health sector financing and cost

1. Health Sector Financing
1
6/3/2021 kaleab

2. Total expenditure in health sectors
• In many of the poorest countries, the level of spending
is insufficient to ensure equitable access to basic and
essential health services and intervention
• The major policy issue is how to ensure adequate and
equitable resources mobilization for health
6/3/2021 kaleab 2

3. • In 1981, it was proposed to spend at least 5% of
GNP on health
• But now international momentary fund suggested
that effective health coverage would required
around 12% GNP in low income countries in
orders to meet the international development
goals.
3
6/3/2021 kaleab

4. Health Sector Reform & Financing Health
Care…
Objectives
1.To generate resources for the health sector
2. To ensure equity in health care delivery
3. To improve efficiency of health services
4
6/3/2021 kaleab

5. Major factors
• Since the 1990s life expectancy in many developing countries
has started to decline after almost a century of improvement.
• In most other parts of the world significant portions of the
population are denied access to needed services or
interventions:
Because:
• People cannot afford to pay
• Governments cannot afford to provide them
5
6/3/2021 kaleab

6. WHO Priority
• For population suffering from financial access
to the basic health services due to absence or
negligible presence of social safety for health,
• WHO’s innovative approach to achieve
universal coverage through the development of
community health insurance
6
6/3/2021 kaleab

7. Financing
• Raising revenue to pay for a good or services
• The process of health care finance involves
– Where the money come from
– How it was collected
– Pooled
– Re-distributed to the 3rd party payers
– Finally used to pay the providers for their services
7
6/3/2021 kaleab

8. Revenue collection
There are five broad ways of revenue collection
for health care financing:
1. General revenue (taxation )
2. Social health insurance
3. Voluntary or private health insurance
4. Out of pocket payment
5. External donation
8
6/3/2021 kaleab

9. National Health Care Financing
Systems
Sources of health care funding
1. Public Sources
– Direct government budgeting
– National health services and public health services
system
– Social health insurance sponsored or mandated by
the government
– Community financing
9
6/3/2021 kaleab

10. 2. Private Sources
• Direct payment by households
• Private voluntary health insurance
• Employers based health insurance
• Payment by community and other local
organization
10
6/3/2021 kaleab

11. 3. External Financing
• Foreign aid for development loans
• From bilateral aid programme or
international NGOs
11
6/3/2021 kaleab

12. Small Group Discussion
• What are the roles of government in health
care?
• Why do government get involved in health
care?
• What are the economic justifications for
market failure?
12
6/3/2021 kaleab

13. Role of government in health care
• For every country to establish the best and fairest
health system possible,
–The health of the people must always be a
national priority
• Financing
• Delivery
• Regulation
• Guideline setting
13
6/3/2021 kaleab

14. Why do government get involved in health care?
• Market failure
• Stewardship
• Needs healthy workforce
• Increasing commitment to equity
• Reduce social unrest
• Dogma/ideology
14
6/3/2021 kaleab

15. What is Market Failure?
• Market failure occurs when freely functioning markets,
operating without government intervention, fail to
deliver an efficient or optimal allocation of resources.
• Therefore - economic and social welfare may not be
maximised - leading to a loss of allocative and
productive efficiency. When this happens there is market
failure
• In reality – all markets fail at some time.
15
6/3/2021 kaleab

16. Market failure exists when the competitive
outcome of markets is not efficient from the
point of view of the economy as a whole.
This is usually because the benefits that the
market confers on individuals or firms carrying
out a particular activity diverge from the benefits
to society as a whole.
6/3/2021 kaleab 16

17. Economic Justifications for Market Failure
• Nature of goods (public
goods)
• Externalities (Positive and
negative)
• Natural monopolies
• Imperfect competition
• uncertainty and imperfect
information
• Asymmetry of information
• Large component of
personal services
• Health care as free market
• Suppliers induced demand
• Etc. …
6/3/2021 kaleab 17

18. Insurance
Health insurance is a means of pooling risks across
different population groups as a means of avoiding the
financial burden of unanticipated and catastrophic
illness based on risk aversion and uncertainty of illness
and medical outcomes
Traditionally insurance is for expensive potential losses
- car accidents, hospitalization
18
6/3/2021 kaleab

19. Definition of Insurance….
• A means by which money is raised to pay for health
services by financial contributions to a fund
• The fund then purchase health services from
providers for the benefit of those for whom
contributions are made or who are otherwise covered
by the system/design
19
6/3/2021 kaleab

20. Benefit of Insurance
• Certainty is gained at the cost of a reduction in wealth.
• The certainty is “experienced” because the risk is
transferred to the insurance company.
• The insured benefits from insurance whether or not
there was a loss.
• Therefore, the primary benefit of insurance is certainty,
not the payment of a claim.
20
6/3/2021 kaleab

