hen 368 lecture 5 cost and benefit evaluation methods
TRANSCRIPT
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Health Economics
Lecture 5Cost and Benefit
Evaluation Methods
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Rational
Never intentionally choose to be worse
off
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Choices
What is life worth?How do we measure?Costs and Benefits?
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Cost Benefit Analysis(CBA)
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Type of CostsDirect Medical Costs
Direct Non-Medical CostsIndirect Costs
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Direct Medical CostsHospitalsPhysicians
Nursing HomesTests and Examinations
Drugs
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Direct Non-Medical Costs
TransportationHome Heath Care
DietFamily Members
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Indirect CostsTime
Opportunity CostsLost Productivity
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Benefits(Diverted Costs)
Prevent IllnessPostpone DeathRestore HealthIncrease Utility
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Benefit Less Cost= Net Benefit
Benefit
Cost
Net
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A B C D E
Cost Benefits
MarginalCosts
MarginalBenefits
Cost Benefits
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Marginal Costs Marginal Benefits
too little too much
Objective: Maximize Net Benefits
JustRight
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Discounting
Present Value of the Future
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2014 2015 2016 2017 2018
7176
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100100100100100
AmountPresent Value
500410 Discount Rate = 7%
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(1+r)N
r = rate N = number of periods
Present Value or PV
1
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(1+r)N
r = 10% PV =? 1 .909
2 .8263 .7514 .6835 .621
N PV
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Value of a LifeHuman Capital Approach
Willingness-to-Pay Approach
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Human Capital Approach
Present value of all production in a life
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Human Capital Approach
100,000 a year30 years
Total = 3,000,00010% discount
Present Value = 942,691
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Human Capital Approach
Only considers moneyno leisure
no income = no value
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Willingness-to-PayApproach
How much are you willing to pay to reduce the probability
of dying?
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Willingness-to-PayApproach
Value of Life = Cost divided by
probability
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10 riyals to reduce your chance of dying by 1 in 100,000?
Value of Life = Cost ÷ Probability Cost = 10Probability = .00001Value of Life = 10 ÷ .00001Value of Life = 1,000,000
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500 riyals to reduce your chance of dying by 1 in 4,000?
Value of Life = Cost ÷ Probability Cost = 500Probability = .00025Value of Life = 500 ÷ .00025Value of Life = 2,000,000
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Willingness-to-PayApproach
Usually higher than human capital
approach estimate
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What is one year of your life worth?
Compare to the cost of getting it
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New Technology
Surgical diagnostic devices Pharmaceutical, Biomedical researchInformation technology
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Health
Medical Costs
Health and Medical Costs
New Innovation
New Innovation
More health for same cost
Same health for lower cost
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Cost Effective AnalysisCEA
Compare the cost effectiveness of two
or more options
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Cost Benefit AnalysisWhat is the the dollar value of
the costs and benefits?
Cost Effective AnalysisGiven an objective, what are
the costs of various alternatives to achievement?
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Incremental Cost Effective Ratio
ICER
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Cost new
Effectiveness new
Cost old
Effectiveness old
--
C1
E1
C2
E2
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CostLess
CostMore
MoreEffective
LessEffective
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Option CostEffectiveness
Life YearsCost
Effectiveness
Current 20,000 2 10,000
A 100,000 12 8,333
B 5,000 1 5,000
C 50,000 4 12,500
D 15,000 1 15,000
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Life?
QuantityversusQuality
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Quality-Adjusted Life-YearsQALYs
Quantity x Quality
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HigherQuality
LowerQuality
MoreYears
FewerYears
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Human Utility IndexMeasure Quality
Scale 0 to 1
0 = death 1 = perfect
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QALY AnalysisLife
Years Quality QALY
1 0.75 0.75
10 0.5 5.0
5 1 5.0
10 0.1 1.0
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Human Utility Index
Rating ScaleStandard GambleTime Trade-off
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Rating Scale
Individuals are surveyed
Results = HUI
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Standard GambleTwo choices
A. Live with less than perfect condition
B. Procedure with probability of perfect health or (one minus probability) of death
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Standard Gamble
Two choices
A. Blind
B. Cure blindness or death
Probability on procedure = HUI
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Time Trade-Off
Two choices
A. Live X years with perfect health
B. Live Y years with condition
X÷Y = HUI
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Cost Utility Ratio
--
Cost new
QALYs new
Cost old
QALYs old
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CEA versus CUA
Option CostLife
Years CEAHealthUtilityIndex
QALY CUA
Current 20,000 2 10,000 0.7 1.4 14,286
New 110,000 12 9,167 0.4 4.8 22,917
Gain 90,000 10 9,000 3.4 26,471
New 2 110,000 12 9,167 0.8 9.6 11,458
Gain 90,000 10 9,000 8.2 10,976
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SummaryScarcity requires choicesCost-Benefit Analysis - CBA What is a life worth?Human Capital vs. Willingness-to-PayCost Effectiveness Analysis - CEA Life Year Saved - LYRatio ComparisonsCost Utility Analysis - CUAHealth Utility Index - HUISurvey, Standard Gamble, Time Trade OffQuality-Adjusted Life Year - QALYRatio Comparisons