1. Capital Insight Pty Limited ABN 76 056 297 100 77 Berry Street North Sydney NSW 2060 t02 9955 2300 f02 9955 5574 www.capitalinsight.com.au Health Economics Master Class Presenter: Khal Katrib 06 May 2014

2. Overview Introduction / objectives Case study 1 Feedback/questions Context: economics and its use Economics in Health Methods of evaluation Case study 2 Problem solving scenario

3. who are Capital Insight – project management and advisory services firm – support government and not-for-profits – focus on delivering social infrastructure – specialise in Health services and programs a bit about me – qualified economist – previously worked within banking and government sectors – currently leading Capital Insight’s economics services – experienced in Health economics as well as other sectors CI major projects include: Introduction

4. Lifehouse at RPALiverpool Hospital Gold Coast University HospitalUNSW Tyree Building

5. Session objectives provide enough background for you to: – identify the difference between economic versus financial analysis – understand why and when you may need economic analysis – place pressure on economists by challenging their analysis and theories  leading to better reports, choices and outcomes

6. Context: economics definition Social science that analyses and describes the consequences of choices made concerning scarce productive resources. Economics is the study of how individuals and societies choose to employ those resources: what goods and services will be produced, how they will be produced, and how they will be distributed among the members of society. Merriam Webster Dictionary So what does all that mean??

7. financial analysis examines cash-flows and funding alternatives for: – an organisation – other government agencies economic analysis examines impacts of a project for: – a government agency (including financial) – other agencies and stakeholders – the community (the public) – the environment economic analysis is the primary tool for Government – more services needed while resources/funding limited – prioritisation based on added value to the community – value-add needs to be quantified or qualitatively analysed Context: economic analysis and why we use it

8. Economics in Health simply the application of economics to the health sector focused on evaluating health care alternatives identifying the right services to the right areas demonstrating health benefits of services to patients/population consider all impacts, including: – benefits to quality of life – benefits of free access to health services – travel and environmental costs – opportunity costs – residual values

9. Economics in Health – increasingly important Governments spend 74% more on health today than a decade ago $42 billion more per year than a decade ago reasons: population growth hospital expansions/upgrades medical innovations at high cost

10. Economics in Health - process demonstrate/identify the service need articulate alignment to government and organisational strategies must identify all available options to evaluate – include demand management – rationalising between service providers – capital expansion – potentially leasing economic appraisal of results – financial impacts – economic impacts summary and recommendations

11. Methods of evaluation cost benefit analysis – quantifiable costs and benefits – net present value assessment – incremental assessment, additional cost/benefit of increasing service – evaluate alternatives against status quo cost effectiveness analysis – quantifiable costs compared to non-quantifiable outcomes/benefits – cost over patient preference or numerical outcome (volume) qualitative analysis – typically value management study or similar – stakeholders identify necessary criteria and evaluate options against the criteria

12. Methods of evaluation AIHW research into disability weights – degree of disability inflicted on sufferer – 0 = perfect health – 1 = death use estimate for Value of Statistical Life Year (VSLY) – 2013: $170,255 model assumptions for impact of treatment after new or expanded service E.G: – benefit for only 25% of additional patients, as others would have been treated elsewhere » each patient treated has 10% reduction in disability burden » only 2% of patients avert mortality after treatment

13. Methods of evaluation

14. Case Study 1 - proposed capital investment in a tertiary hospital Phoneytown Hospital – located in an area of significant population growth 5 – 10 years

15. Case Study 1 - proposed capital investment in a tertiary hospital

16. $millions Present Values at 7% discount rate Base CaseOption BOption C Capital Costs 7231366 Recurrent Costs 09031,084 Benefits 12,8173,816 NPV at 7% discount rate -61,6822,366 NPV Incremental to Base Case 1,6882,372 Rank321 NPV per dollar invested-0.97.36.5 Benefit-cost ratio0.12.52.6

17. Case Study 2 - delivering oral health care services to disadvantaged communities expanded oral health care service for Phoneytown growing region, higher proportions of: – unemployment – people with English as second language – historically poor oral health care – high growing demand difficult to argue lower mortality potentially lower disability burden, at a low indicative disability rate but, can argue value of free health access to patients – use a price proxy based on charges at a private clinic

18. are these items financial or economic impacts – Eg.1 additional revenue due to increased patients for a private hospital – Eg.2 opportunity cost of holding a parcel of land as opposed to selling or redeveloping it for potentially a better use – Eg.3 maintenance cost avoided in an upgraded building – Eg.4 patient health benefit after treatment at a newly developed part of a hospital – Eg.5 travel costs avoided through reduced use of vehicles – Eg.6 an estimate for the value of treatment for patients attending a free health clinic based on prices charged at private clinics Understanding Appraisals Exercise 1

19. Refer Handouts Understanding Appraisals Exercise 2 – Drug and Alcohol Treatment Centre