1. Introduction to Health Economics
Nelly BIONDI ,
South African Centre of Epidemiological Modelling and Analysis (SACEMA),
Makerere University, 21th July 2009 1

2. Outline What is Health Economics?
Generic steps in Economic evaluation.
Types of economic evaluation. 2 2

3. Part 1: What is Health Economics? The importance of Economic evaluation.3

4. Economists view of the world…
Pessimist: bottle ½ empty
Optimist: bottle ½ full
Economist: bottle ½ WASTED!! 4 4

5. The ‘Health Economic’ problem
Unlimited healthcare “wants” with rapid growth in health expenditure.
Insufficient health sector resources.
Choosing between ‘wants’ we can ‘afford’ given our resource ‘budget’. 5 5

6. Concept of opportunity cost
“ The value of forgone benefit which could be obtained from a resource in its next-best alternative use”.
The aim is to choose activities where benefits outweigh opportunity cost.
Pg ‘A’
Pg ‘B’
Budget 6 6

7. What is Health Economics?
Theoretical framework to help healthcare professionals ,decision-makers or governments to make choices on…
…HOW to maximize the health of population given constrained health producing resources.
What health economists need is…
To understand the relationship between resources used and health outcomes achieved by alternative options.
…and compare! 7 7

8. Economic evaluation is…
“ The comparative analysis of alternative courses of action in terms of both their costs and consequences in order to assist policy decisions” (Drummond et al,1997)
Economic evaluation is not “choosing the cheapest”. 8 8

9. Economic Evaluation criteria
Economic evaluation is used to ensure that limited resources are allocated as efficiently as possible.
Technical efficiency: meeting a given objective at least cost.
Allocative efficiency: producing exactly what society wants.
Society may have other goals when allocating resources: equity or ethical issues.
Horizontal equity: ‘equal treatment of equals’.
Vertical equity: ‘unequal treatment of unequals’. 9 9

10. Part 2: Generic steps in Economic Evaluation10

11. Stages in economic evaluation11 11

12. Deciding upon the study question
Identifying the problem and aims of evaluation
What is the problem?
Why is this problem important?
What aspects of the problem need to be explained?
Choosing the alternative options
Describing the interventions accurately.
Defining the counterfactual intervention (comparator).
Defining the audience
Defining the info needs of the audience.
Considering how the audience will use the study results. 12 12

13. Deciding upon the study question
Defining the perspective of the study
Patient / Providers / Payers / Healthcare system / Society.
Choosing a perspective depends on the audience.
Defining the time frame and analytic horizon
Analytic horizon > Time frame.
Choosing the study format
Prospective / Retrospective / Model.
Depends on data, time and resources available. 13 13

14. Assessment of costs Overview of costing process:
Identification of costs
Cost type: direct vs indirect vs intangible.
Cost category: programme, patient.
Organizational level: national, regional, district.
Input category: capital vs recurrent.
Intervention activities: planning, administration, media, training.
Time: start-up vs post-implementation.
Funding: national govt vs NGO vs donor. 14 14

15. Assessment of costs Measurement
Measure in natural physical units (e.g. hours of labour time).
Fixed, variable and total costs.
Average versus marginal costs.
Marginal versus incremental costs. 15 15

16. Assessment of costs 16 16

17. Assessment of costs Valuation Calculation
Market prices (e.g. wage rates) used unless strong belief they do not reflect opportunity cost (e.g. volunteers).
Local currencies vs international currencie.
Adjustments for price inflation.
Calculation
Multiply unit of measurement by unit cost (e.g. 2 hours of time at $5 per hour = $10 labour cost). 17 17

18. Assessment of health effects
Overview of the process:
Identification
Which outcome measure is employed depends on the objective of the evaluation.
This then determines the type of evaluation.
Measurement
Measure effectiveness not efficacy.
Measure (count) in natural physical units.
Measure final not intermediate outcomes. 18 18

19. Assessment of health effects
Valuation if appropriate
Value is determined by benefits sacrificed elsewhere (see opportunity cost again).
Valuation either in terms of:
Utility (e.g. QALY, DALY, HYE)
Money (e.g. WTP) 19 19

