Cost-Effectiveness and Cost-Benefit Analysis

1. Cost-Effectiveness and Cost-Benefit Analysis N287E Spring 2006 Joanne Spetz 31 May 2006

2. Optimal planning involves comparing marginal benefit and marginal cost • If a central health planner needs to pick the “right” level of production, how will she choose? Social marginal benefit = Social marginal cost

3. We can’t always see the “margin” • We can make choices with discrete projects Benefit of project A > Benefit of project B • This is the purview of cost-effectiveness and cost-benefit analysis

4. Good CEA/CBA requires good measurement • How to measure benefits? • What are the benefits? • Extended life • Better quality of life • Reduced morbidity

5. Measurement options for benefits • Number of disease cases averted • Number of years of life gained • But what about differences in quality of life? • Dollar value of saved life, reduced medical costs

6. Quality-adjusted life years • QALYs are a common way to weight for quality of life • Each year of life is weighted by the expected quality

7. Quality-adjusted life years • How do you determine QALYs? • Clinical experts • Experimental data • Surveys • There is usually not measurement of individual preferences

8. Example of a QALY calculation 70-year-old man 20 year life span 10 years of perfect health 10 years of 50% quality health (10 x 1 QALY/yr)+(10 x 0.5 QALY/yr) = 15QALYs

9. Some thoughts about QALYs • Social health can be the sum of population QALYs • Trade-offs and comparisons can be made across people

10. What about creating monetary measures of benefits? • Option 1: Cost of illness • Direct cost of medical care resources • Indirect costs • Morbidity cost: wages lost due to inability to work and value of housekeeping • Mortality cost: present value of future earnings • Future earnings are “discounted” and summed

11. Problems with cost of illness • Men valued more than women (due to higher earnings) • Ethnic groups valued differently • Children valued less than adults • What about quality of life? • What is the value of non-market work?

12. What about creating monetary measures of benefits? • Option 2: Willingness to pay • Choices that individuals make reveal information about how they value life • Information about value of life comes from • Surveys • Data on consumer behavior

13. Problems with willingness to pay (and one benefit) • Surveys • People can say anything • Responses vary with income • People misestimate risk • Consumer behavior • Consumers might not have accurate risk information • Do you count the risk of injury? • WTP more directly addresses the concept of marginal utility

14. A few more thoughts on financial value of life • Willingness to pay usually values life more highly than discounted future earnings • Most studies value life between $1 and $6 million • In order to make policy decisions, a value of life must be made explicitly or implicitly

15. What is cost-benefit analysis? • Cost-benefit analysis compares costs and benefits, with benefits measured monetarily • Net benefit = S(Bt-Ct)/(1+r)t • If net benefit > 0 then do the project • Or, net benefit = (SBt/(1+r)t) (SCt/(1+r)t) • If net benefit > 1 then do the project

16. Measurements of costs • What is the viewpoint of the analysis • Often “social perspective” • Viewpoint of a particular agency • The patient • What are the comparisons? • Two or more treatment programs? • What categories of costs to include? • How to handle capital expenditures • How to discount for future costs

17. It is important to not double-count costs and benefits • Example: building a stadium • “Jobs created” • But, we pay wages for the jobs! • The payments for wages are a cost • “Property values will go up and businesses will get more income” • The higher property values reflect the increased income

18. To make a CBA-based decision… • Projects can be ranked by net benefits • Informal judgements can be made after ranking • Income distribution can be considered • Age distribution can be considered

19. What is cost-effectiveness analysis • CBA is disliked by many health professionals • Cost-effectiveness analysis determines the cost of a certain • Number of cases of disease prevented • Number of QALYs obtained • Other non-monetary measurement of benefits

20. A classic example of CEA • What do we gain from the sixth stool guaiac? • New England Journal of Medicine • 1975 • 293: 226-228

21. Background on sixth stool guaiac • Six sequential tests for occult blood • If any test is positive, a barium enema is done

22. The decision tree is: Test 1 pos neg Test 2 enema neg pos Test 3 enema pos neg Test 4 enema pos neg enema Etc.

23. What are the detection rates? • ~72 people of 10,000 have colon cancer • P(detection) = 91.66% • P(false positive) = 36.51% • The first test detects 0.9166 x 72 = 65.9952 cases • The second test detects 99.3% of cases • .993 = (.9166+.9166(1-.9166))

24. What about costs? • $4 for the initial test • $1 for each additional test • $100 for the barium enema

25. A detection grid for 10,000 people, Test 1 Test result

26. Costs from first test • $4 x 10,000 = $40,000 for initial test • $100 x 375 = $37,500 for barium enemas • Total = $77,500

27. A detection grid for Test 2 – 9625 people Test result

28. Cost from Test 2 • $1 x 9625 for repeat test • $100 x 304.5 for barium enemas • Total = $40,075

29. A detection grid for Test 3 – 9320.5 people Test result

30. Cost from Test 3 • $1 x 9320.5 for repeat test • $100 x 290.458 for barium enemas • Total = $38,366.30

31. How many cases are detected?

32. Cost analysis

33. Comparison • What if the barium enema was done for all patients? • Total cost for 10,000 people would be $1,000,000 • Average cost per case detected = $13,900 • Marginal cost = $13,900

34. Sensitivity analysis • It is important to consider the assumptions made in the analysis • Should some assumptions be changed? • New technologies or information could affect conclusions

35. Sensitivity analysis in guaiac paper • Assume: • Protocol detects only 60% of cases per screening OR • Population prevalence is lower, 11/10,000

36. Sensitivity analysis of costs

37. What is an acceptable cost-effectiveness ratio? • There is no clear answer! • Even if the ratio seems reasonable, we still might not be able to afford the cost • We might not be able to invest today for future gains • Most studies compare their cost-effectiveness ratios to those of well-accepted treatments/screenings

38. Can you apply this to nurse staffing? • Needleman & Buerhaus, Health Affairs 2006 • Rothberg, Abraham, et al., Medical Care 2005

39. Needleman & Buerhaus • Estimated costs of: • More total nursing staff • Substituting RNs for other staff • Benefits were cost savings in: • Shorter length of stay • Fewer adverse events • Fewer deaths

40. Needleman & Buerhaus • Results • Substituting RNs for other staff produces net cost reduction • Increasing total nursing hours improves outcomes but also increases costs about 1.5% more

41. Rothberg et al. • Staffing comparison: • 8:1 ratio vs. 4:1 ratio • Benefits: • Cost savings from reduced LOS • Lower patient mortality • Method: Statistical analysis with random variation in effects of staffing. • Outcome = costs per life year saved

42. Rothberg et al. • Results: • 1:8 was least expensive, highest mortality • Mortality improved and costs rose and nursing ratio became richer • Incremental cost-effectiveness was $136,000 (95% CI $53,000-402,000) per life saved. • Sensitivity analysis: • Sensitive to the effects of ratios on mortality • Throughout the ranges tested, ICER <= $449,000 per life saved.