University of Minnesota Medical Technology Evaluation and Market Research Course: MILI/PUBH 6589 Spring Semester, 2012 Stephen T. Parente, Ph.D. Carlson School of Management, Department of Healthcare Management

Have COURAGE

WSJ Article requires courage

The COURAGE Study as Case Exercise Small Group Exercise What are the competing technologies involved in the case? What regulatory agencies are involved? What reimbursement policies are involved? Is comparative effectiveness as private initiative to bend the cost curve down in jeopardy? Going forward, if you were DHHS and you want to invest research $$$, name 2 key objectives of the study?

Estimating the Costs of New Medical Technologies

Why Measure Costs? CE Ratio = (Net change in Costs ) / Change in QALYs Scenario: –New drug that is prophylactic against heart disease. –You want health plans to cover this treatment? –What are they going to want to know?

Opportunity Costs Key Cost Concept: Opportunity cost! What are opportunity costs? How do we identify these costs? –Create a flow-chart outlining the events that occur through the course of an illness. The role of ‘time costs’

Flow Chart of Course of Influenza Influenza Seasons Starts Person does not get flu shot Stays wellGets Sick Mild Case Misses 2 days of work Over the counter medicines Kids get sick Moderate Case Misses Week of work Visits Physician- Over the counter medicines Kids get sick Severe Case Misses 2 weeks of work Visits physician & ER visit Over the counter medicines Kids get sick Person gets flu Shot

Three Steps to Measuring Costs 1.Identify resources used After flowchart is constructed, for each cell identify the costs associated with that state. 2.Measure the resources used. Quantify the identified resources. Example 3.Place a monetary value on resources used.

Whose Costs are we Measuring? Patient—out of pocket costs and inconvenience of treatment. Hospitals providing care out of a fixed budget or reimbursement system (e.g. Medicare). Increases in demand from providing service. Insurers are concerned about the payments they make to providers and the costs of processing claims. Benefits are generally increases in demand from providing service. Social Planner is concerned with all resources.

Direct and Indirect Costs Costs are generally divided into two categories: Direct and Indirect Direct costs are those that are directly attributable to the intervention. Drugs, tests, supplies, healthcare personnel and medical facilities. Time costs can go in either the numerator or denominator— probably best to put in the numerator. Productivity costs go into the denominator of the CE ratio (e.g. QALY)

Costs to Consider Physician visits Hospital visits — includes hospitalization and physician time (billed separately ) Medications Laboratory tests Transportation Long Term Care Patient Time Care Giver Time

Costs to Consider Health CostsPatient Costs HospitalizationTime in treatment/Care giver time / Co-pays Ambulatory CareTransportation to office / Co- pays MedicationsOTC or Prescription? Co-pays Long Term CareCare giver time / insurance

Micro-Costing and Gross-Costing Aggregate costs obtained from the medical literature are called gross costs. An Example The process of identifying each resource used, measuring, valuing and adding up is called micro-costing.

Using Micro and Gross Costs Gross costing is much easier and less time consuming than micro-costing (e.g. hospital costs) –Example: Obtaining the cost of a hospitalization for appendicitis. 1 st step is reduced to looking up the average costs for appendicitis. Micro-costing should be used when the cost- effectiveness analysis is centered on changes in the way resources are delivered. –Example from readings

Hospital and Ambulatory Costs Usually the biggest component of the cost of treating a condition. Costs are easy to identify, difficult to measure. Value of claims data is very high here. Other sources of information: –Health care Cost and Utilization Project (HCUP)— AHRQ –Medical Expenditure Panel Survey (MEPS) –National Ambulatory Medical Care Survey (NAMCS)

Hospital Costs—Using Cost-to- Charge ratios Charges do not reflect resources use. No one pays them. Often, they are the only information available. Can deflate charges by cost-to-charge ratio to get an approximation. Approximate cost = (charge for hospitalization) x (total reimbursements/total charges) When is this ‘good enough’?

Transportation Costs Importance will vary with condition Transport costs = cost of a gallon x number of gallons x hourly wage x number of hours patients spends in transit. Example: Breast cancer treatments. Course of treatment patients can travel 89 hours / 370 miles through course of treatment.

Time Costs Time costs are those costs associated with the time a patient spends receiving a medical intervention— “Time in treatment costs.” Duration of physician contract by disease and physician specialty is available from the NAMCS. Average contact time 19.2 minutes. Valuing time costs —opportunity costs. Wage is a good proxy. –Problems with wages. –Earnings by profession: –The mean physician earns $60 / hr.

Side Effects Side effects are valued via micro-costing. One medication / treatment may generate many side effects—need to identify them all. Need to identify frequency at which they occur. Side effects are typically measured and valued based on the ambulatory or hospital resources used in treatment.

Medication Costs Medications consumed throughout the course of an illness usually can be identified through the medical literature or from clinical practice guidelines. Prices of medicines can be obtained from Drug Topics Red Book. Red Book lists the average wholesale price for virtually every medication prescribed.

Fixed versus Variable Costs Fixed costs—Perhaps 20% of total provider costs are fixed. Includes property, plant, DME. These expenses are incurred not mater what. Variable costs—costs that vary with the intervention. In general, do not include fixed costs in the analysis—only use variable costs.

Future Costs Identifying future costs can be important. Perspective matters here (health plan, patient, society, etc.) Examples. Discounting—Need to discount future expenditures to make comparable to current expenditures. Restricting cost analysis to a fixed time period may introduce bias because most expenditures occur near death

Future Costs (5% discount rate) Future Years Without Intervention With Intervention 1$1,000$1,500 2$2,0000 3$4,0000 Total$6,184.5$1,425

Learning Curves Roughly, doubling cumulative output leads to a % reduction in the costs of production. Saywell et al. (1989) reports a 50% reduction in the costs of heart transplants at a single hospital over 4 years. Adjusting costs measurements to account for learning.

Learning Curves A new treatment has been performed 500 times and the current unit cost is $10,000. There is ongoing learning. Doubling output is expected to lead to a 10% reduction in costs ($1,000). One additional treatment (.2%) will lead to a $2 reduction in the cost of each future treatment. 200 treatments will be performed each year for the next 10 years.

Learning Curves (cont) True marginal cost = Current production costs – PDV of the reduction in future production costs. In example, 200 x $10,000=$2,000,000 total, naïve production costs. The 501 st unit reduces this production cost by.2% = $4,000. So, true incremental cost is $10,000-$4,000 = $6,000. Role of discounting.

Influenza Example Bridges, et al. (2000) JAMA Studying the cost-effectiveness of influenza vaccines. Question: What are the costs and benefits of administering flu shots?

Study Background N=1,200 for two years US manufacturing firm Direct Costs: –Flu shot ($24.70) –Drugs –$ spent on MD visits –$ spent on Hospitalizations Indirect Costs –Hours lost for Sick days –Hours lost for MD visits

Influenza Outcomes

Costs

Costs

Summary CategoryUnit Price Cost/Person Treatment Cost/Person Placebo MD Visit MD co-pay Drugs Drug co-pay OTC Hospitalization s Lost workdays Lost work hours for MD visits Vaccination Total