Objectives of this Module • to identify the various types of economic evaluation together

with their data requirements and informational content

• to understand the alternative measures of outcome used in economic evaluation, including the concept of quality adjusted life years (QALYs)

• to appreciate the principles and practice involved in undertaking a cost analysis

• to appreciate how to deal with uncertainty in economic evaluation

• to be able to tackle the practical and methodological tasks associated with designing and planning an economic evaluation

Exercise To what extent are the following statements commonly expressed in your country, or other countries of which you are aware? To what extent are they accurate? If they are held, what implications do they have for health policy, health practice and health status outcomes? • The declining real value of public health expenditure is the cause of (all) our problems. • An increase in health costs, as observed in many western European or north American discussions, would be a good thing. It would definitely be better than our present state of affairs. • Individuals are responsible for their own decisions, including health decisions, in the new society which is emerging, with less central direction and control. Therefore, poor health outcomes are the individual’s own responsibility and do not justify collective action. • Politicians can decide freely whether they wish market forces to shape their health systems or not.

Health care sector of the economy is very large affected by:

• Total expenditure on health as % GDP

• Size of health workforce

• Household out of pocket expenditures on health

• Gross Domestic Product (GDP) GDP is the market value of the goods and services produced by

labor and property located in the United States. A barometer of the U.S. economy, it illustrates the pace at which the economy is growing or shrinking.

• Gross National Product (GNP) The market value of all final goods and services produced in a

given time period (usually one year) by the nationals of a country residing either in the country or abroad.

• Health Care Costs The actual costs of providing services related to the delivery of

health care, including the costs of procedures, therapies, and medications. It is differentiated from HEALTH EXPENDITURES, which refers to the amount of money paid for the services, and from fees, which refers to the amount charged, regardless of cost.

Total expenditure on health as % GDP, 2008

(WHO Health Statistics, 2010)

Health Spending ,2009(WHO)

Health Expenditure in Africa

• Africa is home to about 10% of the worlds population.

• Almost half of the burden of communicable diseases, But

• Only 1% of health expenditure is spent in Africa

Health Expenditure in Africa

• There are shortages of hospital beds and patients are left to lie in corridors while politicians argue endlessly over whether more or less is being spent on the NHS.

• Why is it that health care is such a controversial area?

• Why is there never enough money to give

us the level of health care we want?

• To answer these questions we need to introduce and apply a range of economic concepts

• The purpose of studying economics is not to acquire a set of ready-made answers to economic questions

The agents of the economy

Scarcity - the health care dimension

• Scarcity has two sides:

◊ the infinite nature of human wants

◊ the finite or limited nature of resources available to produce goods and services

• What does this mean when related to health care?

The demand for health care has expanded so dramatically in developed countries over the last 40 years:

• Changes in the age structure

• Increasing real incomes

• Improvements in medical technology

What is the picture in your country?

The Resources

• The other side of the scarcity equation relates to the finite nature of resources.

• The term ‘resources’ covers all inputs used to produce goods and services. Economists also refer to these as the factors of production • They are divided into four categories:

1. Land - the physical resources of the planet including mineral deposits 2. Labour - human resources in the sense of people as workers 3. Capital - resources created by humans to aid production, such as tools, machinery and factories 4. Enterprise - the human resource of organizing the other three factors to produce goods and services. We can see all four factors at work in the production of health

care

• It is fairly obvious that the available quantity of these factors is limited, therefore there is some maximum quantity of health care that can be produced at any one time.

• We can explore this idea theoretically by using what economists call a

Production Possibility Frontier (PPF)

• How can society decide which of Health Care Systems is most suitable in any given case?

• There are two criteria that economists use to assess the performance of an allocation system:

The first is efficiency: does the system produce an allocation which is Pareto efficient (and thus on the economy’s PPF).

If the allocation is efficient, then the economy is producing exactly the quantity and type of health care that society wants (allocative efficiency) and it is producing that health care for the lowest possible cost (productive efficiency).

• The second criterion is equity:

Does the system produce an allocation which meets society’s requirement for justice?

• This is a normative issue: the decision made depends upon people’s values.

However, it is a very important consideration for many people when they consider the allocation of health care.