20. Assessment of health effects
Zoom on the concept of QALY: 20 20

21. Adjusting for timing Discounting Annuitization of capital costs
Prefer to have benefits now and bear costs in the future – ‘time preference’
Rate of time preference is termed ‘discount rate
To allow for differential timing of costs (and benefits) between programmes all future costs (and benefits) should be stated in terms of their present value using discount rate.
Thus, future costs given less weight than present costs.
Annuitization of capital costs
Capital costs represent an investment at start-up in an asset which is used and depreciated over time.
Annualise the initial capital outlay over the useful life of asset. 21 21

22. Sensitivity analysis
Process of assessing the robustness of an economic evaluation by considering the effects of uncertainty.
Consists in:
Identifying the (uncertain) variables.
Specifying the plausible range over which they should vary.
Recalculating results, usually based on:
One-way analysis
Multi-way analysis
Extreme scenario analysis
Threshold analysis. 22 22

23. Part 3: Types of Economic Evaluation23

24. Basic types of economic evaluation
Cost minimization Analysis (CMA)
Cost-effectiveness Analysis (CEA)
Cost-utility Analysis (CUA)
Cost-benefit Analysis (CBA) 24 24

25. Cost minimization Analysis
Specific type of analysis in which the outcomes of the 2 (or more) healthcare interventions are assumed equal.
Therefore economic evaluation is based solely on comparative costs.
Result: least cost alternative. 25 25

26. Cost-effectiveness Analysis
In CEA, outcomes are measured in natural or physical units (e.g. heart attacks avoided, deaths avoided…).
Only one domain of outcomes can be explored at a time.
Result: cost per unit of consequence (e.g. cost/LY gained) 26 26

27. Cost-effectiveness Analysis
Decision rule:
Two programmes A (comparator) and B.
If Outcome B = Outcome A => Compare costs (CMA).
If Outcome B > Outcome A and Cost B < Cost A, B is dominant.
If Outcome B > Outcome A and Cost B > Cost A, we have to make a decision.
In order to make a decision on which intervention to choose, a cost-effectiveness ratio (CER) should be calculated. 27 27

28. Cost-effectiveness Analysis
The most commonly CERs used are the:
Average cost-effectiveness ratio (ACER)
Incremental cost-effectiveness ratio (ICER)
The next question is : Is the intervention “cost-effective”? 28 28

29. Cost-effectiveness Analysis
There is no ‘magic’ cut-off number that establishes whether or not an intervention is ‘cost-effective’.
It will depend on what is termed the decision maker’s ‘ceiling ratio’.
The ceiling ratio can be inferred from the amount that decision-makers are willing to pay.
To make a decision:
If ICER of the program ≤ ceiling ratio → adopt the program
If ICER of the program > ceiling ratio → do not adopt the program 29 29

30. Cost-effectiveness Analysis
The cost-effectiveness acceptability Plane: 30 30

31. Cost-utility Analysis
In CUA, the outcomes are measured in healthy years, to which a value has been attached.
CUA is multidimensional and incorporates considerations of quality of life as well as quantity of life using a common unit.
Result: Cost per unit of consequence (e.g. cost/QALY). 31 31

32. Cost-benefit Analysis
CBA try to value the outcomes in monetary terms, so as to make them commensurate with the costs.
Result: Net benefit or cost-benefit ratio.
CBAs rarely used in health care. 32 32

33. Summary Type of Analysis Result Consequences Costs Cost Minimisation
Cost Benefit
Cost Utility
Cost Effectiveness
Money
Single or multiple effects not necessarily common. Valued as “utility” eg. QALY
Different magnitude of a common measure eg., LY’s gained, blood pressure reduction.
Least cost alternative.
Identical in all respects.
Cost per unit of consequence eg. cost per LY gained.
Cost per unit of consequence eg. cost per QALY.
As for CUA but valued in money.
Net £
cost: benefit ratio. 33 33

34. Thank you…. Merci. Weebale. R. Baltussen, K. Floyd and C
Thank you…! Merci!...Weebale! R. Baltussen, K. Floyd and C. Dye, (2005) “Cost effectiveness analysis of strategies for tuberculosis control in developing countries,” British Medical Journal, 331;1364, (originally published online 10 Nov 2005; doi: /bmj ) D. R. Hogan, R. Baltussen, C. Hayashi, J. A. Lauer, J. A. Salomon, (2005) “Cost effectiveness analysis of strategies to combat HIV/AIDS in developing countries,” British Medical Journal, doi: /bmj (published 10 November 2005) C. A. Goodman, P. G. Coleman, A. J. Mills, (1999) “Cost-effectiveness of malaria control in sub-Saharan Africa” The Lancet, vol. 354, , July. mailto: 34