David Cohen Professor of Health Economics Tel: 01443 483827 Email: dcohen@glam.ac.uk

1. Module 10Introduction to Health Economics / Pharmacoeconomics David Cohen Professor of Health Economics Tel: 01443 483827 Email: dcohen@glam.ac.uk

2. Economics The study of how people and society end up choosing with or without the use of money to employ scarce resources to produce various commodities and to distribute them for consumption now and in the future among various groups in society. (Samuelson, 1976)

3. RESOURCE INPUTS OUTPUTS PRODUCTION PROCESS A simple view of economics

4. Resources • Resources are those things that contribute to the production of output • Pharmaceuticals are resources, as are the health professionals who prescribe

5. Money • Gives a command over resources • Provides a common measure of value Half an hour of nurse time (valued at £X) plus so much of a drug (valued at £Y) = £(X + Y)

6. Output of Health Care • The output of all health care activity is ‘healthier’ people • Services measure EFFORT – not ACHIEVEMENT

7. Economics The study of how people and society end up choosing with or without the use of money to employ scarce resources to produce various commodities and to distribute them for consumption now and in the future among various groups in society. (Samuelson, 1976)

8. To an economist … NEED = THE CAPACITY TO BENEFIT FROM TREATMENT AS DETERMINED BY A HEALTH PROFESSIONAL (preferably on the basis of evidence)

9. NEED … • Increases with every new treatment that allows people to benefit more than before • Number of new treatments is growing rapidly • Resourcing is falling behind • Gap is widening • Resources are SCARCE!

10. Scarcity means … 1. Committing resources to X means sacrificing the benefit of Y In economics ‘cost’ refers to benefit foregone – OPPORTUNITY COST 2. We cannot do everything we would like to do so CHOICES have to be made The criteria for choice must be made explicit One criterion for choice is EFFICIENCY = maximising the benefit to available resources

11. Policy Programme Activity Intervention USES RESOURCES WHAT IS GAINED ? WHAT IS FORGONE ? Cost Benefit Approach

12. 3 basic types of economic evaluation • Cost benefit • Cost effectiveness • Cost utility

13. Cost Benefit Analysis • Expresses all gains (benefits) and losses (costs) in common units (money). • Can challenge the objective • Examines whether - or to what extent - and objective is WORTH pursuing • This concerns ALLOCATIVE EFFICIENCY • Very few pharmaceutical products get subjected to CBA

14. Cost Effectiveness Analysis • Compares ALTERNATIVE ways of pursing a GIVEN objective • This addresses TECHNICAL EFFICIENCY • Cannot challenge the objective • Outcome (effectiveness) measure in narrow ‘natural’ units e.g. - smokers who quit - mmHg blood pressure reduction - episode free days - life years gained

15. BUT…… • Each of these can only show the most cost effective way of producing a specific outcome • In principle all health care (pharmaceutical products) produce the output ‘health’ Q: What is the most cost effective way of producing health?

16. What is health? • WHO definition? • Health has 2 dimensions: LENGTH and QUALITY • LENGTH (mortality/survival) is objective and easy to measure • QUALITY (morbidity/state of health) is subjective and difficult to measure

17. Rosser Index • Disability = 8 dimensions • Distress = 4 dimensions 8 x 4 = 32

22. Rosser Index • Wrote 29 cards each with unique combination of disability and distress • Asked respondents to order then from best to worst • Best state = 1 • State equivalent to death = 0 • Score others cardinally with negative scores allowed

24. Results • “remarkable consistency in scoring” • Doctors were out of step with everyone else

25. Health has two dimensions • If a health care intervention is to be effective, then it must either: • make you LIVE LONGER (mortality) • improve the QUALITY OF LIFE (morbidity) • … or some combination of the two • Thus all health care activities (curative or preventive) produce what are termed as: • QALYs • (Quality of Life Years)

26. To calculate QALYs you need… • A set of descriptors (health states) • Choice of perspective (society, doctors, patients) • A scaling/scoring system • A method of eliciting utilities • The most commonly used system in Europe is the EuroQol (EQ-5D)

