Timing of Costs Year Cost of Program ACost of Program B ($000s) ($000s) 1515 21010 315 4 “Total”3029

24. R. Bitrán- Flagship Tehran- March 2004 24 Programs Lasting Multiple Years Question: Is this comparison legitimate? Answer: No! Question: What to do? Answer: Convert future costs to ‘present’ costs

25. R. Bitrán- Flagship Tehran- March 2004 25 Value of a 1-year Investment Deposit $100 in the Bank @ 10% / year ==> get $110 after 1 year How much is $100 in 1 year worth today? ==> $91 Deposit $100 in the Bank @ 5% / year ==> get $105 after 1 year How much is $100 in 1 year worth today? ==> $95

26. R. Bitrán- Flagship Tehran- March 2004 26 Multi-Year Programs Conclusion: – Timing matters – The interest rate matters

27. R. Bitrán- Flagship Tehran- March 2004 27 Choice of Discount Rate Makes a Difference r=0% r=1% r=5% r=10% Costs ($000s) ($000s) ($000s) ($000s) P A 30 29.31 26.79 24.08 (late costs) P B 29 28.54 26.8124.91 (early costs)

28. R. Bitrán- Flagship Tehran- March 2004 28 Review Important Issues in C/E Analysis: In/exclusion of costs and consequences Difficulty estimating cost and effectiveness Timing of costs (and consequences) Discount rate Program (input) level

29. R. Bitrán- Flagship Tehran- March 2004 29 Additional Issues What happens to the C/E of a program when the input is increased?

30. R. Bitrán- Flagship Tehran- March 2004 30 Example 2: Doubling Inputs COSTS: Health Care Costs $2,000,000 Patient/Family resources $10,000 Costs in other sectors $100,000 CONSEQUENCES: Lives saved = 150 Health care savings $375,000 Savings in other sectors $30,000 Savings in pat./fam. Resource $18,000

31. R. Bitrán- Flagship Tehran- March 2004 31 Impact of Doubling the Inputs Example 1: C/E=$7,330 Example 2:C/E=$11,247 ==> Cost doubled but effects did not!

32. R. Bitrán- Flagship Tehran- March 2004 32 Additional Issue: Marginal Vs. Average Cost Marginal Cost Effectiveness May Depend On How Extensively Some Services Are Provided Because Of “Diminishing Returns”

33. R. Bitrán- Flagship Tehran- March 2004 33 Using Cost Effectiveness To Calculate A Basic Benefit Package Determine cost-effectiveness ratio of each option Rank according to those ratios Calculate total cost of including each service in package Go down the list in rank order until the available budget is exhausted

34. R. Bitrán- Flagship Tehran- March 2004 34 Important Things to Remember: C-E analysis is predicated on (objective) utilitarian beliefs: What happens if you have other ethical beliefs? - Subjective utilitarian? - Egalitarian liberal? - Communitarian?

35. R. Bitrán- Flagship Tehran- March 2004 35 Important Assumptions to Remember Ignores equity issues Ignores political concerns Assumes people are rational (they’ll demand what’s “good” for them)

36. R. Bitrán- Flagship Tehran- March 2004 36 Conclusion C-E analysis is relatively simple in theory but difficult in practice Extreme care must be taken when confronting the methodological challenges inherent in CEA CEA does not consider equity issues and is based on objective utilitarianism

37. R. Bitrán- Flagship Tehran- March 2004 37 Conclusion (cont.) Notwithstanding these caveats, CEA is a potentially useful input into the design process of a benefit package, but it is not sufficient by itself.

38. R. Bitrán- Flagship Tehran- March 2004 38 Appendix

39. R. Bitrán- Flagship Tehran- March 2004 39 Example 1: Cost-Effectiveness Ratio 1) Health Care Cost Only $1,000,000 / 100 lives C/E = $10,000/life saved 2) Health Care Resources Only ==> Health care cost - health care savings ($1,000,000-250,000)/100 lives C/E= $7500 / life saved

40. R. Bitrán- Flagship Tehran- March 2004 40 Example 1: Cost-Effectiveness Ratio 3) All Resources C/E = (All costs - All savings) / # lives saved ($1,000,000+5,000+50,000) - ($250,000+20,000+12,000) / 100 LS = $7730 / life saved

41. R. Bitrán- Flagship Tehran- March 2004 41 Discounting Net Present Value (P) of a stream of future Costs: 3 P=  F n (1+r) -n n=1 F 1 F 2 F 3 =------- + -------- + -------- (1+r) (1+r) 2 (1+r) 3 F 1 F 2 F 3 =------- + -------- + -------- (1.05) (1.05) 2 (1.05) 3