Tools for health economics

Prepared by-
Mohammad Tohidul Amin
Lecturer
Department of Pharmacy
WHAT IS ECONOMICS?

• Economics is the science of scarcity. It analyses how choices are

structured and prioritized to maximize welfare within constrained
resources.
• Economics is the study of distribution of scarce resources commonly
known as goods and services across a population
• The discipline of economics deals with use of scarce resources to
satisfy human wants and needs how best to use the resources
available.
WHAT IS HEALTH?
• According to World Health Organization's (WHO) constitution health
is 'a state of complete physical, mental and social well being and not
merely the absence of disease or infirmity‘.
HEALTH ECONOMICS
• Health economics is the study of how scarce resources are allocated among
alternative uses for the care of sickness and the promotion, maintenance
and improvement of health, including the study of how health care and
health-related services, their costs and benefits, and health itself are
distributed among individuals and groups in society. It can, broadly, be
defined as 'the application of the theories, concepts and techniques of
economics to the health sector'.
• It is the allocation of resources within the health system in the economy, as
well as functioning of health care market.
• Health economics is concerned with the formal analysis of costs, benefits,
management, and consequences of health and health care. It is the branch
of economics concerned with the application of economic theory to
phenomena and problems associated with health and health care.
Health Microeconomics

• Health microeconomics is concerned with how individuals choose,

minimize costs or maximize profit or utilities within a given health
care system within a set of rules and prices.
Components of health economics
• Meaning and scope of health economics
• Determinants of health
• Demand for health and health care
• Supply of health care
• Health care markets
• The relationship between economic growth and health
• Health sector budgeting and planning
• National health systems
• Equity in health outcomes and in health care
• International health.
FEATURES OF HEALTH ECONOMICS
• Health and medical care is considered as economic goods
• Health is a private or a public good
• Measurement of health is also considered in economics
• Stock of health
• Investment aspects of health
• Loss due to ill health
• Resource costs of different diseases, effects of health and medical care
provision
• Planning of health and medical care
• Choice of technology in health care system, etc.
• Provision of equity in health outcomes and health care;
AREAS OF HEALTH ECONOMICS
• Economic aspects of relationship between health status and
productivity
• Financial aspects of health care services
• Economic decision making in health and medical care institutions
• Planning of health development and such other related aspects
IMPORTANCE OF HEALTH ECONOMICS
• To formulate health services
• To establish the true costs of delivering health care or to estimate all
real costs like the use of patients' time, loss of output elsewhere in
the system etc.
• To estimate the effects of certain economic variables like user
charges, time and distance costs of accessibility, etc on the utilization
of health services.
• To evaluate the relative costs and benefits of particular policy options
IMPORTANCE OF HEALTH ECONOMICS
• Some health policy issue and their relevancy in economics are described
here
• Health and economic development: To identify and measure health and
diseases, basic needs. To identify determinants of growth and economic
development, elements of health expenditure by use of macro economics.
• Organization and economic development: To determine the economic
characteristics of health care and Health related activities.
• Finance aspects of health sector: To find out the source of health care
financing; social accounting system, self financing insurance etc.
• Demand analysis: To analyze the determinants of demand, individual and
supplier induced behavior, time, cost ,health payment system etc
IMPORTANCE OF HEALTH ECONOMICS
• Supply analysis: To determine the physical resources and costs,
estimation of short term And long term cost curve.
• Health man power: To determine the labour market and demand for
& supply of health workers, remuneration and other determinants of
behavior ,productivity etc.
• Financial management: Budgeting system and accounting ,inventory
managment
ECONOMIC EVALUATION
• Economic evaluation is the comparative analysis of alternative
courses of action in terms of both their costs and consequences in
order to assist policy decisions.
Steps in Economic Evaluation
• Deciding Upon the Study Question
• Assessment of Costs and Health Effects
• Adjustment of timing
• Adjustment for uncertainity
• Making a decision
TYPES OF ECONOMIC EVALUATION
1. Cost-benefit Analysis (CBA)
2. Cost minimization Analysis (CMA)
3. Costeffectiveness Analysis (CEA)
4. Cost-utility Analysis (CUA)
Cost analysis
• Cost analysis is a resource tool for financial management in hospital
or department. It is an economic evaluation technique that involves
the systematic collection, categorization, and analysis of program or
intervention costs, and cost of illness.
• Cost analysis can be used as an evaluation method when
-Only one program is being assessed,
-Information about program effectiveness is not available, or the
interventions being assessed and compared are equally effective.
Objectives of Cost Analysis
• To assess the efficiency and effectiveness of function and their cost
implication.
• To improve the policy relevance and utility through assessment, planning
and avoidance of wasteful expenditure in the hospital.
• To allow researchers to achieve cost minimization for the programs under
consideration.
• To assess the efficiency of a programme
• To assess the priorities
• Accountability
• To assess equity
Framework of cost analysis
1. Identify and define the problem
2. Defining the alternatives
3. Defining the audience
4. Define the perspective
5.Define time frame
6. Determine the time frame and analytic horizon
7. Choose a format/methodology
Basic steps in cost analysis
• Define program, treatment, or technology to be analyzed
• Develop a framework for cost analysis of program
• Describe objectives of analysis
• Select type of cost analysis
• Design methodology of cost analysis
• Apply principles of cost analysis
• Describe study outcomes
• Development of cost inventory
• Preparation of cost summary
• Measurement/evaluation of resources used
• Calculate cost analysis results : total cost, average costs, and marginal costs
• Sensitivity analysis and discounting
Total cost (TC)
• The total cost of a program or an intervention is derived by adding all the
costs incurred in producing a given level of output. It includes the cost of all
the personnel, the supplies, and the equipment that were identified in the
cost inventory.
• Total cost is an important indicator of financial health. It provides specific
information regarding what a company or person spends on average. Total
cost can help you determine if you are spending too much on something
and whether or not you need to cut down on some of those costs.
• A more complex total cost formula commonly used in business is:
(Average fixed cost + Average variable cost) x Number of units = Total cost
Fixed cost & Variable cost
• Fixed cost: A cost that is constant and already set in stone, such as
the cost of leasing a warehouse or the cost of renting an apartment.

