Chapter 3 Cost and Benefit Analysis (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use

Cost Identification Analysis Cost identification studies –Measure the total cost of a given medical condition or type of health behavior on the overall economy Total cost - three major components: 1.Direct medical care costs 2.Direct nonmedical costs 3.Indirect costs (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 2

Cost Identification Analysis Direct medical care costs –Incurred by medical care providers Hospitals, physicians, and nursing homes –All necessary medical tests and examinations –Administering medical care –Any follow-up treatments (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 3

Cost Identification Analysis Direct nonmedical costs –All monetary costs imposed on any nonmedical care personnel, including patients Transportation to and from the medical care provider Home care; specific dietary restrictions Indirect costs –Time costs associated with implementation of the treatment –Opportunity cost of the patient’s (or anyone else’s) time that the program affects (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 4

Cost Identification Analysis Druss et al. (2001) –Total economic cost of chronic medical conditions in 1996 –Hypertension, $121.8 billion –Mood disorders, $66.4 billion –Diabetes, $57.6 billion –Heart disease, $42.4 billion –Asthma, $31.2 billion (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 5

Cost Identification Analysis Meltzer et al. (1999) –Estimated influenza pandemic in the U.S. 89,000 to 207,000 deaths 314,000 to 734,000 hospitalizations 18 to 42 million outpatient visits, 20 to 47 million other illnesses –Economic impact: $71.3 to $165.5 billion Sobocki et al. (2006) –Cost of depression in Europe 118 billion euros (Direct costs = 42 billion euros) (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 6

Cost Identification Analysis The American Diabetes Association (2008) –Direct and indirect costs of diabetes in 2007 $174 billion –$116 billion direct medical costs –$58 billion indirect expenses such as lost work days and permanent disability The American Heart Association –Cost of cardiovascular disease and stroke $448.5 billion in 2008 (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 7

Cost-Benefit Analysis Resource scarcity –Forces society to make choices Economics - social science –Analyzes the process by which society makes these choices People - rational decision makers –People know how to rank their preferences from high to low or best to worst –People never purposely choose to make themselves worse off (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 8

Cost-Benefit Analysis People - make choices –Based on their self-interests –Choose those activities they expect will provide them with the most net satisfaction Decision rule –If expected benefits exceed expected costs for a given choice, it is in the economic agent’s best interest to make that choice (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 9

Cost-Benefit Analysis Optimizing rule: NB e (X) = B e (X) – C e (X) –X - a particular choice or activity under consideration –B e – expected benefits associated with the choice –C e - expected costs resulting from the choice –NB e - expected net benefits If NB e >0 –Economic agent’s well-being is enhanced by choosing the activity (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 10

Cost-Benefit Analysis Surgeon general –Maximize the social utility of the population by choosing the best aggregate mix of goods and services to produce and consume –Allocate land, labor, and capital resources to any and all uses –Maximize the total net social benefit (TNSB) from each and every good and service produced in the economy (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 11

Cost-Benefit Analysis TNSB = TSB – TSC –TSB - total social benefit in consumption Money value of the satisfaction generated from consuming the god or service –TSC - total social cost of production Money value of all the resources used in producing the good or service (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 12

Cost-Benefit Analysis TNSB from medical services TNSB(Q) = TSB(Q) - TSC(Q) –Q – quantity of medical services Maximize TNSB(Q) –Choose Q at which the difference between TSB and TSC reaches its greatest level (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 13

FIGURE 3–1 Determination of the Effi cient Level of Output (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 14 The TSB curve represents the monetary value of the total social benefit generated from consuming medical care. The curve is positively sloped to reflect the added monetary benefits that come about by consuming more medical care. The curve bows downward to capture the fact that society experiences diminishing marginal benefit with regard to medical care. Quantity of medical services (Q) TSB Q0Q0 TNSB is maximized when the vertical distance between the two curves is greatest and that occurs at Q 0 level of medical services. A The TSC curve represents the TSC of producing medical care and is upward sloping because total costs increase as more medical care is produced. The curve bows toward the vertical axis because the marginal cost of producing medical care increases as more medical care is produced. TSC B Costs and benefits of medical services 0

Cost-Benefit Analysis TSB - increase at a decreasing rate –Diminishing marginal benefit Successive incremental units of medical services generate continually lower additions to social satisfaction –Slope: MSB(Q) = ΔTSB/ΔQ MSB - marginal social benefit from consuming a unit of medical services MSB decreases with quantity since the slope of the TSB curve declines due to diminishing marginal benefit (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 15