It is possible to argue, for instance, that notions of social justice were the single most important influence on the setting up of the National Health Service

The 3 “Es” must be followed in health care : Effectiveness Efficiency Equity

Doing the right things right for the right people at the right time under the right conditions

EQUITY • The notion of equity is inextricably linked with notions of

fairness and justice, but it is important to distinguish it from the concept of equality, which is the ‘condition of being equal’ (Oxford English Dictionary).

• Policies designed to achieve equality of opportunity, or

access, or utilisation or outcome may well be desirous but they need not necessarily be equitable. • Horizontal equity and vertical equity: The former refers to the ‘equal treatment of equals’ and

the latter to the ‘unequal treatment of unequals’.

Horizontal and Vertical equity

• Horizontal equity: equal treatment of equal need.

2 individuals with same illness and severity should

receive same treatment

• Vertical equity: unequal treatment of unequal need

More treatment for patients with serious conditions

than for those with minor affections.

• Passing the financing of health care to ability to

pay (progressive income tax).

Implicit incorporation of equity in economic evaluation

• Social value judgments & notions of equity issues are embedded within efficiency evaluations

• Focus on particular interventions • Include some costs and not others • Include some benefits and not others – Non-discrimination by social role – Quality Adjusted Life Years (QALYs) • Equal value no matter to whom it accrues

Efficiency • Vilfredo Pareto formulated efficiency , He said that

an allocation of resources is efficient if it is impossible to change that allocation to make one person better off without making someone else worse off.

• Extent to which decisions relating to the allocation of limited resources maximizes the benefits for society and has been defined as ‘maximising well-being at the least cost to society’.

• The concept of efficiency embraces inputs (costs) and outputs and/ or outcomes (benefits) and the relationship between them, with a society being judged in efficiency terms by the extent to which it maximizes the benefits for its population,

• Technical efficiency or operational efficiency:

Where output is expected to be maintained, while at the same time making cost reductions, or where additional output is generated with the same level of inputs.

• It is applied where a choice needs to be made between alternatives that seek to achieve the same goal, and exists when output is maximized for a given cost, or where the costs of producing a given output are minimized.

The Production Possibilities Frontier

Number of Lives Saved per Period

Quantity of All Other Goods per

Period

100,000 200,000 300,000 400,000 500,000

1,000,000 950,000 850,000

700,000

500,000

400,000

B A

C

D

E

F

W

At point A, all resources are used for "other goods."

Moving from point A to point B requires shifting resources out of other goods and into health care.

At point F. all resources are used for health care.

Production Possibility Frontiers

• Show the different combinations of goods and services that can be produced with a given amount of resources

• No ‘ideal’ point on the curve

• Any point inside the curve – suggests resources are not being utilised efficiently

• Any point outside the curve – not attainable with the current level of resources

• Useful to demonstrate economic growth and opportunity cost

PPFs in health care Example:

Suppose the heart bypass unit has 10 surgeons working in it, and assume that the only factor which affects the quantity of operations provided is the number of surgeons assigned to them.

If all the surgeons are assigned to heart bypass operations then the unit can carry out 50 heart operations per week.

If, on the other hand, all the surgeons are assigned to other operations, then the unit can carry out 50 of these other operations per week

All the possible maximum combinations of operations that the unit can achieve given the quantity and productivity of resources available.

All surgeons and theaters will be input in heart bypass, so, output per surgeon will diminished, A lot of surgeons doing bypass.

Additional extra one surgeon from other operation creates only a small increase in a number of bypass operations , So the line concave This phenomenon is called the Law of Diminishing Returns and makes the PPF concave to the origin

The trade-off between the two possibilities is one to one. This is what is called the marginal rate of transformation, MRT.

Opportunity Cost

“The value of forgone benefit which could be obtained from a resource in its next-best

alternative use.”

Opportunity Cost • The opportunity cost of an activity is the value of

the resources used in that activity when they are used in their next best alternative.

• The slope of the Production Possibility Frontier measures the opportunity cost of producing one good in terms of the amount of the other good foregone

• Helps us view the true cost of decision making

• Implies valuing different choices

Implications of Opportunity Cost

• Deciding to do A implies deciding not to do B (i.e. value of benefits from A>B).

