1. Health Economics II – 2010 Health Economic Evaluations Part IV Lecture 3 Cost-benefit analysis Nils-Olov Stålhammar

2. Type of analysis - the outcome measurement Type of analysisCostsEffect Cost-minimizationMoneyNot measured Cost-effectivenessMoneyNatural units; Life years gained, relapses Cost-consequenceMoneySeveral disease specific measures Cost-utilityMoneyCombining length and quality of life, QALYs Cost-benefitMoneyMoney

3. Guidelines’ view The Dental and Pharmaceutical Benefits Agency, (Tandvårds och läkemedelsförmånsverket, TLV): –“If it is difficult to use QALY’s (e.g. with heavy pain over a short time in connection with treatment), then a cost-benefit analysis with the willingness to pay may be used as a measure of effect.” NICE: –“For the reference case, cost-effectiveness (specifically cost–utility) analysis is the preferred form of economic evaluation. This seeks to establish whether differences in costs between options can be justified in terms of changes in health effects. Health effects should be expressed in terms of QALYs. –The focus on cost-effectiveness analysis is justified by the more extensive use and publication of these methods compared with cost– benefit analysis and the focus of the Institute on maximising health gains from a fixed NHS/PSS budget.”

4. The rationale for Cost Benefit Analysis The Hicks- Kaldor criterion (Also referred to as Potential Pareto criterion) –If, when moving from state A to B, gainers can compensate the losers and still have some gains left, then B is preferred to A. Note: no requirement that compensation actually takes place. Assume describes the utility of individual i as a function of income and characteristics associated with state A Define CV as the willingness to pay when moving to state B Assume that some win and some lose ; Losers will have negative CV, must be compensated to accept change (Willingness To Accept) If  CV>0; then the gainers place a higher monetary value on the move than the losers; Winners’  CV= 51 and Losers’  CV= - 45

5. Cost Benefit Analysis Use of terminology not always stringent The CBA-question: Is the program worthwhile? Net Social Benefit The philosophical foundation of CBA is in welfare economics – Maximisation of individual utility – Pareto optimality Broader scope than CEA/CUA How to value b i in money terms? (Often viewed as controversial) – The human capital approach – Revealed preferences – Stated preferences

6. The Human Capital Approach Health care is an investment in human capital – the pay back is the increase in the value of the human capital, measured as present value of future earnings Regarded as being too narrow since value of healthy time not sold for a wage is ignored Also, should focus on health-money decisions under uncertainty, willingness to forgo to achieve a reduction in probability of dying, value of a “statistical life” – thereby aligning valuation of life with welfare economics However, the human capital approach is used to value productivity changes

7. Revealed Preferences Wage-risk studies, house prices in neighbourhoods with better air quality Consistent with welfare economics Problems: – Separating risk (or QoL aspect) from other influences – Discrepancy between subjective probability and relative frequency – Representativeness of persons studied (in particular w.r.t. risk) – Empirically there is great variability

8. Contingent Valuation Attempts to replace missing markets Can use either compensating or equivalent variation – CV: $ required after the change for unchanged utility – EV: $ required before the change for unchanged utility Can ask questions of WTP or WTA

9. Contingent Valuation Programme statusGain or lose from the change? Compensating variation (CV) Equivalent variation (EV) BeforeAfter$ +/- required after the change for unchanged utility $ +/- required before the change for unchanged utility No Prog- ramme Programme Gain WTP: max amount that can be taken from gainer and still maintain utility at ’before’ level WTA: amount that must be paid to potential gainer to accept no programme (forgo gain) Loss WTA: must be paid to loser to maintain utility at ’before’ level WTP: max amount that can be taken from potential loser for utility as after change (WTP for no change)

10. The direct method – Questionnaire studies –A hypothetical (but realistic) choice situation is presented to the respondent and (s)he is asked to state WTP for the preferable alternative –Challenges: It’s a hypothetical question…. –Understanding the scenario –Emotional rejection, lack of motivation –Tactical answer –Preferences influenced/created by the question Must be clear about what should be valued – global vs. restricted (to avoid double counting in the later analysis) Measuring Willingness To Pay

11. How is uncertainty included? –Valuing a certain health outcome, W –Valuing a treatment with uncertain outcome, W* P * W = W* only if individuals are risk neutral –Valuing access to a treatment programme, W** (uncertain future use and uncertain outcome) Most relevant in markets with insurance or tax arrangements Measuring Willingness To Pay

12. Open-ended questions –May give unbiased but imprecise estimates Closed-ended questions; A single bid is made to the respondent - the bid may be varied in different sub samples –Follow-up questions Bidding game Open-ended follow-up question –May introduce starting point bias Measuring Willingness To pay Question formats

13. WTP measurements Example 1 (Stålhammar 1996) WTP for a drug that can be taken in relation to meals compared with a drug that must be taken at least one hour before meals and has the additional disadvantage that it interacts with contraceptive pills The survey was conducted by a medical marketing agency 42 Swedish gastroenterologists Inclusion criteria –Ongoing treatment with antisecretory drugs for duodenal ulcer or reflux esophagitis –Age less than 65 years 105 patients participated in the study Telephone interviews

14. Patient characteristics Mean age 50 years Male/female (%): 56/44 Reflux esophagitis/duodenal ulcer (%): 54/41 62% usually took the medication in conjunction with meals –The main reason was ease of remembering 82% thought that it would be more difficult to remember to take the drug if they had to take it 1 hour before a meal

15. The WTP question (1) “Assume that the next time you are prescribed a drug for your gastric disorder (or heartburn) you can choose between two drugs, A and B. According to clinical studies, the drugs are equally effective. They differ, however, in two respects: Drug A must be taken at least one hour before a meal and, furthermore, interacts with contraceptive pills so that other contraceptives must be used if you are a woman. Drug B can be taken any time during the day and does not interact with contraceptive pills.”

