Efficiency in Health System

1. Efficiency in Health System

2. Health System: an inefficient system • A set of 185 publicly-funded interventions in the United States cost about $21.4 billion per year, for an estimated saving of 592 000 years of life (considering only premature deaths prevented). • Re-allocating those funds to the most cost-effective interventions could save an additional 638 000 life years if all potential beneficiaries were reached. • At the level of specific services, the cost per year of life saved can be as low as $236 for screening and treating newborns with sickle-cell anemia or as high as $5.4 million for radionuclide emission control

3. Health Economics • Health economics, is the study of how to allocate scarce resources for production of health and of how health services and health itself is distributed among individuals and groups in society.

4. Why Efficiency Is Important? • Scarcity + opportunity cost → need for efficiency

5. Efficiency • Efficiency measures whether healthcare resources are being used to get the best value for money. • Healthcare can be seen an intermediate product, in the sense of being a means to the end of improved health.

6. Efficiency • Efficiency is concerned with the relation between resource inputs (costs, in the form of labor, capital,or equipment) and either intermediate outputs (numbers treated, waiting time, etc) or final health outcomes (lives saved, life years gained, quality adjusted life years (QALYs)).

7. Efficiency • Although many evaluations use intermediate outputs as a measure of effectiveness, this can lead to suboptimal recommendations. • Ideally economic evaluations should focus on final health outcomes.

8. Technical efficiency “doing things right”

9. E1i Max Max C1i Most Effective Intervention = E1i Technical Efficiency = * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 E1i Is The Percent Reduction In DALY Lost DALY Saved For I11 (Most Effective Intervention)= DALY1 × E11 Total Cost = N1 × C11 Usually we have not enough resources for using the most effective interventions DALY Saved For I12 (Technically Efficient Intervention)= DALY1 × E12 Total Cost = N1 × C12 DALY1 × E11>DALY1 × E12 Shift from Most Effective to Technically Efficient Is a Kind of Rationing

10. Technical efficiency • Technical efficiency refers to the physical relation between resources (capital and labor) and health outcome. • A technically efficient position is achieved when the maximum possible improvement in outcomes obtained from a set of resource inputs. • An intervention is technically inefficient if the same (or greater) outcome could be produced with less of one type of input.

11. Technical efficiency • Consider treatment of osteoporosis using alendronate. A recent randomized trial showed that a 10 mg daily dose was as effective as a 20 mg dose. The lower dose is technically more efficient.

12. Input quantities vs. input cost • Critically, almost all mainstream definitions take technical efficiency to refer only to input quantities, and not input costs in monetary terms

13. Economic Efficiency • The cost of any production process is, of course, influenced not only by the quantities of inputs used, but also by the cost of these inputs. • A production unit which is economically efficient will produce a given output for the minimum possible total input cost, or maximize output for a fixed value input budget. • Thus, an economically efficient firm is, by definition, a cost-minimiser.

14. Economic Efficiency • The critical implication of economically efficient behaviour is the “principle” or “rule” of substitution (e.g. Lipsey and Chrystal, 1995; Samuelson and Nordhaus, 1995) • When the relative prices of inputs change (for example, if the prices of imported drugs rise relative to the costs of labour due to exchange rate depreciation) the choice of production process will change to use relatively more of the cheaper factor and relatively less of the more expensive factor.

15. Economic Efficiency • This formulation of economic efficiency is particularly important in considering health care interventions. • Clinicians (quite reasonably) tend frequently to focus on best practice in terms of inputs – but differences in relative input prices may mean that a technically efficient “best practice” is economically efficient in one country but not in another. • This possibility is clearly a key practical constraint upon attempts to produce truly international “evidence based medicine” and to develop easily generalizable cost-effectiveness results.

16. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Most Effective Intervention Most Efficient Intervention

17. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Moving from less effective interventions To Most Effective Intervention Most Efficient Intervention

18. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Moving from less effective interventions To Most effective interventions Most Effective Intervention Most Efficient Intervention

19. Performance B Cost A Moving from less effective interventions To Most effective interventions

20. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Moving from most effective intervention To Most efficient interventions But we have not enough resources to ensure delivery of most effective interventions Most Effective Intervention Most Efficient Intervention

21. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Moving from most effective intervention To Most efficient interventions Most Effective Intervention Most Efficient Intervention

22. Effectiveness to Technical Efficiency Rationing Performance B Cost C A Moving from most effective intervention To Most efficient interventions

23. Performance Cost C A Moving from a more costly, less effective intervention to most efficient intervention usually is the case

