economic analysis for health - april

8/8/2019 Economic Analysis for Health - April

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For Internal Circulation

An Introduction toEconomic Analysis for the Health Sector

Suyash RaiEarly Child Health Practice

Social Initiatives Group, ICICI Bank


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Table of Contents

No. Topic PN1 Introduction

Resource Constraints 4

Health Sector and Economic Analysis 4Health Policy - Aspirations and Constraints 4

The Purview of Health Economics 5

2 Economic Analysis in HealthCost-of-illness AnalysisIntroduction to cost-of-illness analysis 6Methodological Framework for estimation 7Summary 14

Economic Evaluation for the Health sectorIntroduction 15Costing of interventions and programs 15Types of Economic Evaluation 17Summary 24

Programme Budgeting and Marginal Analysis 25

3 To ConcludeUsing Economic Analysis 26

Summing up 27

References 29

Appendices 33


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1. Introduction

Resource Constraints

One of the primary aims of application of economic theory is to maximize the benefitsderived from available resources. This is the question of efficiency that a large part ofeconomics literature tries to address. The need for efficiency derives from a state ofconstraints that can be understood at multiple levels. At the broadest level, it can beargued that we live in an environment of limited resources. This implies thatconsumption today is always at the cost of the potential of future generations toconsume. Also, the amount of resources readily available for consumption in a giventime period is limited, meaning that consumption for one purpose takes the resourceaway from other purposes. This state of constraints at the macro level carries to specificsituations as well. This is why trade-offs are central to the economic theory. EconomistArthur Okun aptly put it, You cant have your cake and eat it too is a good candidate forthe fundamental theorem of economic analysis.

Health Policy - Aspirations and Constraints

Health policies of many countries articulate an aspiration for comprehensive qualityhealthcare for all. This aspiration can be seen as a collection of expectations from thehealth sector: comprehensive care, quality, and universal access. Ensuring universal ac-cess, in itself, is a fairly challenging task. It entails ensuring timely provision of services toevery individual in the country. Comprehensiveness means ensuring every componentof a set of requirements needs to be made available. Quality is a complex idea because itrelates to the usability of the product or service for the people, making it context-specific.There may be trade-offs, for instance, there is evidence that comprehensiveness and free

availability may come at the cost of quality1

.

Prioritisation and rationing of resources are necessary to maximize the overall outcome.Also, production of goods and services could be made more technically efficient, so thatmore individuals can be treatedwith the same resource allocation, or there could be bet-ter targeting, so that somepeople may be excludedfrom certain services2. Moreover, re-allocation of public resources from other sectors could be an option in countries like In-dia, where the public spending is clearly very low3,4. Methods of Economic Analysis canbe of help in such decisions.

Health sector and Economic Analysis

The health sector seeks to address a fundamental need for the society. This need isparticularly difficult to address in the context of the developing countries, where evenbasic facilities are not available and there are too many demands on limited resources. Insuch a situation, adding an economic perspective can aid the policymakers in takingbetter resource allocation decisions, and improving the efficiency of existingprogrammes. This can happen at different levels.

1 Aaron and Schwartz (1998)

2 Hine (1999)

3 National Health Account of India 2002. Ministry of Health and Family Welfare, India. 2005.

4 National Health Accounts of countries (www.who.int) (Accessed on October 6, 2006)

4
http://www.who.int/http://www.who.int/http://www.who.int/


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Firstly, there are resource constraints at the level of the economy, where economicanalysis can help make a case for appropriate allocation for health. For example, a cost-of-illness study can bring the burden of disease in focus, thus underlining the need totake action to prevent or cure the burden. Secondly, there is a constraint in the totalfunds available for health, where the economic evaluation of interventions can help in

taking efficient resource allocation decisions. Lastly, there are resource constraints foreach programme and intervention. Here, economic analysis can help improve efficiency.

Before moving forward, let us locate this perspective in a larger framework. Most of thehealth sector goals could be seen as ends in themselves, though they may lead to bettereconomic growth for the country. It is important for a country to set its priorities in a waythat the health goals get the status they deserve. This prioritisation is informed by under-standings from health sciences and the idea of basic rights, and can be supported byeconomic analyses. For example, based on the medical knowledge about a basic pack-age of interventions for neonatal survival and an affirmation of a neonates right to sur-vive (notwithstanding the status of parents) a government can take the decision toprovide the services. Economic analysis can then help in deciding the most efficient wayof providing the service. Economic analysis can be put to use within a larger frameworkwith a principle like equitable access to basic services informing broader prioritisation.

The Purview of Health Economics:

Health economics can be defined broadly as the application of the theories, conceptsand techniques of economics to the health sector5. The above diagram shows the spanof health economics.

Figure 1: The Span of Health Economics

Source: Mills A and L Gilson. Health Economics for Developing Countries: A Survival Kit. HEFPworking paper 01/88, London School of Hygiene and Tropical Medicine, 1988

5 Mills and Gilson (1988)

5

HAT IS HEALTH? WHAT ISITS VALUE?Perceived attributes of health:Health status indexes: valueof life:Utility scaling of health:

HAT INFLUENCESHEALTH?Occupational Hazards:Consumption Patterns:Education Income: etc.

MICRO-ECONOMICEVALUATIONCost Effectiveness &Cost Benefit Analysis ofAlternative Waysof improving health (eg

choice of programme,delivery method,

DEMAND FOR HEALTH CAREInfluences of A + B on HealthCare Seeking Behaviour:Barriers to Access (Price, Time,Psychological; Formal); AgencyRelationship; Need.

MARKETEQUILIBRUIMMoney Prices.Time Prices,

aiting Lists& Non-PriceRationingSystems as

EquilibratingMechanisms andheir Differential

SUPPLY OF HEALTH CARECosts of Production;Alternative Production;Techniques; Input

Substitution; Marketsfor Inputs (Manpower, Equipment,Drugs, etc.) RemunerationMethods & Incentives

PLANNING, BUDGETING, &MONITORING MECHANISMSEvaluation of Effectiveness ofInstruments available for Optimisinghe System; including the interplay

of Budgeting, Manpower Allocations;Norms; Regulation, etc. and the

EVALUATION AT WHOLE SYSTEM LEVELEquity & Allocation Efficiency Criteria broughto bear on E + F; Inter-regional &

International Comparisons of Performance

AB

C

F

G

D

E

H


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This note touches upon issues relating to most of the fields of study depicted in thediagram, but focus will be on those in boxes B, E, G and H. The areas of healtheconomics concerned with the valuation of health, economic burden of illnesses, costand outcomes of alternative healthcare interventions, evaluation of health systems, andthe use of such information and analysis for maximizing the achievement of the

objectives of the health sector will receive maximum attention in this note.

If you are new to economic analysis, before going to the next section it may be useful tounderstand a few concepts presented in the Appendix to this note. These are theconcepts of: Economic costs, Adjusting for time factor, and marginal values.

2. Economic Analyses in Health

This note discusses three types of widely applied tools of economic analyses: 1) Cost-of-illness study, for estimating economic burden of a disease or risk factor; a type of needsassessment method that helps focus on areas of priority within the health sector basedon their economic burden; 2) Methods of Economic Evaluation, to compare costs andeffects of an intervention, and compare alternatives from the economic perspective; 3)The framework of Programme Budgeting and Marginal Analysis, which can help inprioritization and resource re-allocation for a set of programmes.

