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Flagship Program on Health Sector Reform and Sustainable Financing

Flagship Program on Health Sector Reform and Sustainable Financing. Cost-Effectiveness Technique in Health: Strengths and Limitations. Presentation Objectives. To describe cost-effectiveness analysis (methodology) To discuss limitations and assumptions underlying CEA. Why a Benefit Package?.

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Flagship Program on Health Sector Reform and Sustainable Financing

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  1. Flagship Program on Health Sector Reform and Sustainable Financing

  2. Cost-Effectiveness Technique in Health: Strengths and Limitations

  3. Presentation Objectives • To describe cost-effectiveness analysis (methodology) • To discuss limitations and assumptions underlying CEA R. Bitrán- Flagship Tehran- March 2004

  4. Why a Benefit Package? • Outcomes: • Use resources more rationally • Meet equity goals • Ensure accountability and transparency • Process: • Clarify goals, priorities, choices, and opportunity cost • Mobilize consent through participation in design process R. Bitrán- Flagship Tehran- March 2004

  5. What Is a Basic Benefit Package? 3 defining features: • Limited set of services • Services included based on prioritization methods • Synergies among interventions/services included R. Bitrán- Flagship Tehran- March 2004

  6. Key Words: Limited & Prioritized Question: How best to choose the limited number of services that can be included in a benefit package? Answer: That depends... ? ? ? R. Bitrán- Flagship Tehran- March 2004

  7. How would An Objective Utilitarian Choose? Design your benefit package so that the population’s health status is maximized R. Bitrán- Flagship Tehran- March 2004

  8. ? ? But How? ? ? ? R. Bitrán- Flagship Tehran- March 2004

  9. Cost-Effectiveness Analysis! R. Bitrán- Flagship Tehran- March 2004

  10. What Is Cost-Effectiveness Analysis? One type ofEconomic Evaluationthat focuses on outcomes, e.g., -Lives - DALYs R. Bitrán- Flagship Tehran- March 2004

  11. Economic Evaluation Consequence A Program A Costs A Choice Costs B Comparator B Consequence B Source: Drummond et al., 1997 R. Bitrán- Flagship Tehran- March 2004

  12. Economic Evaluation Consequence A LIVES SAVED Program A Costs A $ Choice Costs B $ Comparator B Consequence B LIVES SAVED Source: Drummond et al., 1997 R. Bitrán- Flagship Tehran- March 2004

  13. Problem: How to compare: - costs - consequences Solution: Compare Cost-Effectiveness Ratios R. Bitrán- Flagship Tehran- March 2004

  14. Cost-Effectiveness Ratio Cost $ / Effectiveness C/EA vs. C/EB ==> PickProgram Aif C/EA<C/EB PickProgram Bif C/EB<C/EA Seems simple, but is that really the case? R. Bitrán- Flagship Tehran- March 2004

  15. First Issue: Effectiveness • Need same measure of Effectiveness, E.g.: • Lives saved • DALYs • Can’t compare “apples” and “oranges” R. Bitrán- Flagship Tehran- March 2004

  16. Second Issues: Costs Many different kinds of costs • Health care costs • Patient resources (time, $, other) • Costs in other sectors Which ones to include? R. Bitrán- Flagship Tehran- March 2004

  17. COSTS: Health Care Costs$1,000,000 Patient/Family resources$5,000 Costs in other sectors$50,000 CONSEQUENCES: Lives Saved: 100 Health care savings $250,000 Savings in other sectors$20,000 Savings in pat./fam. resources$12,000 Example 1 R. Bitrán- Flagship Tehran- March 2004

  18. Example 1: Cost-Effectiveness Ratio Summary: 1) C/E = 10,000 / life saved 2) C/E = 7,500 / life saved 3) C/E = 7,730 / life saved Question: Which one is right? R. Bitrán- Flagship Tehran- March 2004

  19. The “Right” C/E Ratio • The “right” C/E ratio depends on your perspective and your objectives • Economists argue for a societal perspective: ==> Include all costs and consequences C/E = $ 7730 / life saved R. Bitrán- Flagship Tehran- March 2004

  20. The “Right” C/E Net Costs / Effectiveness Net costs = Costs - Resources Saved = C - S C= C1+ C2 + C3 +... S= S1 + S2 + S3 +... R. Bitrán- Flagship Tehran- March 2004

  21. Cost and Effectiveness Are Difficult To Predict • Both depend on how well the delivery system functions • The incremental cost of any one service depends on what else is done • Demand for a service may change when it is included in a benefit package R. Bitrán- Flagship Tehran- March 2004

  22. Determining Cost Effectiveness Requires Many Value Judgments To Create A Single Measure Of Gain • The value of diminishing different kinds of disability • Disability versus death • Death at different ages • Current versus future gains (discount rate) • Attitude toward uncertainty (risk aversion) R. Bitrán- Flagship Tehran- March 2004

