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Demonstrating value in tough times: an introduction to economic analysis

Demonstrating value in tough times: an introduction to economic analysis. Fraser Battye Deirdre O’Brien 8 th December 2011. This workshop is structured around five propositions. It covers theory first, then practice; we end with an exercise. 2. Practice. 1. Theory. Agenda.

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Demonstrating value in tough times: an introduction to economic analysis

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  1. Demonstrating value in tough times: an introduction to economic analysis Fraser Battye Deirdre O’Brien 8th December 2011

  2. This workshop is structured around five propositions. It covers theory first, then practice; we end with an exercise 2. Practice 1. Theory Agenda • We want more than we can have: we must prioritise • We should prioritise so as to get most social ‘good’ • Economic analysis aids prioritisation • There are a range of approaches you can use, each has pros and cons. (SROI might be suitable here) • Economic analysis should form part of a case, alongside other types of evidence Our aim is to be non-technical and informal – please ask questions at any point

  3. Before we get going, here’s a quick three-point guide to the territory 2. Practice 1. Theory Agenda • A great quote • A bad joke • The monetary value of human life

  4. The great quote 2. Practice 1. Theory Agenda • “It is the mark of an educated mind to rest satisfied with the degree of precision which the nature of the subject admits and not to seek exactness where only an approximation is possible” • Aristotle We might not achieve precision. Services and problems are complex; the evidence always incomplete. What we always get is a useful and robust set of concepts.

  5. The bad joke 2. Practice 1. Theory Agenda • Q: How many economists does it take to change a light bulb? • A: Two. One to assume the existence of a ladder, and one to change the bulb Complexity and incomplete evidence aren’t necessarily fatal to economic analysis - but they leave us relying on assumptions. Be clear what they are

  6. 2. Practice 1. Theory 3. Example Agenda

  7. The ‘economic problem’ is our starting point: we have unlimited wants, but resources are finite 2. Practice 1. Theory Agenda

  8. Because we can’t have everything we want, we must make ‘trade-offs’. This leads to ‘opportunity cost’ 2. Practice 1. Theory Agenda Opportunity cost = the value of the next best alternative • Buyers must trade-off alternatives, e.g.: • Should we invest in drugs or community-based services? • In Children’s Centres or universities? • In training for the unemployed or aid programmes? • By choosing something, we forgo something else

  9. Examples of opportunity cost: how many of these could have been bought instead of a year of war in Afghanistan? 2. Practice 1. Theory Agenda Year in average UK care home Senior nurse Smoking quit (deprived group) Healthy school dinners A&E attendance

  10. So, we need to allocate our limited resources to achieve maximise value...but how? 2. Practice 1. Theory Agenda • Allocation under a free market: • Private decision making; consumers and producers; supply and demand • Prices convey information (VFM is easy!) • But, some goods / services not left to a market • Here the problem is one of allocating public resources for the greatest public ‘good’ • This is not a new problem • But current problems have sharpened the emphasis...

  11. Economic analysis aids resource allocation by systematically comparing costs and benefits A range of interventions can then be compared and the most efficient ones prioritised – we get the greatest good for available resources 2. Practice 1. Theory Agenda Activities COSTS Resources consumed BENEFITS Outcomes resulting

  12. Logic models are a great starting point for economic analysis. They help you to describe costs and benefits 2. Practice 1. Theory Agenda COSTS BENEFITS Data collection then flows from this

  13. Once you have the data, there are two main ‘types’ of analysis, distinguished by the way they express benefits 2. Practice 1. Theory Agenda £ per improvement in mental health £ per QALY £ per reduction in domestic violence Little philosophical distinction – but often significant technical differences • Where benefits are expressed in ‘natural’ units • Cost-consequence • Cost-effectiveness • Cost-utility • 2. Where benefits are expressed in monetary units • Cost-benefit • Social Return on Investment Costs are measured in monetary units for all types of analysis

  14. ‘Cost’ is the value of resources consumed (more than just cash spent). So, what did this 2nd hand bike cost? 2. Practice 1. Theory Agenda “The real price of every thing...is the toil and trouble of acquiring it” Adam Smith

  15. For Cost-Benefit or SROI analysis, benefits are measured (as far as possible) monetarily 2. Practice 1. Theory Agenda It might not always be possible. If not, quantify but don’t monetise • This is a significant advantage, results can be shown as a ratio: • ‘For every £1 of cost, you get £x worth of benefits’ • Enables comparison across wider range of interventions • It is also tricky: how do you value ‘intangible’ / social benefits in £? • What is the £ value of: being free of fear / living near a nice park / gaining a qualification / having a nice view / having a spouse / good education / better mental health etc.

  16. There are a range of ways to monetise social benefits - each has pros and cons 2. Practice 1. Theory Agenda • Cost of poor outcomes avoided (e.g. reductions in GP appointments / use of acute care etc) • Actual spending on similar benefits (e.g. paying for improved mental health) • Willingness to pay / accept (hypothetical) • Human capital (value of time) • Court awards (e.g. for emotional distress / injury) The best place to start looking is existing literature

  17. Remember: 1) value is subjective, and 2) you do this all the time 2. Practice 1. Theory Agenda A: It depends...what are you willing to pay? What are sellers willing to accept? Q: What is this T-shirt worth? There is no such thing as an ‘objective’ value

  18. ‘Social’ value is also a mainstream concern... 2. Practice 1. Theory Agenda

  19. Coffee break

  20. There are five main steps in undertaking your analysis; your task is to apply the first four to the example project 2. Practice 1. Theory Agenda • Setting the perspective is vital: • Costs and benefits to whom? The state? The commissioning organisation? Society as a whole? • The time-frame is too: • A year? Three years? Five years? 20 years? • The further out you go, the less certain you can be • Costs relatively easy to work out • Benefits are more difficult. Two challenges: • Getting good outcome data (evaluation) • Valuing these outcomes (if doing CBA / SROI) • Be clear about your assumptions / workings and sensitivity in the model

  21. Many thanks for coming to this workshop.Please get in touch with any follow-up questions • fraser.battye@ghkint.com • 0121 2338900 • GHK is an independent, employee-owned research and consultancy firm. • We specialise in the analysis of public policy for a range of clients across government and the third sector. • For more information, visit: www.ghkint.com

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