• Cost can be incurred without financial expenditure.

• Value not necessarily determined by “the market”.

Opportunity cost

• Pareto analysis will typically show that a disproportionate improvement can be achieved by ranking various causes of a problem and by concentrating on those solutions or items with the largest impact.

• The basic premise is that not all inputs have the same or even proportional impact on a given output..

Opportunity Cost

Example of opportunity costs −Community health nurse and peer counselor for

breastfeeding intervention

−What are we losing?

Example, community-based diabetes management

• If you knew the exact alternative use of resources, the value of the alternative use is the opportunity cost

Getting more treatment

• There are only two ways that society can get more treatment:

• A. By improving the productivity of the factors of production

• B. By increasing the quantity of the factors of production.

• The question is how does society decide between them.

The cost of more treatment

• The PPFs we have been using relate to choices between different types of health care.

• But we can equally use PPF analysis to illustrate the trade-off between health care and all other goods.

• The question is how does society decide between them.

• Two questions address :

• 1. What are the aims of health economics?

• (normative question)

Scarce resources should be used efficiently

• 2. By what methods are those aims best achieved?

• (positive question)

It is a technical question

Positive and Normative Economics • Health care can be improved

with more tax funding

• Pollution control is effective through a system of fines

• Society ought to provide homes for all

• Any strategy aimed at reducing factory closures in deprived areas would be helpful

• Positive Statements (sure to be): – Capable of being verified

or refuted by resorting to fact or further investigation

• Normative Statements (opinion): – Contains a value

judgement which cannot be verified by resort to investigation or research

Trade-offs • Allocation of health care

• Given scarcity, what we need is an allocation or decision making system to determine how much of which kinds of health care is provided.

• There are three possibilities: the free market; the

command system; and the mixed system.

• Trade-off:

- waiting may give competitors a competitive advantage;

- waiting allows for learning from others’ experience

How does society chooses among feasible allocations? • VOTING mechanism

• Criteria to be used: - Efficiency: Select only efficient allocations (rule out allocation A) - Equity. [Normative criterion] Select allocations meeting society’s requirement for justice. ! people’s values e.g. social justice is behind the set-up of a NHS. Horizontal and Vertical equity

Decision Making The principles of economic evaluation • Should a new drug or new surgical procedure be adopted or

whether a particular medical procedure/health intervention worth undertaking?

• Should one form of treatment be expanded (while another is contracted)?

• After clinical effectiveness has been demonstrated, need to look to the balance of benefits and costs; identification and estimation of the health outcomes or benefits and costs of health care.

• A specialist hospital requests a license to establish a kidney transplant programme as claims it is cheaper than constant dialysis

Health economics ‘map’

B. What influences Health? (other than

health care)

E. Market Analysis

A. What is Health? What is it’s value?

D. Supply of Health Care

G. Planning, budgeting, regulation mechanisms

H. Micro-Economic Appraisal

C. Demand for Health Care

F. Macro-Economic Appraisal

A: Value of health

B: Demand for health

Economic analysis: Starting point: A ! Demand side Supply side C (with B) D

Equilibrium E (from B;C) Economic evaluation: microlevel (F), macrolevel (G)(G. PLANNING, BUDGETING,REGULATION, AND MONITORING MECHANISMS

Policy analysis: H

Economic Evaluation

What is economic evaluation?

Economic evaluation is defined as the “comparative analysis of alternative courses of action in terms of both their costs and consequences” (Drummond et al., 1997)

Economic evaluation & CE plane

Alternative A versus B

Costs Effects

Opportunity cost

“the comparative analysis of alternative courses of action in terms of both their costs and consequences in order to assist policy decisions”.

Economic Evaluation

Why is Economic Evaluation Important?

1-To become more efficient , so that more individuals can be treated with the same resources

2-To extend means testing so that, some people may be excluded from certain services due to their wealth

3-To increase ‘rationing’ or to provide a smaller range of services

• Economic evaluation is the systematic, explicit analysis of alternative courses of action, assessed in terms of both costs and consequences.

• It is concerned with choice.

• Indeed, economic issues pervade almost every aspect of our daily lives and economic evaluation is needed to find efficient solutions to resource allocation problems.