16. The WTP question (2) “Assume that for drug A you must pay the normal patient fee, i.e. SEK 120, for a one- month treatment. Would you be willing to pay more for drug B, which can be taken any time during the day and which does not interact with contraceptive pills?”

17. The WTP question (3) The patients who were willing to pay more were randomised to a bidding game starting with either: –High bid (SEK 1000) –Low bid (SEK 20) The bid was either accepted or rejected –If the bid was rejected, sequentially lower bids were given until a bid was accepted –If the bid was accepted, sequentially higher bids were given until a bid was rejected SEK 20, 50, 80, 120, 180, 250, 500, 1000

18. Results 78% would be willing to pay in addition to the normal patient fee to receive drug B instead of drug A Average WTP was SEK 138 Average WTP by starting bid –Low bid: SEK 70 –High bid: SEK 289 –Starting point bias!

19. WTP measurements Example 2 ( Kartman et al (1996, 1997)) WTP for superior treatment of reflux esophagitis –Short-term treatment that increases the probability of being free from symptoms after 4 weeks –Long-term treatment that reduces the risk of having a relapse once recovered –A drug that can be taken with meals, as compared with a drug that must be taken at least 1 hour before meals

20. Study design The survey was conducted by a medical marketing agency 54 Swedish general practitioners Inclusion criteria –Patients receiving medical treatment intended for reflux esophagitis 400 patients participated in the study Telephone interviews

21. Patient characteristics Mean age: 60 years Male/female (%): 59/41 Characterization of the reflux esophagitis in its most advanced phase (%): –Mild to moderate pain: 28.8 –Moderate pain: 27.8 –Moderate to severe pain: 24.6 –Severe pain: 17.3

22. The WTP question: Short-term treatment (1) “Imagine that your reflux oesophagitis has advanced to a phase where medication therapy is required. There is a choice between two medication treatments, A and B. After 4 weeks on medication therapy A, 80% of patients have been reported being free from symptoms. The corresponding treatment result in patients receiving medication therapy B is 40%.”

23. The WTP question: Short-term treatment (2) “For medication B you would have to pay the usual prescription fee of SEK 120 for each month of medication. For the more effective medication A, however, you would have to pay an amount in excess of the prescription fee of SEK 120. Would you choose the more effective medication A although you had to pay [the assigned bid] in excess of the prescription fee for one month of medication?” (Swedish kronor, SEK, 1995 prices. Exchange rate as of October 1999 US$ 1=SEK 8.30)

24. The WTP question: Short-term treatment (3) WTP was elicited using the closed-ended question with an open-ended follow-up SEK 20, 50, 80, 120, 180, 250, 500, 1000 Immediately after the response to the bid, the open-ended follow-up question was asked Each respondent was asked three WTP questions: –Short-term treatment, long-term treatment, drug that can be taken with meals The same bid was made in the three WTP questions The sequence of the questions was also varied in sub samples

25. The WTP question Tests of the sensitivity of WTP to the magnitude of the health benefit (“scope tests”) –Probabilities of being free from symptoms after 4 weeks Drug A and B: 60% and 40% Drug A and B: 80% and 40% (Higher WTP expected) –Probabilities of having a relapse once recovered Drug A and B: 50% and 80% Drug A and B: 30% and 80% (Higher WTP expected)

26. Results (WTP in SEK) Closed-endedOpen-ended Short-term treatment (prob. of being free from symptoms after 4 weeks treatment): 60% versus 40%746248 80% versus 40%1023 295 Long-term treatment (prob. of relapse during 6 months of treatment): 50% versus 80%625260 30% versus 80%912 250 Drug that can be taken with meals347 129

27. Old exam question In contingent valuation studies questions can be asked either in the context of compensating variation (CV) or in the context of equivalent variation (EV). Furthermore, questions can be asked about willingness-to-pay (WTP) or willingness-to-accept (WTA). a) What are WTP/WTA-questions aiming at measuring in the context of compensating variation (CV) and in the context of equivalent variation (EV), respectively? b) Assume that you are evaluating the introduction of a programme using the contingent valuation method and that you have identified a group of individuals who loses from the introduction of the programme. What kind of question (WTP or WTA) would you ask this group of individuals in the context of compensating variation and what would you then – in general terms – be aiming at measuring? And what kind of question (WTP or WTA) would you ask this group in the context of equivalent variation and what would you then – in general terms – be aiming at measuring? (Hint: think about utility levels before and after the introduction of the programme.)

28. Old exam question Wage-risk studies aim at examining the relationship between particular health risks associated with a hazardous job and wage rates that individuals require to accept the job. What is the most obvious strength of this approach and what are the potential drawbacks?