27. EQ-5D 35 = 243 health states

28. EQ-5D • Set of descriptors: 243 states • Perspective: Society • Scaling system: Perfect health = 1 Dead = 0 (Negative scores allowed) • Utility elicitation method: Time trade-off (TTO) (Note: EuroQol group provide country-specific ‘tariffs’ for each health state)

29. Quality adjusted life years gained from an intervention with intervention Quality adjusted life years gained perfect health 1.0 without intervention health-related quality of life (HRQoL) 0.5 Death 2 Death 0.0 Death 1 duration (years)

31. Cost Utility Analysis A form of CEA which uses QALYs (or similar) as the unit of effectiveness

32. The Cost Effectiveness Plane Cost difference + Intervention is less effective and more costly (Dominated) Intervention is more effective and more costly Effect difference - + Intervention is more effective and less costly (Dominant) Intervention is less effective and less costly -

33. Most common result of a CUA • New drug treatment more effective but more costly • Results reported in terms of extra cost per extra QALY (Incremental Cost Effectiveness Ratio – ICER) • Is it worth spending an extra £X to get an extra QALY? • In an ideal world we’d say ‘yes’ regardless of size of X

34. But we don’t live in an ideal world NICE rule of thumb: • If X less that £30,000 approve it • If X more than £30,000 reject it NB: This is an oversimplification !!!

35. Some quick statistical considerations

36. Incremental cost effectiveness ratio Costint – Costalt Effectint – Effectalt = • Above figures are means and ICER is a point estimate • We need a confidence interval around it

37. CI around costs and CI around effects 95% CI effects x 95% CI costs

38. But … • CI of a ratio assumes difference in cost independent of difference in effect which is not likely • Most common solution = non-parametric bootstrapping

39. Bootstrapping • Simulation based technique • Uses large number of re-sampling experiments (minimum 1,000 more commonly 10,000) to generate empirical distribution for parameter of interest • 95% CI can be derived

40. Distribution

41. Cost Effectiveness Acceptability Curve (CEAC) • Shows probability that an ICER is below a range of willingness to pay thresholds • Deals with joint uncertainty in costs and effects

42. Cost Effectiveness Acceptability Curve (CEAC)

43. Where cost effectiveness information come from? • Clinical trials which include an economic component (increasingly required to get funding) • Modelling exercises

44. Clinical Trials Frustration!! • “Possible points of view include ....” • “The most common practice is to ...” • “It is by no means clear when an analyst should ...” • “Not only does the analyst have a choice about ... but also ...” • “The question of ... is open to debate.” • “The main point ... is that there is no unambiguously right way to … ” • “The analyst needs to form a judgement on ...” (All the above from Drummond et al Ch.4)

45. The NICE Reference Case • NICE has produce a ‘reference case’ which identifies the preferred way of dealing with each point on previous slide • This is for comparisons and does not claim to be the “correct” way to do things

46. Modeling: an unavoidable fact of life • A mathematical representation which synthesises evidence on costs and effects from trials, observational studies, case reports, administrative record etc. • Requires assumptions on incidence, prognoses, risks, effects of treatment, use of resources, etc. etc. etc. • Technique used, evidence sources and assumptions used can produce any result you want.

47. Is it ethical to deny patients effective treatments on grounds of cost effectiveness?

48. Two levels of decision-making • Health professional/patient • Do what’s best for the patient • Opportunity cost is not important • Planning • Do what’s best for society • Opportunity cost is vital

49. Medical Ethics v. Healthcare Ethics • Common decision rule = do nothing where harm exceeds good • Medical ethics = good v. harm to the individual • Health care ethics = - concept of the common good - harm = sacrifice of benefit by others through denial of treatments (opportunity cost)

50. Summing up • Health economics is a way of thing • Resources are scarce • Allocating resources incurs opportunity costs elsewhere • Resource allocation choice are inescapable • Efficiency is a noble decision aiding criterion • Drug therapies need to be cost effective as well as clinically effective