1. Farid Abolhassani Cost-Benefit Analysis 18

2. Learning Objectives After working through this chapter, you will be able to: Define and give examples of health outcomes in monetary terms Explain cost–benefit analysis Describe three ways of expressing the results of a cost– benefit analysis

3. Key Terms Benefit-cost ratio (BCR) Benefit-cost ratio (BCR) A way of presenting the results of a cost–benefit analysis, this is simply the benefits divided by the costs. Human capital approach Human capital approach An approach that uses wages to measure the value of productivity lost through illness. Net benefit Net benefit The benefits of an intervention minus its costs. Willingness to pay Willingness to pay (WTP) A method of measuring the value an individual places on reducing the risk of developing a health problem or gaining an improvement in health.

4. Definition monetary value of the resources monetary value of the outcomes Cost–benefit analysis (CBA) is a method of economic evaluation where the monetary value of the resources consumed by a health intervention (costs) is compared with the monetary value of the outcomes (benefits) achieved by the intervention.

5. How to compare costs and benefits Net benefit Net benefit – this result is expressed as a single number with monetary units; Benefit–cost ratio (BCR) Benefit–cost ratio (BCR) – this result is expressed as a ratio of benefits to costs.

6. Measuring benefits in monetary terms Changes in the cost of illness Willingness to pay (WTP) surveys.

7. Classification of Costs Total Cost of Illness Direct CostsIndirect Costs Health careNon-health care Value of lost productive time Intangible Costs PatientCaregiverRecurrentCapital ConsumablesRunning cost

8. Human Capital Approach Measuring the value of lost productivity by wages The value of productivity lost is then equated to wage multiplied by the time missed the wage multiplied by the time missed. Measuring the value of lost productivity by wages The value of productivity lost is then equated to wage multiplied by the time missed the wage multiplied by the time missed.

9. Reservations about the use of the human capital measure Is it equitable? Is it equitable? High-wage workers will be deemed to have higher indirect benefit than low-wage workers The value of non-market time: The value of non-market time: The human capital measure undervalues the work of housewives and retired people Intangible costs not included: Intangible costs not included: Most studies on cost of illness exclude intangible costs but doing so may do severe injustice to people who suffer and their families and friends

10. Willingness to Pay Approach The value that an individual places on reducing their risk of developing or of treating a health problem. Through a WTP survey a representative sample of the population is asked how much they would be willing to pay to gain something The value that an individual places on reducing their risk of developing or of treating a health problem. Through a WTP survey a representative sample of the population is asked how much they would be willing to pay to gain something

11. Water vessels for diarrhea prevention – WTP survey Total benefit = 125+200+750+150=1225 Total cost = 80 × 10 = 800 Net benefit = 1225 – 800 = 425

12. Reservations about the use of the WTP approach The WTP will be affected by the level of education and understanding about the causes of illness and by how important a health problem it is believed to be Where a third party pays for health care, the respondents may not have an accurate idea of what illness costs The estimates are based on what people say they will do – not what they actually do

13. Valuing benefits resulting from reduction in mortality Many people are unwilling and often feel it is impossible to value lives; they frequently place an infinite value on life when responding to surveys For indirect benefits, one could assume that the reduction in mortality is equivalent to lengthening of productive life and attach a value to it In WTP surveys pain and suffering reductions could be valued together with all the other attributes from the outcome of an intervention The inability or unwillingness of survey respondents to attach a value to reduced mortality has become an obstacle to the widespread use of cost–benefit analysis in health care decision making