This document provides an overview of economic evaluation of health interventions. It defines economic evaluation as the comparative analysis of costs and consequences of at least two health care interventions. Resources are limited, so economic evaluations are conducted to help with optimal resource allocation. The document outlines different types of economic evaluations including cost-minimization analysis, cost-effectiveness analysis, cost-utility analysis, and cost-benefit analysis. It also discusses key components of economic evaluations like costs, outcomes, and methods of comparing alternatives.

1. ECONOMIC EVALUATION
OF HEALTH INTERVENTIONS
Abdur Razzaque Sarker
MHE (Health Economics), MSS (Economics)
Health Economics and Financing Research, icddrb
and
PhD Fellow in Strathclyde University, UK
Email: razzaque.sarker@gmail.com

2. What is economic evaluation?
Economic evaluation is the comparative analysis of at least
two health care interventions or alternatives in terms of
both their costs and consequences.
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3. Why Conduct an Economic
Evaluation?
Resources are limited and consequently
priority needs to be made for optimal
resource allocation.
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4. Country Type Year
Australia Mandatory 1993
Canada (Ontario) Mandatory 1995
Canada (British Columbia) Mandatory 1996
France Mandatory 1997
Finland / Italy Mandatory 1998
Sweden Recommended Regular use
USA (Arizona, Colorado) Mandatory
Requirement for Economic Evaluation Guidelines
for
reimbursement of drugs
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5. Understanding Economic Evaluations
 Types of health care evaluations
 Whose perspective is being used?
 What alternatives are being considered?
 Which costs are included?
 What outcome measure is being used?
 How are alternatives being compared?
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6. Resources
- Labor
- Capital
Health intervention
Changes in health
outcomes
- Cases prevented
- Life years saved
- Disability averted
What is Healthcare intervention?
Health care intervention is a production
process that transforms ‘inputs’ (surgery,
physical exercise) into ‘outputs’ (change in
health status).
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7.  Cost‐Minimization Analysis
Compare the costs of two or more interventions to achieve an
identical outcome and choose the least costly one
 Cost‐Effectiveness Analysis
Compare ‘cost per consequence’ of two or more interventions,
where the consequences are measured by “natural” units (life
years gained, saved years of life)
 Cost‐Utility Analysis
Compare ‘cost per consequence’ of two or more interventions,
where the consequences are measured by “utility” related to
health (quality-adjusted life years, disability adjusted life years)
 Cost‐Benefit Analysis
Compare cost of intervention with the benefit incurred, where
the
benefit is measure by monetary units
Types of Economic Evaluations
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8. Economic evaluation methods at a glance
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9. Cost Analysis
Cost analysis is an technique that involves the systematic collection,
categorization, and analysis of costs of intervention.
Note: Cost of intervention is same for any type of economic evaluatio
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10. Four steps for cost calculation
1. Identify the relevant resources used, regardless of whether they can
be measured or not
2. Quantify these resources in physical units.
3. Value the different resources used at their opportunity costs.
4. Deal with differential timing at which resources have been used
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11. Classification of costs items
Capital costs
Costs that last longer than a year. Example: Computer, building, vehicles.
Recurrent costs
Costs that are used up in the course of a year and are usually purchased
regularly. Example: Cartridge, repairing, fuel
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12. Types of costs
Fixed costs
Costs that do not vary with the quantity of the good or service produced in the
short run. Example: Land, vehicle, x-ray machine.
Variable costs
Costs that vary with the quantity of the goods or services produced.
Example: Syringes, x-ray film, medicine.
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13. Shared or overhead cost allocation
Costs that are not specific to patient, but attached to a higher level (ward,
department etc.)
Example: Hospital administration, central laundry, cleaning
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14. Direct allocation of shared costs
A given ward’s share of central administration would be equal to the
total
cost of central administration, multiplied by the ward’s share of the
allocation
basis paid hours for staff).
