chapter 4 Flashcards
Society making optimal use of scarce resources to help satisfy changing wants & needs.
I. Economic Efficiency
Society making optimal use of scarce resources to help satisfy changing _
wants & needs.
- The economic criterion for maximizing well-being is
to maximize the sum of the consumer and the producer surplus.
- Total Welfare =
Consumers’ Surplus + Producers’ Surplus
- It is the process of systematic identification, measurement, and valuation of the inputs and outcomes of two alternative activities, and the subsequent comparative analysis of these in order to assist policy decisions.
Economic Evaluation
heart of an economic evaluation because making choices is central to economics.
Existence of alternatives
- Health care programs take inputs (labor, capital, etc.) and transform them into WHAT
outputs
measure is called ‘costs’ and it is in monetary units.
- Input
called ‘effects’ and expressed in natural units (such as a percentage detection or completion ratio)
- Outputs
- Broader measure of effects relies on ‘utilities’ and the output unit is called
a ‘quality adjusted life year’ (the satisfaction of the time that a person has left to live).
(the satisfaction of the time that a person has left to live).
a ‘quality adjusted life year’
- Output expressed in monetary units as the costs, in which case the consequences are now called ‘WHAT’.
benefits
- Any negative effect resulting from the implementation of the project
COST
any positive effect on the organization resulting from the implementation of the project.
BENEFIT
How do we measure cost?
Step 1: Identify the category of cost
Step 2: Gather cost data
Step 3: Add up all cost
Directly related to the health care industry (the doctors, the hospitals and the patients).
- DIRECT COST
Inputs and outputs that pass outside the health care industry.
- INDIRECT COST
- The main measure of these indirect effects is via
earnings forgone or enhanced due to treatment, as the earnings reflect the value of production lost to, or gained by, the rest of society.
provides one good method for evaluating proposed public projects.
- Cost-benefit analysis (CBA)
measures the benefits and costs of projects in money terms.
- Cost-benefit analysis (CBA)
- This often requires that we place dollar values on years of life or improvements in health and well-being.
- Cost-benefit analysis (CBA)
emerged as the principal alternatives to CBA.
- Cost-effectiveness analysis (CEA) and cost-utility analysis (CUA)
- The basic idea of WHAT analysis mirrors the measurement problems that it addresses.
cost-benefit
WHAT rests on the premise that a project or policy will improve social welfare if the benefits associated with it exceed the costs.
- CBA
T OR F
- Benefits > Costs
T
- We can also rank projects according to the WHAT
benefit to cost (B/C) ratio;
T OR F
a lower B/C ratio generally indicates a project that will deliver greater social benefits for a given dollar of costs.
f higher b/c ratio
- As in standard economic theory, costs are measured as _
opportunity Costs
T OR F
The most common difference between public and private project evaluation is that public projects often have opportunity costs that have no market to serve as a guide for pricing.
T
Problems in CBA
- Much of the controversy of CBA derives from the imprecise task of placing dollar values on these difficult-to-evaluate costs and benefits.
- Public investments may have side effects that impose additional measurement difficulties.
- The costs of materials and manpower can be measured directly, and the benefits to those immunized can be estimated.
public immunization program
- The program, however, also benefits people who never get immunized by reducing the number of infected carriers, thus reducing their exposure to the disease.
- EXTERNAL BENEFIT
Steps in CBA
- Step 1: Define the objective of the intervention.
- Step 2: Define the baseline, that is, what would happen if no action is taken.
- Step 3: Define the alternative options to achieve the objective.
- Step 4: Quantify the investment costs of each option compared to the baseline.
- Step 5: Identify and quantify the positive and negative welfare effects of each alternative option compared to the baseline.
- Step 6: Value the welfare effects in monetary terms, using market prices and economic valuation methods.
- Step 7: Calculate the present value of costs and benefits occurring at different points in time using an appropriate discount rate.
- Step 8: Calculate the Net Present Value (NPV) or Benefit/Cost (B/C) ratio of each alternative option.