• In health care, an economic evaluation provides a framework and a set of techniques that enable decision makers to incorporate economic criteria into decisions about whether, and how, to allocate scarce resources to particular health care options

How are Economic Evaluation conducted? Two approaches:

1. Conducted alongside RCT (Randomized Controlled Trial) or non-randomised studies (such as before and after studies)

– Collect primary (new) data

2. Rely on existing (secondary) data or existing studies

– Technology Assessment Reviews (TARs)

Characteristics of Economic Evaluation

• Economic evaluation involves identifying, measuring and valuing both the inputs (costs) and outcomes (benefits) of the intervention/s

• there are two broad areas of economic measurement;

Provider or narrow perspective - consider inputs (costs) and outcomes (benefits), and compares both aspects across alternative interventions

Societal perspective - include only some elements of inputs and outcomes

• The provider approach has limitations because ranking interventions in terms of value for money may be very different if the analysis includes all costs and benefits

History of Health Economic Evaluation

• 1950’s – economists began to apply economic theory to health care

• 1960’s – cost-of-illness studies began to emerge

• 1970’s – cost-benefit approach accepted but money value of health ‘dismissed’

• 1980’s – alternative outcome measures led to CEA/CUA

• 1990’s – re-emergence of interest in CBA – formal adoption by regulatory bodies • 2000’s - integration of CBA and CUA (SVQ)

Essential to an evaluation are: • Identification of all main clinical event pathways and their

associated resource implications, and the consequences (health outcomes) for each relevant option

• Estimation of the probabilities of the main event pathways

occurring • Identification and measurement of resource use associated

with each pathway • Identification and measurement of the consequences to be

valued

Scope of an economic evaluation

The overall development process for clinical practice guidelines consists of:

• Formulation and Consultation

• Implementation and Dissemination; and

• Evaluation and Revision (NHMRC 1999).

Formulation

In developing guidelines, the committee should consider

the cost (ie resource use) as well as the effectiveness of the health care options available, in order to ensure:

• greater health gains for less cost;

• the same health gain for less cost; or

• greater health gain for an additional cost deemed worth paying

Implementation • A change in clinical practice will almost certainly

affect resource use.

• A new practice may cost more than the current practice (eg if there is an effective health care option for patients who are currently untreated) or less

(eg if a treatment is replaced by a less expensive treatment). In either case it should be

more efficient

Dissemination The guideline dissemination process also has associated

costs and an economic evaluation can be used to analyse alternative strategies of dissemination to determine the most cost-effective approach

The total cost of the process is the cost of the guideline

formulation plus the cost of dissemination and this cost can be compared with the costs of changing from current to new practice patterns

The greater the cost savings in changing practice, the

greater the amount that is worth spending on dissemination

Uses of Economic Tools Economic tools include 1. Health outcome measurement (e.g. quality-adjusted life-years) 2. Costing (e.g. total costs, the components of cost and their distribution) 3. Economic evaluation (e.g. the cost-effectiveness of a new drug) 4. Development and diffusion of health technology (e.g. incentives and for how technologies are used) 5. Economic modeling and forecasting (e.g. a decision- tree model or econometric approaches)

Important Features of Economic Evaluation

“The comparative analysis of alternative courses of action in terms of both their costs and consequences in order to assist policy decisions” (Drummond et al,2005)

1. Costs and consequences – efficiency

2. Comparison – technical efficiency

3. Assist - not replace - decision making

Place of economic evaluation in the wider ‘evaluation cycle’

needs

assessment

program

planning

program

implementation

process

evaluation

Economic

Evaluation

outcome

evaluation

evaluability

assessment

impact

evaluation

1. Can it work (efficacy)?

2. Does it work (effectiveness)?

3. Is it worth doing (efficiency)?

The ideal economic evaluation would: 1- Be based on high-quality effectiveness data

2- Conform to stringent economic criteria

3- Be internally valid

4- Be externally valid, i.e., generalizable to other settings/countries

• An ideal economic evaluation would be based on the best available clinical evidence.

…determine forms of evaluation

NO YES

Examines only

consequences

Examines only

costs

1A PARTIAL EVALUATION 1B

• Outcome

description.

• Cost

description.

