Classen_HealthEcon_Class6 - RAND Study and RAND Study and...

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Unformatted text preview: RAND Study and RAND Study and Intro to CBA/CEA Class 6 Loyola University Chicago Prof. Tim Classen January 31, 2011 Class Outline Finish up Estimates of Elasticities of Demand for Health Care Introduction to Cost­Benefit and Cost­ Effectiveness Analysis (Chapter 4) Estimates of the Demand for Medical Care Early estimates of price elasticity of demand were quite large (>1), but randomized experiments find much smaller elasticities Problems with observational studies Selection bias in who buys full coverage insurance Panel data can help, but “natural experiment” is highly desirable – insurance plans are form of supply (RAND) RAND HIS Experiment RAND HIS Experiment Unique attempt to identify: Subjects assigned to different plans, 3­5 years Effect of health insurance on medical care usage And, effect of medical care on health Full coverage resulted in most use But health outcomes didn’t vary much by use levels Can’t vary actual care due to ethics Compensation for differences in cost (income effect) So is marginal productivity low or zero? Depends on group of interest “Cause no harm” and elective surgeries Estimates from Rand HIS Estimates from Rand HIS Random assignment to health insurance plans in 1971 Nearly 6,000 enrollees Full (0%), 25% copay, 50% copay, 50% for dental/mental health (25% o/wise), catastrophic (up to 5­15% of income ($1k cap) w/ 95% copay) and $150 deductible (outpatient) FFS plans and one HMO with no cost­sharing Participation incentive paid equal to maximum risk faced (income effect, not price effect) Estimates from Rand HIS Estimates from Rand HIS Measure quantity of medical care by spending & # of episodes Those on 0% copay had 4.5 annual visits and $750 of spending vs. 2.7 visits and $520 of spending for 95% copay Demand elasticities for any medical care (episodes) were 0.1 for low copay (0­25%) and 0.14 for higher copay (>25%) Big catch­up in dental care in first year for low copay people Elasticities from Rand HIS Elasticities from Rand HIS Effect of Insurance on Effect of Insurance on Spending Based on Rand HIS results, uninsured under age 65 spend $1,330 annually on medical care relative to $2,300 for fully insured (75% more) Previous studies indicated much more responsiveness to price so predicted gap was much bigger Still used extensively. Still relevant given changes to health care system? Cost­Benefit and Cost­Benefit and Cost­Effectiveness Analysis Benefits and Costs Benefits and Costs Like most economic choices, decisions regarding health care involve weighing the potential benefits against associated costs. People choose health care options that they feel will make them better (benefits > costs), but not necessarily in financial terms. The benefits of medical treatment may be measured in intangibles (such as quality of life), while the costs of medical treatment are usually measured in dollars. Cost­Benefit and Cost­ Effectiveness Analysis Modes of Analysis in Health and Health Care Evaluations Cost­Benefit Analysis (CBA) Cost­Effectiveness Analysis (CEA) Beware: What is sometimes referred to as cost­benefit analysis in health care settings is often not a cost­benefit analysis in standard economic parlance. Sometimes "cost­benefit" refers to cost­savings associated with an intervention (i.e. a "cost offset") Sometimes the "benefits" are really measured as clinical effects, i.e. CEA, not CBA CEA is used to determine which alternatives are cheaper yet effective (rather than simply which alternatives yield the most benefit). Cost­Utility Analysis Introduction Cost­benefit analysis (CBA) involves weighing the costs (C) and benefits (B) of a decision and choosing those outcomes for which the benefits exceed the associated costs (B > C). Cost­effectiveness analysis (CEA) is used to determine which alternatives are cheaper yet effective (rather than simply which alternatives yield the most benefit). Examples of CEA and CBA Examples of CEA and CBA Study evaluating how many years hypertension screening, nutrition counseling, medication, or cardiac bypass surgery each add to a person’s life expectancy for each dollar spent would use CEA. Study evaluating whether cardiac bypass surgery adds a sufficient number of years to life expectancy to justify its cost would use CBA. Relevant for patients, physicians, hospitals, insurance companies, etc. Costs and Benefits Depend on Opportunity Costs Medical decisions require us to consider available alternatives. For example, no diabetic person wants to have his or her foot amputated. But if the alternative is to let the disease spread and to die as a result, then the benefit of amputation becomes longevity. Similarly, some people forego a visit to the doctor because the opportunity cost of missing a day of work is too high. Health Care Benefits Are Often Intangible While monetary costs of health care are often apparent, the benefits of medical treatment are often