21. Demand for Insurance by Individuals
• Why do individuals take actions to reduce
risk?
– Simple answer: they are risk aversive
– Risk aversion ==> prefer certain outcome to an
uncertain outcome with the same expected value
21
6/3/2021 kaleab

22. The Effects of Insurance on Wealth
• Begin by examining the effects of insurance on
a person’s wealth
– Example:
• Wealth without insurance = $80,000 or
$100,000 with equal probability
–i.e., there is a 0.5 chance of a $20,000 loss
for a person with $100,000
22
6/3/2021 kaleab

23. The Effects of Insurance on Wealth …
– Important Point:
• Insurance reduces wealth if a loss does not occur
• Insurance increases wealth if a loss does occur
– Useful perspective when thinking about insurance
purchases:
• do I want to give up some wealth when a loss does not
occur so that I will receive additional wealth when a
loss does occur?
23
6/3/2021 kaleab

24. Risk Aversion
– A risk averse person prefers a certain amount of
wealth to a risky situation with the same expected
wealth
• Example:
– Would you accept a 50-50 chance of winning $1,000 or losing
$1,000?
– The gamble does not change a person’s expected wealth, but it
makes the person’s wealth uncertain
– A risk-averse person therefore would choose not to accept the
gamble
24
6/3/2021 kaleab

25. Risk Aversion …
• A risk averse person would require compensation
(called a risk premium) before accepting the
gamble in this example
• change the odds (e.g., 60% chance of winning)
• change the payoffs (e.g., win $1,400, lose $1,000)
• The additional expected wealth ($400) needed to induce a risk
averse person to accept the gamble is the premium required to
compensate the person for the risk
• A risk neutral person would not require a risk
premium to accept this gamble; a risk neutral
person only cares about expected wealth
25
6/3/2021 kaleab

26. Risk Aversion …
– A risk averse person would be willing to pay more
than the expected loss to reduce risk
– Example:
• 2% chance of losing $10,000
• Expected loss = $200
• A risk averse person would pay more than $200 to
eliminate the risk
26
6/3/2021 kaleab

27. Risk Aversion…
– Most people behave as if they are risk averse
• Require compensation for engaging in risky activities
– they require additional expected return to invest in
riskier securities
• Are willing to pay to avoid risky activities
– they will pay positive loadings for insurance
27
6/3/2021 kaleab

28. Factors Affecting the Demand for Insurance
– Premium Loadings
• As loading increases, quantity of insurance purchased
generally falls
– Income and Wealth
• More wealth is usually associated with more assets to lose and therefore
more insurance coverage
• Limited resources may prevent people from purchasing insurance
• Degree of risk aversion may decline as wealth increases
28
6/3/2021 kaleab

29. Factors Affecting the Demand for Insurance…
– Information
• Individual’s perception of loading
• Underestimate the true risk ==> buy less insurance
• Overestimate the true risk ==> buy more insurance
– Other Sources of Indemnity
• If others (e.g., society or family) will pay uninsured loss
buy less insurance
29
6/3/2021 kaleab

30. Factors Affecting the Demand for Insurance…
– Non-monetary Losses
• Examples:
–pain and suffering
• Demand for insurance against non-monetary losses
differs from demand for insurance against monetary
losses
30
6/3/2021 kaleab

31. Factors Affecting the Demand for Insurance…
– Why do people buy insurance against monetary
losses?
• because insurance gives them money when it means the
most to them, i.e., when they have less of it (following a
loss)
• This logic does not necessarily apply to non-monetary
losses
31
6/3/2021 kaleab

32. Factors Affecting the Demand for Insurance…
• Money does not necessarily mean more to people
following a non-monetary loss
• Indeed, the opposite could hold
– Example: loss of child
– Many people would prefer to have more money
when the child is alive than when the child is
dead
• Thus, many people would not demand insurance against
non-monetary losses even if there were no premium
loading
32
6/3/2021 kaleab

33. Insurance…
The previous demand analysis assumed that the
patient pays for care out-of-pocket
How does insurance affect the demand for care?
1. Coinsurance - Patient pays only a fixed % of the cost of
each visit (often C = .20)
e.g. If the visit costs $100 :
patient pays $20, insurance pays $80
33
6/3/2021 kaleab

34. Insurance …
• No insurance : consumer faces price P, makes q visits
Price
P
cP
qc
q # Visits
• W/ coinsurance : consumer faces price cP, wants to
make qc visits
34
6/3/2021 kaleab