3A PARTIAL EVALUATION 3B

• Efficacy or

effectiveness

evaluation.

• Cost analysis.

2 PARTIAL EVALUATION

• Cost-outcome description.

4 FULL ECONOMIC EVALUATION

• Cost-minimisation analysis.

• Cost-effectiveness analysis.

• Cost-utility analysis.

• Cost-benefit analysis.

NO

YES

1. Are both costs (inputs) and consequences (outputs) examined?

2. A

re a

t le

ast

2 a

ltern

ati

ves c

om

pare

d?

Types of Health Economic Evaluation

Type of Analysis Result Consequences Costs

Cost Minimisation

Cost Benefit

Cost Utility

Cost Effectiveness

Money

Single or multiple effects

not necessarily common.

Valued as “utility” eg.

QALY

Different magnitude of a

common measure eg.,

LY’s gained, blood

pressure reduction.

Least cost alternative. Identical in all

respects.

Money

Money

Money Cost per unit of

consequence eg. cost

per LY gained.

Cost per unit of

consequence eg. cost

per QALY.

As for CUA but

valued in money.

Net £

cost: benefit ratio.

The three-dimensional conceptual framework

COSTS • Costs usually describe the total costs that arise in the context

of an intervention • This includes the treatment costs, expenditures by the

patients and their families, consumption of resources in other areas and productivity changes (Drummond et al. 2005).

• Cost determines the point of view from which a health economic analysis is carried out (e.g. from a societal point of view, from the point of view of the health care system, from the point of view of health insurance providers,...)

• Costing involves measuring resource use in naturally occurring units

• Costs refer to the opportunities foregone when a given resource is used in a particular way.

• Total costs can be compared with benefits to see if the resource use is worthwhile.

• The distribution of costs influences the incentives faced by participants, i.e. whether to take the action or avoid it.

• Other issues in costing include: should future costs and cost savings be factored into analysis?

• If cost data are sourced from different time periods there may be need to adjust them for medical inflation and undertake discounting

• The quality of evidence on costs is based on the level of confidence that can be placed in the studies

The evidence is based on criteria for 1-internal validity 2-generalisability 3-sensitivity analysis

Costs ………..cont’d 1. Refer to the benefits sacrificed elsewhere “foregone”): • resources have alternative uses • are wider than financial expenditure alone • can differ according to the viewpoint adopted 2. Comparing costs and benefits • Requires accurate estimation of total costs 3. Total costs can be viewed from various perspectives, e.g.: • types • sources • timing • uncertainty

4. Changing the distribution of total costs can alter:

• the incentives faced by participants

• the actions they take

5. The cost information:

• can be difficult to obtain

• three stages, progressively more difficult

– identification

– measurement

– valuation

• consistent approaches facilitate:

– comparisons

– longer-term learning

6. Cost information:

• can be presented in more or less helpful ways

an aid to:

– improved decision-making

– better use of scarce resources

– improved outcomes

In health economic analyses the costs are evaluated in three steps:

The evaluation of costs (as with benefits) has a sub-structure all of its three steps to ensure that all costs are captured properly:

1- All relevant resources whose consumption is affected

through an intervention are identified 2-The resource consumption is quantified 3-Costs of the previously identified resources are defined

1-Measure the amount of resources required for each option

• Having listed the ‘ingredients’ required for each intervention

• the next stage is to specify how much/how many /how long of:

*each resource is needed

*additional office accommodation is required

* many more hours of staff time are necessary

and what level of expertise do each of the options need, and so on

2-Value the resources required of each option

• The valuation stage assigns monetary values to each of the resources identified and quantified in

the previous stages. • The economist will often use information taken from the accounts

of the main agencies involved to cost the resources that each one provides.

• Expenditures on salaries will often be used to assign values to staff inputs.

• Usually, documented spending on things such as the office expenses (the telephone and photocopier for example) can also be used to assign values to these inputs.

Implications for the evaluation team • Successful valuation of the costs of a program is critically

dependent on the prior stages – the identification

and measurement of resources.

• Identifying the resources requires a team effort.

• The economist can specify the broad categories of resource use that might be required (capital costs, staff costs, etc.) but the responsibility is on the practitioners and policy makers who are on the evaluation team

• To ensure that the list of ingredients is as comprehensive as it is possible to be.