Cost-Benefit Analysis TSC - increase at an increasing rate –Increasing marginal costs of producing medical services. –Slope: MSC(Q) = ΔTSC/ΔQ MSC - marginal social cost of producing a unit of medical services MSC increases with output as the slope of the TSC curve gets steeper due to increasing marginal cost (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 16

Cost-Benefit Analysis Maximize TNSB –Slope of TSB = slope of TSC –MSB(Q) = MSC(Q) –At output level Q 0 Allocative efficiency - best quantity of medical services (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 17

Cost-Benefit Analysis MSB curve - negatively sloped –Diminishing marginal benefit MSC curve - positively sloped –Increasing marginal costs, respectively Efficient amount of medical services: Q 0 –Where MSB = MSC (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 18

FIGURE 3–2 Under- and Overprovision of Medical Services (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 19 Quantity of medical services (Q) Q0Q0 Costs and benefits of medical services If Q L amount of medical care is produced, then the MSB exceeds the MSC and society would be better off if more medical services were produced. If Q R amount of medical care is produced, then the MSB is less than the MSC and too much medical care is produced. MSB A MSC B C QRQR QLQL G F E H The MSB curve stands for the marginal social benefit generated from consuming medical care and is downward sloping because of the notion of diminishing marginal benefit. The MSC curve stands for the marginal social cost of producing medical care and is upward sloping because of increasing marginal costs. TNSB is maximized at Q 0 level of medical care where the two curves intersect. At that point, the MSB of consuming medical care equals the MSC of production.

Cost-Benefit Analysis TNSB –Area below MSB curve but above MSC curve Sum of net marginal social benefits –Area ABC = maximum TNSB that society receives if resources are allocated efficiently (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 20

Cost-Benefit Analysis For Q L MSC –Too few medical services are being produced –Deadweight loss: ECF Lost amount of net social benefits Cost associated with an underallocation of resources to medical services (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 21

Cost-Benefit Analysis For Q R > Q 0 : MSC > MSB –Too many medical services are being produced –Deadweight loss GCH Net cost to society from producing too many units of medical services and therefore too few units of all other goods and services. (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 22

Cost-Benefit Analysis NMSB(Q) = MSB(Q) - MSC(Q) –NMSB - net marginal social benefit the society derives from consuming a unit of the good If NMSB > 0 –Total net social benefit increases if an additional unit of the good is consumed If NMSB < 0 –Society is made worse off if an additional unit of the good is produced and consumed (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 23

Practical Side of Using Cost-Benefit Analysis - Health Care Decisions Benefits, or diverted costs, of a medical intervention - four broad categories: 1.The medical costs diverted because an illness is prevented Easiest to calculate –Estimate medical costs that would have been incurred had the medical treatment not been implemented 2.The monetary value of the loss in production diverted because death is postponed Projecting the value of an individual’s income that would be lost due to illness or death (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 24

Practical Side of Using Cost-Benefit Analysis - Health Care Decisions 3.The monetary value of the potential loss in production saved because good health is restored Projecting the value of an individual’s income that would be lost due to illness or death 4.The monetary value of the loss in satisfaction or utility averted due to a continuation of life or better health or both. Most subjective, most difficult to quantify Estimating the monetary value of the pleasure people receive from a longer life and good health (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 25

Discounting A benefit (or a cost) received today –Has more value than one received at a future date Present value, PV, –Of a fixed sum of money, F, to be received a year from now –r - annual rate of interest (discount rate) (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 26

Discounting PV of a fixed sum –Inversely related to the rate at which it is discounted PV of sums of money received over a number of years, T: –F t (t = 1, 2, 3,..., T) equals the payment, or net benefit, received annually for T years (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 27

Discounting Present value –NB - the PV of net benefits (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 28

Discounting Choosing the interest rate –Affects the present value of a project –Too high Choice of medical interventions that offer short-term net benefits –Too low Choice of medical projects that provide long-term net benefits –Should equal the rate at which society collectively discounts future consumption (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 29

Human capital approach Many medical interventions –Extend or improve the quality of life Human capital approach –Value of a life = the market value of the output produced by an individual during his or her expected lifetime –Estimate the discounted value of future earnings resulting from an improvement in or an extension of life (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 30

FIGURE 3–3 Present value of lifetime earnings, males & females, 2000 (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 31

Human capital approach Present value of lifetime earnings –Initially increases with age Value of lifetime earnings that accrue mainly in the middle adult years are discounted over a shorter period of time –Peak - between the ages of 20 and 24 –Then decreases with age Productivity and number of years devoted to work decrease –Sensitive to the discount rate (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 32