35. What if the consumer has full coverage?
• i.e., copayment = 0
Price
# Visits
35
6/3/2021 kaleab

36. Indemnity Insurance
– Insurer pays a fixed amount for each purchased service
• Insurer pays $150 for each overnight hospital stay, and
patient pays the rest
Price
Visits
D0
D1
$150
36
6/3/2021 kaleab

37. Fixed $ copayment
– Patient pays up to $20 per visit, and insurer pays the rest
Price
Visits
D0
$20
D1
37
6/3/2021 kaleab

38. Deductibles - Consumer must pay a fixed amount out of
pocket per year before coverage begins
– e.g. The initial $100 per year in health care
expenditures must be paid by the customer
38
6/3/2021 kaleab

39. Estimating Demand for Medical Care
• Quantity demanded = f( … )
– out-of-pocket price
– real income
– time costs
– prices of substitutes and complements
– tastes and preferences
– state of health
– quality of care
39
6/3/2021 kaleab

40. Rationales for health insurance
• Increase total available resources
• Improve stability of resources
• Greater equity implications
40
6/3/2021 kaleab

41. Logic
• The consumer pays insurer a premium to cover medical
expenses in coming year
– For any one consumer, the premium will be higher
or lower than medical expenses
• But the insurer can pool or spread risk among many insurees
The sum of premiums will exceed the sum of
medical expenses
41
6/3/2021 kaleab

42. Determinants of Health Insurance Demand
1 Price of insurance
– The consumer will forego health insurance if the
premium is greater than expected.
2 Degree of Risk Aversion
– Greater risk aversion increases the demand for
health insurance
42
6/3/2021 kaleab

43. 3 Income
– Larger income losses due to illness will increase the
demand for health insurance
4 Probability of illness
– Consumers demand more insurance for events most likely
to occur
– Consumers demand less insurance for events least likely
to occur
– Consumers more likely to insure against random events
43
6/3/2021 kaleab

44. Assumptions underlying the theoretical model
of health insurance demand
• Consumers bear the full cost of their own health
insurance
• Insurance companies can appropriately price policies
• Individuals can afford health insurance/health care
The above 3 assumptions do not always hold in the
real world
44
6/3/2021 kaleab

45. Types of health insurance
• Public sector
• Private sector
• Community
45
6/3/2021 kaleab

46. Payment Methods
• Third party payment-fee for services
• Capitation
• Out of pocket payment (self insurance)
46
6/3/2021 kaleab

47. Payment …
• The allocation of resources (usually money) to
health sector organizations and individuals in
return for some activity (e.g. delivering
services managing organization)
47
6/3/2021 kaleab

48. 1. Third party payment (fee-for-service)
• Payments to a provider for each act or services rendered
• A payment mechanism where by a provider or health care
organization receives a payment each time a reimbursable
services is provided (e.g. office, visit, surgical procedures,
diagnostic test, etc)
• The fee-for services system encouraged physicians to provide
more care than necessary in order to increase their income, as
they were paid for each service or procedure they provided
48
6/3/2021 kaleab

49. Rational for third party payment
• Public demand and political commitment to
equity
• Dominance of provider interest groups
• Market failure
• Imperfect information
• Externalities
49
6/3/2021 kaleab

50. Imperfect Information and Uncertainty
• Do not know how long you will live,
• Do not know how healthy you will be in the future.
• Do not know when you might be unhealthy.
• Do not know how much health care you might need.
• Do not know how much change in health will affect future
income
50
6/3/2021 kaleab

51. 2.Capitation
• A fixed payment to a provider for each listed or
enrolled person served/period of time
• A payment mechanism where by an organization
receives a fixed, specified amount of money per time
period (e.g. month, years) for each individual for
which it is responsible for meeting health needs (e.g.
primary care, regardless of the volume of services
rendered)
51
6/3/2021 kaleab

52. • In other words, payments will vary according
to the number of patients enrolled, but not with
the number of services rendered per patient
• Prevents overuse of services
• Could limit necessary services
52
6/3/2021 kaleab

53. 3. Out of pocket payments
Fee paid by the consumers of health services directly to
the providers at the time of delivery.
• Health care - commodity
• Government role small or nonexistent
• Those in need least able to pay
• Poor health reduces ability to earn
• Uncertainty
53
6/3/2021 kaleab

54. Types of Cost of Illness
• Direct
• Incidental
• Indirect
• Psychic
Direct costs of a disease
– accurately correlated with an illness
– Preventing, diagnosing, treating the disease (hospital stay,
professional fee, drugs, laboratory exams, home care)
54
6/3/2021 kaleab