Factors Affecting Comparative Advantage….

• National differences in opportunity costs not the account value

• Costs affected by availability of resources

• Costs affected by production requirements for goods and services produced

• Costs affected by resource combinations

• Costs affected by resource mobility

COSTING is challenging • A researcher doesn’t usually know the exact alternative use of the

resources

• As a result, we usually use money spent on resources as a measure of value • Economic theory can be used to demonstrate that in many cases the

money spent on resources equals the value of the resources to the firm and the value to society

• Cost function shows relationship between output and cost ! economic approach to production activity

• Resources should be measured in physical units such as number of physician visits, hours of nurse time or quantity of drugs taken.

• SO, The process of economic costing involves three steps:

– identifying and describing resource use changes

– quantifying them in physical units

– Valuing them

IDENTIFICATION of COST

Intervention

Direct Cost Indirect Costs

Wider cost

implications to

society eg. lost

production

Non-health

services resource

use. Eg. patient

transportation,

informal care

Health services

resource use.

Eg. Inpatient,

outpatient, tests,

drugs

Costs to family

and friends

• Which to include depends on perspective taken

A-Direct costs

• The term “direct costs” usually implies that money is directly transferred • Direct cost refers to the resources that are immediately

consumed within the framework of an intervention (time, money, personnel,…).

• It has to be pointed out that when studies are compared, attention is paid to the fact that costs are always immediately defined and written in the formula,

because e.g. sometimes a patient’s waiting time is qualified not as direct but indirect costs.

• Direct costs are categorised as:

– Capital costs (buildings, equipment)

– Overheads (jointly used resources, such as heating and lighting, administration and catering)

– Labour (medical and non-medical staff)

– Consumables (disposable items, such as drugs, bandages etc)

CAPITAL COST

• Large expenditures on things that will last a long time −Could be as big as a new hospital −Could be an expensive new piece of equipment −Could be a vehicle for a community health program −Don’t just use accounting-based depreciation • Change in market value and the alternative rate of

return

• −Depreciation and return on riskless asset

EXAMPLE

• Suppose health department owns a clinic worth $500,000

Depreciation of $25,000 per year

Could invest the $500,000 at 3% risk-free,

so add $15,000

Total cost = $40,000

• Depreciation is often based on accounting rules that do not always match the reality of depreciation

• Accounting rules use the original value of the asset to calculate changes rather than the current market value

A1: DIRECT MEDICAL COSTS • The direct medical costs represent the most obvious

cost factor in health economic evaluations

• They indicate the direct use of resources that are necessary for an intervention

• This includes the labour force of the necessary personnel (doctors, therapists, hospital nurses,…), costs for clinical tests, medication, appliances, medical equipment and consumable material

A2: Direct non-medical costs (external costs) The direct non-medical costs include, for instance,

• costs for child care for the time the mother is treated

• transport costs even if the patients use their private cars or public transport

• the time consumed by the transport

B-Indirect costs • Indirect costs are also called productivity costs because they represent the productivity loss due to illness.

• Regarding society in general, the indirect costs become virtual costs from the moment openings are filled with unemployed persons

• loss of leisure-time pleasures, which be counted towards the loss of quality of life and that it should not be regarded as indirect costs

• The indirect costs can be morbidity costs and mortality costs, volunteer time’ and ‘patient/family leisure time lost cost

B1:Volunteer time’ and ‘patient/family leisure time • In the case of ‘volunteer time’ there is the suggestion to use

‘unskilled wage rates’ but the market value of leisure time is much harder to assess.

• There exist several suggestions to overcome this problem: some say leisure time should be attributed the value 0, some suggest to use average wages as a guideline, and others argue to use double wages paid for overtime as the basis for attributing a price to leisure time because also the employer has to pay double for the free time of the employee (Drummond et al. 2005).

• Even before worrying about the value of time, it should be evaluated how much time volunteers and relatives really sacrifice and then it should be assessed whether this factor could influence the result considerably.

• The common practice is to attribute the value 0 to the time factor, especially in analyses which are carried out from the perspective of decision makers

• The time of volunteers and relatives could be documented separately in time units and that these records could be analyzed parallel to the cost evaluation (Drummond et al., 2005).

