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Cost-Benefit, Cost-Effectiveness Analysis, and An Application to

Home Care

William WeissertProfessor and Chair

Department of Health Management and Policy, School of Public Health

University of Michigan

Ann Arbor

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Outline

• Key concepts and examples– Types of cost-analysis

• An application of cost-benefit analysis to home care budgeting

• Take away points on Cost Effectiveness Analysis (CEA)

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Cost-Benefit Ratio

$CostIntervention - $CostComparison

$BenefitsIntervention - $BenefitsComparison

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Compared to What?• What’s the intervention?

• Expanded home care benefits

• What’s the comparison group?• Usual care

– What they’re already getting: not nothing

• What’s the marginal cost?• How much additional spending is made

• What’s the marginal benefit?• What are the additional benefits

– Over what they would have been without the intervention?

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- +

+

COST

EF

FE

CT

IVE

NE

SS ADOPT CEA

CEA REJECT

•ADOPT?

•REJECT?

•ADOPT?

•REJECT?

Source: Cliff Goodman, Lewin Assoc.

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Whose Costs, Who’s Benefits

• Patient

• Family

• Provider

• Medicaid

• Medicare or other payer

• Society at large

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Types of Economic Analysis

• Cost - Minimization: $ vs. $ (same outcome)

• Cost - Effectiveness: $/ Outcome units

• Cost - Utility: $/Quality units

• Cost - Benefit: $/$ or ($-$)

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Cost-Minimization Analysis• (Hospvisits2*Hospcosts2)+(ERvisits2*ER$2)+(OPvisits2*OP$2)+

(HCvisits2*HC$2)+(Trans2*Trans$2)+(Nhadmits2*NHdays2*NH$/day2)+(Infhrs2*Inf$2)+(DMEunits2*DME$2)+(Prescribe2*Prescribe$2)+(Disposunits2*Disposunits$2)+(Housingdays2*Housing$2)+(Meals2*Meals$2)+or(Copay2*Copay$2)

+(NewTreat2*NewTreat$2) minus

• (Hospvisits1*Hospcosts1)+(ERvisits1*ER$1)+(OPvisits1*OP$1)+(HCvisits1*HC$1)+(Trans1*Trans$1)+(Nhadmits1*NHdays1*NH$1)+(Infhrs1*Inf$1)+(DMEunits1*DME$1)+(Prescribe1*Prescribe$1)+(Disposunits1*Dispos$1)+(Housingdays1*Housing$1)+(Meals1*Meals$1)+or-(Copay1*Copay$1)

equals

• Net cost difference (+ or -)

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Cost-Minimization ExampleAfter Home Care ExpansionPatients PerDeim Days Cost

Hospital 98 $800 2.94 $230,496NursHome 75 $100 329 $2,467,500HomeCare 200 $50 200 $2,000,000Sum $4,697,996

Before Home Care ExpansionPatients PerDeim Days Cost

Hospital 100 $800 3 $240,000NursHome 100 $100 365 $3,650,000HomeCare 50 $50 50 $125,000Sum $4,015,000After minus Before $682,996

17.01%

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Cost-Effectiveness Analysis • [(Hospvisits2*Hospcosts2)+(ERvisits2*ER$2)+(OPvisits2*OP$2)+

(HCvisits2*HC$2)+(Trans2*Trans$2)+(Nhadmits2*NHdays2*NH$2)+(Infhrs2*Inf$2)+(DMEunits2*DME$2)+(Prescribe2*Prescribe$2)+(Disposunits2*Dispos$2)+(Housingdays2*Housing$2)+(Meals2*Meals$2)+or-(Copay2*Copay$2)+(NewTreat2*NewTreat$2)]

minus • [(Hospvisits1*Hospcosts1)+(ERvisits1*ER$1)+(OPvisits1*OP$1)+

(HCvisits1*HC$1)+(Trans1*Trans$1)+(Nhadmits1*NHdays1*NH$1)+(Infhrs1*Inf$1)+(DMEunits1*DME$1)+(Prescribe1*Prescribe$1)+(Disposunits1*Dispos$1)+(Housingdays1*Housing$1)+(Meals1*Meals$1)+or-(Copay1*Copay$1)]

divided by• [Units of a Single Outcome2 (such as %Satisfied or Days in Community) minus

Units of the same Single Outcome1]equals

• Net cost per increased unit of Same Single Outcome (+ or -)

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Cost-Effectiveness ExampleAfter Home Care ExpansionPatients PerDeim Days Cost

