Health economics

Economic Evaluation
Of Health Care System
Dr / Eman Mortada
Associate Professor
Community medicine department-
faculty of medicine- Zagazig University

Outline
1- Health System definition, composition and
varieties
2-What is Health Economic?
3- Why Do We Need Health Economic Evaluations?
4- Basic Concepts of Health Economics
5- Economic Evaluations definition, aim and uses
6- Components and Analytic Framework of
Economic Evaluations

What is a Health System?
Complex to define, however, a health system is taken
to include
“all activities whose primary purpose is to promote,
restore or maintain Health”

Health care systems composed of:
1-Beneficiaries
Patients, society
2-Settings
Hospitals, clinics, pharmacies
3-Workers
Doctors, nurses, professionals
4-Technologies
Medicines, surgical equipment etc

Variety of ways of providing health care
Ability to pay Based on the need
GOALS OF HEALTH SYSTEM
Health systems have multiple goals, but they
fundamentally exist to improve health
Private Sector versus Public Sector in Health care

Those who provide health care (e.g. clinicians) as well as
Those who plan care provision face difficult questions such as:
which services to provide?
at what stage in the disease process to provide it?
to whom it should be provided?
With what health care resources, and
With what relation to other health services?
Difficult questions

The answers to these questions is a trade of
providing all services to limited number of people
or
providing limited services to all number of people
Difficult answers

Can The Application Of Economics
Help?

The answer is: YES
“To every complex question, there is a simple answer ...
-Decisions in the health sector of different levels of
complexity can be informed by the use of economic
analysis
-health economists are concerned with determining:
what medical services to produce,
and who should receive them
-Techniques have been developed to compare
interventions

The economic way of thinking
Health services
Uses resources
What is gained? What is forgone?
(benefits) (costs)
Benefits >< Costs?
Then trade - off between cost and benefits

Uses of Economic Analysis in Setting
Health Policy
1-Policy and program evaluation
-Assist in policy decisions
-Adopt a new program
-Develop guidelines for care
2-Health care resource allocation decisions
Compare innovation to standard care

Accountants care only about $$$$$$$$$$
Physicians care only about patients……
Economics is how to allocate scarce
resources
Health Economists care about resource$ and patients

Health Economics can be defined as:
1: A branch of economics that is concerned with how resources
are allocated and used in different health systems.
2: It is the logic framework that help health care professional,
health care decision makers and governments to make
choices on how to make the best use of limited health care
resources.

Why Do We Need Health Economic
Evaluations?

Economics and Health
1-Economics and health are related
Health used to be viewed as an end product of
the growth process
New thinking is that health enhances
economic growth
-Healthy people are productive people

1960
Health Care Expenditures as a share of GDP
2-Cost of Health Care Rising
During the last four decades, healthcare expenditures have
become a larger and larger share of the economy. It has
become a world wide phenomena and a matter of
public concern
1970 1980 1990 2000
5.1 %
7.0 %
8.8 %
12.0 %
13.2 %

Why Is the Cost of Health Care Rising?
Demand has risen every year due to:
1-Aging of population and epidemiological
transition
2-Technological advances e.g. organ
transplantation, MRI, renal dialysis.
3-Rising patient expectations

 Health resources Health
resources
Medical personnel time,
equipment, drugs, patient
Resources dedicated to
health care have
increased
but are still limited
•In poor countries this limitation is absolute.
Richer countries have more resources, but also have an
higher offer of new technologies which cannot be all
simultaneously acquired
Limited resources for health care -3

4-Economic data influence government
decisions regarding health care
In the last 2 decades economic evaluation has been
recognized as an important tool that assist decision
maker in deciding which intervention and program
represent good "value for money",
helping policymakers choose interventions which maximise
health within the available resource constraint.
Health Economics can be used to:
improve the performance of a health system.

Basic Concepts of Health Economics

1- Scarcity
This is a fundamental starting point for the economic
perspective
Scarcity means that society does not have enough of
everything (resources) for everyone (wants and needs).
Scarcity is a problem facing society due to:
1-Unlimited Wants and
Needs:
This is a basic characteristic
of humanity . people are
never totally satisfied with the
quantity and variety of goods
and services.
2-Limited Resources:
which means that the
quantities of available
resources used for
production are finite.