B2: SOCIETAL PERSPECTIVE COST

• This cost factor in any case should including.

• Regarding the prices of medications the market values can be distorted because of price-fixing agreements between the pharmacology companies and the government.

• Also this should be considered and if necessary corrected in the attribution of values (Drummond et al. 2005)

B3: MORBIDITY COSTS

• Morbidity costs are caused by health impairments

• This means a reduced ability to work, and limitations with regard to leisure time activities,… However, limitations of leisure time activities should rather be regarded as a reduction of quality of life

B4: MORTALITY COSTS

• Mortality costs describe the years of life lost through disease.

• They can be included in the analysis either as monetary loss or as reduction in utility or effectiveness.

• The only thing that has to be made sure is that they are not included twice, i.e. either they have to be included among the costs or they have to be counted towards the effectiveness or utility.

• In general, it is recommended that mortality costs should not be attributed a monetary value.

• Losses of productivity should be quantified by the human capital approach, i.e.

• the period-related income of the patient group concerned. If no specific data are available for the patient group considered, average values can be used from

official statistics.

Loss of productivity = Incapacity for work x wage cost l Dependent employees x 365 days

• In determining the loss of productivity, gender, age and social components must be considered, depending on the question.

• It is also possible in the case of long-term absence from work or death to consider the current labour market situation, i.e. workplaces can be filled again within a relatively short space of time.

• Only the period until the workplace is filled again (friction period) is assessed as loss of production. Likewise, it is conceivable in the

• event of a very short period of absence from work for the absence to be covered by colleagues. The use of the friction cost approach, however, must be justified.

Fixed, variable and total cost

• Fixed cost (FC) – costs that in the short run do not vary with quantity, usually

capital, overheads (labour?)

• Variable cost (VC) – costs which vary with the level of service, usually consumables

(labour?)

• Total cost (TC) – all costs incurred while producing a service

TC = FC + VC

Fixed, variable and total cost

TC

VC

FC

Cost

Quantity

• Average Cost: Total Cost/production (unit cost)

• Marginal Cost: cost when producing one additional unit

Average versus marginal cost

• Average cost

– cost per unit of output

– Influenced by fixed cost

• Marginal cost

– cost of producing an extra unit

– Influenced by variable cost

QTC

QTC

Importance of marginal cost

Importance of marginal cost cont…

C- OPPORTUNITY COSTS • Opportunity costs are also called alternative costs because they also

express how the expended resources could have been used alternatively.

• One example of where the opportunity costs are important would be the assessment of indirect costs due to production downtimes of a sick employee.

• The money that has to be spent to cover the costs which arise in this context cannot be used for other things (“opportunities”), even though it possibly would have produced a better utility to use the money for something else.

• The monetary value of the utility loss is called opportunity costs

Approaches to Costing

• Approaches to costing fall into two broad types:

– macro- or ‘top-down’ costing

– micro- or ‘bottom-up’ costing

• These are distinguished largely on the basis of the level of disaggregation at which individual resources are measured and valued.

COST EVALUATION

Cost evaluation consists of two elements:

• The quantitative evaluation of the resources

• and the attribution of costs per unit (Lauterbach et al., 2006& Drummond et al.,2005)

Quantitative evaluation of resources

• The quantitative evaluation of resources can for example be carried out on the basis of study records (in the case of analyses within the framework of clinical studies).

• Also data systems (e.g. in hospitals) or the case histories of patients can serve as a basis for this evaluation.

• Resources that were expended in the domestic context can be established by means of questionnaires or in the form of expenditure diaries.

Attribution of costs

• The attribution of costs /market prices is possible for many resources (price per appointment with the doctor, price per x-ray image, price per medication,…).

• In this context it could be argued that the actual cost of a resource corresponds to the opportunity costs but the attribution of existing market prices should be chosen as practical approach.

• It covers attribution of market prices

Sources of Data for Costs

1-Administrative −Within a hospital or other provider 2-Claims −From an enrollee or an insurer 3-Survey −Ask individuals about quantity of services used or amount of

money spent 4-Micro-costing studies −Gather very detailed information about specific resources used

during an intervention