Hospital 98 $800 2.94 $230,496NursHome 75 $100 329 $2,467,500HomeCare 200 $50 200 $2,000,000HigherADL 10 365Sum $4,697,996

Before Home Care ExpansionPatients PerDeim Days Cost

Hospital 100 $800 3 $240,000NursHome 100 $100 365 $3,650,000HomeCare 50 $50 50 $125,000Sum $4,015,000After minus Before $682,996Cost per improved client day: $187 17.01%

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Measuring Utiles• Utiles are usually measured in QALYs• QALYs are Quality Adjusted Life Years

– (1 year of life at full health minus adjusted for reduced quality)

– e.g., if one year of full health equals 1 QALY– and having one ADL dependency reduces the value of

life by 20%– then prevention of loss of independence in one

ADL=.2QALY

• %reduction is arbitrary, or preference based– I used, 5ADL dependency=0 Quality of Life (0

QUALYs)• May understate value of 5ADL dependent life

- and thus overstates value of preventing a single ADL decline

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Cost-Benefit Analysis • [(Hospvisits2*Hospcosts2)+(ERvisits2*ER$2)+(OPvisits2*OP$2)+

(NHadmits2*NHdays2*NH$2)+(Trans2*Trans$2)+(Infhrs2*Inf$2)+(DMEunits2*DME$2)+(Prescribe2*Prescribe$2)+(Disposunits2*Dispos$2)+(Housingdays2*Housing$2)+(Meals2*Meals$2)+or-(Copay2*Copay$2) +(NewTreat2*NewTreat$2)

minus • (Hospvisits1*Hospcosts1)+(ERvisits1*ER$1)+(OPvisits1*OP$1)+

(NHadmits1*NHdays1*NH$1)+(Trans2*Trans$1)+(Infhrs1*Inf$1)+(DMEunits1*DME$1)+(Prescribe1*Prescribe$1)+(Disposunits1*Dispos$1)+(Housingdays1*Housing$1)+(Meals1*Meals$1)+or-(Copay1*Copay$1)]

divided by• [(Units of outcomeA2*$value per unit of outcomeA2)+(Units of outcomeB2*$value

of outcomeB2)+ (Units of outcomeN2*$value per unit of outcomeN2) minus

• (Units of outcomeA1*$value per unit of outcomeA1)+(Units of outcomeB1*$value of outcomeB1)+ (Units of outcomeN1*$value per unit of outcomeN1)] 

• Outcomes are converted first to QALYs, Quality Adjusted Life Years (1 year of life at full health minus discount for reduced quality), then to $, e.g., if one year of full health is worth $200,000, and having one ADL dependency reduces the value of life by 20%, then prevention of loss of independence in one ADL=$40,000

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Value of Life

• Usually estimated by either human capital approach (lifetime earnings) but produces discrimination problems, or preferably willingness to pay (also called contingent valuation) – as revealed by extra pay for extra risky jobs, or population cost of life-saving products like air bags divided by lives saved in the population

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Cost-Benefit ExampleAfter Home Care Expansion

Patients PerDeim Days Cost

Hospital 98 $800 2.94 $230,496

NursHome 75 $100 329 $2,467,500

HomeCare 200 $50 200 $2,000,000

HigherADL 10 -$110 365 -$400,000

HigherSat 100 -$5 180 -$98,630

Sum $4,199,366

Before Home Care Expansion

Patients PerDeim Days Cost

Hospital 100 $800 3 $240,000

NursHome 100 $100 365 $3,650,000

HomeCare 50 $50 50 $125,000

Sum $4,015,000

After minus Before $184,366

4.59%

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Discounting• If costs and benefits flow over a different time,

then discounting should be applied• Often ignored on the assumption that most

benefits are short term– Not a bad assumption in long-term care– Worse assumption for early prevention

• Requires applying a discount rate for each year of delay between costs and outcomes,– e.g. value of outcomes to come in 5 years might be

discounted at 3%/year*5years– Or, if some costs or benefits are short term, and others

long, apply discounting to both long term values

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An Application of Cost-Benefit Analysis to Home Care

Budgeting

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Problems with Home Care• Not cost-minimizing

– Utilization and cost results poor– Minimally reduced hospital use– Some nursing home reduction

» But not enough to offset new costs– Net costs 15-20% higher

• Not cost-effective– Few outcome benefits, very high cost per

benefit– No physical or mental benefits

– ADL, IADL, activities, other measures– No increase in longevity– Contentment higher (though transient) in:

» some patients» some family care-givers

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Underlying Cause: Imperfect Agency

• Perfect agent requires:– Clear goals from principal

– Good information• Tools, procedures, resources,

training, feedback

– Appropriate incentives• Rewards, constraints, sanctions

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Observed Versus Predicted:Mean Rate of Hospitalization for

Selected Subgroups Characteristic Predicted Actual Ratio Male 0.0178 0.0178 1.00 Age over 80 0.0134 0.0133 1.01 Human help toileting 0.0155 0.0156 0.99 Human help transfer 0.0161 0.0160 1.01 Human help eating 0.0142 0.0135 1.05 Human help w/mobil 0.0161 0.0161 1.00 Mental/Alz. dx 0.0128 0.0128 1.00 Respiratory dx 0.0207 0.0207 1.00 Nonhyperten. circ.dx 0.0172 0.0172 1.00

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Resource allocation is randomFigure 1. Per Capita Spending by Decile of

Hospitalization Risk in ALTCS ’92-97

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Figure 2. Per Capita Spending by Decile of Nursing Home Admission Risk in ALTCS ’92-97

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Figure 3. Per Capita Spending by Decile of Risk of Death in ALTCS ’92-97

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Figure 4. Per Capita Spending by Decile of Functional Decline Risk in ALTCS ’92-97

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Reform Agenda: Improve Agency• Clarify goals

– Focus on patient specific outcome goals

• Improve information• Provide risk assessment tools

– Reduce false positives in selection• Replace single, categorical eligibility with multistage

process

– Create demand for dose-response data

• Create incentives for efficiency, effectiveness– Impose budget constraint binding on every patient– Focus care planning on marginal benefit for

marginal cost

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Effectiveness, Risk, Value(ERV) Budget Model

• Clarifies goals– Emphasizes patient-specific outcomes

• Accommodates broad range of outcomes

• Improves information– Provides better risk assessment methods– Employs two-stage needs assessment– Implies care plan evaluation criteria

• Creates incentives for marginal benefit- marginal cost trade-offs– Sets binding constraint on care plan costs– Shifts funds from low risk to high risk patients– Rewards improved effectiveness

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ERV Example for One Risk

• If…– Hospital risk for a given patient = 25%, and,– Cost of hospitalization would be = $10,000, and– Effectiveness of home care in mitigating hospital

risk = 20%,– Then, monthly ERV= $500

» (500=.20*.25*10,000)

• Note incentives:– Higher effectiveness=more money– Spending reallocated to highest risk-benefit potential– Process, outcome evaluation criteria implied

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Some Case ExamplesCharacteristics Value Outcome Monthly Risk Monthly Budget

Risk Percentile Target Budget %ADL's 4 Death 0.82% 15-20% $8 15-20%Married Widow Functional Decline 1.82% 10-15% $35 10-15%AGE 87 Hospitalization 0.86% 15-20% $42 15-20%SEX Female Nursing home admission 1.71% 0-5% $64 0-5%

Total $149 0-5%

Characteristics Value Outcome Monthly Risk Monthly Budget Risk Percentile Target Budget %

ADL's 1 Death 0.72% 10-15% $7 10-15%Married Widower Functional Decline 10.97% 95-100% $212 95-100%AGE 92 Hospitalization 0.78% 10-15% $38 10-15%SEX Male Nursing home admission 4.03% 30-35% $151 30-35%

Total $408 50-55%

Characteristics Value Outcome Monthly Risk Monthly Budget Risk Percentile Target Budget %

ADL's 4 Death 67.59% 95-100% $684 95-100%Married Married Functional Decline 2.35% 25-30% $45 25-30%AGE 82 Hospitalization 7.66% 95-100% $375 95-100%SEX Female Nursing home admission 61.86% 95-100% $2,314 95-100%

Total $3,419 95-100%

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Take-Away Points About Cost- Effectiveness Analysis

• Central purpose of CEA:– Compare relative value of marginal costs of new

policy to marginal value of health benefits produced• Specify all current costs and new costs• For a single outcome, subtract old costs from new, and• Subtract old benefit levels from new

– Divide net cost by number of clients benefiting

• For multiple outcomes, convert all outcomes to QALYs• QALYs must be valued to produce value of benefits

• CEA doesn’t render decisions, only input– Just trying it will improve your decision process

• Makes you clear about what you’re likely to get and costs– May help you think about what’s feasible and what’s not