2- choices
‘choosing’ is an unavoidable consequence of scarcity .
Scarcity forces choices to be made
If there are not sufficient resources to meet all "needs" then
some needs must be left unmet
Priority setting refers to the process of deciding which needs
should be met and which needs cannot be met,
Indeed, economics has been labeled the ‘science of
choosing

3- Opportunity cost
Rest on:-
the two principles of scarcity and choice.
As health care resources are limited we have to make
choices between different alternatives so certain
opportunity will be taken while others will be foregone
Benefits associated with the foregone opportunity is the
opportunity cost

If you are making a decision on funding a health care
programme for £10,000
Which on are you going to fund
 10 hip replacements
 Or a liver transplant
 Or a smoking cessation programme
Thus we need to know cost and benefits of various health
care activities aiming at maximizing benefits and
minimizing the opportunity cost ( economic efficiency)
Opportunity cost

4-Economic Efficiency
 Allocative efficiency : assess competing programmes
and judge the extent to which they meet objectives
 Technical efficiency: assess the best way of achieving a
given objective
The best use of resources to achieve an objective, either
treating the maximum number of patients or producing
maximum health gains.

EFFICACY EFFECTIVENESS
EFFICENCY
Does it work in
clinical practice?
Does it work
in real life?
Does it contribute to a
more efficient use of
resources?
Efficacy, effectiveness and efficiency
Effectiveness of a procedure is a prerequisite
for its consideration in any efficiency
analysis

Effectiveness
Health care planners seek measures of effectiveness to
establish whether health care interventions achieve their
stated objectives,
while health economists use measures of effectiveness in
cost effective analysis to assess efficiency

It measures the % of success of the program in achieving
its objectives=
achieved objectives/ planned objectives
E.g. if a program intend to decrease the prevalence of certain
disease from 100% to 60% in 5 years
But actually at the end of the 5 y we only decrease the
prevalence to 80%
Planned objective was 100-60=40%
While achieved objectives 100-80=20%
So effectiveness of that program 20/40*100=50%
Effectiveness From
Health Care Planners Point Of View

It is the optimal use of the available resources
Relationship between Outputs (services provided)
& Inputs (resources used to produce these
services) in other words maximum output for a
given input.
= BENEFITS / RESOURCE COSTS
Effectiveness From
Health Economists Point Of View
EFFICIENCY (Avoids Waste)

Health Economic Evaluations Are Just One Part
of Health Economics
Health
Economics Health
Economic
Evaluation
Other topics in health
economics:
optimal size of hospitals, optimal
payment for physicians, optimal
level of co-payment by patients,….
Definition :
Set of techniques used to
weight up costs
and consequences of
different alternatives.

Health Care
Input
Output or
Outcomes
Health Care
Program or
Procedure
COSTS
(Resources
consumed)
OUTCOMES
Clinical effects
Quality of life
Economic benefits
PROGRAM
Surgery
Hospital
Drug Therapy
framework for
Economic analysis
(Important Steps)

A. Define the problem
B. Identify intervention options
C. Select and measure costs
D. Select and measure outcomes
E. Select appropriate economic evaluation technique
F. Identify time frame and analytical horizon
g. Further refinement
-discounting
-sensitivity analysis
Important Steps

1-Defining problem or the question to be
assessed
Define Precisely problems to be analyzed, and
limits
Important Steps
2-Identify intervention option
Particular disease
Medication only
Surgery
Community screening program
Old test
New test

decreased
productivity
Direct Costs Indirect Costs
Intangible
Costs
non-medical Costs Medical Costs
Anxiety,
pain or
suffering
COST
incurred outside the
medical sector
Transportation to a
medical care facility
Childcare
Resources spent on medical
services as a direct
consequence of a disease
Lab, drugs, surgery,
hospitalization
Important Steps
Expenses related to the
provision of medical care,
3-Select and measure costs :
The different forms of cost

Indirect Medical Costs
Intangible
Non-Visible
Costs
Visible
Costs
Represents 3 X Medical Costs
Direct Medical costs
Medical
Pharmaceutical
Important Steps
Health Care Cost Is Like An Iceberg

4-Defining the Audience and Perspective
of the study
 The viewpoint assumed in an analysis is
important:
- Perspective taken determines which costs will be
included.
- A programme which looks unattractive from one
viewpoint may look attractive when other viewpoints
Important Steps

