Health Economics II – 2010 Health Economic Evaluations Part II Lecture 1 Which costs to include and how

1. Health Economics II – 2010Health Economic Evaluations Part IILecture 1Which costs to include and how Nils-Olov Stålhammar

2. Which costs to include? Costs • What is the viewpoint of the analysis? • The societal perspective is most often recommended • Is the comparison restricted to the alternatives under study? • Costs common to all alternatives may then be neglected • Are some costs merely likely to confirm a result that would be obtained by consideration of a narrower range of costs? • What is the relative order of magnitude of costs? Health sector Other sectors Patient/ family Productivity losses

3. Which costs to include?

4. Issues in studies of costs • How are values imputed for non-market items? Common problem when family time is used as input • When and how to adjust market prices? Adjustment of hospital charges (Sometimes charges are more appropriate) • For how long should costs be tracked? So that all related consequences on costs are included… Note: The more general question has to do with the time horizon for the analysis (should be so long that all consequences of the decision under study are captured)

5. Issues in studies of costs • Should unrelated costs be included? (Which costs are unrelated/related?) Costs for treating ‘other’ diseases? Costs for treating diseases that arise because the patient lives longer? Other costs than health care costs?

6. Life expectency w/o treatment w treatment Cost for cancer treatment in years of life that would have been lived anyway 10 20 Cost for unrelated diseases (asthma?) incurred in years of life that would have been lived anyway 5 5 Cost for cancer treatment in ‘added’ years of life (future related medical costs) 5 Cost for unrelated diseases (asthma?) incurred in ‘added’ years of life 2 Non-medical costs (food, housing etc.) and production (paid work) in ‘added’ years of life 7 Future costs - treatment of cancer (example) Current LYs Added LYs Include May be excluded, but what is unrelated? Must be included Inclusion often recommended but… ?

7. Views on inclusion of futurecosts • Is it possible to correctly identify related and unrelated future health care costs? • Are there any truly unrelated future health care costs? • Any treatment that reduces mortality will change mortality rates of other diseases; mortality, as well as cost, is ‘shifted’ to another disease • Since the benefits of treatment of ‘unrelated’ diseases is included in gained life years, the corresponding cost should also be included

8. Views on inclusion of futurecosts • The distinction between health care costs and other costs is artificial. Hence, the magnitude of unrelated future health care costs depends on how budgets are defined. • The difference between total consumption and total production in added years represent a cost which must be financed • Inclusion of future costs will increase cost-effectiveness of life-saving programmes among younger individuals • Failure to include future costs will favour programmes which extend life compared to programmes which improve quality of life

9. The theoretical basis for including future costs • Meltzer (J Health Econ 1997;16:33-64) maximises expected life time utility….. β = discount factor St = Probability surviving from period t-1 to period t H = Health status U = Utility as a function of consumption c and H

10. …subject to a resource constraint… mk,t = Medical expenditure on intervention k in period t it = Income in period t …which yields the following optimization problem:

11. and are changes at optimum is the marginal utility of income and Differentiating the FOC yields the ratiobetween total change in costs (E) and utility (EU) ”… the total cost of the intervention will include expenditures which occur because an intervention increases the probablility of survival …” (p. 43) However, the utility of these expenditures should also be included!

12. Meltzer’s conclusions ”… implies that cost-effectiveness analysis must include the total change in future expenditure which results from a medical intervention, regardless of whether those expenditures are medical or not.” (pp. 40-41) ”… no distinction between ’related’ and ’unrelated’ medical expenditures …” (p. 41) ”… the benefits of extending life include the utility generated by thosefuture expenditures and the analysis therefore must also include the costs necassary to obtain that utility.” (p. 41)

13. An alternative view on the inclusion of futurecosts • Nyman (Health Econ 2004;13:417-427) presented three principles: • Include in the analysis the costs of those resources that directly produce the utility that is being measured in the denominater of the cost-utility ratio • Exclude the costs of those resources that produce utility that is not measured in the denominator, even though the costs are causally associated with the intervention • Include the costs of those resources consumed that are casually related to the intervention, but that have no counterveiling utility gains (p. 419)

14. Learningsfrom Meltzerand Nyman • Meltzer: • Since the utility of futureconsumption is included, the correspondingcostsshouldsalso be included (includingfuturenon-medicalcosts) • Nyman: • The futurecost of consumptionshould be includedonlyif the correspondingutility is included – and it is not included in QALYs • Thus, bothauthorsargue for symmetry, butreaches different conclusions • The criticalquestion is thenwhetheror not the utility of futurenetconsumption is included in QALYs

15. What is included in QALYs? • The relevant question is: will maximisation of QALYs give the same result as maximisation of a traditional utility function including all relevant arguments (such as consumption) • This is the same as asking if QALYs can be interpreted as utilities • Strong assumptions must be satisfied • We are back to the discussion about the theoretical foundation and the different options • Welfarism: include future costs but questionable to use QALYs... • Extra-welfarism: costs outside of health-care sector should not be included • The decision maker approach: may not include future costs because of concerns about distributional implications

16. Which costs to include?

17. Guidelines’ view • The Dental and Pharmaceutical Benefits Agency, (Tandvårdsochläkemedelsförmånsverket, TLV): • “If the treatment affects survival, then the costs for increased survival – total consumption less total production during gained life years – should be included.” (Data is provided on total consumption less total production for various ages) • NICE: • Costs related to the condition of interest and incurred in additional years of life gained as a result of treatment should be included in the reference-case analysis. Costs that are considered to be unrelated to the condition or technology of interest should be excluded.

