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1. MEASURING COSTS Prof. Mahmoud Alhaddad

2. INTRODUCTION
Costs are calculated to estimate the resources (inputs) that are used in
the production of a good or service.
based on economic theory, e “true” cost of a resource is its
opportunity cost “the value of the best forgone option or the next
best option.

3. Example: if a new clinic requires a part time physician. But the current
physician who is working as a full time in the old clinic is asked to work
few hours daily in the new clinic as part of his duties. Even no extra
payment is given to the physician, still the opportunity cost should be
calculated based on the hourly wages. This is because if the physician
did not go to the new clinic he would spend more time in his current
clinic and do some other jobs.

4. The “price” or the amount that is charged to a payer is not necessarily
synonymous with the cost of the product or service.
For example: if a hospital system wanted to calculate how much it cost
to treat a patient with a specific diagnosis, there may be a substantial
difference in what the is the total cost to the hospital compared with
the amount the hospital charges the payer compared to what is
actually collected from the payer after allowable amounts are
factored in.

5. COST CATEGORIZATION
1. Direct medical costs
2. Direct nonmedical costs
3. Indirect costs
4. Intangible costs

6. Direct Medical Costs: are the most obvious costs to measure.
These are the medically related inputs used directly to provide the
treatment.
Examples: medications, medication monitoring, medication
administration, patient counseling and consultations, diagnostic tests,
hospitalizations, clinic visits, emergency department visits, home
medical visits, ambulance services, nursing services.

7. Direct nonmedical costs: are costs to patients and their families that
are directly associated with treatment but not medical in nature.
Examples: travel costs to receive health care (bus, gas, taxi),
nonmedical assistance related to condition, hotel stays for patient or
family for out-of-town care, child care services for children of
patients.

8. Indirect Costs: involve the costs that result from the loss of productivity
because of illness or death.
Indirect Benefits: are savings because of avoiding indirect costs. Are
the increased earnings or productivity gains that occur because of the
medical product or intervention.
Examples on indirect costs: lost of productivity for patient, lost of
productivity because of premature mortality.

9. Intangible Costs: include the cost of pain, suffering, anxiety, or
fatigue that occur because of an illness or the treatment of an illness.
Intangible Benefit: is avoidance or alleviation of intangible costs, are
benefits that result from reduction in pain and suffering related to a
product or intervention.
Examples on Intangible costs: pain and suffering, fatigue, and
anxiety.

10. PERSPECTIVE
To determine what costs are important to measure, the perspective of
the study must be determined.
Perspective is an economic term that describes whose costs are
relevant based on the purpose of the study.

11. COMMON TYPES OF PERSPECTIVES
Societal: the most comprehensive perspective which include costs to the
insurance company, costs to the patient, other sector costs, and indirect
costs because of the loss of productivity. (difficult and time consuming)
Institution (provider): e.g. hospital or clinic. Actual costs to treat the
patient should b estimated.
Payer: e.g. Medicaid or private insurance plan.
Payer perspective may include the costs to the third party plans or the
patient or a combination of the patient copay and the third party
plan costs.
Patient

12. TIMING ADJUSTMENTS FOR COSTS
Bringing Past Costs to the Present: Standardization of Costs.
When costs are estimated from information collected for more than
one year before the study, adjustment of costs is needed
(standardization of costs).
If a retrospective data are used to assess resources used over a
number of years back, there costs should be adjusted, or valued at
one point in time.

13. If you compare costs for patients who received treatment in 2000 with
patients who received treatments in 2005, the comparison of
resources used would not be fair comparison because treatment costs
tend to go up each year. Adjustment of 2000 costs to the amount they
would have cost in 2005 is needed before direct comparison can be
made.

14. First method to estimate costs is to calculate the units consumed in
2000 and multiply this number with the cost of each unit in 2005.
The second method to estimate the costs is to multiply the costs
collected in 2000 by the medical inflation rate for the year. This rate
ranges between 4-5%.

15. DISCOUNTING
Discounting is the process of bringing future costs to the present.
If costs are estimated based on dollars spent or saved in future years,
a modification called discounting is needed.
There is a time-value associated with money.
People prefer to receive money today rather than at a later time.
Therefore money received today is worth more than the same amount
of money received next year.