Cost-of-illness analysis

Needs assessment in the health sector is broadly of two types:6

i) Cost of illness or disease costing generating an assessment of the total economicburden on the community of the nominated disease.

ii) Community based surveys of health care priorities, focusing on public'sperceptions about their health needs.

Both needs-assessment methods involve some data on disease/risk factor prevalence orincidence. This data is then analysed differently. The Cost-of-illness method involvesestimating economic costs.

Introduction:COI studies represent a descriptive economic method, wherein the estimates describethe resources lost because of a disease. Such a study involves identifying andmeasuring

the direct,indirect, and/or intangible costs of a particular disease7. Estimatingthe cost ofan illness can be a useful aid to policy making, and organisations such as the World Bankand the WHO commonly use such studies8.

COI estimates can be used for determining budgetary allocations, prioritising researchfunding, and justifying funding for existing and new disease programs. Though all costscannot be readily converted into economic terms, estimating the economic costs canfacilitate comparison among alternatives. Cost-of-illness studies also provide importantinformation for cost-benefit analyses, which will be discussed later in this note.

6 Segal, and Richardson (1994)

7 Byford (2000)

8 Murray and Lopez, eds (1994)

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With a few exceptions, such studies have mainly been conducted and used in developedcountries9,10. The idea of conducting such research in a developing country like Indianeeds to be considered sensitively. Given the focus on economic growth in countries likeIndia, including an analysis of the economic costs of the problem could bolster theargument for intervention. So, one could say that when the other rationales are not able

to get the decision, the economic rationale could strengthen the case. But this line ofargument can also lead one into a potentially undesirable territory, wherein people canadvocate for making this the central criterion for evaluating options for allocatingresources. Therefore, considering the fundamentally political nature of the enterprise ofadvocacy, the idea of using economic considerations as a basis of evaluating options inpublic health needs to be presented with caution, and debated widely and deeply. Thisdebate could be informed by a sound understanding of this analysis.

Methodological Framework for estimation:A cost-of-illness study typically involves a few closely linked decisions regarding the

scope of the study. In this section, the questions related to these decisions arediscussed. Together they form the broad framework of a Cost-of-illness study.

What is the disease/risk factor for which the estimation is being done?A COI study can be conducted for one or more illnesses or risk factors. The illness or risk factor should to be defined clearly. This is important for identification of cases to beincluded for estimation. For cases with multiple illnesses, it is important to decide howthe costs should be attributed. Excluding the costs directly attributed to other illnessesmay lead to an underestimation of costs, because some of these may be related to theone being studied. Including all such costs may lead to double counting. Attributablecosts of such multiple diseases can be calculated using either attributable risk analysis(top-down approach) or econometric analysis. These methods are discussed later, in a

section on 'estimating direct costs'.

The process of estimating costs of risk factors, such as smoking and obesity, is slightlydifferent from that for illnesses. Risk factors have few costs themselves, but rather causeother conditions that may have high costs. Alderman et al (2004) estimates the cost ofLow Birth Weight (LBW) in Low-income countries. LBW is not a disease in itself, but is afactor that can lead to increased risks of morbidity and mortality, and also a decrease inproductivity11. The LBW babies carry relatively greater risks of perinatal and neonatalmortality and are more susceptible to developing infections. LBW baby girls are morelikely to grow up to be underweight and stunted women, who in turn have a higherprobability of delivering low birth weight babies themselves, thereby perpetuating an

intergenerational cycle of undernutrition and sub-optimal development.12 In addition,there is suggestive evidence linking LBW to coronary heart disease and diabetes in adultyears.13 The costs due to all these should be attributed partially to LBW. Such a study ismethodologically different because the costs need to be attributed selectively and thelimitation of scientific knowledge on causality also constrains the process.

9 Rice (2000)

10 RTI-UNC Centre for Excellence in Health Promotion Economics (2006

11 RTI-UNC Centre for Excellence in Health Promotion Economics (2006)

12 Podja and Kelley, eds (2002 )

13 Barker (1998)

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Once the disease or risk factor has been defined, the next step is proper identificationofcases in the given community or region. A process of proper identification suffers fromthe limitation of relevant epidemiological data due to difficulty in case definition, under-reporting of diseases and so on. If such data is not easily available, the researcher mayprovide estimates with different prevalence rates, so that reader can use the findings

depending on the rates they find reliable.

Multiple variants of COI studies have been conducted. For instance, Moore et al (2002)considered all the diseases in the country, classified them, and estimated all the costsrelated to them for the year 199814. In another study15, costs were estimated for twodiseases, namely Atopic Asthma16 and Seasonal Allergic Rhinitis (SAR)17. This study alsodifferentiated between different levels of severity of Atopic Asthma (moderate to severe).Such methodological flexibility for detailing is possible in the COI framework.

Who are the target audience and what is the purpose of the exercise ?If a government is commissioning a COI study for a disease with the purpose ofinforming its fund allocation, it would most likely include all the social costs and not justthe productivity loss and loss due to absenteeism, which may be the only costs includedwhen an employer is commissioning a COI study for evaluating alternative ways ofimproving productivity. Thus, the target audience and purpose of the study define theperspective of the study. A COI study can be conducted from different perspectives,determining what costs should be included in the estimate. For instance, Moore et al(2002) took a societal perspective to estimate the burden of diseases in Canada, becausethe purpose was to provide information for advocacy with the national policy.

Table 1: Costs Included in Cost-of-Illness Studies, by PerspectivePerspective Medical Costs MorbidityCosts MortalityCosts Transportation/Non-medical Costs Transfer PaymentsSocietal All Costs All Costs All Costs All Costs -Health CareSystem

All Costs - - - -

Third-partypayers

Covered Costs - Covered Costs - -

Businesses Covered Costs(self-insured)

LostProductivity

LostProductivity

- -

Government Covered - - Criminal JusticeCosts

Attributable toillness

Participantsand families

Out-of-pocketcosts

Lost Wages/HouseholdProduction

Lost Wages/HouseholdProduction

Out-of-pocketpayments

Amount Received

Source: Cost-of-illness Studies - A Primer (Segel, JE). 2006

Such studies can take a societal, health care system's, third-party payers', businesses',government's, or participants and their families' perspective. As can be seen in Table 1,societal perspective is most comprehensive and challenging. It requires data from many

14Moore (2002)

15 Schramm (2003)

16Atopic Asthma (or Extrinsic asthma ) refers to the onset of wheezing, cough, shortness of breath upon contact of anallergen. (http://www.predictonline.com/azma1.htm)

17 SAR, generally known as Hay fever, is an allergic reaction to airborne substances such as pollen that get into the upper

respiratory passages and also the eyes. (http://www.netdoctor.co.uk/diseases/facts/hayfever.htm)

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different sources, along with estimation of many indirect costs. These reasons also makea strong case for this perspective for economic analysis in public health.

Estimates are significantly sensitive to the perspective. As an example of how this hap-pens, consider Szucs et al (2001). They estimate the economic burden of Genital

Herpes18

in Unites States from two different perspectives, namely a societal perspectiveand a Third Party Payers perspective. The societal perspective used a cross-sectionalsurvey of a sample of primary and secondary care physicians to estimate the direct med-ical costs, whereas the third-party payer perspective used a claims database to estimatethem. The costs from societal perspective were estimated to be $984 million, while thethird-party payers perspective gave a figure of $283 million.

