Flagship Program on Health Sector Reform and Sustainable Financing

Flagship Program on Health

Sector Reform and

Sustainable Financing

Cost-Effectiveness Technique in Health: Strengths and Limitations

R. Bitrán- Flagship Tehran- March 2004 3

Presentation Objectives

• To describe cost-effectiveness analysis (methodology)

• To discuss limitations and assumptions underlying CEA


Why a Benefit Package?

• Outcomes: – Use resources more rationally

– Meet equity goals

– Ensure accountability and transparency

• Process:– Clarify goals, priorities, choices, and opportunity

cost

– Mobilize consent through participation in design process


What Is a Basic Benefit Package?

3 defining features:

– Limited set of services

– Services included based on prioritization methods

– Synergies among interventions/services included


Key Words:Limited & Prioritized

Question:

How best to choose the limited number of services that can be included in a benefit package?

Answer:

That depends...?? ?


How would An Objective Utilitarian Choose?

Design your benefit package so that the population’s health status is maximized


But How?

??

?

?

?


Cost-Effectiveness Analysis!


What Is Cost-Effectiveness Analysis?

One type of Economic Evaluation that focuses on outcomes, e.g.,

- Lives- DALYs


Economic Evaluation

Choice

Program A

ComparatorB Consequence B

Consequence A

Source: Drummond et al., 1997

Costs A

Costs B


Economic Evaluation

Choice

Program A

ComparatorB

Consequence B

LIVES SAVED

Consequence A

LIVES SAVED

Source: Drummond et al., 1997

Costs A $

Costs B $


Problem:

How to compare:

- costs

- consequences

Solution:

Compare Cost-Effectiveness Ratios


Cost-Effectiveness Ratio

Cost $ / Effectiveness

C/EA vs. C/EB

==> Pick Program A if C/EA < C/EB

Pick Program B if C/EB < C/EA

Seems simple, but is that really the case?


First Issue: Effectiveness

• Need same measure of Effectiveness, E.g.:

– Lives saved

– DALYs

• Can’t compare “apples” and “oranges”


Second Issues: Costs

Many different kinds of costs

– Health care costs

– Patient resources (time, $, other)

– Costs in other sectors

Which ones to include?


Example 1

COSTS:

– Health Care Costs$1,000,000

– Patient/Family resources$5,000

– Costs in other sectors$50,000

CONSEQUENCES:

– Lives Saved: 100

– Health care savings $250,000

– Savings in other sectors$20,000

– Savings in pat./fam. resources$12,000


Example 1: Cost-Effectiveness Ratio

Summary:

1) C/E = 10,000 / life saved

2) C/E = 7,500 / life saved

3) C/E = 7,730 / life saved

Question: Which one is right?


The “Right” C/E Ratio

• The “right” C/E ratio depends on your perspective and your objectives

• Economists argue for a societal perspective:

==> Include all costs and consequences

C/E = $ 7730 / life saved


The “Right” C/E

Net Costs / Effectiveness

Net costs = Costs - Resources Saved

= C - S

C= C1+ C2 + C3 +...

S= S1 + S2 + S3 +...


Cost and Effectiveness Are Difficult To Predict

• Both depend on how well the delivery system functions

• The incremental cost of any one service depends on what else is done

• Demand for a service may change when it is included in a benefit package


Determining Cost Effectiveness Requires Many Value Judgments To

Create A Single Measure Of Gain

• The value of diminishing different kinds of disability

• Disability versus death

• Death at different ages

• Current versus future gains (discount rate)

• Attitude toward uncertainty (risk aversion)


Programs Lasting Multiple Years

Differential Timing of CostsYear Cost of Program A Cost of Program B

($000s) ($000s)

1 5 15

2 10 10

3 15 4

“Total” 30 29


Programs Lasting Multiple Years

• Question: Is this comparison legitimate?

Answer: No!

• Question: What to do?

Answer: Convert future costs to ‘present’ costs


Value of a 1-year Investment

• Deposit $100 in the Bank @ 10% / year==> get $110 after 1 year

• How much is $100 in 1 year worth today?==> $91

Deposit $100 in the Bank @ 5% / year==> get $105 after 1 year

• How much is $100 in 1 year worth today?==> $95


Multi-Year Programs

Conclusion:

– Timing matters

– The interest rate matters


Choice of Discount Rate Makes a Difference

r=0% r=1% r=5% r=10%

Costs ($000s) ($000s) ($000s) ($000s)

PA 30 29.31 26.79 24.08

(late costs)

PB 29 28.54 26.81 24.91

(early costs)


Review Important Issues in C/E Analysis:

• In/exclusion of costs and consequences

• Difficulty estimating cost and effectiveness

• Timing of costs (and consequences)

• Discount rate

• Program (input) level


Additional Issues

What happens to the C/E of a program when the input is increased?


Example 2: Doubling Inputs

COSTS:

• Health Care Costs$2,000,000

• Patient/Family resources$10,000

• Costs in other sectors$100,000

CONSEQUENCES:

• Lives saved = 150

• Health care savings $375,000

• Savings in other sectors$30,000

• Savings in pat./fam. Resource$18,000


Impact of Doubling the Inputs

• Example 1: C/E=$7,330

• Example 2: C/E=$11,247

==> Cost doubled but effects did not!


Additional Issue: Marginal Vs. Average Cost

Marginal Cost Effectiveness May Depend On How Extensively Some Services Are Provided Because Of “Diminishing Returns”


Using Cost Effectiveness To Calculate A Basic Benefit

Package• Determine cost-effectiveness ratio of each

option

• Rank according to those ratios

• Calculate total cost of including each service in package

• Go down the list in rank order until the available budget is exhausted


Important Things to Remember:C-E analysis is predicated on (objective) utilitarian beliefs:

What happens if you have other ethical beliefs?

- Subjective utilitarian?

- Egalitarian liberal?

- Communitarian?


Important Assumptions to Remember

• Ignores equity issues

• Ignores political concerns

• Assumes people are rational (they’ll demand what’s “good” for them)


Conclusion

• C-E analysis is relatively simple in theory but difficult in practice

• Extreme care must be taken when confronting the methodological challenges inherent in CEA

• CEA does not consider equity issues and is based on objective utilitarianism


Conclusion (cont.)

Notwithstanding these caveats, CEA is a potentially useful input into the design process of a benefit package, but it is not sufficient by itself.


Appendix



1) Health Care Cost Only

$1,000,000 / 100 lives

C/E = $10,000/life saved

2) Health Care Resources Only

==> Health care cost - health care savings($1,000,000-250,000)/100 lives

C/E= $7500 / life saved



3) All Resources

C/E = (All costs - All savings) / # lives saved

($1,000,000+5,000+50,000)

- ($250,000+20,000+12,000) / 100 LS

= $7730 / life saved


DiscountingNet Present Value (P) of a stream of future Costs:

3

P= Fn(1+r)-n

n=1 F1 F2 F3

= ------- + -------- + --------

(1+r) (1+r)2 (1+r)3

F1 F2 F3

= ------- + -------- + --------

(1.05) (1.05)2 (1.05)3

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