Example:
Total administrative cost = 20,000 Taka
Total staff hours in hospital = 200 Hours
Total staff hours in a specific ward = 50 hours
The administrative cost to the ward will be allocated is:
20,000 * (50/200) = 5,000 Taka
If 1000 patients are treated by the ward, then the administrative cost
per
patient will be =5,000/1,000 = 5 Taka
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15. Costing methods
Bottom-up approach
The bottom up approach values each cost component for individual patients.
Data requires at patient level.
Top-down approach
The top down approach values each cost component for average patients.
Data requires at the department level.
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16. Calculating cost
Total costs
Average costs
Marginal costs
Incremental costs
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17. Total cost
 Total costs are the sum of the value of all resources used to produce a
total output.
 To calculate total costs (TC), the quantities (Q) of all program components
used are determined and multiplied by their unit price (P).
TC = (Q1 x P1) + (Q2 x P2) + … … … ... … … + (Qn x Pn)
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18. Average cost
Average costs (AC) are the average value of inputs used per unit of
output or total cost of output divided by the number of outputs.
AC= TC/Q
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19. Calculating TC and AC
Component Data
Number of
Patients (Q)
10 20 30 40 50 60 70
Variable cost (VC) 10 10 10 10 10 10 10
Fixed cost (FC) 150 150 150 150 150 400 400
Total cost (TC)=
[(Q x VC) + FC]
250 350 450 550 650 1000 1100
Average cost (AC)
=
[TC / Q]
25 17.5 15 13.75 13 16.6 15.71
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20. Marginal cost
Marginal costs (MC) are the cost of adding an additional unit of service or
good.
Example: The additional cost of immunizing one more child (marginal cost)
is
the additional value of resources required to do so. This includes, for
instance,
extra vaccines, supplies, and the amount of personnel time spent in
administering the vaccine.
MC = Change in total costs  Change in quantity produced
Example:
Total cost for treating 25 patients = 750 Taka
Total cost for treating 26 patients = 770 Taka
MC = (770-750)  (26-25) = 20 Taka
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21. Incremental cost
The additional cost that one intervention imposes over another mutually
exclusive alternative.
Example:
Program A: Cost 200 Taka
Program B: Cost 300 Taka
Then, incremental cost is 300-200 = 100 Taka
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22. Adjusting cost for time differentials
• Future streams of costs are discounted to reflect time preference and
presented in terms of their present value.
• Hence, discount rate is the quantitative measure of time preference.
• A discount rate of 0% indicates no distinction between present and
future costs and benefits.
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23. How to discount?
Discounting factor
Here,
r = discount rate
n = number of years
 Commonly use at 3% discount rate (WHO recommended)
 Discount rate is varied from 0% to 10% in sensitivity analyses
Present value = Future value x Discount
factor
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25. Example:
Annual costs for a project are
Year 1 = Taka100,
Year 2 = Taka 200, and
Year 3 = Taka 300.
What is the present value of the total program costs, if the discount
rate is 5%?
Present value = 100 x + 200 x + 300 x
= 100 x 0.9524 + 200 x 0.9070 + 300 x 0.8638
= 535.8 Taka
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26. Inflation-adjusted discount
Inflation is the change in price level of any inputs (in this case).
A thermometer costs 20 Taka in year 2011. The inflation rate between
2010
and 2011 is 8%. The inflation adjusted cost of thermometer in year
2010 is
20/(1+0.08)^1= 18.5 Taka
If the inflation is 8% and discount rate is 5%,
Then inflation-adjusted discount rate = (1.05 x 1.08) = 1.134
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27. Concept of Annuitizing
Annuitizing involves determining an annual value of capital item for
the life of the resource.
Annuitizing spreads the capital costs over the useful life of
resources and provides more accurate estimates of true resource
use.
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29. Example:
Purchase or replacement cost of a capital item (PC) = 200,000 Taka
PC = Equivalent annual cost × Annuity Factor (r, n)
= E×AF3%,10 (r=3%, n=10 years)
 200000 = E×8.5302
 E = 200000  8.5302 = 23446 Taka
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30. THANKS
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Email: razzaque.sarker@gmail.com