16. To calculate the present value (PV) we need to know the discount rate
which ranges between 3-6% and the number of years.
PV= I/(1+r)¹
I = cost
r = discount rate
t = number of years

17. E.g. if the expenses of cancer treatment for the next three years are
$5000 for the first year, $3000 for the second year, and $4000 for
the third year. What is the PV?
PV
calculation
Estimated costs
without discounting
Year costs are
incurred
$4762
5000/1.05
$5000
Year1
$2721
3000/(1.05)2
$3000
Year2
$3455
4000/(1.05)3
$4000
Year3
$10938
$12000
Total

18. SENSITIVITY ANALYSIS

19. AREAS OF UNCERTAINTY: VARIABILITY IN SAMPLE
DATA
Data required for economic evaluations are the resources,
health outcomes and the data necessary to value those
resources/consequences.
 E.g. enalapril quantity, blood pressure, enalapril price.
Variability with different populations with respect to these
data is a key source of uncertainty in economic evaluation.
Usually handled through sampling technique and conventional
statistical methods.

20. AREAS OF UNCERTAINTY: GENERALISABILITY OF
RESULTS
Generalisability is concerned with the extent to which results of a
study, as they apply to a particular population and/or a specific
context, hold true for another population and/or in a different
context.
Generalisability of a study and attempts to strengthen studies are
further sources of uncertainty.

21. AREAS OF UNCERTAINTY: GENERALISABILITY OF
RESULTS
Whether the results conducted on one group valid for another.
 Is a cholesterol lowering drug, which is cost-effective when prescribed to men, also cost-effective when given
to women?
Whether the relative C-E observed within a trial hold true in clinical practice.
Whether resource and non resource consequences observed in one hospital, region, or
country can be replicated in other locations?

22. AREAS OF UNCERTAINTY:
EXTRAPOLATION
Many economic evaluation extrapolate away from primary data
sources to:
 Model final outcome from intermediate clinical end point
 Model longer time horizon than the primary data source

23. AREAS OF UNCERTAINTY: ANALYTICAL
METHODS
Analytical methods used in an economic evaluation consist of a range
of techniques. A number of these have disagreement amongst
practitioners about the most appropriate analytical methods:
 Methods of measurement
 Methods of valuation
 Choice of costs & benefits
 Choice of discount rate

24. DEFINITION
Sensitivity analysis is a process whereby the soundness or
robustness of the results and conclusions of economic
evaluations are tested by varying the underlying assumptions
and variables over a range of plausible values
It is not a change in study design but a mathematical
manipulation of the study variables

25. WHY IMPORTANT?
Used to determine the effect of data uncertainty or
assumptions on study conclusions
oFinding sensitivity can greatly influence a researcher’s
interpretation of results and thereby serves as a critical step
in conducting HE evaluations
Used to identify the most important study
assumptions
oBy identifying sensitive variables, sensitivity analysis can
pinpoint areas where additional research is needed to clarify
the contribution of specific variables

26. TYPES OF SENSITIVITY ANALYSIS
Simple sensitivity analysis
Probability sensitivity analysis

27. SIMPLE SENSITIVITY ANALYSIS
Most common form.
One or more parameters of an evaluation is varied across a plausible
range.
Useful when high quality sample data are not available.

28. SIMPLE SA: ONE-WAY
Each uncertain component of the evaluation is varied individually, while the others
retain their base-case specification, in order to establish the separate effect of each
component on the results of the analysis.
The analysis could be repeated on different parameters at different times.

29. SIMPLE SA: ONE-WAY
Suppose that a researcher
would like to test which
parameters have the
greatest influence on a
model’s results.
Each parameter in the model
(or, at least, each of the key
parameters) could be
changed by a specific
amount, e.g. 20% of
original value.
• For each parameter change, the researcher might record the percentage impact on
the model’s main outcome, which can be shown graphically in the form of a tornado
diagram.

30. SIMPLE SA: ONE-WAY
Threshold analysis is a variant of
one-way SA.
Concerned with identifying critical
value of parameter above or
below which the conclusion of a
study will change i.e. break-even
point.
• Example: cost-effectiveness of a particular intervention will remain
below a pre-specified threshold of £20,000 only if the intervention is
priced below £270. As the price of the intervention increases, it
becomes less and less cost-effective.

31. PROBABILISTIC SENSITIVITY ANALYSIS
(PSA)
In PSA, rather than assigning a single value to each parameter,
computer software (such as TreeAge) is used to assign a distribution to
all parameters in the model. The ranges are determined by:
 The average value
 The standard deviation
 The ‘shape’ of the spread of data.
Each time the model is run, the software will be able to randomly
‘select’ one value for each parameter and record the model’s results. If
the model is then run a great number of times (in some cases, more than
100,000 ‘iterations’), the software will record the result each time, and
present the variation in results.

32. RESOURCES FOR COST ESTIMATIONS
How does someone estimate the common direct medical costs?
 Sometimes these costs are measured directly during a clinical study for each patient
through record keeping and patient logs.
 The more similar clinical study is to “real-world” practice, the better estimate this
method provide.
 Sometimes costs are collected retrospectively from medical records or reimbursement
claims data.
Sources of estimates for four types of common direct medical cost categories are
addressed. (medications, medical services, personnel costs, and hospitalization).

