Introduction to Health Economics

1. Introduction to Health Economics Matthew Jones – The NIHR Research Design Service in the East Midlands (NDL)

2. Objectives • To give a basic understanding of Economics and Health Economics. • To outline economic evaluation, and some of the methods used. • Some basics of what to look for when bids mention Health Economics.

3. Economics Two rules underpin economics: • WANTS are infinite • RESOURCES are strictly limited • We are forced to choose from amongst our wants the things that we really want...

4. Economics The ECONOMIC PROBLEM is the trade-off that ensues: • What is going to be produced? • Who is going to produce it? / How is it going to be produced? • Who is going to get it? • ECONOMICS is the study of the choices people (economic agents) make when reconciling their wants with scarcity of resources.

5. Opportunity Cost So we have the economic dilemma: • Resources are Scarce and Wants are infinite • Therefore choices have to be made • Hence, each choice has an attendant “cost” Every extra unit of health for A means one less unit of health for B Health of Person A Health of Person B

6. What Is Health Economics? Health Economics is the application of the basic economic principles to the health care sector. The purpose of Health Economics is not to stop drugs or treatments receiving money, but to place the scarce resources of the NHS to the most optimal and efficient point, called: “Allocative Efficiency” Where if any resource is moved, it will lead everyone to be worse off!

7. What is Economic Evaluation? “The comparative analysis of alternative courses of action in terms of both their costs and consequences” Drummond et al Page 9 We rely upon economic evaluation in instances when: i) We suffer market failure (i.e. no market or no price) ii) Market outcomes are not “socially optimal”. Its ultimate objective is: EFFICIENCY

8. Why is Health Economics Important? It is important for 3 reasons: • The size of the contribution of the health sector to the overall economy. • The importance that many people attach to the economic problems they face in pursuing and maintaining their health. • Decisions about how health care is funded, provided and distributed are strongly influenced by the economic environment and constraints.

9. Its Importance To The DoH • In 2004, the Department of Health published a document called the “Standards for Better Health”. • This document identified 7 important domains where the quality of Health Care would be measured: • Safety • Clinical and Cost Effectiveness • Governance • Patient Focus • Accessible and Responsive Care • Care Environment and Amenities • Public Health • This shows how important Health Economics is becoming, it is ranked equally to clinical effectiveness.

10. Its Importance In Bids • In the recently published review of the first 3 rounds of RfPB competitions, one of the areas that are important but not investigated were economic evaluations, and that they were keen to add these to the RfPB Portfolio. • The guidelines of the HTA programme identify Cost-Effectiveness and “Value for Money” as key areas to be considered when applying for HTA funding. • The MRC, jointly with NIHR and ESRC, have recently launched a major drive to encourage further research within the Health Economics area.

11. Cost Minimisation Analysis • Interventions being compared differ in costs but NOT consequences. • Costs measured in monetary units. • Potentially the easiest to undertake. • But assumption of equality in outcome is highly unlikely.

12. Cost Benefit Analysis • Costs and Benefits measured in commensurate units – MONEY • Interventions can be valued absolutely (do the benefits outweigh the costs?) • Potentially the broadest form of evaluation • Comparable by net gain across all sectors of the economy • Measurement problems • Requires human lives to be valued in money terms. Decision makers may find this unethical.

13. Cost-Effectiveness Analysis • Interventions being compared differ in terms of cost AND effect • Costs in Monetary Units • Consequences measured in non-monetary units (Natural Scale) • Consequences should be relevant to level of efficiency (treatment, health service, societal) • Relatively simple to do • Data is often available • Not comprehensive – the outcome is one-dimensional so cannot incorporate other important aspects of health care into the outcome measure • Poor comparability – interventions using different outcome measures cannot be compared with one another

14. Cost-Utility Analysis • Outcome is generic (multi-dimensional) • Encompasses mortality and morbidity (UTILITY) • Used when Quality of Life is important • Combines life years gained with some judgement on the quality of those life years (e.g. Quality Adjusted Life-Years) • Extends CEA to incorporate quality of life • Enables comparability between health care programmes • Limited to comparability within the health care sector • Difficulties in deriving health benefits

15. Important Processes in Undertaking anEconomic Evaluation • Define the question/objective/problem • The perspective of analysis • Identification of relevant costs and benefits • Measurement of relevant costs and benefits • Valuation of relevant costs and benefits • Discounting/Depreciation • Sensitivity Analysis

16. Define the Question To decide between alternatives, e.g. • Clinical strategies for a condition • Settings for care • Personnel providing care • Programmes for different conditions • Scale and size of programme • Ways to improve health

17. The Perspective • Is the perspective suitable? • Is it broad enough?

18. Identification Of Relevant CostsAnd Benefits • Knowing the differences between interventions • What resource use matters? • Collaboration with clinicians • Critical Appraisal: have all the relevant items of resource use been considered? • What are the range of benefits resulting from an intervention? • Who benefits?

19. Measurement Of Relevant CostsAnd Benefits • Measurement in natural units (days, units, etc) • Resource use data collected as part of trial? • Review patient notes in retrospect? • Literature Review?

20. Valuation Of Relevant CostsAnd Benefits • Valuation of resource use in monetary units • Unit costs: cost per unit of resource (Price) – have they used suitable sources? • Utility valuation techniques (VAS, SG, TTO, EQ-5D, SF-6D) • Monetary: WTP vs. WTA

21. Discounting/Deprecation • Is capital depreciated? Have they used the appropriate rates? (NICE) • Discounting – is it necessary?

22. Sensitivity Analysis • Approach used to explore the implications of uncertainty and is used to test the statistical properties of economic parameters. • Types include: • Simple • Threshold • Analysis of extremes • Probabilistic

23. The End