According to the authors, the difference could be explained by the influence of compli-ance to treatment. The higher figure is obtained with data collected via questionnaire andis likely to represent the monetary value of the amount of treatment prescribed by physi-cians. The lower figure, on the other hand, is an estimate based on claims and representsthe minimum amount of medical care and treatment actually consumed by patients. Thisdifference can be expressed as the difference from what is prescribed and what is actual-ly consumed, i.e. Compliance. A lower level of compliance means probably lower short-term direct costs, but probably higher indirect and long-term medical costs. The paperalso states that the hypothesis of different utilization rates is also consistent with the psy-chological aspects of Genital Herpes, which is perceived as a potential source of shamefor patients which is a plausible reason for lower levels of compliance to treatment 19.

Whether the the study is incidence-based, prevalence-based, or a combination of both?Epidemiological data being used differentiates the studies. Incidence-based studiesestimate lifetime costs. They measure the costs of an illness from onset to conclusion forcases beginning within the period of the study, usually a year 20. Incidence costs include

the lifetime medical, morbidity, and mortality costs for the incident cohort. The costs arediscounted to come to a present value.

Prevalence-based studies estimate annual costs. They measure the costs of an illness ina given period, usually a year, regardless of the date of onset 21. These studies include allmedical care and morbidity costs for a disease within the study year. However, in manyprevalence-based studies, the mortality and permanent disability costs are calculateddifferently from the other costs. Discounted mortality and permanent disability costs arecalculated for all patients who die or become permanently disabled in the study year forthat year and each year until the expected age of death 22. One way of estimating theoverall costs in a region from the prevalence-based perspective is to use the National

Health Accounts framework, which is a framework for estimating the cost-of-illness in aregion for a particular disease or sets of diseases in a given year23,24.

18 Genital Herpes is a sexually transmitted disease (STD) caused by the herpes simplex viruses type 1 (HSV-1) and type 2

(HSV-2). Results of a nationally representative study show that genital herpes infection is common in the United States.

(www.cdc.gov/std/herpes/STDFact-Herpes.htm) (accessed on 25-01-2006)

19 Mindel (1996), as cited in Szucs et al (2001)

20Segel (2006)

21 Ibid.

22 Hodgson (1983), as cited in Segel (2006)

23 PHR plus Project USAID (2004)

9
http://www.cdc.gov/std/herpes/STDFact-Herpes.htmhttp://www.cdc.gov/std/herpes/STDFact-Herpes.htmhttp://www.cdc.gov/std/herpes/STDFact-Herpes.htm


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For an illness that has costs within one year, a prevalence-based or incidence-basedstudy would be the same because future costs would not exist. For illnesses with coststhat extend past the first year, incidence-based studies provide more information aboutthe costs of averting a case. One may need to use a combination of these approaches.For instance, the Moore et al (2002) study to estimate the burden of illness in Canada for

year 1998, employed the Prevalence-based approach, except for mortality costs, forwhich an incidence-based approach was used. This means that Mortality cost estimateswere based on the discounted value of current and future costs of premature deathsoccurring in 1998, rather than a prevalence-based approach wherein estimates would bebased on 1998 dollar value of premature deaths that occurred prior to 1998.

Which costs should be included in the study and how should they be estimated?This decision is largely derived from the perspectiveof the study. The perspective andresource and data availability constraints determine which of the costs get included inthe estimate. As presented in Table 1, different costs are included for differentperspectives adopted for the analysis. Firstly, the costs generated by all the cases of theillness are identified. Traditionally, most Cost-of-illness studies identify costs that can beclassified as Direct or Indirect costs. Some studies also estimate the intangible costs.Costs may be estimated retrospectively or prospectively, depending on reliability ofavailable data and resource constraints.

Direct costs: These are the resources expended for preventive or curative activities ofhealth care25. Basically, these include the costs borne by the health care system, com-munity and family in directly addressing the problem. The direct costs can be furtherclassified into medical and non-medical costs. Direct medical costs include inpatientcare, outpatient care, nursing home care, rehabilitation care, specialists and other healthprofessionals care, diagnostic tests, prescription drugs and drug sundries, and medicalsupplies26. The direct medical costs may also include costs on health science research,

administration, and other related health care expenditures, but these are difficult to at-tribute to particular diseases27. Direct costs may also include labour costs, such as that ofhealth professionals and support staff, as well as capital costs, such as equipment, build-ings, supplies, utilities and land28. Non-medical direct costs include transportation coststo health care providers; relocation expenses; and costs of making changes to onesdiet, house, car, or related items29.

Estimation of the direct costs: The direct costs can be estimated using one of the threeapproaches: the top-down, the bottom-up, or the econometric approach. In the Top-down approach, direct costs are calculated by multiplying the total health care expendit-ures by the proportion of health care services used by the disease group. For example,

hospital costs for cancer would be the multiple of the total expenditures for hospital careby the percentage of all hospital services used by the cancer patients. For accurate es-timates, this approach uses aggregated data on costs along with a population-at-tributable fraction (PAF) to calculate the costs attributable to a certain disease or risk fac-

24 PHR plus project (USAID) (2005)

25 Bernard and Anita (2002)

26 Segel (2006)

27 Bernard and Anita (2002)

28 Chan et al (1996)

29 Segel (2006)

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tor30. The Population Attributable Factor (PAF), developed by Morganstern et al31, can beobtained by using a formula, in which the proportion of medical care for a disease at-tributable to another disease is measured.

The bottom-up approach estimates costs by calculating the average cost of treatment ofthe illness and multiplying it by the number of cases of the illness

32

. Since the averagecost of treatment for an illness is seldom readily available, the bottom-up approach oftencalculates the average cost of treatment by adding together the various components ofthe treatment. The bottom-up approach can involve multiplying the unit cost of a particu-lar treatment by the average amount of utilization of the treatment to get an average costestimate of the treatment. For example, the costs of hospital care in cancer would be cal-culated by multiplying the average cost of a hospital stay per day by the total number ofhospitalised days attributed to the cancer patients.

The econometric or incremental approach estimates the difference in costs between acohort of the population with the disease and a cohort of the population without the dis-ease33. This difference, when adjusted for other factors, can give the direct costs for theparticular disease. For instance, calculating the difference between the costs incurred bya cohort of cancer patients and a cohort of people not suffering from cancer, and adjust-ing this for other confounding factors could give estimate for direct costs of cancer.

Data requirement for these approaches: The econometric approach requires at least twodata sets (of those suffering from the disease and those not suffering), the top-down ap-proach requires data on costs and relative risks for calculating the PAF, and the bottom-up approach requires data from multiple sources for the unit cost and utilization rates. Ifused properly, each of these methods can give valid estimates, but the econometricmethod would usually requires lesser and more readily available data34.

Indirect costs: These are the resources forgone as the result of a health condition35.These costs include the productivity losses caused by the problem or disease, borne bythe individual, family, society, or the employer. Non-market activities such as housekeep-ing are sometimes omitted from analyses, or evaluated as a certain percent of the valueof market activity36. For conditions like Cancer, developmental diseases like cerebralpalsy, hearing loss, and visual impairment, epilepsy, injuries, musculoskeletal conditionslike Arthritis, and some mental disorders, indirect costs can be higher than direct costs37.

Since estimation of indirect costs requires putting a dollar value on mortality and disabili-ty, it is a controversial arena in the cost-estimation domain. There are controversiesaround the issues of what to measure? and how to measure it?. These methods tend

to give lower estimates of indirect costs for the elderly and also for those who are less di-rectly productive for the economy. Therefore it is important to debate whether the indi-

30 Segel (2006)

31 Morganstern et al (1980)

32 Liu (2002)

33Segel (2006)

34 Ibid.

35Haddix AC et al (eds) (1996), as cited inBernard and Anita (2002)

36 Welch (1997)

37 RTI International (2006)

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rect costs should be included at all. It may so happen that including the indirect costsmay take the attention away from the diseases of certain sections of the society.