55. Cont…
Incidental costs – non-medical costs like travel costs, food and
lodging, costs of attendants
Indirect costs – production losses, economic losses, loss of wages
due to illness, disability, premature death
Intangible costs or Psychic costs
– Unquantifiable
– Pain, suffering, disruption of normal lifestyle
55
6/3/2021 kaleab

56. • Systematic and comparative analysis of courses of
action in terms of both costs and consequences or
benefits
• Economic evaluation is therefore an effort to analyze
inputs (resources) and outputs (changes in health
outcomes) simultaneously, and help decision makers
assess whether a certain level of output is worth the
amount of resources expended to produce it (given
that resources are scarce and can be used for
alternative purposes).
56
6/3/2021 kaleab
Economic Appraisal / Evaluation

57. Economic Evaluation and Decision Making
• A few economic evaluation limitations
–Not able to quantify decision makers' or public’s
feelings regarding equity and distribution of
benefits
–Not able to capture any sense of family quality of
life
–Focused on health-related quality of life when QOL
is driven by a lot more than health
• Economic evaluation provides structured information but is not
intended to be the only information used in decision making
57
6/3/2021 kaleab

58. Cont…
58
6/3/2021 kaleab

59. Why Should Economic Evaluations Be Conducted?
59
6/3/2021 kaleab

60. Nature of Economic Evaluation
Target
patient
group
 Survival
 Quality of life
Program A
Program B
Impact on health
status
Impact on health care
costs
Impact on health
status
Impact on health care
costs
 Survival
 Quality of life
 Hospitalisations
 Drugs, procedures
etc.
 Hospitalisations
 Drugs, procedures
etc.
60
6/3/2021 kaleab

61. Generic steps in economic evaluation
(1) Define study question and perspective
– Describe alternatives, determine study perspective
(2) Identify, measure and value costs and benefits
– Measure costs and benefits in physical units relevant
for study perspective, value costs and benefits
(3) Analysis of costs and benefits
– Discounting, incremental (additional) costs and
benefits of alternatives, sensitivity analysis on key
parameters
(4) Decision rule
– Incremental Cost-Effectiveness Ratios (ICERs) e.g.
cost per LYG or QALY thresholds, other decision-
making criteria
61
6/3/2021 kaleab

62. Study Perspective
• Study question (& funding agency) determines
perspective
• Perspective determines costs/ consequences
considered
–e.g. societal, government, provider, third
party payer
• Societal - widest possible range of costs/
consequences
• Provider - e.g. exclude time and transportation costs
• Run societal perspective alongside other study
perspectives
62
6/3/2021 kaleab

63. Costs
• Identify, measure and value all resources
• Direct health care costs (e.g. costs of treatment)
• Direct personal costs (e.g. transportation)
• Direct non-health costs (e.g. legal system)
• Indirect costs (e.g. productivity losses)
• Valuation of opportunity costs - market prices
63
6/3/2021 kaleab

64. Benefits
• Cost-Effectiveness Analysis
– Measure benefits in natural units e.g. LYG
– Addresses technical efficiency, difficult to compare
across programs
• Cost-Utility Analysis
– Measure benefits in terms of QALYs
– Addresses technical efficiency, easier to compare
across programs
64
6/3/2021 kaleab

65. Benefits ...
• Cost-Benefit Analysis
– Measure benefits in terms of dollar valuations
– Addresses allocative efficiency, easier to compare
across programs
– Can be used to compare health and non-health
programs
65
6/3/2021 kaleab

66. 0.0
1.0
0.4
0.2
0.6
0.8
Initial
Final
Quality Adjusted Life Years (QALYs)
Full
Healt
h
Dead
66
6/3/2021 kaleab

67. Incremental Analysis
Target
patient
group
 Survival
 Quality of life
New Program
Old Program
Impact on health
status
Impact on health care
costs
Impact on health
status
Impact on health care
costs
 Survival
 Quality of life
 Hospitalisations
 Drugs, procedures
etc.
 Hospitalisations
 Drugs, procedures
etc.
68
6/3/2021 kaleab

68. Incremental Cost-Effectiveness Ratio (ICER)
(Costnew – Costold)
(Effectivenessnew – Effectivenessold)
Incremental resources
required by the
intervention
Incremental health effects
gained by using the
intervention
ICER = C / E
= ICER
69
6/3/2021 kaleab

69. A simple decision rule
ICER for new program ≤ $50,000/QALY
Decision: adopt new program
ICER for new program> $50,000/QALY
Decision: do not adopt new program
70
6/3/2021 kaleab

70. Evaluation
 systematic assessment of:
– Relevance
– Adequacy
– Progress
– Efficiency
– Effectiveness
– Impact of a course of action.
71
6/3/2021 kaleab

