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Unformatted text preview: CostBenefit Analysis CostBenefit Analysis
Class 7 Loyola University Chicago Prof. Tim Classen February 4, 2011 Class Outline CostBenefit Analysis Revealed Preference Contingent Valuation Methods of Valuation of Benefits CostBenefit and Cost Effectiveness Analysis Modes of Analysis in Health and Health Care Evaluations CostBenefit Analysis (CBA) CostEffectiveness Analysis (CEA) 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. 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 (CUA) 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. 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 procedures, 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 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 Scope Scope
CBA allows comparison of health and nonhealth programs Allows quantification of spillover effects i.e. total value/cost accruing to both individual and society Must consider possible negative externalities or positive spillovers from policies, treatments, etc. What Costs and What Benefits Should Matter? Consider an intervention that prolongs life and adds to an individual's lifetime medical costs and other costs. Example: Smoking cessation strategies As in all such cases, the role of perspective is again central. Measuring Value of Benefits in Clinical Literature How to (accurately) measure patients’ benefit Willingness To Pay vs. Human Capital Approach Relatively uncommon, largely owing to difficulties in using market data to estimate WTP Oftentimes rely on "stated preference“ (contingentvaluation) methods rather than "revealed preference" (market valuation) methods “Monetization” of Benefits Two approaches Human Capital is the health, education, training, and skills embodied in individuals This approach values benefits of treatment based on how it affects a person’s ability to earn income Human Capital Willingness to Pay (WTP) Human Capital Human Capital Health interventions may be thought of as an investment It is a productionbased method of valuing health benefits Forms an important piece of puzzle, but is not always satisfactory increase worker productivity (quality of HC) increase longevity (quantity of HC) Problems with HC approach Problems with HC approach Measurement issues More consistent approach would estimate how much someone is willing to sacrifice for a health gain Wage rates may not reflect a worker’s true productivity i.e. labor market imperfections and discrimination will affect wages How is “healthy time” that is not sold in the market valued? e.g. homemakers, retirees, children Willingness To Pay Willingness To Pay
Willingness To Pay (WTP) method explicitly recognizes that there are gainers and losers in society to every resource allocation decision Two approaches used to estimate WTP Revealed Preference Contingent Valuation Revealed Preference Revealed Preference
Look at situations where money vs. health risk tradeoffs are made to infer willingness to pay for increased health Wagerisk studies typically look at wages in hazardous jobs to estimate the implied value of a “statistical life” Measure “value” of life based on data Consider other situations when people take on known risks to get estimate Revealed Preference Revealed Preference Weaknesses Wideranging estimates seem context and job specific Many confounding factors that make it hard to separate out wagehealth risk relationship Makes it necessary to have an estimate of occupational choice for each health outcome under consideration in a CBA Labor market imperfections may influence estimates Selfselection into certain jobs (“thrill seekers”) Contingent Valuation Contingent Valuation Survey based approach Estimates tend to depend on survey instrument Hypothetical scenarios are presented to respondents Asked maximum value they would be willing to pay for a certain health benefit should such a market exist “Framing” of issue Estimates need to take into account decision making context i.e. what are the relevant choices facing the individuals involved But are answers relevant prior to event? Value of Technological Innovations in Health Care Obviously, innovations over time have increased longevity and improved healthrelated QoL CBA may be useful to consider the value of such innovations Many argue that we spend “too much” on health care in the U.S. Technological improvements make up large part of increases in health spending So, how do we use the tools just considered to address the questions of “Is what we spend worth it?” and “How much should we spend?” Cutler and McClellan (2001)
Argue that benefits from tech. improvements in healthcare far outweigh costs Benefits include both increased longevity and higher QoL Some benefits may be due to unobserved factors (spending outside of health care that benefits health) So, easier to study specific conditions Value of Tech. Change in HC New technologies can be either substitutes for old tech. or provide expansions to new forms of care MRI substitutes for xray Prozac expands treatment of depression beyond talk therapy and increases % of depressed population treated Could cost more or less than old tech. (CEA) Conclude that benefits from reduced infant mortality and better treatment of heart attacks outweighs ALL increases in health care spending Are treatments effective? ...
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This note was uploaded on 04/14/2011 for the course ECON 329 taught by Professor Classen during the Spring '11 term at Loyola Chicago.
- Spring '11