Estimation of Indirect Costs: There are basically three methods used for estimation of in-direct costs: the human capital method, the willingness-to-pay or contingent valuation

method, and the friction cost method. These methods are also useful for estimation ofbenefits in a cost-benefit analysis, discussed later in this note.

The Human Capital Method includes only the loss of economic productiondue to disabil-ity (morbidity) and premature mortality 38. Indirect costs in the human capital approachare seen as the earnings, present and future, lost as a result of the illness. Individuals areregarded as producing output in their lifetime that can be valued as equal to each indi-viduals market earnings at that time. Therefore, the estimates for different groups earn-ing different wages and with different employment rates are different. For estimating thecosts of permanent disability and premature mortality, the approach requires multiplyingthe earnings lost at each age by the probability of living to that age. The future costs arediscounted to arrive at a present day figure.

This was one of the first methods that put a monetary value on a human life and disabil-ity, and was subjected to criticisms for this. Some economists retort that implicit valua-tions are placed on human lives in a whole range of decisions about allocation of re-sources in the public sector and this approach is simply being explicit about the pro-cess39. Another criticism is that its estimates imply that certain sections of the society,like the elderly, and the youth are less important. It is also controversial to use existingsalaries as the basis of analysis, because there may be imperfection in labour markets af-fecting the wage rates, which then cannot be used as perfectly reliable measure for pro-ductivity. This is truer for a developing country like India, which also have high levels ofunemployment and under-employment, which could lead to under-estimation.

The Willingness-to-Pay (WTP) method measures the amount an individual would pay toreduce the probability of illness or mortality40. WTP values can be estimated directly viaquestionnaires asking individuals how much they are willing to pay to reduce their risk ofdeath or illness; by inferring from the observed behaviours of individuals in the market-place (like examining the additional wages for jobs with high risks); by other proxy meth-ods (like examining the demand for products that lead to greater health or safety); andother methods41. Inferring from observed behavior is possible only in rare situationswherein risks and the value people attach with them can be measured.

The Friction Cost method considers only the economic losses during the time it takes toreplace a worker42. The assumption is that production losses due to morbidity may notbe very high because existing labour pools and workplace structures can absorb someof this lost productivity43. Thus, only the costs associated with the time needed to replacea sick worker, training the new employees, and those due to differential productivity (ifthe productivity of the new employee is lower than the one replaced) are included. This

38 Segel (2006)

39 Robinson (1993)

40 Ibid.

41 Rice et al (1989)

42 Segel (2006)

43 Koopmanschap et al (1995)

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approach gives lower estimates than a Human Capital Approach, and takes a instrument-al view of human life and capacity. In India's context, this approach is likely to give dis-mal estimates, due to the large unused and underused labour pools.

Key criticisms of the methods: The methods for indirect costs can come up with very

different estimates because of the different assumptions underlying these methods. TheHuman Capital and the Friction Cost methods look only at the productivity loss, with thelatter considering only the costs related to the replacement of the employees. Therefore,the estimates provided by the Friction method would be lower than those provided bythe Human Capital Approach. Both these methods would generally give significantlylower estimates for groups that are less directly active in the market.

The willingness-to-pay method puts the decision in the hands of the people, and maygive more realistic estimates because of its methodology, and takes care of the problemswith the other two approaches by looking at peoples perceptions of their own health,but it is very difficult to use this method. This method could give lower estimates forpoorer people, because of their lower ability-to-pay. If the estimation is done throughsurveys, only individual costs would be estimated, which do not cover a large part ofcosts in case of diseases with high negative externalities for the society. This means thatif someone tells the willingness-to-pay to avoid a communicable disease, the personusually conveys the indirect costs for oneself, but not the value for the society of havingone less person with a disease that can spread.

Intangible Costs: These are costs of pain, suffering, anxiety, grief and loss of leisure time,for which a monetary value is assigned44. Intangible costs may also be seen as a subsetof indirect costs. Estimate these costs is a challenging task45. The Willingness-to-payapproach is usually employed to estimate these costs46. Another way of estimating is touse the domestic wage rate as a shadow price for the lost opportunity of domestic

activities47. In many cases, non-wage and work time may overlap, and difficulties mayarise in separating these elements when illness has implications for both. For example, apatient attending a hospital outpatient session in the afternoon may make up his lostemployment by staying extra time on return to work, in which case the cost of hisattendance is his leisure time. These and other such issues make it a complicatedexercise to estimate the intangible costs of an illness.

Measuring the costs - Marginal, average and joint costs: Most decisions in health careare not binary i.e. they are not concerned with whether or not a service should be pro-vided, but with how much of the service should be provided, that is, should existing lev-els of provision be expanded, contracted or left at the same level?48 Consider questions

like: Where should maternity care services be made available? Should the existing pub-licly funded interventions around childcare be limited to the poor or should they be al-lowed to remain as they are? Such decisions do not get much help from average esti-mates but need estimate for marginal changes. Marginal costs are the costs for every ad-ditional change, while the average cost is total costs divided by the number of units ofoutcome from the process. For example, while estimating the costs of hospitalizationcare, the average cost would be the total cost of hospitalization divided by the number of

44 Choi et al (1997)

45 Posnett and Jan (1996)

46 Ibid.

47Kernick (2000)48 Robinson (1993)

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patients. The marginal cost is the cost of each additional patient taken for inpatient careat the given point of time. Table 2 illustrates the difference. In the short run there is oftenan important difference between the marginal costs of an activity and its average cost49.

Table 2: Average and Marginal Costs

Number of patients Total Cost (in Rs.) Average Cost (in Rs.) Marginal Cost (in Rs.)

10 2000 200 -

20 2400 120 40

30 2800 93 40

40 3000 75 20

50 3200 64 20

A bottom-up approach is more appropriate for estimating marginal costs, because of itsuse of primary patient-specific data.

An area of difficulty in cost estimation can be of joint costs50. There are processes thatlead to more than one outputs. One example is of tests like blood tests and urine teststhat can lead to multiple diagnoses. One of the ways used for allocating the costs in suchcases is to allocate the costs on the basis of number of units of utilization, like taking thenumber of tests in a laboratory to allocate the costs of laboratory. Another way of allocat-ing these costs can be to equally allocate to all the diagnosed diseases.

SummaryA Cost-of-illness study is an economic method for needs assessment in heath, whichgives the estimate for the economic burden of disease or risk factor for a community/region. The first step is to define and identify cases of the disease or risk factor clearly.After this, one has to decide about the target audience and purpose perspective, fromwhich the perspective of the study is decided. The perspective, in turn, determines whichcosts should be included. The costs included may be direct, indirect and/or intangible,based on a prevalence or incidence-based approach. There are potential debates andcontroversies for each of the decisions involved in such a study. Therefore it is useful toprovide estimates using as many combinations of different variables as possible.

A cost-of-illness study can help in prioritising among diseases and risk factors that needintervention, but it cannot help compare costs and effects of an intervention, neither canthey help compare alternative interventions. To take intervention decisions, we needmethods that help in a more complete understanding of opportunity costs in a situation,determine economic viability of an intervention, and help compare alternativeinterventions for solving a problem, based on the relationship between resource usagesand health effects. Economic Evaluation Methods can complement cost-of-illness studiesby comparing the costs and health effects of alternative interventions.