Human capital approach Shortcomings –Unable to control for labor market imperfections Gender, racial, other forms of discrimination –Doesn’t take into account Value of any pain and suffering averted because of a medical treatment Value an individual receives from the pleasure of life itself –A chronically unemployed person Has a zero or near-zero value of life (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 33

Willingness-to-pay approach –How much money people are willing to pay for small reductions in the probability of dying –Deciding whether to purchase a potentially life- saving medical service Benefit = reduced probability of dying, π, times the value of the person’s life, V Purchase if benefit just compensates for the cost, C π ˣ V = C (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 34

Willingness-to-pay approach π ˣ V = C V = C / π –Value of the human life lower-bound estimate Advantage –Measures the total value of life and not just the job market value (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 35

Should College Students Be Vaccinated? Meningococcal disease Jackson et al. (1995) –Cost-benefit analysis – policy to vaccinate all college students –Benefits - from a decrease in the number of cases of meningococcal disease –Cost of implementing a vaccination program for all college students (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 36

Should College Students Be Vaccinated? Costs –Cost of the vaccine ($30) multiplied by the number of doses needed 2.3 million freshmen 80% receive the vaccine –Estimated cost of any side effects One severe reaction per 100,000 students vaccinated ($1,830 per case) –$56.2 million a year (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 37

Should College Students Be Vaccinated? Benefits include –Medical costs diverted Treatment costs per case = $8,145 Costs for cases occurring in the2nd, 3rd, and 4th years of college - discounted at 4% $3.1 million at 15 times the baseline rate –Estimated value of lives saved Human capital approach - value of lost earnings Each life saved =$1 million $8.8 million for 2 times the baseline rate and $60.7 million for 15 times the baseline rate (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 38

TABLE 3–1 Estimated Benefits and Costs for the Vaccination of College Students against Meningococcal Disease (in millions of $) (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 39 Baseline times 2Baseline times 15 Cost of the Vaccination Program Total Benefits Direct Medical Benefits Indirect Benefits—Value of Lives Saved Net Benefits—(Benefits – Cost) $ $

Should College Students Be Vaccinated? Estimated costs, baseline times 2 –Outweigh the benefits by more than $46 million Net benefits, baseline times 15 –$7.6 million. Estimated possible rate: 2.6 times –Costs outweigh the benefits (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 40

Costs and Benefits of New Medical Technologies Advances in medical technology –Driving force behind rising medical costs –Profound effect on health and well-being of millions of people Overall mortality & disability rates in the United States have fallen consistently since World War II. (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 41

Costs and Benefits of New Medical Technologies Impact of medical technology on health –Total product curve for medical care Relationship between health and amount of medical care consumed –New medical technology - improves health Total product curve - rotates upward Each unit of medical care consumed now has a greater impact on overall health (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 42

Costs and Benefits of New Medical Technologies Cutler and McClellan (2001) –Benefits outweigh the costs –Heart attack 1984 – 1998: increase life expectancy by 1 year Net benefit: $60.000; Payoff 7 to 1 –Low-birthweight infants Net benefits = $200,000 per infant; Payoff 6 to 1 –Depression –Cataracts –Breast cancer (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 43

Cost-Effectiveness Analysis Cost-effectiveness analysis CEA –Estimates the costs associated with two or more medical treatment options or clinical strategies –For a given health care objective –To determine the relative value of one medical treatment or technology over another (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 44

Cost-Effectiveness Analysis Incremental cost effectiveness ratio (ICER) –Compare a new medical treatment (new) with an existing treatment (old) –Cost of new treatment, C new –Cost of existing treatment, C old –Medical effectiveness of new treatment, E new –Medical effectiveness of existing treatment, E old (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 45

Cost-Effectiveness Analysis New treatment dominate the old –New treatment is less costly than the old –New treatment is more effective than the old –Adopt new treatment Old treatment dominate the new –New treatment is more costly –New treatment less effective –Don’t adopt new treatment (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 46

Cost-Effectiveness Analysis New treatment - more effective & more costly than the old –Is the gain in improved health brought about by the new treatment worth the additional cost in dollars? – If the cost of a new medical treatment is less than $50,000 per additional year of life saved it is generally viewed favorably (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 47

Cost-Effectiveness Analysis New treatment - less effective & less costly than the old –Is the decrease in health worth the cost savings? –CEA – provide relative cost savings per life-year New medical treatment / technology –Where none previously existed (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 48