• Variable cost: The opposite of fixed cost: A cost that changes based
on how many goods the company produces or how much of a service
or additional services a person uses.
Average cost (AC)
• The average cost is the cost per unit of output (e.g., cost per patient
treated or cost per child immunized). AC is computed by dividing the
total cost by the number of participants or other relevant
intervention units. The formula is
AC = TC / Q ; Q= Units of output
Marginal cost (MC)
• The marginal cost is the resource cost associated with producing one
additional or one less unit within the same intervention/program
MC = Change in total costs/change in quantity produced Or
MC = (TC' -TC) / (Q‘- Q)
TC' = Total costs a higher output level
TC = Total costs at lower output level
Q' = Higher level of output
Q = Lower level of output
Hedonic pricing
• The hedonic method is based on the
principle that the prices that consumers
pay or receive depends on characteristics
of the person that can be objectively
measured.
• W = f (q,e,ex,a,g)
• Whereas W= the wage rate;
• q =a measure of qualification;
• e= experience;
• ex = measure of
• experience;
• a= age;
• g=gender
 Advantages: Below mentioned are some of the major

Hedonic pricing advantages of the Hedonic Pricing

• It focuses more on the consumption patterns of the
customers and has the ability to price fairly.
• It takes into account both internal and external factors that
will affect the decision making of the buyer.
• The pricing as per the hedonic pricing model may change as
per the parameters used in the analysis. some may give more • Gives more preference to the likes and dislikes of the buyer
weight to the external environment and less to the internal to buy a house.
like the interior of the house etc. • A 360-degree approach in order to price a particular product.
• Some may give lesser weight age to the external environment
and more to the internal like house structure, interior,
facilities available, etc. Disadvantages
• Hence this pricing may differ from customer to customer and • It does not take into account the information which is hidden
from one builder to another from the buyer of the house in order to inflate the price. Eg:
• It gives a strong picture of the pricing analysis by analyzing a If there is a water problem in the locality in spite of being a
large amount of data. good location it may face opposition from the buyers. Hence
by not disclosing the fact, the builder may keep the price
• It also takes into account the environmental intact of the house.
and macroeconomic factors to derive the correct price of the • It sometimes does not take into account the interest rates
goods. and other taxes that can have a massive impact on the
pricing.
• Changing government policies can be very difficult to derive a
price.
• A costlier process to execute
Averting behavior method