49Ibid.

50Ibid.

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Economic Evaluation for Health Sector

IntroductionThe Cost-of-illness study discussed earlier does not help in identification, assessment, orcomparison of health interventions that may affect the burden of disease. This is wherethe economic evaluations come in. Evaluation of health care interventions/programmesmay be subdivided intoevaluation of efficacy, effectiveness, availability, accessibility andefficiency. Evaluation of efficiency is more commonly known as economic evaluation51.One should consider the following alongside the question of efficiency52:

- Can the health intervention work (the efficacy of the intervention)?- Does the intervention work (effectiveness)?- Will it be reaching those who need it (availability and accessibility of the service)?

In the context of the health sector, using economic evaluation to maximise efficiency isuseful when these considerations have been addressed satisfactorily. Achieving anoptimal allocation of resources, one that maximizes well being, requires attention to thethree economic questions53:i) What to produce: known as `Allocative Efficiency' and concerned with the

optimal mix of goods and services;ii) How to produce: known as `Technical (or production) Efficiency' and concerned

with the least cost combination of resource inputs for the production ofnominated goods or services; and

iii) To whom should goods and services be distributed; the question of equity.

An Economic Evaluation compares costs and outcomes of the programs, thus providingan important input for choosing between multiple programs. All the economic evaluation

methods involve systematic identification, measurement, and, wherever appropriate,valuation of all the relevant costs and consequences of the options under review. Thefollowing diagrammatic representation illustrates what economic evaluation involves.

Figure 2: Economic Evaluation

Costing of interventions and programs:The costs of interventions and programs can be direct or indirect. In such estimations,direct costs represent the resources consumed by the intervention and associated

51Cunningham (2001)

52Drummond and Davies (1991)

53 Segal and Richardson (1994)

15

Healthcare in uts Health Outcomes

Health

Intervention orro ram

Costs Benefits

Economic Evaluation


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events54. For example, direct costs associated with primary care include doctors time,practice nurse costs, drugs, and capital costs arising from equipment and buildings.Indirect costs may be tangible, i.e. productivity losses or inputs from caregivers, orintangible, i.e. loss of leisure time, costs of pain, suffering, uncertainty or death55.Methods for estimating costs are similar to those discussed in the section on COI

studies.

As in the cost-of-illness studies discussed earlier, the estimation of costs of interventionsalso significantly depends on the perspective of the study. The perspective depends onthe target audience and purpose of the study.The broadest perspective one can take isthe societal perspective. A case can been made for taking a societal perspective, particu-larly for public health programs and interventions, but the range of resource effects thatare potentially relevant for the societal perspective is enormous56.

Procedure for costing: Three stages can be distinguished in the costing process 57: identi-fication, measurement, and valuation of costs. Identification involves listing the likely re-source effects of the intervention as comprehensively as possible so that frame of thestudy can be finalised i.e. which effects might reasonably be excluded. This step involvesformation of a decision problem (including the objectives of costing, the perspective ofcosting, and the time horizon), the description of particular intervention or program (costobject), as well as the identification of resources used to deliver the service 58.

The second stage, i.e. Measurement, refers to measuring the resource changes (costs)included in the study. At this stage, the measurement of resource utilization is done interms of natural units. For example, hospital beds are counted as the number of hospitalbeds and not as their costs in monetary terms, which are estimated in the next stage.

The third stage, i.e. Valuation, involves attaching monetary value to resource use59. One

way of doing this is to use prices as a proxy for costs60. If prices are known, and we as-sume that they reflect costs, then they can be multiplied by corresponding units of re-source use toyield total costs. For example if x is the number of hours given by a doctor,and y is the per hour fee for consultancy, then x multiplied into y would give the totalprice, which can be used as a proxy for costs. Two problems complicate this relativelysimple process: prices oftendo not exist for the relevant changes, and available pricesmaynot reflect the societal value of resources. Economic theory suggests that prices re-flect resource values only under conditionsof perfectly competitive markets, a situationappearing rarely in the economy and hardly in health care. Thus, other strategies for es-timation may be recommended.

Strategies for costing: Two broad strategies61are- micro costing and gross costing. Mi-cro costing involves detailed primary analysis of the changes in resource use due to theintervention. This means the researcher identifies, measures and values each of the costs

54 Kernick (2000)

55 Ibid.

56 Byford and Raftery (1998)

57Raftery (2000)

58 Mogyorosy and Smith (2005)

59 Ibid.

60Raftery (2000)61 Ibid.

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incurred for the intervention, and adds these costs to arrive at the total cost. Thisstrategy follows a bottom up approach to estimating costs, discussed earlier in this note.

Gross (or top down) costing allocates total costs or budget in the context of a facility or alarger program to specific interventions or services62. Here, the approach to estimation is

a top-down one, involving attribution of total costs to specific interventions or services.Conceptually, it is similar to the top-down approach discussed earlier in the note.

The micro-costing approach would give the actual marginal cost of the intervention,while the gross costing approach gives average costs. In most contexts, marginal costsmay be more relevant than average costs. A micro-costing approach is more likely than agross-costing approach to give a reliable estimate that can be used for taking decisions.Some studies usea mix of the two, micro costing for some of the costs, and gross cost-ing for others63. Costing can be done retrospectively (using past data) or prospectively(using data as it is recorded) as well. Appropriate adjustments for time should be done.

Example of a costing exercise: Though a costing exercise is useful when it is accompan-ied by an estimation of related outcomes, it can by itself can be useful for pinpointingflaws in the current processes and practices. We take the example of Borghi et al (2002),estimating the costs of publicly provided maternity services in a city of Argentina64. Thestudy estimated provider costs of antenatal care, a normal delivery, and a caesarean sec-tion. The exercise was done retrospectively. The study found the cost for caesarean sec-tion ($525.27) to be five times that for a normal delivery ($105.61). The average costs foran Antenatal visit were less than one-third of those for a normal delivery ($31.10).

It was found that a normal delivery costs less at the general hospital and a caesareansection costs less at the maternity hospital. For antenatal care, the provider costs werelower at the health centre than at the hospital. For the women, the cost of an antenatal

visit was around $4.7, most of which was due to indirect costs due to travel and waitingtime. This was because most of the formal costs are subsidized. Please refer the Ap-pendix for details of identification, measuring and valuation for this study.

A number of recommendations were derived from these findings. It was concluded thatefficiency could increase if the antenatal visits at primary level could be promoted and di-verted away from higher-level facilities. This could also help the women by cutting theirindirect costs by reducing travel and waiting time. It was also recommended that encour-aging normal deliveries at general hospitals and complicated deliveries at specializedmaternity hospitals could increase efficiency.

Though the methods available for costing interventions/programs are common for anyeconomic evaluation, there are four types of economic evaluation, differentiated by howthey look at the outcomes.

Types of Economic EvaluationThe methods of economic evaluation are: Cost-minimization Analysis (CMA), Cost-effectiveness Analysis (CEA), Cost-benefit Analysis (CBA), Cost-utility Analysis (CUA).Though all these can support decisions about resource allocation, they differ in their

62Ibid.

63Raftery (2000)64 Borghi (2003)

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methodologies. The benefits are estimated differently, with the cost-minimization, as wewill see, assuming the benefits to be equal for all the interventions under focus.

Cost-minimization Analysis:Cost-Minimization Analysis is a type of analysis in which the outcomes of the interven-tions or programs being compared are assumed equal, thereby resulting in an assess-ment based solely on comparative costs65. It is an appropriate evaluation method to usewhen the case for an intervention has been established and the programs or interven-tions under consideration are expected to have the same, or similar, outcomes66.