18. LFN (The Pharmaceutical Benefit Board) provides data on consumption and production

19. Hypothetical ex.: A treatment results in 1 additional LY – w/o treatment the patient dies immediately 1) TLV; 2) Burström et al, Health Policy 2001; 55: 51-69

20. The effect of including future costs – the example of hypertension treatment in Sweden Johannesson M, et al, MDM 1997;17:382-389

21. Issues in studies of costs • Capital outlays • Average vs. marginal cost • Incremental vs. marginal • Overhead costs • Hospital costing • Micro-costing • Components of resource use are estimated and unit costs derived • Case-mix group • A cost for each category of case or hospital patient (Disease Related Groups, DRG) • Disease specific per diem (or daily cost) • Average daily cost for each disease category • Average per diem (or daily cost) • Over all categories of patients

22. Issues in studies of costs • Allowance for differential timing • Discounting • Choice of discount rate • Real rate of return – the social opportunity cost approach • The social rate of time preference • Guidelines usually recommend 3% with 0% and 5% in a sensitivity analysis • Analysis usually performed in constant prices without adjustment for inflation

23. Issues in studies of costs • Valuing loss of productivity • Should it be included at all? The issue of objectives and perspective (Extra welfarism) • Equity considerations • Estimation; • Gross earnings lost (Gross wage x Time lost) • The friction cost method • Double counting?

24. Double counting? • It has been argued that (US Panel, 1996): • Net expenditure in the numerator • Costs of health care services • Costs of patient time expended for the intervention • Costs for care giving, travelling • Net improvement in health in the denominator • Effect on length and quality of life • HRQL should be captured in such a way that effects of morbidity on productive time (loss of income) and leisure are incorporated • Alternative and dominating view (Johannesson& Meltzer, 1998): • Change/effect on leisure time can be assumed to be captured by the QALY • However, loss of productivity due to morbidity can not be assumed to be captured by the QALY • Individuals do not bear the full cost • Even when sick-leave is not fully paid, income and payroll taxes imply that the individual bear only a proportion of the cost • Furthermore, if QALYs were to capture loss of productivity, then why not also cost of health care, at least ‘out of pocket’ cost

25. Valuing productivity costs • Gross earnings lost • Changes in amount of time individuals can allocate to paid work (also, in principle, changes in productivity whilst at work) is valued by change in gross earnings (gross wage x time lost) • Gross wage reflects the value of the production at the margin • Rests firmly on neoclassic labour theory and theory of the firm • This assumes flexibility in prices and that all markets clear • Also known as the Human Capital approach : The value of an object (human capital) is determined by the owner’s financial loss from losing it (future income) • Critique: likely to result in overestimation i) marginal value of production often less than average value, ii) unemployment

26. Valuing productivity costs • The friction cost approach • Involuntary unemployment exist – can replace the sick worker; There will be a cost for identifying and training and loss of productivity during the friction period (until the replacement has taken place) • The value of lost production may be substantially less than with the human capital approach –especially for long-term sick-leave • Also, for short-term sick leave it has been argued that the worker may be able to ‘make up’ for the lost production on return to work, or by colleagues • Critique: • Not correct to assume that all vacancies can be filled by unemployed persons (country-specific data on length of friction period would not be enough) • Would imply that value of clinicians’ and other health care workers time also should be reduced • Assuming that workers can ‘make up’ upon their return is not in line with important elements of economic theory

27. Guidelines’ views • Läkemedelsförmånsnämnden (The Pharmaceutical Benefits Board): • “All relevant costs associated with treatment and illness should be identified, quantified and evaluated. The production loss for treatment and sickness should also be included (estimated using the human capital method).” • Guidelines for Pharmacoeconomic Research in the Netherlands (The Health Care Insurance Board): • “When indirect costs outside the health care system (also known as productivity costs) are involved, these need to be calculated using the friction cost method.” • NICE: • “..the appropriate reference case perspective on costs is that of the NHS and PSS. In non-reference case analyses, significant resource costs imposed outside the NHS may also be considered ….but will not normally include productivity costs.”

28. ’Old’ exam question. Part II a) What was the recommendation from The US-panel on Cost-Effectiveness in health and medicine (1996) regarding loss of productivity due to morbidity, i.e. should the cost for this be measured in the numerator or in the denominator of the C/E ratio? Why? b) Give arguments in support of an opposite recommendation. c) After having presented a compelling argument for including health care costs for ‘unrelated’ disease during added years of life (when comparing interventions that affect life expectancy), the panel expresses the view that this would impose a burden on the analyst frequently not warranted by the importance of future costs. The conclusion is therefore that these costs may be either included or excluded. Describe the compelling argument presented by the panel. Note: This has not been discussed in class spring 2009

29. ’Old’ exam question. Part II Regarding the role and estimation of productivity changes. a) Two competing approaches for calculating productivity changes are the human capital approach and the friction cost method. Describe the main elements of both approaches. b) What was the recommendation from The US-panel on Cost-Effectiveness in health and medicine (1996) regarding loss of productivity due to morbidity, i.e. should the cost for this be measured in the numerator or in the denominator of the C/E ratio? Why? c) Give arguments in support of an opposite recommendation.