- Step 9: Perform a sensitivity analysis.
- Step 10: Select the most efficient intervention option
CBA STRENGTHS
Strengths
* Systematic way of thinking and analysis
* Focus on use of scarce resources
* Strong methodological basis
* Monetary measurement provides comparison
* Appeal to policy makers
CBA LIMITATIONS
- Uncertainty of all parameters used
Why CBA?
- It provides a consistent framework for deciding when interventions are desirable or not.
- To estimate the benefits, in monetary terms, of proposed policy changes in order to inform decision making.
- Estimating benefits in monetary terms allows the comparison of different types of benefits in the same units.
an economic evaluation in which consequences of different interventions are measured using a single outcome, usually in ‘natural’ units (for example, life- years gained, deaths avoided, heart attacks avoided or cases detected).
- Cost-effective analysis
- Alternative interventions are then compared in terms of cost per unit of effectiveness.
- Cost-effective analysis
- It indicates which interventions provide the highest ‘value for money’ and helps them choose the interventions and programmes which maximize health for the available resources.
CEA in healthcare
PURPOSE AND OBJECTIVES OF CEA
To compare alternative programs with a common health outcome
To assess the consequences of expanding an existing program.
To identify the most cost-effective intervention from a group of alternatives
To provide empirical justification for a program
To identify and exclude programs that is wasting resources.
To evaluate the interventions in terms of efficacy (cost effective ratio), absolute health gain and affordability (absolute cost)
Drawback of Cost-Effectiveness Analysis
o It does not facilitate comparisons across different diseases when different outcomes have been used.
- The proper comparison of costs per output in CEA is based on the
ratio of incremental costs to incremental output, as noted in equation.
CEA RATIO
C1-C0/ E1-E0
an economic evaluation in which the incremental cost of a program from a particular point of view is compared to the incremental health improvement expressed in the unit of quality adjusted life years (QALYs).
- cost-utility analysis
was developed to address the problem of conventional CEA, which did not allow decision-makers to compare the value of interventions for different health problems
- CUA
STEPS IN CUA ANALYSIS
- Step 1: Identification of 2 or more alternatives
- Step 2: Identification of Perspectives
- Step 3: Determination of Costs
- Step 4: Determination of Outcomes in Utility Terms
QALY: Quality Adjusted Life Years
DALY: Disability Adjusted Life Years
- Step 5: Calculation of cost-utility ratio
- Step 6: Decision making
QALY:
Quality Adjusted Life Years
DALY:
Disability Adjusted Life Years
able to combine the effects of health interventions on mortality and morbidity into a single index thereby providing a common currency to enable comparisons across different disease areas
QALY
- The QALY is a weighting system that assigns a value, q, ranging WHAT to represent quality of life for each year.
From 1 (perfect health) to 0 (death)
COST BENEFIT ANALYSIS
COST OF INTERVENTION?
OUTCOME?
CONCERN?
COST BENEFIT ANALYSIS
COST OF INTERVENTION: MONETARY UNITS
OUTCOME: VALUED IN CASH TERMS
CONCERN: NETCOST: BENEFIT RATIO
COST EFFECTIVENESS ANALYSIS
COST OF INTERVENTION?
OUTCOME?
CONCERN?
COST OF INTERVENTION: MONETARY UNITS
OUTCOME: QUALITATIVE NON-MONETARY UNITS
CONCERN: COST PER UNIT OF CONSEQUENCES OR COST PER YEARS OF LIFE GAINED/SAVED
COST UTILITY ANALYSIS
COST OF INTERVENTION?
OUTCOME?
CONCERN?
COST UTILITY ANALYSIS
COST OF INTERVENTION: MONETARY UNITS
OUTCOME: VALUED AS UTILITY
CONCERN: COST PER UNIT OF CONSEQUENCES OR COST PER QALY
Example: The pain and suffering that are caused by a healthcare intervention
what category of cost?
intangible
_ also addresses public choices involving either benefits or costs that are external to the market they came from
CBA