71. Importance of Economic Evaluation
• All type of health services are faced with choices about
the best way to use limited resource to achieve their
objectives
• Complete economic evaluation aims to:
• Clarify
• Quantity
• Value all of the relevant options and their inputs
and consequences
72
6/3/2021 kaleab

72. Types of Economic Evaluations
 Cost Minimization Analysis
 Cost Effectiveness Analysis
 Cost Utility Analysis
 Cost Benefit Analysis
– Always compares any health care programme with an
alternative, for example, no treatment or routine care.
– Always measure the benefits produced by all
alternatives compared.
– Always measures the cost of any programme.
• The various methods of economic evaluation
differ in the way they itemize and value inputs
and consequences or effects
73
6/3/2021 kaleab

73. Cost minimization analysis
• Consequences of competing interventions are the same and in
which only inputs, that is, costs are considered
• Used when the effect of both interventions is identical (or
assumed to be identical). Thus, there is no outcome measure -
only costs are accounted for.
• Aim is to decide the least costly way of achieving the same
outcome
• Choose least costly outcome among options with similar
outcomes
74
6/3/2021 kaleab

74. Cost Effectiveness Analysis (CEA)
• Concerned with technical efficiency issues
• Technical efficiency issues are what is the best way
of achieving a given goal or what is the best way of
spending a given budget
• Comparison can be made between different
programs in terms of their cost effectiveness ratio.
• Cost per unit of effect
75
6/3/2021 kaleab

75. Cost effectiveness analysis (CEA) …
– Under CEA effects are measured in terms of the most
appropriate one-dimensional natural unit
– E.g. What is the best way of treating renal failure?
– The most appropriate ratio with which to compare
programs might be cost per life saved
– The advantage of the CEA approach is that it is
relatively straight forward to carry out and is often
sufficient for addressing many questions in health care.
76
6/3/2021 kaleab

76. Cost effectiveness analysis (CEA)…
• However it is not comprehensive
Identification : Single effect common to both
alternatives but achieved to different degree
Measurement: Natural units
e.g. Life years gained, disability days saved, point of BP
reduction
77
6/3/2021 kaleab

77. Advantages
• Relatively simple to carry out.
• Often able to use outcome measures which are
meaningful in a particular field.
Disadvantages
• Because outcome is one-dimensional, cannot
incorporate other aspects of outcome into the cost-
effectiveness ratio.
• Interventions with different aims/goals cannot be
compared with one another in a meaningful way.
78
6/3/2021 kaleab

78. Con…
• Meanings of outcome measure not always
clear, i.e. what is value of a case detected in a
screening program.
• May have situations when the option with the
highest cost effectiveness ratio should be
chosen.
79
6/3/2021 kaleab

79. Examples of measures of effectiveness
 Cases treated appropriately
 Lives saved
 Life years gained
 Pain or symptom free days
 Cases successfully diagnosed
 Complications avoided
80
6/3/2021 kaleab

80. Cost-Utility Analysis
• CUA is concerned with technical efficiency and allocative
efficiency within the health care sector
• These are multidimensional under this form of analysis
• CUA tends to be used when quality of life is an important
factor involved in the health programs being evaluated
• This is because CUA combines life years (quantity of life)
gained as a result of a health program with some judgment on
the quality of those life years
• It is this judgment element that is labeled utility
81
6/3/2021 kaleab

81. Cost-Utility Analysis …
• Utility is simply a measure of preference
• This is normally done by assigning values
between 1.0 and 0.0 where 1.0 is the best
imaginable state of health and 0.0 is the worst
imaginable (perhaps death)
• Measures the effects on morbidity (quality of
life) and mortality quantiity of life )
82
6/3/2021 kaleab

82. Cost-Utility Analysis …
• Identification: Single or multiple effects, not
necessarily common to both alternatives, and
common effects may achieved to different
degrees by the alternatives
• Problem league tables
83
6/3/2021 kaleab

83. Cost-utility analysis (CUA) …
• combines life years saved with the quality of life during those
years
• Patient’s preferences are considered with respect to the effects
of the intervention
• Used when treatments have a wide range of outcomes and a
common unit is required
• Outcomes are measured in a composite metric of both length
and quality of life
84
6/3/2021 kaleab

84. Cont…
• Outcomes measured using a common scale
– DALYs – disability-adjusted life years
– QALYs – quality-adjusted life year
85
6/3/2021 kaleab

85. Cost-Benefit Analysis
• Cost benefit analysis is the most comprehensive and
theoretically sound form of economic evaluation
• it has been used as an aid to decision making in many different
areas of economic, social policy in the public sector for more
than fifty years.
• estimates and totals up the equivalent money value of the
benefits
• costs to the community of projects to establish whether they
are worthwhile.
86
6/3/2021 kaleab