  23. Programs Lasting Multiple Years Differential Timing of Costs Year Cost of Program A Cost of Program B ($000s) ($000s) 1 5 15 2 10 10 3 15 4 “Total” 30 29 R. Bitrán- Flagship Tehran- March 2004

  24. Programs Lasting Multiple Years • Question: Is this comparison legitimate? Answer: No! • Question: What to do? Answer: Convert future costs to ‘present’ costs R. Bitrán- Flagship Tehran- March 2004

  25. Value of a 1-year Investment • Deposit $100 in the Bank @ 10% / year ==> get $110 after 1 year • How much is $100 in 1 year worth today? ==> $91 Deposit $100 in the Bank @ 5% / year ==> get $105 after 1 year • How much is $100 in 1 year worth today? ==> $95 R. Bitrán- Flagship Tehran- March 2004

  26. Multi-Year Programs Conclusion: • Timing matters • The interest rate matters R. Bitrán- Flagship Tehran- March 2004

  27. Choice of Discount Rate Makes a Difference r=0% r=1% r=5% r=10% Costs ($000s) ($000s) ($000s) ($000s) PA 30 29.3126.7924.08 (late costs) PB 2928.54 26.81 24.91 (early costs) R. Bitrán- Flagship Tehran- March 2004

  28. Review Important Issues in C/E Analysis: • In/exclusion of costs and consequences • Difficulty estimating cost and effectiveness • Timing of costs (and consequences) • Discount rate • Program (input) level R. Bitrán- Flagship Tehran- March 2004

  29. Additional Issues What happens to the C/E of a program when the input is increased? R. Bitrán- Flagship Tehran- March 2004

  30. COSTS: Health Care Costs$2,000,000 Patient/Family resources$10,000 Costs in other sectors$100,000 CONSEQUENCES: Lives saved = 150 Health care savings $375,000 Savings in other sectors$30,000 Savings in pat./fam. Resource$18,000 Example 2: Doubling Inputs R. Bitrán- Flagship Tehran- March 2004

  31. Impact of Doubling the Inputs • Example 1: C/E=$7,330 • Example 2: C/E=$11,247 ==> Cost doubled but effects did not! R. Bitrán- Flagship Tehran- March 2004

  32. Additional Issue: Marginal Vs. Average Cost Marginal Cost Effectiveness May Depend On How Extensively Some Services Are Provided Because Of “Diminishing Returns” R. Bitrán- Flagship Tehran- March 2004

  33. Using Cost Effectiveness To Calculate A Basic Benefit Package • Determine cost-effectiveness ratio of each option • Rank according to those ratios • Calculate total cost of including each service in package • Go down the list in rank order until the available budget is exhausted R. Bitrán- Flagship Tehran- March 2004

  34. Important Things to Remember: C-E analysis is predicated on (objective) utilitarian beliefs: What happens if you have other ethical beliefs? - Subjective utilitarian? - Egalitarian liberal? - Communitarian? R. Bitrán- Flagship Tehran- March 2004

  35. Important Assumptions to Remember • Ignores equity issues • Ignores political concerns • Assumes people are rational (they’ll demand what’s “good” for them) R. Bitrán- Flagship Tehran- March 2004

  36. Conclusion • C-E analysis is relatively simple in theory but difficult in practice • Extreme care must be taken when confronting the methodological challenges inherent in CEA • CEA does not consider equity issues and is based on objective utilitarianism R. Bitrán- Flagship Tehran- March 2004

  37. Conclusion (cont.) Notwithstanding these caveats, CEA is a potentially useful input into the design process of a benefit package, but it is notsufficient by itself. R. Bitrán- Flagship Tehran- March 2004

  38. Appendix R. Bitrán- Flagship Tehran- March 2004

  39. Example 1: Cost-Effectiveness Ratio 1) Health Care Cost Only $1,000,000 / 100 lives C/E = $10,000/life saved 2) Health Care Resources Only ==> Health care cost - health care savings ($1,000,000-250,000)/100 lives C/E= $7500 / life saved R. Bitrán- Flagship Tehran- March 2004

  40. Example 1: Cost-Effectiveness Ratio 3) All Resources C/E = (All costs - All savings) / # lives saved ($1,000,000+5,000+50,000) - ($250,000+20,000+12,000) / 100 LS = $7730 / life saved R. Bitrán- Flagship Tehran- March 2004

  41. Discounting Net Present Value (P) of a stream of future Costs: 3 P= Fn(1+r)-n n=1 F1 F2 F3 = ------- + -------- + -------- (1+r) (1+r)2 (1+r)3 F1 F2 F3 = ------- + -------- + -------- (1.05) (1.05)2 (1.05)3 R. Bitrán- Flagship Tehran- March 2004

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