FIGURE 3–4 The Cost-Effectiveness Plane (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 49 Net Cost + (C new > C old ) Net Cost - (C new < C old ) Net Effect + (E new > E old ) Net Effect - (E new < E old ) I Review relative costs and benefits II Old treatment dominates III Review relative costs and benefits IV New treatment dominates The horizontal axis measures the net impact of a new medical treatment or technology on health outcomes. In quadrant II the new option is less effective and more costly than the current one. In this case, the current medical option should be retained. Moving counterclockwise, quadrant III shows the case in which the new medical option is less costly and less effective than the current one. The relevant question is whether the reduction in cost is worth the loss in health associated with the new medical option. In quadrant IV the new medical option dominates the old one because it is more effective and less costly. Net costs are measured on the vertical axis with positive net costs scored above the origin and negative net costs scored below the origin. The cost-effectiveness plane shows how CEA can be used to determine whether a new medical technology or treatment should be adopted. Quadrant I depicts the situation in which a new medical option is more effective and more costly than the current procedure. To the right of the origin, the new treatment enhances health or life expectancy, and to the left of the origin it diminishes health when compared to the current treatment.

Cost-Effectiveness Analysis Cost effectiveness of breast cancer screening (mammogram) –Age 50-69, cost per year of life saved = $21,400 –Age 40-49, incremental cost-effectiveness ratio = $105,000 per life-year saved Critics: life-years are not homogenous –Medical intervention Significant number of life-years saved but a reduced quality of life Few life-years saved but an enhanced quality of life (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 50

Cost-Utility Analysis Cost-utility analysis –Number of life-years saved –Quality of life –Adjusts the number of life-years gained by some type of index that reflects health status, or quality of life (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 51

Cost-Utility Analysis Rating scales –Quality-adjusted life-years (QALYs) Life expectancy ˣ Health-utility index –Health-utility index = measure of the quality of remaining life-years Scale: 1 to 0 1 = one year of full health 0 = death (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 52

Cost-Utility Analysis Survey techniques – health-utility index –Rating scale –Standard gamble –Time trade-off Rating scale –Individuals rate various health outcomes –Scale 0 to 1 (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 53

Cost-Utility Analysis Standard gamble –Two hypothetical health alternatives First: less than perfect health outcome (disability) Second –Successful procedure »Probability of success = π; Perfect health –Unsuccessful procedure »Probability (1- π); Death –Choose π that generates an indifferent response between the two alternatives –Health-utility index = π (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 54

Cost-Utility Analysis Time trade-off –Hypothetical choice Live for x years in perfect health followed by death Live y years with a particular chronic condition y>x Vary x until the person is indifferent between the two outcomes –Health-utility index = x/y. (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 55

Cost-Utility Analysis Cost-utility ratio from a new medical treatment or technology –QALYs – quality adjusted life-years (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 56

Cost-Utility Analysis Critics –Survey techniques –Discrimination –Does not tell us whether the overall well-being of society is increased –Just whether one medical treatment or technology is more cost effective than another (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 57

Cost-Utility Analysis Neumann et al. (2000) –Effectiveness of prescription drugs Mean ratio of $11,000 per quality-adjusted life-year –Immunization - $2,000 per QALY –Medical procedures - $140,000 per QALY. –Surgery - $10,000 per QALY –Screening at $12,000 per QALY Stone et al. (2000) –Effectiveness of clinical preventive services Median cost utility ratio = $14,000 per QALY (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 58

Cost-Utility Analysis Digital vs. film mammography –Digital - superior in its ability to detect cancer for certain subpopulations Far more expensive –Tosteson et al. (2008) Replacement of all-film mammography screening with all-digital = cost $331,000 per QALY gained Targeted-digital mammography screening –Women 50 and younger - $26,500 per QALY –Women 50 and younger plus women older than 50 with dense breasts - $84,500 per QALY (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 59

TABLE 3–2 An Example of Cost Effectiveness and Cost-Utility Analysis (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 60 Treatment optionCostLife-years gainedHealth-utility indexQALY Current procedure New procedure $20,000 $110,000 2 years 8 years

Autologous Blood Donations Are They Cost Effective? Autologous blood donation –Donor and recipient are the same person Allogeneic blood donation –Donor and recipient are different people Autologous blood donation –Safer –More costly More administrative and collection expenses Higher discarding costs (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 61

TABLE 3–3 Estimated Cost Effectiveness of Autologous Blood Donations (c) 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 62 Total Hip Replacement Coronary-artery Bypass grafting Abdominal Hysterectomy Transurethral Prostatectomy Additional cost per unit of autologous blood transfused QALY per unit transfused Cost effectiveness (row one/row two) $ $235,000 $ $494,000 $ $1,358,000 $4, $23,643,000