The assumption of equal outcomes can be risky, as such assumptions rarely hold inpractice67. This has limited the application of this approach considerably. This method isalso inappropriate for separate and sequential hypothesis tests on differences in effectsand costs to determine whether incremental cost-effectiveness should be estimated68.

In spite of these limitations, there are a few examples of its use. Nathwani et al (2003) dida retrospective audit of managing 55 treatment episodes of bone and joint infectionswith teicoplanin69 delivered in the outpatient or home setting and found the mean cost ofcare per episode of infection to be less in ambulatory setting (1749.15), than in in-pa-tient setting (11400) or in the hypothetical situation of treatment with oral linezolid in thehome setting (2546). Vinodkumar and Jacob (2004) identified the areas of increased ex-penditure on drugs and disposables used during anesthetic practice in the operating the-aters and then tried to minimize the use of expensive drugs and disposables withoutcompromising on the quality of anesthetic care, thus bringing down mean cost per case.Another use CMA could be to determine the optimal level of provision of a service. Khanet al (2001) conducted such an exercise to plan the geographic distribution of health fa-cilities in Bangladesh70, particularly to determine the optimal distribution of Emergency

Obstetric Care (EOC) facilities to minimize the average social cost per woman.

Cost-Effectiveness AnalysisLike a cost-minimization analysis, a Cost-effectiveness analysis also takes the worthinessof the health goal as a given, and helps in finding the best way of achieving it. For a costeffectiveness analysis, the outcomes of the alternative strategies are measured in naturalunits, such as lives saved, years of life saved, and reduction in prevalence, and should beexpressed in a single dimension or unit71. The future health effects are usually discount-ed using the same rate as for discounting future costs, but there is an argument advocat-ing lower rate for discounting health effects, taking into account the growth in the future

65 Shiell, A, et al (2002)

66 Robinson (1993)

67 Robinson (1993)

68 Briggs and OBrien (2001)

69 Teicoplanin belongs to a group of antibiotics called glycopeptides. It is used to treat serious infections of the heart and

blood. (www.tisali.co.uk/lifestyle/healthfitness/health_advice/netdoctor/archive/100003919.html) Accessed: Feb 1, 2007

70 Khan et al (2001)

71Robinson (1993)

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value of health effects72. CEA considers both costs and effects, giving scope for a moreexpensive intervention to get considered, if it produces better effects.

If effects of alternative interventions are same, choice is relatively easy. One wouldchoose the least expensive option. Similarly if the alternatives cost the same, we would

choose the one that has the maximum effect, ceteris paribus. But, in situations where al-ternatives produce different levels of outcome and require different levels of investment,we need to to consider ratios of costs and effects, that depict the cost per unit of out-come obtained, in comparing one treatment option to another73. For example, a home-based management of severe malnutrition gives lower results than a facility-based one,and with lower costs. Cost-effectiveness ratio (CER) can be averageor incremental.

The generic formulae for calculating these cost-effectiveness ratios are:Average CER= (costs)/(health effects produced)Incremental CER=(Cost difference between A & B)/(Difference in health effects from A&B)

Whether an average or incremental cost-effectiveness ratio is used depends on the rela-tionship between alternatives in question. There are independent interventions, wherecosts and effects of one intervention are not affected by the introduction of the other,and then there are mutually exclusive interventions, where implementing one interven-tion means that another cannot be implemented, or where the implementation of one in-tervention affects the costs and effects of other interventions. The independent interven-tions are usually those that serve different sets of people. Usually, for comparing inde-pendent interventions, average cost-effectiveness ratios are used, and for mutually ex-clusive interventions incremental cost-effectiveness ratios are more appropriate74. Theaverage CERs help rank the independent alternatives, and then an optimal mix of inter-ventions within the available budget can be determined. Consider the following table

Independent InterventionsIntervention Cost (Rs.) Effect (life years saved) Average CER (Rs./life year saved)

A 60000 15 4000

B 40000 8 5000

C 120000 20 6000

In the above table, there are three independent interventions, each with a different pa-tient group. Holding everything else constant, upto a budget of Rs. 60000, it would bebest to spend only on intervention A, then on B, followed by C, as budget increases.

Mutually Exclusive InterventionsIntervention Cost (Rs.) Effect (life years saved) Incremental

CostIncrementalEffect

IncrementalCER

P 100000 10 100000 10 10000

Q 120000 15 20000 5 4000

R 90000 18 -30000 3 -10000

S 140000 20 50000 2 25000

T 130000 22 -10000 2 -5000

72Gravelle and Smith (2000)

73 Shiell (2002)

74 Phillips and Thompson (2007) (www.evidence-based-medicine.co.uk)

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For a situation with mutually exclusive interventions, which usually affect the same con-dition, firstly the interventions have to be ranked in the ascending order of effect. Afterthis, the incremental ratios have to be computed. The negative ratios for R and T showthat they produce greater effects at lower cost than their preceding interventions Q andS. Now, interventions that are more expensive and less effective are excluded. In this

case, Q and S are such interventions. After this the ratios are computed again for theresidual alternatives. From the resulting table, the alternatives with higher incremental ra-tio than the next alternative should be excluded and this process should be continued tillwe have a table of alternatives with the incremental ratios in an ascending order. Choicefrom these remaining alternatives can be made depending on the budget.

Usually, a cost-effectiveness analysis considers only one outcome, but sometimes morethan one outcome may be relevant. In such a context, a variant of cost-effectivenessanalysis called cost-consequence analysis is applied. In this method all the importantoutcomes are presented with relevant cost effectiveness ratios and the reader is left tojudge the relative importance of the outcomes75.

The validity of a cost-effectiveness analysis depends significantly on the quality of the ef-fectiveness trial, because the data on the effects of intervention comes from that. Some-times it may be difficult to get good evidence relating health inputs to outputs, particular-ly for new technologies and interventions, which are commonly the focus of economicevaluation. Though it is possible and ideal to build cost effectiveness analysis in a trial,many studies depend on other existing trials of effectiveness, because including thecosting component in trials is considered to be costly and time-consuming76. 'Bias' in thestudy can be another challenge to its validity. Doubts have been raised about the validityof many existing cost-effectiveness studies. Bell et al (2006) found that most publishedanalyses report favourable incremental cost effectiveness ratios. Studies funded by in-dustry were found to be morelikely to report favourable ratios.

Cost-effectiveness analysis is one of the most widely used methods of economic evalua-tion, with many examples of its use. Wandwalo et al (2005) compared the cost-effective-ness of two alternative ways of treatment of tuberculosis, namely health facility baseddirectly observed treatment (DOT) by health personnel and community based directlyobserved treatment by treatment supervisors, and found that the former costs more thanthe latter, with costs falling more for patients than for health services. Such analysis hassignificant public health implication, particularly where the resources are over-stretched.The analysis has also been used to identify sources of inefficiency. For instance, Venninet al (2000) conducted a trial with 20 general practices in England and Wales to comparethe cost effectiveness of general practitioners and nurse practitioners as first point of

contact in primary care, and found that if nurse practitioners maintained the benefitswhile reducing their return consultation rate or shortening consultation times, they couldbe more cost effective than General Practitioners.