The Societal Perspective Is Most
Important.
Several different perspectives from which we can
analyze a program including:
1-Health care providers
2-Patients (travel, time, leave from work, anxiety about results,
pain)
3-Government
4-Institution (hospital)
5-Societal (meaning that all program costs and
consequences are included in the analysis, regardless of
who pays or benefits)
Important Steps

Cost Perspective
Societal Payer Employer Patient
Direct Medical Y Y Y Out of pocket
Direct Non-Medical
(e.g., transportation,
day care)
Y N N Y
Indirect (e.g.,
Productivity)
Y (if not in
denominator)
N Y Y (if not in
denominator)
Intangible (e.g.,
grief, pain, suffering)
Y (if not in
denominator)
N N Y (if not in
denominator)
Examples of cost based on perspective of
analysis

Usually health improvements, which can be measured in a
number of ways including:
1-Health effects for example, cases found, cases prevented, lives
saved.
2-Economic benefits that can be :
-direct (savings in health care costs because the programme makes the
person healthier),
-indirect (individuals are able to return to work)
-intangible benefits (monetary value of the reduction in pain and
suffering).
3-Value of the health improvement itself to the patient, family and
society.
Important Steps
5-Select and measure benefits

6-Which technique should you
use?
Important Steps
There are four main approaches to economic
evaluation :
The main difference is in the way each technique
measure outcomes …
… because they differ in terms of the question they to
address
Also Technique vary depending on Who makes decision

Economic evaluation methods …
CMA
CEA
CUA
CBA
COST-MINIMISATION ANALYSIS
COST-EFFECTIVENESS ANALYSIS
COST-UTILITY ANALYSIS
COST-BENEFIT ANALYSIS
Answered the question: Which of two equally
effective interventions has the lowest cost?
which one is the best way of achieving a given goal
and the best way of spending a given budget?
which one do people prefer
Which intervention maximises the net (monetary)
benefit?

The simplest from of economic evaluation
When outcome of alternative intervention
are equivalent
then analysis will only compare cost .
1 Cost-minimization Analysis
Both test A and B can detect 100 case of breast
cancer in 10, 000 population, but test B is twice
expensive as test A,
so it is reasonable to adopt the test which has the
least cost
cost

Patient
Population
Original
interventions
new
interventions
Similar outcome
Consider costs
Cost-minimization Analysis
Disadvantages
few interventions have identical outcome so
it is rarely used
Advantages
Most simple and easiest

2- Cost-effectiveness Analysis
When different health care interventions do not produce
the same outcome
 Costs are expressed in monetary terms
 Benefits are expressed in “natural units,” e.g., life-years
Cost $ / natural unit
The most common units are:
year of life gained pain free days
complications prevented Cased diagnosed
one outcome is measured ( in the same units to compare
interventions)

Patient
Population
Original
interventions (1)
new
interventions(2)
outcome(1)
Costs (1)
COMPARE:
outcome(2)
Costs (2)
outcome 1
Cost Drug 1
outcome 2
Cost Drug 2
> ?
Cost-effectiveness Analysis
An intervention is favored if it is more effective and costs less

Cost
Effectiveness New Strategy New Strategy
Costs less Costs more
New Strategy
less Effective
New Strategy
more Effective
Cost-Effectiveness decision matrix

Cost-effectiveness possibilities
New more costlyNew intervention
is less effective
and more costly
New
intervention is
less effective but
less costly
New intervention
is more effective
but also more
costly
New intervention is
more effective and
less costly
New more
effective than old
New less costly
New less effective
The
‘no go’
zone?
Cost-effective
(Dominance)
0
assesses the incremental gain in health
status
achievable with incremental increase in
health care resources calculate ICER
?????
Uncertainty
So … is it
worth it?

Drug A
Total cost for 100 patients = $10,000
Effectiveness = 10 strokes prevented
C/E of Drug A = 10,000/10=$1000 / strokes prevented
Drug B
Total cost for 100 patients = $60,000
Effectiveness = 50 strokes prevented
C/E of Drug B = 60,000/50=$1200 / strokes prevented

Incremental Cost-Effectiveness
Analysis
=
$50,000
40
= $1250 / additional stroke prevented
=
$60,000 - $10,000
50-10
“The additional costs that one service or program imposes over
another, compared with the additional benefits, it delivers.”
what’s the extra cost to get the extra effectiveness?

