hen 368 lecture 5 cost and benefit evaluation methods
DESCRIPTION
Lecture 5 Cos Benefits MethodsTRANSCRIPT
Health Economics
Lecture 5Cost and Benefit
Evaluation Methods
Rational
Never intentionally choose to be worse
off
Choices
What is life worth?How do we measure?Costs and Benefits?
Cost Benefit Analysis(CBA)
Type of CostsDirect Medical Costs
Direct Non-Medical CostsIndirect Costs
Direct Medical CostsHospitalsPhysicians
Nursing HomesTests and Examinations
Drugs
Direct Non-Medical Costs
TransportationHome Heath Care
DietFamily Members
Indirect CostsTime
Opportunity CostsLost Productivity
Benefits(Diverted Costs)
Prevent IllnessPostpone DeathRestore HealthIncrease Utility
0
1
2
3
4
5
6
7
8
9
10
Benefit Less Cost= Net Benefit
Benefit
Cost
Net
0
1
2
3
4
5
6
7
8
9
10
A B C D E0
1
2
3
4
5
6
7
8
9
10
A B C D E
Cost Benefits
MarginalCosts
MarginalBenefits
Cost Benefits
0
1
2
3
4
5
6
7
8
9
10
0
1
2
3
4
5
6
7
8
9
10
Marginal Costs Marginal Benefits
too little too much
Objective: Maximize Net Benefits
JustRight
Expected Value
Probability of several events
Expected ValueIdentify events and outcomes
Assign probabilitiesMust equal 100%
Outcome x ProbabilityTotal of all
Expected ValueEvent Probability Outcome Expected
A 50% 100 50
B 30% 50 15
C 20% 20 4
Total 100% 69
Expected ValueEvent Probability Outcome Expected
A 80% 100 80
B 10% 50 5
C 10% 20 2
Total 100% 87
Expected ValueEvent Probability Outcome Expected
A 80% 120 96
B 10% 80 8
C 10% 10 1
Total 100% 105
Discounting
Present Value of the Future
0
25
50
75
100
2014 2015 2016 2017 2018
7176
8287
93
100100100100100
AmountPresent Value
500410 Discount Rate = 7%
(1+r)N
r = rate N = number of periods
Present Value or PV
1
(1+r)N
r = 10% PV =? 1 .909
2 .8263 .7514 .6835 .621
N PV
1
Value of a LifeHuman Capital Approach
Willingness-to-Pay Approach
Human Capital Approach
Present value of all production in a life
Human Capital Approach
100,000 a year30 years
Total = 3,000,00010% discount
Present Value = 942,691
Human Capital Approach
Only considers moneyno leisure
no income = no value
Willingness-to-PayApproach
How much are you willing to pay to reduce the probability
of dying?
Willingness-to-PayApproach
Value of Life = Cost divided by
probability
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
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
Willingness-to-PayApproach
Usually higher than human capital
approach estimate
What is one year of your life worth?
Compare to the cost of getting it
New Technology
Surgical diagnostic devices Pharmaceutical, Biomedical researchInformation technology
Health
Medical Costs
Health and Medical Costs
New Innovation
New Innovation
More health for same cost
Same health for lower cost
Cost Effective AnalysisCEA
Compare the cost effectiveness of two
or more options
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?
Incremental Cost Effective Ratio
ICER
--
Cost new
Effectiveness new
Cost old
Effectiveness old
--
C1
E1
C2
E2
CostLess
CostMore
MoreEffective
LessEffective
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
Life?
QuantityversusQuality
Quality-Adjusted Life-YearsQALYs
Quantity x Quality
HigherQuality
LowerQuality
MoreYears
FewerYears
Human Utility IndexMeasure Quality
Scale 0 to 1
0 = death 1 = perfect
QALY AnalysisLife
Years Quality QALY
1 0.75 0.75
10 0.5 5.0
5 1 5.0
10 0.1 1.0
Human Utility Index
Rating ScaleStandard GambleTime Trade-off
Rating Scale
Individuals are surveyed
Results = HUI
Standard GambleTwo choices
A. Live with less than perfect condition
B. Procedure with probability of perfect health or (one minus probability) of death
Standard Gamble
Two choices
A. Blind
B. Cure blindness or death
Probability on procedure = HUI
Time Trade-Off
Two choices
A. Live X years with perfect health
B. Live Y years with condition
X÷Y = HUI
Cost Utility Ratio
--
Cost new
QALYs new
Cost old
QALYs old
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
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