Economic evaluation of health programmes Department of Epidemiology, Biostatistics and Occupational Health Class no. 13: Cost-benefit analysis – Part 2 Oct 20, 2008

Plan of class  Discussion - assignment no 3  Finish material from lecture no 12  Methods for valuing benefits in CBA – old and new (2)

Pareto-optimality; Kaldor-Hicks  Pareto-optimality: No trade can be made such that someone is better off and no-one is worse off One person owning everything can be Pareto- optimal!  Kaldor-Hicks: If winners gain enough that they could compensate losers if they wanted to, welfare has been increased.

Early method for evaluating benefits: Human capital All or part of benefit of programme measured in terms of economic productivity Discredited because from a welfare economics point of view, this is too narrow a question. Winners might value the health benefit much more than its productivity gain. Ex: cosmetic surgery.

Method no. 2: Revealed preference  Value of a life implied in:  Wage differentials for riskier jobs  Price increment for safety features

Modern: Contingent valuation Contingency of a market for a health program existing. How much is it valued – how much are people prepared to pay for it?

Willingness to pay for what?  Degrees of uncertainty in what one pays for:  Certain need, certain health outcome of Tx Tx that will solve a problem you have –Ex post perspective  Certain need, uncertain health outcome Tx that may solve a problem you have  Uncertain need/future use,uncertain outcome Tx that may solve a problem you may develop –Ex ante perspective

Restricted vs global willingness-to-pay  Restricted WTP:  Question concerns health state only  Global WTP  Question also encompasses future health cost savings  Question also encompasses production gains and income effects

Willingness to accept Possible new program that benefits an individual Possibility of a program that benefits the individual being taken away WTP: Maximum amount person is willing to pay for program to be provided WTA: Minimum amount person will accept to feel adequately compensated for loss of program Compensating variation : Amount person would need to give to be at same level of utility with the new program as before Equivalent variation: Amount person would need to receive to be at same level of utilit following loss of program as before Note: Much more common to seek to obtain WTP than WTA values

Exercise  Design corresponding WTP questions with regards to a program providing expensive chemotherapy drug  Do not address issue of how to elicit the actual WTPs, only the constructs you are trying to estimate  Discuss advantages and disadvantages of estimating global WTP

Methods for eliciting WTP values  Open-ended question  Maybe unbiased, but imprecise  Closed-ended:  Bidding games – search algorithm Starting point bias?  Take it or leave it Need larger sample

Exercise  How would you elicit restricted WTP using these 3 methods for the ex ante scenario (uncertain need)

Discrete choice experiments (1)  A health outcome usually has different attributes  E.g., related to efficacy, adverse health events, cost  What would be the attributes of an evening spent with friends – engaging in various possible activities- e.g., going out to dinner, seeing a movie, inviting them over for dinner, etc.?

Discrete choice experiments (2)  Attributes can have different levels  Cardinal, ordinal or categorical  How might you categorize levels associated with:  Attribute of cost?  Attribute of fun?

Steps in a DCE (1)  Identify attributes (or characteristics)  Lit reviews, focus groups  Assign levels  Draw up scenarios  If needed use experimental design methods to reduce number of scenarios efficiently

Steps in a DCE (2)  Elicit preferences by asking respondents to choose among pairs of scenarios  Various elicitation formats  Use econometric methods to analyse data: ΔU i = β 1i (ΔX 1i )+ β 2i (ΔX 2i ) + β 3 (ΔX 3i ) +…+ β ni (ΔX ni ) +ε i

Example  How would we construct a simple DCE to evaluate trade-offs among travel time and wait time for an appointment with a specialist?

Concluding comments (1)  True CBA more than tallying of direct costs – involves assigning dollar value to intangible costs and benefits  CBA appeals to many economists because of grounding in welfare theory

Concluding comments (2)  WTP and DCEs are now dominant methods for assigning $ value to intangible benefits  However, there are problems:  Technical: answers may be inconsistent  Ethical/philosophical: Welfarism means current wealth/income allocation accepted; WTP values related to respondents’ incomes