 Example 2:
___________________________________________________
Total Cost/ Lives Saved/
100 Patients 100 Patients
Drug A $220,000 79 $2784.81/ life
saved
Drug B $20,000 78 $256.41/ life
saved
_____________________________________________________
•Incremental CE ratio
Cost drug A - Cost drug B
Outcomes drug A - Outcomes drug B
= $220,000 - $20,000
79 Lives - 78 Lives
= $200,000 / Life Saved

Advantages
Relatively simple to carry out
Disadvantages
1- can only compare interventions whose effects are
measurable in the same units
2-Interventions with different objectives cannot be
compared Unlike cost benefit analysis, cost effectiveness
analysis cannot tell you whether to fund a program.

3-Cost-utility Analysis
(cost per QALY)
Cost-utility analysis are a special form of cost-
effectiveness analysis, in which:.
Costs are expressed in monetary terms
 Benefits are expressed in quality-adjusted “natural
units,” e.g., quality adjusted life-years
 The most commonly used unit of utility is quality-
adjusted life-years (QALYs).

Measure Utility
Utility : is a measure of preference about an outcome (a
health state).
 Utility values representing individual preferences can
be assigned to health rates (usually 1=healthy;
0=dead)
1. Time trade off
2. Standard gamble
3. Rating scales
4. Person trade off
Cost-Utility Analysis
Utility measures:

1-Time Trade-Off (TTO)
Quality of Life
Length of Life
Long and dull
Short and fun
Which life do you prefer?
QALY = health status valuations  survival periods
= quality of life  quantity of life= .5 x 22
healthy
blind both eyes
0
1.0
0.5
12 22

2-Visual Analogue Scale
How do you feel??
0 1
worst health state
(death)
best health state
0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9


QUALITY WEIGHTING
(Perfect 1
Health)
(Death) 0
0 1 2 3 4 5 6 7 8
without
intervention B quantity
gain
quality
gain QALY
GAIN
with
intervention
B
TIME
(Years)

(NEW) Drug A
 New medication
 Cost $6,000/year
 Provides one additional
life-year
 Severe edema (reduces
quality of life)
 Utility = 0.8
(OLD) Drug B
 Current Standard Rx
 Cost $4,500/year
 Provides 1/2
additional life-year
 No edema (perfect
health)
 Utility = 1.0

(NEW) Drug A
QALY = life-years x
utility
= 1.0 x 0.8
= 0.8 QALY
(OLD) Drug B
QALY = life-years x
utility
= 0.5 x 1.0
= 0.5 QALY
cost utility = $6,000/ 0.8 cost utility = $4,500/ 0.5

• Advantages
1- Includes patient preference in analysis of benefits
2- Allows comparisons between different disease area
3-Permits comparisons between and within health care
programmes
Disadvantages
-Utility measurements are not standardised they vary by:
Method used and by respondent
-Subjective assessments

4-Cost-benefit Analysis
Refers to economic analysis in which outcomes are
expressed in monetary units.
Costs expressed in $ terms
Benefits expressed in $ terms
Results compare :
Benefit / Costs = Ratio

____________________________________________________
Cost Benefit Average B:C Ratio
New Benefit/Cost
Service $25,000 $45,000 1.8:1
____________________________________________________
Cost-benefit Analysis
Decision Rule:
1-Accept programs with benefit: cost > 1.0
2-When comparing alternatives, choose the
treatment with the highest net benefit ratio

1-Willingness to Pay
The value of health is the maximum amount individuals
would be willing to pay to maintain it.
the maximum amount of money an individual is willing
to pay for a product is an indicator of the value of
that product.
Monetary Valuation of
Benefits

2-Human Capital Approach
(Values of Life)
Age Male Female
20-24 $170,707 $133,328
30-34 $205,062 $130,044
40-44 $180,352 $111,647
50-54 $124,989 $86,286
60-64 $45,169 $53,426
70-74 $9,718 $29,189
The value of health is the value of
what is produced

Advantage:
.
Powerful tool as in it cost and outcome are m
Limitations:
1- it is difficult to monetarize the value of all health outcome
2- Ethical problems and moral objections
(impact of ability to pay in the process of valuing effect

When is CEA Used?
When is CUA Used?
When is CBA Used?
Which technique should you use
B- depending on the question to be addressed

Comparison of programs
with same goal
increase provision of iron
therapy
vs.
health education
program for
changing faulty
dietary habits
Common goal: decrease prevalence of iron deficiency
anemia
Which technique should you
use??????
When is CEA Used?