CEA analysis can aid in sector-wide choices. Edjer et al (2005) identify cost-effectivestrategies for child health in developing countries, considering selected child health inter-ventions, namely case management ofpneumonia, oral rehydration therapy, supplemen-tation or fortificationof staple foods with Vit A or zinc, provision of supplementary foodwith nutrition counseling, and measles immunization. Similarly, Adam et al (2005) evalu-ated interventions for maternal and neonatal health in parts of Africa.

75 Goodacre and McCabe (2002)

76Robinson (1993)

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measurement80. The costs of interventions for this method are estimated in the sameway as that for the other methods.

Health Utility: Health Utility is a measure of strength of preference people have for partic-ular health states81. A year with full health from the point of view of a particular aspect of

health status is assigned a value of 1 while a state that is considered equivalent to deathis assigned a value of zero. Health states that lie somewhere between these two pointsare assigned utility values that are somewhere between zero and one. Some states areconsidered to be worse than death, and are given utility scores less than zero. Health util-ities are used to attach weights to improvements in life expectancy. Five techniques havebeen used which purport to measure82:the use of category rating or a rating scale (RS),standard gamble (SG), time trade off (TTO), equivalence techniques (ET) and magnitudeestimation (ME). There are also standard descriptive systems like EuroQoL83 that can beused to determine the weight associated with a particular health state.

These techniques involve presenting a health state description to people and elicitingtheir preferences for the health state relative to some reference states, usually full healthand death. The standard gamble approach is the classic method of measuring prefer-ences in economics, first presented by von Neumann and Morgenstern84. In this methodpeople are asked to choose between the certainty of the specified health state for a givenperiod of time or a gamble that involves a probability (p) of restoration to full health anda complementary probability (1-p) of immediate death85. The value of p is changed untilthe respondent regards the two options as equivalent to each other. The utility of thespecified health state is then given by p.

In Time trade off method, the respondent faces a choice between living for a given peri-od of time (t) in the specified health state or a shorter period of time (x) in full health86.The duration in full health is altered until the respondent regards the two options as

equivalent to each other. The value of the health state is then given by (x/t).

Quality Adjusted Life Years (QALYs): Quality Adjusted Life Years (QALY), a summarymeasure of health gain combining (changes in) life expectancy and quality of life, is oneof main utility-basedmeasures. QALYs are measured as expected number of years of lifemultiplied into a health utility weight, which quantifies that aspect of the quality of lifeupon which decisions should be made87, and then adjusting to get the present value.

Suppose an individual has just one health state each year and the state is known withcertainty in advance, and the utility scores for these states are known. These states canbe denoted by Qt (where t = 1,2,..T). T is the expected number of life-years left. The

persons QALY score is given by:

80 Robinson (1993)

81 Torrance (1986)

82Richardson (1990)

83 Williams (1995)

84 Von Neumann and Morgenstern (1953)

85 Shiell et al (2002)

86 Ibid.

87Richardson (1990)

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QALY = t=1T[1/(1+i)t-1] X u(Qt), where u(Qt)is the utility associated with being in state Q tfor one year and iis the rate of discount.

If a state of living with a disease is assigned a health utility of 0.6, and expected life yearsare 10. The QALY score would be equivalent to 10X0.6 = 6 QALYs. Thus any measure

that prevents one from entering such a state of disability would be saving 10 - 6 = 4QALYs. For sake of understanding, we have not considered discounting in this example.

Cost-Utility Ratios: If there are two alternative interventions, one of which produces less-er QALYs but at more or the same cost as that of the other, the choice becomes simple.One would always choose the intervention with higher production of QALYs. The choicebecomes a little difficult when a more expensive intervention also produces moreQALYs. Comparison between such alternative interventions is done by using cost-utilityratios. A cost-utility ratio is given by the difference in costs of the two interventions di-vided by the difference in the number of QALYs produced by the two interventions. Thisratio gives the incremental cost of producing one extra year of perfect health (QALY) bythe intervention producing more QALYs.

For example, suppose intervention A produces 10 QALYs for Rs. 400000, and interven-tion Bproduces 14 QALYs for Rs. 700000. The cost per QALY produced by interventionA is Rs, 40000, while that for intervention Bis Rs. 50000. The cost-utility ratio for compar-ing the two interventions is given by: (700000-400000)/(14-10) = 300000/4 = Rs.75000,which is the cost per extra QALY produced by interventions B. The choice is based onavailable budget.

To determine the worthiness of an intervention, the policymakers need to, based on theirpriorities and resource-constraints, decide the threshold beyond which the investment inthe intervention can be considered. As of January 2005, a figure of 30,000 per QALY

was the normal British threshold value88. Thus, any health intervention which has anincremental cost of more than 30,000 per additional QALY gained would normally berejected, while the others could be given a consideration.

A number of health status measures have been developed in the recent years, as a re-sponse to a demand for a measure that accounts for quality of life. Many of these meas-ures have not been able to answer the specific question: whether or not they indicate atreatment, which should be chosen in preference to some other treatment for the sameor for some other disease89. This was because most of these measures lacked intervalproperties. For a measure with interval property, if health intervention A improves pa-tients' health by 10 pointson a scale and intervention B by 5 points, then interventionA

can be said to be producing twice as much improvement as B 90. QALY as a measure ofhealth status has interval properties, making it easier to compare the magnitude of differ-ence in effects. Another important advantage of this approach is that the outcomes ofhealth care interventions are measured in units that combine quality and quantity of life,and can aid in comparisons between different interventions and health problems.

There are many criticisms of the QALY as a measure. There is an ambiguity in theconcept of 'utility' itself. One of the supposed strengths of utility measures is that their

88 Wikipedia (http://en.wikipedia.org/wiki/Cost-utility_analysis)

89 Richardson (1990)

90 To Read more about interval properties, please refer any good statistics textbook.

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valuation is based on individual preferences91. Therefore, one of the strongest criticismswas aimed at this strength by asserting that the QALYs misrepresent consumer prefer-ences and thus, lead to decisions and policies that do not reflect peoples preferences92.Economists like Culyer and Wagstaff (1992) have argued back by acknowledging thatQALYs maymisrepresent preferences but there is no evidence that they actually doso93.

McGregor (2003) has identified some key points to look for in a cost-utility analysis94.These are: The QALY should be meaningful(its significance understandable by the user),valid(measuringwhat it is intended to measure), reliable(repeatable by thesame or dif-ferent individuals) and relevant (applicable to the population affected by the policy inquestion). To understand the details of these conditions with an example, please see Mc-Gregor (CMAJ, 2003). Some people have argued for adoption of other measures for aCost-Utility Analysis, like the Health Year Equivalents (HYEs)95.

Most examples of CUA are from developed countries. Forbes et al (1999) evaluated thecost utility of interferonbeta-1b96 in secondary progressive multiplesclerosis. They foundthat the cost per QALY gained is high because of the high drug cost and modest clinicaleffect and concluded that resources could be used more efficientlyelsewhere. A criticismof this paper by Ellis (1999) pointed out some problems in the methodology used for thepaper. The criticisms centred around the fact that the study uses a single aspect of disab-ility (wheelchair dependence) and then extrapolates QALYs to which a price tag is at-tached, completely ignoring the other problems associated with the disease. Another cri-ticism by Ellis (1999) contests the underlying assumption behind QALYs that badness ofa disability is a fixed quantity. Many healthy people might say they would prefer to bedead rather than live with a significant disability, but if you ask disabled people they gen-erally prefer to be alive. The badness of a disability depends on one's perspective and isnot fixed. These criticisms can be extended to other such studies also.

