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Unformatted text preview: CostBenefit Analysis CostBenefit Analysis and Cutler/McClellan
Class 8 Loyola University Chicago Prof. Tim Classen February 7, 2011 Class Outline CostBenefit Analysis Revealed Preference Contingent Valuation Methods of Valuation of Benefits Discussion of Cutler/McClellan 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 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“ (contingent valuation) 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, better 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? Measuring Costs and Benefits Use PDV of current and future costs of conditions (at 3% discount rate) Include costs of future conditions that would not have occurred w/out intervention? Value 1 QALY at $100,000 Measure contribution of technology (as opposed to unmeasured factors) based on results from clinical trials Discount benefits as same rate? Timevarying? Include increased productivity, so probably have to include increased costs from future conditions Changes in treatment of AMI Decomposing Increased Cost of AMI Treatment Cost of care increased from $12k to $21.7k in 14 years! Nearly half of increase in cost is due to improved treatments/technology Life expectancy after AMI increased more than a year during period studied Base cost on Medicare reimbursement in year after AMI W/out even measuring increased QoL, benefit outweighs increased costs Allow for $25k of consumption and no work, with $100k Value of Life year, (benefit – cost increase) = ~ $60k Even with benefits from nontech changes (lower smoking rates), tech. has big net benefit Improvements in treatment for LBW Babies Tech. changes in treatment of lowbirthweight infants improved dramatically from 1950 to 1990 High cost ($40k), but mortality for <2,500g babies fell from 18% to 6% and increased life exp. by 12 years – present value of $240k Increases labor productivity Try to disentangle from changes in maternal behavior But also don’t consider benefit of reduced longterm health risks from LBW babies (conservative est.) Higher QoL Expansions in Treatment for Depression with SSRIs Innovation in treatment for depression provides large benefits due to previously untreated depressed patients seeking care Also part of increased spending on prescription drugs which gets attention 50% of depressed patients on SSRI by 1996, with SSRIs having same net costs as previous therapies but more effective (with lower time costs) Increase QALYs by 0.1 to 0.6 and allow for more productive time provides large benefit Possibly 50% of depressed not receiving care 4 of 5 conditions have large net benefits Policy conclusions
Attempts to reduce “waste” in HC system may stymie tech. innovation Adjusting for quality, price of medical care actually declines over time Need to focus more on benefits of our HC system, rather than just costs ...
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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