When is CUA Used?
1- When quality of life is the important outcome.
2- When the program affects both morbidity and mortality.
3- When the programs being compared have a wide range
of different outcomes.
use??????

Uses of Cost Benefit
Analysis
 1- Decision of whether or not to fund a program.
 Do the benefits exceed the costs?
 Should the health department spend money on a smoking
cessation program? (Y or N)
 Cost side: Smoking cessation program costs expressed in $ terms.
 Benefit side: Place a value on the benefits of reducing the
proportion of who smoke.
 Compare costs with benefits.
 If Benefit-cost ratio is greater than 1 (or if net benefits are positive)
then DO IT!
use??????

 2- Comparison of programs, even those having
different goals.
 Spend money on smoking cessation program or drug
addiction treatment services?
 Compare costs and benefits of smoking cessation
program.
 Compare costs and benefits of addiction treatment
program.
 Rank programs by benefit-cost ratios.
 Select the program with the highest benefit-cost ratio (as
long as it is greater than 1).
use??????

Choosing between
programs
B/C of smoking
cessation
B/C of addiction treatment
services
vs.
Choose the alternative with the higher B/C
ratio as long as it is >1.
use??????

CBA
CUA
CEA
Who makes decisions:
Country Head,
Legislators
Minister of
Health
Program
Director
C- Depending on who make
decisions
use??????

7-Identify Time frame
--Short-term
Within the time period of the trial
--Long-term
e.g 5 years
e.g. 10 years
--Lifetime
Many interventions in chronic disease show benefits years later
Time frame: the time period over which intervention is provided
Important Steps
Analytic horizon: the time period over
which benefits expected to occur

8-Further refinement
Every intervention needs to address
Discounting :
adjusting for time preference
Sensitivity analysis:
adjusting for uncertainty
Important Steps

Discounting Costs
Most interventions carried will have its impact in
the future .In order to draw most valid
conclusion about costs, it is necessary to
consider that there is a time preference
associated with money
--Time Preference
Refers to the rate at which people discount the
future relative to the present.
E.g. Suppose different choices can bring the same
benefit, but in different time, generally most
people prefer the nearer one .
Important Steps

--a pound today is worth more than a pound tomorrow
as inflation: erodes the buying power of a pound
A $1000 cost one year from now requires only $930.00 in
hand today.
Therefore future costs must be adjusted to reflect present
value.
--Discounting: = process to obtain the present value of
future money.
--Discount Rate: indicates how you value present
consumption (utility) versus future consumption (utility)

Year Cost (1999 $) Discounted Cost (1999 $)
2000 10,000 10,000/(1+0.03)1
=9,709
2001 10,000 10,000/(1+0.03)2
=9,426
2002 10,000 10,000/(1+0.03)3
=9,151
2003 10,000 10,000/(1+0.03)4
=8,885
 40,000 NPV= 37,171
Example: 3% Discount Rate
So future costs are given less weight than present costs.
Appropriate discount rate?
The medical literature has settled typical discount rates 3-6%
Both costs and health outcomes should be discounted

Sensitivity Analysis
Definition:
reassessment of the model used for data summary that attempts to
detect whether changing any of its assumptions leads to different
interpretations of the outcome. Simply it is adjustment for
uncertainty
Causes of uncertainty
Medical experts are uncertain about the value of various preventive measure.
Professional assessment are constantly updated with research
Its difficult to predict future discount rate
.
The more complex the analysis the more the assumption are made

 Economic evaluations often have to make assumptions
concerning aspects of the study:
 prevalence, incidence of disease
 effectiveness of intervention(s)
 likely treatment choices
 volumes of resource use
 Where there is uncertainty, it can be handled by sensitivity
analysis: the assumption is varied within bounds, to see
how sensitive the result is to the baseline assumption. If
final decision is not affected by making different
assumptions about uncertain quantities-by choosing High
and Low estimates, then intervention may be applied
Sensitivity Analysis

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