24. Allocative efficiency “doing the right things”

25. DALY1×E12 DALY2×E23 DALY3×E33 DALY4×E41 DALY5×E53 DALY6×E64 DALY7×E72 DALY8×E81 DALY9×E92 * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Moving from Technical Efficiency To Allocative Efficiency But we have not even enough resources to ensure delivery of most efficient interventions DALY gain if we adhere to technical efficiency in all problems Most Effective Intervention Most Efficient Intervention

26. DALY1×E12 DALY2×E23 DALY3×E33 DALY4×E41 DALY5×E53 DALY6×E64 DALY7×E72 DALY8×E81 DALY9×E92  Technical Efficiency to Allocative Efficiency Rationing * * × D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * *  D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * × D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * *  D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * *  D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * × D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * *  D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * × D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Moving from Technical efficiency To Allocative Efficiency Selecting the right set of technically efficient interventions Most Effective Intervention Most Efficient Intervention

27. Allocative efficiency • To inform resource allocation decisions in broader context a global measure of efficiency is required. • The concept of allocative efficiency takes account not only of the productive efficiency with which healthcare resources are used to produce health outcomes but also the efficiency with which these outcomes are distributed among the community. • Such a societal perspective is rooted in welfare economics and has implications for the definition of opportunity costs.

28. Allocative Efficiency • In contrast to the technical and economic efficiency concepts discussed above, which all consider only the process of production, concepts of allocative efficiency embrace the notion that society is concerned not just with how an output is produced, but also with what outputs and what balance of outputs are to be produced.

29. Allocative Efficiency • Thus allocative efficiency is conventionally defined as being achieved in a situation in which it is impossible to improve the welfare of anyone without reducing the welfare of someone else through a change in the output combination (the achievement of a Pareto-optimal state). • Explicitly, technical and economic efficiency are necessary but not sufficient conditions for allocative efficiency to be achieved.

30. Allocative Efficiency • Knox Lovell and Schmidt (1988) present a neat summary of what this entails for the individual firm: • “It [the firm]…produces the correct mix of outputs, given output prices, uses the correct mix of inputs, given input prices, and adopts the correct scale given input and output prices: this is what allocative efficiency requires.”

31. Allocative Efficiency • In recent years, a common usage of the term allocative efficiency has been adopted in health care which refers increasingly to the idea that society’s health status should be maximised, through achieving the most cost-effective balance of programs and interventions. • Through this usage, sectoral cost-effectiveness analysis (e.g. through the use of DALYs etc.), cost-utility or cost-benefit analysis can be seen as providing information on allocative (in)efficiency in health care.

32. Technological efficiency “moving to new right things”

33. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Technology Push to more effective but not necessarily more efficient interventions Most Effective Intervention Most Efficient Intervention

34. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * I35 C35 E35 D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * I55 C55 E55 D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * I75 C75 E75 D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * I85 C85 E85 D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * I95 C95 E95 D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Technology Push to more effective but not necessarily more efficient interventions Most Effective Intervention Most Efficient Intervention

35. * * D1 N1 DALY1 I11 C11 E11 I12 C12 E12 I13 C13 E13 I14 C14 E14 * * D2 N2 DALY2 I21 C21 E21 I22 C22 E22 I23 C23 E23 I24 C24 E24 * * I35 C35 E35 D3 N3 DALY3 I31 C31 E31 I32 C32 E32 I33 C33 E33 I34 C34 E34 * * D4 N4 DALY4 I41 C41 E41 I42 C42 E42 I43 C43 E43 I44 C44 E44 * * I55 C55 E55 D5 N5 DALY5 I51 C51 E51 I52 C52 E52 I53 C53 E53 I54 C54 E54 * * D6 N6 DALY6 I61 C61 E61 I62 C62 E62 I63 C63 E63 I64 C64 E64 * * I75 C75 E75 D7 N7 DALY7 I71 C71 E71 I72 C72 E72 I73 C73 E73 I74 C74 E74 * * I85 C85 E85 D8 N8 DALY8 I81 C81 E81 I82 C82 E82 I83 C83 E83 I84 C84 E84 * * D9 N9 DALY9 I91 C91 E91 I92 C92 E92 I93 C93 E93 I94 C94 E94 Technology Push to more effective but not necessarily more efficient interventions Most Effective Intervention Most Efficient Intervention

36. Performance Cost B A Effect of Technology Development

37. Performance Cost C A Effect of Technology Development

38. Technological Efficiency • Technological change occurs through the development of new processes which can produce more output for the same or less input than older processes; they argue that the introduction of such a new process can be thought of as rendering all previous processes technically inefficient. • Under this view, “technology’ consists of the series of all known techniques for producing a particular output – although the invention of a new technique does not necessarily mean it will be available to all producers or all countries (Meier, 1995).