In situations where, given the advantages and disadvantages of different interventions orprocedures, it is difficult to choose any one of them, Cost-utility analysis can, by givingrank order on the basis of effectiveness, quality oflife and economic considerations, helpin choosing one of the interventions. For instance, Leung et al (1999) compare Paclitaxel,docetaxel, and vinorelbine, which are drugs approvedfor chemotherapy in patients withadvanced breast cancer resistant to anthracyclines97.

Summary:Economic evaluation can help in determining the economic worthiness of an interven-tion, and in comparing interventions from an economic point of view. There are four

91 Torgerson and Raftery (1999)

92 Gafni (1989)

93 Culyer and Wagstaff (1992)

94 McGregor (2003)

95 Richardson (1990)

96 Interferon beta-1 b is a highly purified protein that has 165 amino acids. From the Internet Drug Index.

(http://www.rxlist.com/cgi/generic/interferon_beta.htm) (Accessed on January, 20, 2007)

97 Anthracycline is a member of a family of chemotherapy drugs that are also antibiotics. The anthracyclines act to

prevent cell division by disrupting the structure of the DNA and terminate its function. (www.medterms.com) (Accessed

on: Jan 6, 2007)

24
http://www.rxlist.com/cgi/generic/interferon_beta.htmhttp://www.rxlist.com/cgi/generic/interferon_beta.htmhttp://www.rxlist.com/cgi/generic/interferon_beta.htmhttp://www.rxlist.com/cgi/generic/interferon_beta.htm


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types of economic evaluation, each with a different method of outcome evaluation. Thefollowing table summarizes these types of economic evaluation:

Types of Evaluation Costs OutcomesCost-minimisation Monetary Identical

Cost-Effectiveness Monetary Same type (Natural Units)Cost-Benefit Monetary MonetaryCost-Utility Monetary QALYs

These methods are also different in the breadth of their analysis. CMA and CEA tacitly as-sume that the health objectives, which the interventions/programs serve, are worthwhile.CUA permits choice between a much wider range of interventions but still ultimately as-sumes that at some cut-off point of cost per QALY, a programme is worthwhile. CBA intheory permits assessment of whether the health objectives are worth achieving in thefirst place98. In other words, cost-benefit and cost-utility analysis both address the issueof outcome valuation and, therefore, shed more light on whether certain treatments are

worthwhile, while on the other hand, cost-minimization and cost-effectiveness assumethat the intervention is worthwhile99.

Each method of evaluation has its own set of assumptions about outcomes and their re-lations with costs. There are advantages and disadvantages of all these methods, basedmainly on their underlying assumption.

Programme Budgeting and Marginal Analysis

Programme Budgeting and Marginal Analysis (PBMA) is an economic framework to as-sist priority setting and resource allocation, with an aim to maximise benefit and minim-

ize opportunity costs100

. The programme budget is a map of the current use of resources.Through marginal analysis, changes in the amount or the mix of services provided for agiven population are identified. Conceptually, this approach is a lot like economic evalu-ation, but is more pragmatic and is applicable at various levels of decision-making 101. Forinstance, PBMA can be applied in individual programs of care, across a set of programswithin the same general area, or more broadly, across areas. The approach can also beused for considering funding decisions for new technologies or interventions.

The main idea is to get opportunity cost and marginal analysis to inform the decisionmaking process. Marginal analysis examines the incremental costs and benefits of shift-ing resources from one area to another, i.e. Implications of a decision. Marginal analysis

considers unit changes in production of an intervention determines the best mix of ser-vices by examining the relative costs and benefits of the various options, at the margin.

There are basically three budgetary positions wherein this framework may be useful102:Firstly, whenever there is a proposal for increasing budgetary outlay, there is a decisionon how best the additional resources should be spent. Secondly, if there is a budget de-crease, one would want to take resources from areas, which are producing the least be-

98 Mills and Gilson (1988)

99 Cunningham (2001)

100 Shiell (2002)

101 Mitton and Donaldson (2004)

102 Ibid.

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People have questioned the methods of economic evaluation for not representing thedistributional aspects of outcomes.104 It is crucial to give importance to the outcomes andcosts according to the profile of beneficiaries, and thus including the equity aspect in theanalysis. For example, imagine there are two alternative childcare programs, both with

the same level of overall outcome for the population, but with slightly differentbeneficiary sets. The benefits from one of the programs are skewed in favour of thepoorest, while those from the other program in favour of the richest. Preferring theformer may be more advisable for maximizing the overall welfare in the society.

Averages can be misleading. Therefore, one needs to disaggregate the data on the basisof different parameters. One of the methodological solutions could be to attach weightsto health outcomes for specific dimensions (e.g. age, socio-economic condition)105. ACost-of-illness study, which estimates the burden of disease for a region, needs to beapplied in a way that one can estimate the burden for different socio-economic anddemographic groups. Similar disaggregation could be done for economic evaluationstudies. The costs and effects may vary for different groups because of many reasons,including some demand-side factors106,, which should be mapped. Also, given thepossibility of multiple views about some of the variables considered for deriving theestimation, it is advisable to include sensitivity analysis107 in such studies.

These are complex methods with many assumptions, each of which affects the estimatesof costs or benefits, or can skew the results for or against any group. Understanding theassumptions before using the results is crucial. Some approaches may not be advisablein certain contexts. For example a Human Capital Approach can lead to a low estimate inlow-income countries, mainly because of the economic environment in these countries.The Willingness-to-pay approach also brings the income factor into the analysis, and canskew the results towards the wealthy108. Some methods depend on results from other

studies109, which may not be available or may not be of good quality.

These methods of economic analysis have their own assumptions about societalobjectives. Understanding the level of congruence between our understanding of thesocietal objectives and the assumptions embedded in the methods of economic analysisis a pre-condition for using these methods.

Summing up

Sir Isaiah Berlin once wrote, .......where ultimate values are irreconcilable, clear-cutsolutions cannot, in principle, be found. To decide rationally in such situations is todecide in the light of general ideals, the overall pattern of life pursued by a man or agroup or a society." Decision making in public sphere is characterised by complexity andcontest between different viewpoints. The ambiguities of this state replete with divergentquestions, and the continuous changes adding to the complexity, can be quite

104Sassi et al (2001)

105 Ibid.

106Ensor and Cooper (2004)

107Explained in Appendix 1

108 Coast (2004)

109For example, a cost-effectiveness analysis is dependent on the quality of an effectiveness trial.

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overwhelming. There may be a temptation to take refuge in a small box of relatively fixedset of assumptions and ideas, and take this box to be the whole world.

The methods of analysis discussed in this note provide us with certain ways of looking atthe reality, and informing decisions. Considering methods of economic analysis as the

only tools of decision-making would be more dangerous than turning ones back tothem. The methods of economic evaluation can help one choose the more efficient ofthe alternatives, or help judge the merit of an intervention from the economic point ofview. Though this is an important question, it after the question of resource allocation inthe larger economy is answered. If the total allocation to health itself is low, optimalprioritisation within the sector could only be of marginal help. The decision aboutresource allocation in the larger economy may be informed by an analysis like Cost-of-illness, but this analysis takes an excerpted view of the reality, and may under or over-state the needs. To sum up, a wider set of methods and considerations should be usedfor aiding such decisions, and where these methods are used, a critical understanding oftheir assumptions, and modification of methods to adapt to the context are crucial fortheir meaningful use.

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References:

Internet:1. www.medterms.com

2. www.who.int3. www.rxlist.com4. www.cdc.gov5. www.netdoctor.co.uk6. www.wikipedia.org7. www.tiscali.co.uk

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