86. Cost-Benefit Analysis ...
• The main difference between cost-benefit analysis and other
methods of economic evaluation:
• that it seeks to place monetary values on both the
inputs (costs) and outcomes (benefits) of health care
• Among other things this enables the (monetary) returns on
investments in health to be compared with the returns
obtainable from investments in other areas of the economy.
87
6/3/2021 kaleab

87. Cost-Benefit Analysis ...
• In health sector itself; the attachment of monetary values
to outcomes makes it possible to say whether a particular
procedure or program offers an overall net gain to society
in the sense that its total benefits exceed its total costs.
• Cost-effectiveness and cost-utility analysis do not do this
because they measure costs and benefits in different units.
88
6/3/2021 kaleab

88. Cost-Benefit Analysis ..
• CBA requires programme consequences to be valued in
monetary units,
– thus enabling the analyst to make a direct
comparison of the programmes incremental cost
with its incremental consequences in
commensurate units of measurement, be Birr,
dollars, or pounds.
• CBA is broader in scope and able to inform questions of
allocative efficiency,
89
6/3/2021 kaleab

89. Cost-Benefit Analysis ...
• Because it assigns relative values to health and non-health
related goals to determine which goals are worth
achieving, given the alternative uses of resources, and
thereby determining which programmes are worthwhile.
• Both costs and benefits are assigned a monetary value.
• The benefits of any intervention can then be compared
directly with any costs incurred.
90
6/3/2021 kaleab

90. Cost-Benefit Analysis ...
• If the value of benefits exceeds the costs of any intervention
then it is potentially worthwhile to carry that intervention out.
• It is concerned with the question, is a particular goal
worthwhile.
• Potentially it can answer questions such as should extra money
be used for heart transplants or improving housing.
• Method requires that all resources and benefit generated by an
intervention needs to be assigned a monetary value.
• Outcome of 2 programs differ
• All costs and consequences of a program are expressed in the
same units, usually money
91
6/3/2021 kaleab

91. A Benefits Versus Costs Example
• Consider a vaccination program implemented by an employer
to vaccinate employees — healthy working adults — against
influenza. An economic study documents that the total cost of
vaccinating one person is $16.69, and
• benefits gained by each person vaccinated total $30.35.
• If the employer has sufficient health-care funds to fund the
program, should the employer do it?
• Because the benefits outweigh the costs, the employer might
consider investing in the program if it compares favorably
to other programs
92
6/3/2021 kaleab

92. 93
6/3/2021 kaleab

93. Always……
…..identify…
…..measure…
…..value
Have we included everything that is relevant?
Have we counted it?
Have we converted it to a common currency?
Measuring costs and benefits: three important
steps
94
6/3/2021 kaleab

94. Total cost = sum of all the costs of producing a particular
quantity of output
Average cost= total cost/quantity e.g. cost per patient, cost per
diem
Marginal cost= the extra cost of producing one extra unit of
output
Fixed costs = costs which do not vary with the quantity of
output in the short run (about 1 year) e.g. rent, equipment
lease payments, some wages and salaries.
Variable costs = costs which vary with the level of output, e.g.
food, medical/surgical supplies
Definitions of cost
95
6/3/2021 kaleab

95. It is the uses of resources which have opportunity costs.
Therefore, in evaluating an intervention, we want to
identify, measure and value resource use.
Some things usually thought to be “costs” are not so in
an economic evaluation.
‘Rules’ for costing
96
6/3/2021 kaleab

96. “Rules” for costing …
• We are interested in resource use
• Main items of cost are:
– capital (buildings/equipment)
– labour
– consumables
– non-patient related costs
– costs falling on other sectors
– costs incurred by patients/families
97
6/3/2021 kaleab

97. Indirect costs:
• Time lost from work (production effects)
Production effects arise from working in the labour force and
housework
Indirect costs arise because health care may result in lost
production
Value of indirect cost is the value of the lost production
Is this an input to treatment or an output? (Will return)
Take a “societal perspective”.
‘Indirect’ costs
98
6/3/2021 kaleab

98. Double counting: including the same cost more than once
• e.g. including time costs and fees and then adding them
together (often the fee reflects time spent on activities)
• e.g. detailed costing of staff time in an operating theatre and
then adding the hourly cost of theatre time which may already
include costs for staff time as well as amounts for drugs,
supplies, equipment etc.
Double counting
99
6/3/2021 kaleab

99. Use naturally occurring units
e.g. staff costs measured in units of time
drugs measured in amounts such as grams
Measurement
100
6/3/2021 kaleab