39. Technological Efficiency • Clearly, though, there is a difference between inefficiency due to operating off the isoquant for a given technology, as opposed to inefficiency due to failing to move to a different isoquant made possible by a new technology.

40. Efficiency Summary

41. 8 Performance 4 9 5 3 2 6 1 7 Cost Cost performance dilemmas 2- Save as much as possible without reducing outcomes 3- Improved efficiency to both lower cost and raise performance 4- Maximize performance for the current budget 5- Improve performance to such an extent that more money is required 6- Increase in cost without increase in performance 7- Increase in cost and decrease in performance 8- Increase in performance on the flat of the curve, 9- Increase in performance on the steep of the curve, 1- Accept somewhat reduced performance in order to significantly reduce cost

42. 8 Performance 4 9 5 3 2 6 1 7 Cost Cost performance dilemmas B C A Ministries of finance often argue that the nation is a point A and a change like 3 -more performance and lower cost-is required Countries like Brazil or Russia, which are growing, may be primarily concerned with improving performance—even if cost rises somewhat, as shown by 4 or 5 The ministry of health in contrast tends to argue that the system is at C and that move 9-more spending for more health-is the only appropriate response. Countries like Armenia or Tajikistan, in the aftermath of war or civil disorder, may find it necessary to focus on cost reduction, as shown by 1 or 2

43. Main Impediments to Efficiency

44. Short Run and Long Run • These concepts concern the extent to which, over time, a production unit can change the level and combination of inputs it employs, and/or the level or type of output it produces. • The long-run refers to a period which is sufficiently long for a production unit to be completely free in its decisions from its present policies, possessions or commitments (Baumol, 1977). • In contrast, in the short-run, at least one significant factor of production cannot be changed, i.e. is fixed.

45. Main conceptual sources of technical and economic inefficiency • Failing to minimize the physical inputs used (i.e. operating within the production possibility frontier) • Failing to use the least cost combination of inputs (i.e. failing to operate at the point of tangency between the isocost curve and the isoquant) • Operating at the wrong point on the short-run average cost curve • Operating at the wrong point on the long-run average cost curve

46. Failing to minimize the physical inputs used • Excessive hospital length of stay, with patients remaining in hospital after they have ceased to benefit from hospitalization • Poor scheduling of diagnostics and procedures, resulting in excessive hospital stay • Prescribing an intervention or diagnostic test which is known to be of no therapeutic value or relevance • Over-prescribing of drugs (too high a dosage, too long a course, more substances than are actually required) • Excessive use of diagnostic tests (e.g. performing daily tests when the specialist will only be available to interpret them once a week) • Wastage of stocks – allowing stocks to expire, or allowing deterioration due to poor storage etc.; discarding unused contents of opened packets • Over-staffing

47. Failing to use the least cost combination of inputs • Inappropriate overuse of more expensive staff relative to less expensive staff, e.g. physicians vs. professional nurses for basic prescribing of essential drugs, professional nurses vs. nursing assistants for basic personal care, professional nurses vs. clerical staff for basic administrative duties • Use of branded drugs when generics are available • Failure to secure lowest cost supply e.g. continuing to buy supplies from retail suppliers instead of through competitive bidding • Being “locked in“ to purchasing consumables at a set price from a manufacturer for a piece of equipment which has been provided “free” or on loan • Using paramedic-staffed emergency ambulances to transport patients home from hospital, instead of paying for their bus ticket

48. Operating at the wrong point on the short-run average cost curve • Implementing budget cuts which protect salaries at the expense of other expenditure items, hence reducing the number of patients who can be treated, but with no reduction in fixed costs • Refusing to fill a vacant anesthetist post due to budget restraints, forcing the surgical staff to limit their operating time • A rural hospital operating at an average bed occupancy of 50% due to limited local demand • Inadequate drug supply leading to under-utilization of primary care clinics

49. Operating at the wrong point on the long-run average cost curve • Planning to provide full pathology laboratory facilities at every hospital when laboratory services actually demonstrate economies of scale • Planning to build a 1500 bed teaching hospital when diseconomies of scale are known to operate in hospitals above 600 beds

50. Factors Predisposing Towards Technical and Economic Inefficiency • Absence of incentives for efficient behavior, • Constraints on decision-makers’ abilities to make efficient choices.