33. MEDICATIONS
The average wholesale price is often used when calculating the cost of
pharmaceutical products in USA.
This is called the “list price” or “sticker price” of medication.

34. MEDICAL SERVICES
Medical services, such as office or clinic visits and outpatient
laboratory and surgical procedures, are frequently included in direct
medical cost estimates.
Providers have list of charges for these types of services but payers
pay less than this list price.
When the perspective is that purchaser (payer), various sources are
available to estimate these costs to the payers. (physician fee
reference)

35. PERSONNEL
If the perspective of the study is the provider of health services (e.g.
hospital, clinic, physician’s office, pharmacy) and the provision of
different health care alternatives involve a difference in the amount of
time spent by medical personnel.
So cost is calculated based on the time spent by health personnel
times the salary.

36. HOSPITALIZATIONS
The level of precision of estimates varies widely for studies that
include hospital costs as part of their evaluation.
In order, from the least precise (gross or macro costing) to most precise
(micro costing), four methods for estimating hospital costs are:
1. Per diem
2. Disease specific per diem
3. Diagnosis-related group (DRG)
4. Micro-costing

37. The level used is determined by:
 Importance of the hospital-related costs to the overall evaluation.
 The perspective of the study
 The availability of cost data
 Resources available for conducting the study

38. PER DIEM
Is the least precise method of estimating hospital costs
For each day that patient is in a hospital setting, an average cost per
day for all types of hospitalizations is used as a multiplier.
E.g. if the average cost reimbursement per day for hospitalizations of
all patients was USD2000 per day. The total cost for 3 day stay is
2000×3 = USD6000.

39. DISEASE SPECIFIC PER DIEM
Would be more precise to use estimated costs per day for specific
diseases.
E.g. average daily cost for appendicitis cases USD1500. in this case 3
days stay for appendicitis patient is 1500×3 = USD4500

40. DIAGNOSIS-RELATED GROUP
Relatively available and commonly used method.
This method is used to classify clinically cohesive diagnosis and
procedures that use similar resources.
Things to consider:
 Principal diagnosis
 Specific procedures involved
 Secondary diagnosis
 Age
 Etc.

41. MICRO-COSTING
Is the most precise method to estimate hospital costs.
Micro-Costing involves collecting information on resource use for each
component of an intervention.
E.g. this usually entails a review of patients’ hospital records to
determine what specific services (e.g. medications, laboratories,
procedures) were used and assigned a cost for each service.

42. STUDY PERSPECTIVES
Many perspectives are possible in the economic and humanistic evaluation
of medical care.
Perspectives refer to the point of view from which the economic analysis is
performed.
These perspectives will influence the costs and consequences identified,
measured and compared for a program or treatment alternative.
The value of treatment alternative will be heavily dependent on the point
of view taken.
Common perspectives include:
 Patient
 Provider
 Payer
 Societal

43. PATIENT PERSPECTIVE
Patients are the ultimate consumers of health care services.
Costs from the perspective of patients are essentially what they pay
for a product or service, that is the portion not covered by the
insurance.
Other costs incurred due to illness or treatment, including morbidity
and mortality costs.
Costs from a patient perspective might include insurance co-payment
and out of pocket drug costs
Also indirect costs in terms of health related work and living
limitations are also important from patient perspective.

44. PROVIDER PERSPECTIVE
Costs from the provider’s perspective are the true expenses of
providing a product or service, regardless of the charge.
Charge data might be more readily available but are usually not
reflective of the true costs of health care.
Providers could be hospitals, clinics or private practice physicians.
The primary costs from provider’s perspective are of a direct nature.
For example: drugs, hospitalizations, laboratory tests, supplies and
salaries of health care professionals might be important for provider’s
perspective.

45. Indirect costs are less important from provider perspective since they
are not realized by the provider.

46. PAYER PERSPECTIVE
Payers include insurance companies, the government and employers.
The costs to the payer are those charges for health care products and
services allowed, or reimbursed by the payer.
The primary costs from a payer’s perspective are the direct costs.
Indirect costs might also be important from the payer’s perspective in
which patient may become absent from work due to a disease which
affect on the employer’s service level.

47. SOCIETAL PERSPECTIVE
Society is another potential perspective in pharmacoeconomics.
This perspective is the broadest among all other perspectives because
it is the only one that the benefits to the society as a whole.
In societal perspective, all direct and indirect costs are of great
important and are all considered in the analysis.
Costs from societal perspective include patient morbidity and
mortality costs and the overall costs of giving and receiving medical
care.