100. Costing non-market labour
• No market values for housework and voluntary work
• Where possible, impute values from an analogous market
101
6/3/2021 kaleab

101. • Capital costs tend to occur at a single point in time
• However, capital assets are used over time and can be sold at
any time
• Opportunity cost of capital is spread over time
• Calculate an annual equivalent cost
Costing capital
103
6/3/2021 kaleab

102. • Interested in real resource use
• Adjust costs to eliminate effects of inflation
Assuming 5% inflation:
$100 last year  $100 now
$100 last year = $105 at today’s prices
Counting costs in a base year
104
6/3/2021 kaleab

103. • Costs and benefits arise at different points in time (e.g.
prevention)
• We want to look at costs and benefits from the perspective of
the “present day”
• Discounting is simply the expression of opportunity cost over
time, i.e.
– tying up resources now
– not having benefits now
• The same cost arising in the future imposes on us less than if it
arose now
• The same benefit arising in the future is not seen as being as
valuable as the same benefit arising now
• So, we discount these future costs and benefits
• This is not accepted by everybody
Why do we discount the future?
105
6/3/2021 kaleab

104. • Question: “Should costs (and benefits) occurring at different
points in time, be given equal weighting?”
• If I offered to give you £1000 today OR £1000 in 5
years which would you choose?
• Would you rather pay me £1000 today OR £1000 in 5
years?
Discounting
106
6/3/2021 kaleab

105. • We have “positive time preference” because:
– myopia or impatience
– diminishing marginal utility of wealth
– diminishing marginal utility of health
– the future is uncertain
• But, how do we calculate discounted costs and benefits and at
what rate should we discount?
Discounting ...
107
6/3/2021 kaleab

106. • Present Value:
PV=present value
Vn=Value in year n
r=discount rate
n=number of years ahead
Discounting ...
108
6/3/2021 kaleab
n
n
r
V
PV
)
1
( 


107. • Which would you rather have: £1000 today or £1000 in
five years time?
• What is £1000 in five years worth today?
• PV= £1000 /(1.05)5 = £783.50
• £1000 in five years is worth less than £1000 today
Discounting example
109
6/3/2021 kaleab

108. • Consistent with empirical economic studies
• Include government recommended rates
• Consistent with other published economic
evaluations.
Choice of discount rate
110
6/3/2021 kaleab

109. • OK to discount money, but not health
Main arguments against discounting
111
6/3/2021 kaleab

110. Measurement and valuation of benefits
• What do we mean by “benefit”?
• How do we describe Health-Related Quality of Life
benefits?
• How do we obtain valuations for health and non-
health benefits?
112
6/3/2021 kaleab

111. What do we mean by benefit?
• Cases detected, cases treated, lives/life years saved (CEA)
• Combination of quality and length of life e.g. QALYs (CUA)
– Utility based Health State valuations
• More general measures of well-being (CBA)
– Valuing health and non-health benefits, e.g.
reducing inequalities, raising empowerment,
improving access
113
6/3/2021 kaleab

112. Why do we need valuations of benefits?
• Historical focus has been on mortality-based measures of
benefits
• But measures should take into account morbidity and mortality
benefits of programs
• Preferences for “Health States” are used to estimate morbidity
or Health-Related Quality of Life (HRQoL) component
• Data on mortality and morbidity/HRQoL are combined into a
single index (typically QALYs)
114
6/3/2021 kaleab

113. Why do we need valuations of benefits?
• QALYs allow comparisons across
– different programs
– disease groups
– sick versus well
– young versus old
• Can detect unexpected side effects
• Preferences for health and non-health benefits
– permit broader comparisons across health programs
– permit comparisons with non-health programs
115
6/3/2021 kaleab

114. Methods for valuing benefits
• Valuing health benefits (HRQoL)
– Visual Analogue Scale (VAS)
– Time Trade-Off (TTO)
– Standard Gamble (SG)
• Valuing health and non-health benefits
– Willingness To Pay (WTP)
– Discrete Choice Experiments (DCEs)
116
6/3/2021 kaleab

115. Steps in constructing an HRQoL Utility Instrument
• Decompose Health
– Impairment, Disability, Handicap
• Construct a coherent “Descriptive System”
– set of questions / items
• Attach utility weights to items
– Elicit preference values for Health States
included in the descriptive system
– VAS, TTO, SG
• Combine items (using a utility model)
– additive, multiplicative
117
6/3/2021 kaleab

116. Main HRQoL Utility Instruments
• EQ-5D (Euroqol)
• SF-6D (based on SF-36)
• HUI-III (Health Utilities Index Mark III)
• AQoL (Assessment of Quality of Life)
• QWB (Quality of Well-Being)
• Rosser-Kind Index
118
6/3/2021 kaleab