difficult to quantify. For example, a person may “feel better,” be able to continue walking, or have additional years added to his or her lifespan. The benefits of health care may also be uncertain. For instance, a drug treatment may prevent heart attacks, or it may lower cholesterol levels without any effect on the incidence of heart attacks. Benefits (and costs) may also Benefits (and costs) may also involve uncertainty Nearly every health care decision requires the person making the decision to deal with a level of uncertainty. We deal with this uncertainty by attempting to look at the range of possible outcomes and assigning a probability to each outcome that could occur. The weighted sum of each outcome times its probability gives the expected value for the uncertain variable. Categories of Benefits & Costs Categories of Benefits & Costs For most medical programs, there are three major types of benefits: When conducting any cost­benefit analysis, economists typically consider the following types of health care costs: Health Productivity Reductions in future medical costs Medical care and administration Follow­up and treatment Time and pain of patient and family Provider time and inconvenience Example: Prostate Cancer Several treatment options exist for the indication of prostate cancer (diagnosed by elevated PSA levels and biopsy) How is uncertainty represented in each option and how does this affect measurement of costs or benefits? Radical prostatectomy (Laparoscopic?) Radiation therapy Watchful waiting “Alternative” remedies What are costs of each? Diagnosis, surgeon skill/quality, side effects from surgery, recovery time, spread of cancer, longevity gained Consider gain in longevity to determine cost­effectiveness of each approach Concerns over screening leading to overtreatment Opportunity costs defined relative to next best treatment option Perspectives on Health Care Different parties have different perspectives on what they desire from health care: Patients want the best possible treatment. Payers want the most cost­effective treatment. Government wants as many people as possible to have high­quality, affordable health care. Providers want a reasonable return on their investment. Society has changing priorities with respect to the most urgently needed programs and the distribution of resources. Criteria for Assessing Policy Effects Criteria for Assessing Policy Effects Pareto Criterion: A change is a Pareto­improvement if the welfare of each individual is improved by the change (strong) or if the welfare of some individuals is improved by the change but no individual's welfare is worsened by the change (weak). Kaldor­Hicks Criterion: A change is a Kaldor­Hicks­ improvement if the aggregate "value gain" of the improvement to gainers exceeds the aggregate "value loss" to losers. K­H is the foundation of standard Cost­ Benefit Analysis. Voting Criteria: A change is an improvement by an α­ percentile voting criterion if at least α% of the population would find welfare improved by the intervention (median voter as leading example). How to decide policy How to decide policy effects? Cost­Benefit Analysis Cost­Benefit Analysis Benefits are valued in monetary terms CEA/CUA good when complete and comparable data on alternatives is available CEA/CUA tell us the price of achieving a goal e.g. additional life year CBA valuable when this is not the case they do not tell us whether this was “worth” it from a societal perspective Cost­Benefit Analysis Cost­Benefit Analysis CBA considers the social opportunity costs of resources used Questions of how much? It values benefits in the same units (money) and these can be compared with other competing uses of the resource A monetary valuation makes for an easy decision rule across programs Answer: Continue to allocate treatment as long as Marginal Benefit is higher than Marginal Cost Cost from social perspective takes into account opportunities for what could have been done Efficient Allocation Efficient Allocation Marginal cost is the cost of providing one more unit of a good or service. When the marginal cost (MC) of a good or service equals the marginal benefit (MB) obtained by the consumer (i.e., when MC = MB), then resources are efficiently allocated. When MC > MB, resources are being wasted. When MC < MB, the economy is not producing enough of the good or service in question. Net Social Benefit Net Social Benefit NSB means Net Social Benefit NSB ≡ bt − ct ∑1 (1 + r )t −1 t= n bt ≡ benefits at time t; ct ≡ costs at time t r ≡ discount rate; n ≡ duration of benefits NSB>0 means program has merit socially i.e. more benefits than costs Net Social Benefit Net Social Benefit NSB can be calculated for a variety of treatments and these can be ranked in order of value from highest to lowest Provides an easy way to allocate limited resources Exactly what is (should be) going in debates over health care reform Dynamic issue of costs and benefits in these decisions ...
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