117. EQ-5D Descriptive System
• Mobility
• Self-care
• Usual activities
• Pain/discomfort
• Anxiety/depression
• 243 states, 3 levels per attribute
119
6/3/2021 kaleab

118. 120
6/3/2021 kaleab

119. HUI-III Descriptive System
• Vision
• Hearing
• Speech
• Ambulation
• Dexterity
• Cognition
• Pain and discomfort
• Emotion
972,000 states, 5-6 levels per attribute
121
6/3/2021 kaleab

120. Valuing health benefits (HRQoL)
• Visual Analogue Scale (VAS)
• Time Trade-Off (TTO)
• Standard Gamble (SG)
122
6/3/2021 kaleab

121. Visual Analogue Scale (VAS)
1.00
0.00
0.50
0.75
0.25
Dead
Full Health
Poor Health
123
6/3/2021 kaleab

122. Visual Analogue Scale (VAS)
1.00
0.00
0.50
0.75
0.25
Dead
Full Health
Place the Health State
for “Childhood
Leukaemia” on
the scale
124
6/3/2021 kaleab

123. Visual Analogue Scale (VAS)
• Easy to administer and achieve high response rates
• No difficult choices
• Respondents tend to ‘shy away’ from the end-points of the
scale
125
6/3/2021 kaleab

124. Time Trade-Off (TTO)
• Choice between two certain outcomes
• Years of life traded for quality of life
• Years of healthy life you would give up to avoid living in a
state of poor health
126
6/3/2021 kaleab

125. Time Trade-Off (TTO)
Example
– You have arthritis (unable to do household and personal
care tasks, difficulty walking)
– Choose between living with arthritis for the next 10
years (followed by immediate death) or living in full
health for a shorter length of time (followed by
immediate death)
– Would you choose 1 year of full health (followed by
death) or 10 years with arthritis (followed by death)?
– Would you choose 9 years of full health (followed by
death) or 10 years with arthritis (followed by death)?
– ‘go on’ until “preference value” is found
127
6/3/2021 kaleab

126. Time Trade-Off (TTO)
• Utility of Health State A is T/10
– T is the number of years in full health
– 10 is the number of years in Health State A
– If years in full health selected was 6
– Utility (HSA)= 6/10 = 0.60
• The better Health State A is, the less the years of healthy life
you would give up
128
6/3/2021 kaleab

127. Standard Gamble (SG)
• Classical method of assessing preferences
• Choose between certain outcome and a gamble
• Incorporates uncertainty, therefore better reflects real
treatment decisions
• If respondent is risk neutral then utilities from SG
should be the same as from TTO
129
6/3/2021 kaleab

128. Standard Gamble (SG)
• You have end-stage renal disease and face the prospect of
being on dialysis for the remaining 40 years of your life
• You are offered a hypothetical intervention (e.g. a xenograft)
that will involve the gamble:
Immediate return to
full health
(probability = p)
Immediate
death
(probability = 1- p)
130
6/3/2021 kaleab

129. Standard Gamble (SG)
Xenograft
Status quo
Death
Full Health for 40 yrs
Dialysis for 40 yrs
p
1-p
Preference value of ‘Being On Dialysis’ = p
Choice
certain
131
6/3/2021 kaleab

130. Valuing health and non-health benefits
• Willingness To Pay (WTP)
• Discrete Choice Experiments (DCEs)
132
6/3/2021 kaleab

131. Willingness To Pay (WTP)
• Most common method of measuring benefits in cost-benefit
analysis
• Utility you gain from a program represented by maximum
amount you would be willing to pay for the program
• E.g. a new drug improves your health from “severe asthma” to
full health
– What is the maximum you would be WTP for that
drug?
133
6/3/2021 kaleab

132. Willingness To Pay (WTP) …
• Can a monetary value be placed on health?
– monetary valuations often implicit e.g. personal
choices, physician choices
– can be explicit e.g. safety programs, cost-per-
QALY thresholds
• WTP can be measured in terms of out-of-pocket payments,
taxations, insurance
• Equity weights for ability to pay
134
6/3/2021 kaleab

133. Discrete Choice Experiments (DCEs)
• Individuals asked to make pair wise choices between
hypothetical scenarios
• Scenarios describe benefits from programs
• Scenarios decomposed into attributes and levels of different
attributes
– direct parallel to items and item responses in
HRQoL instruments
• Unlike WTP, valuations of attributes can be ‘broken down’ for
the different parts of benefits
135
6/3/2021 kaleab