• The value of a small change in health status can be measured by the

amount of money a person is willing and able to spend on some
controlling or preventive device or defensive (averting) action. This
amount of money represents the person's valuation of safety against
a perceived risk.
Cost-benefit analysis
• Cost-benefit analysis is a practical way of assessing the desirability of
projects, where it is important to take a long view (looking at the
repercussion in the future as well as in the near future and a wide view in
the sense of allowing side effects of many decisions) Le. It implies the
enumeration and evaluation of all the relevant cost and benefits.
• Cost Benefit Analysis (CBA) is an economic evaluation technique that
measures all the positive (beneficial) and negative (costly) consequences of
an intervention or program in monetary terms.
• CBA is a practical approach of appraising the desirability of an intervention
involving public expenditure in terms of net social gain society.
• CBA is the use of analytical techniques involving a monetary assessment to
identify the total costs and benefits of a specific intervention.
Cost-benefit analysis
• Benefits
• Direct Benefits
• Indirect Benefits
• Intangible Benefits
Benefits (B) > Costs (C) or
Net Benefits (NB) = B -C > O.
• CBA adopts a broad societal perspective as it includes all costs and all
benefits
• CBA measures the outcomes in monetary terms.
• It assess the desirability of program/intervention
• To assess the economic efficiency
• To decide whether to implement a specific program
• To select among competing/alternative options
Principles of Cost Benefit Analysis
• The benefits are usually measured by market choices.
• The marginal benefit should be equal to the market price.
• The gross benefits of an increase in consumption are an area under the demand
curve.
• Some measurements of benefits require the valuation of human life. These
values can be used to estimate personal costs in terms of increased risk or of
reduced risk.
• The alternatives must be explicitly specified and considered in the evaluation.
• The impacts of the programmes must be defined
• The discounted present value of benefits should exceed the discounted present
value of costs.
• Compare alternative programmes in terms of the expected benefits and cost
ratio of each programme to determine which should receive priority for funding.
Procedural Steps in Cost-Benefit Analysis
• Defining the Problem
• Identifying Interventions
• Defining the Audience
• Defining the Perspective
• Defining the Time Frame and Analytic Horizon
• Defining the Discount Rate
Importance of cost benefit analysis
• Cost Benefit Analysis is used for determining priorities among various alternative
programs or interventions.
• It provides an estimate of the potential value of undertaking a course of action,
i.e. instituting a new program or intervention or revising the old one.
• It can also be used to compare health-related interventions to those in other
economic sectors.
• It enables policy makers to determine whether the value of its positive
consequences exceeds the value of societal resources required to implement the
program.
• It estimates and totals up the equivalent money value of the benefits and costs of
projects to establish whether they are worthwhile. .
• It is a powerful and relatively easy tool for deciding whether to make a change or
not.
Advantages of Cost Benefit Analysis
• It helps to allocate scarce resources to programs that maximize
societal economic benefit.
• It studies the full economic impact of all potential outcomes of an
intervention.
• It makes possible to compare different programs having different
health outcomes, or health programs to non health programs.
• lt allows analysts to examine its distributional aspects; who will
receive these benefits and who will bear the costs.
Drawbacks of Cost Benefit Analysis
• It measures costs and outcomes in monetary terms and not disease
specific
• There is difficulty in assigning monetary values to all pertinent
outcome including changes in the length or quality of human life.
• The results of CBA are only as good as the assumptions and valuations
on which they are based.
Cost-effectiveness analysis
• Cost-effectiveness analysis is an economic study design in which
consequences of different interventions are measured using a single
outcome, usually in 'natural' units (for example, lifeyears gained, deaths
avoided, heart attacks avoided or cases detected). Alternative
interventions are then compared in terms of cost per unit of effectiveness.
• Cost-effectiveness analysis as tool decision-makers can use to assess and
potentially improve the performance of their health systems. 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.
• Cost Effectiveness Analysis (CEA) is a type of economic evaluation that
examines both the costs and health outcomes of alternative intervention
strategies.
Aim of Cost Effectiveness Analysis
• To maximize the level of benefits health effects-relative to the level of
resources available.
• 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 provide general information on the relative costs and health benefits of
different alternatives
• To evaluate the interventions in terms of efficacy (cost effective ratio),
absolute health gain and affordability (absolute cost)
Drawbacks of Cost Effectivenes Analysis
• The data regarding direct costs such as doctors' or nurses' time and
supplies used; indirect costs such as a portion of administrative costs,
the cost of equipment are usually not readily available.
• It does not facilitate comparisons across different diseases when
different outcomes have been used.
• Cost-effectiveness is the only one criterion for judging whether an
intervention is effective or not.
Benefits of Cost Effectiveness Analysis
• This method is easy to understand and more readily suited to decision
making.
• It provides empirical results for the decision makers to compare the
costs and consequences associated with alternative programmes.
MEASURES FOR COST-EFFECTIVENESS
• COST EFFECTIVENESS RATIO (CER): The cost-effectiveness ratio (CER) is a statistic
used in cost-effectiveness analysis to summarise the cost-effectiveness of a
health care intervention. It is defined by the difference in cost between two
possible interventions, divided by the difference in their effect. It represents the
average incremental cost associated with 1 additional unit of the measure of
effect. The CER can be estimated as:

 Average cost-effectiveness ratio (ACER)

Marginal cost-effectiveness ratio (MCER)
Incremental Cost-Effectiveness Ratio (ICER)
• NET HEALTH BENEFITS (NHB) It is the difference between the health outcome and
cost divided by rate of substitution of money for health.
NHB = E-C/A.
ELEMENTS OF CEA
• A clear study perspective, time frame, and
• analytic horizon
• An explicitly defined study question.
• Relevant assumptions underlying the study.
• Detailed descriptions of the interventions.
• Existing evidence of the interventions' effectiveness.
• Proper identification of all relevant costs.
• A comprehensive discussion of the results.
PROCEDURAL STEPS IN COST-EFFECTIVENESS
ANALYSIS
• Defining the Problem
• Adopting a Research Strategy
• Specify Audience
• Define Perspective
• Specify the Time Frame Work
• Prepare the Analytic Horizon
• Decide the Type of Study Design
• Identify the Outcome Measures or Variable
• Search for Available Alternatives
• Identify the Types of Costs to be included in CEA
• Analysis
Cost utility Analysis (CUA)
• Utility is the value or worth of a level of health as measured by the
preferences of an individual or society. Cost-utility analysis is one
form of cost-effectiveness analysis, which allows the comparison of
different health outcomes by measuring them all in terms of a single
unit-(QALY).
• It weighs costs and. quality adjusted health outcome of each
intervention in order to take the decision for the programme to be
implemented.
Measures of CUA
• Quality of life years /QALY
• Health rating method
• Time trade-off method
• Standard gamble method
• Health index method
• Disability-adjusted life years /DALY: The World Health Organization defines
disabilityadjusted life years (DALY) as 'a health gap measure that extends
the concept of potential years of life lost due to premature death to include
equivalent years of healthy life lost by virtue of being in states of poor
health or disability'. In other words, one DALY is one lost year of healthy
life. DALY is a combined measure of years in disability and years of life lost
due to premature death (from the disability).
Quality of life years /QALY

• The quality-adjusted life

year or quality-adjusted life-
year (QALY) is a generic measure
of disease burden, including both
the quality and the quantity of life
lived. It is used in economic
evaluation to assess the value
of medical interventions. One
QALY equates to one year in
perfect health QALY scores range
from 1 (perfect health) to 0
(dead). QALYs can be used to
inform personal decisions, to
evaluate programs, and to set
priorities for future programs
Calculation of QALY
• The QALY is a measure of the value of health outcomes. It assumes that
health is a function of length of life and quality of life, and combines these
values into a single index number. To determine QALYs, one multiplies
the utility value associated with a given state of health by the years lived in
that state. A year of life lived in perfect health is worth 1 QALY (1 year of
life × 1 Utility value). A year of life lived in a state of less than perfect health
is worth less than 1 QALY; for example, 1 year of life lived in a situation with
utility 0.5 (e.g. bedridden, 1 year × 0.5 Utility) is assigned 0.5 QALYs.
Similarly, half a year lived in perfect health is equivalent to 0.5 QALYs (0.5
years × 1 Utility). Death is assigned a value of 0 QALYs, and in some
circumstances it is possible to accrue negative QALYs to reflect health states
deemed "worse than dead.
Measures of QALY
• Time-trade-off (TTO): Respondents are asked to choose between remaining in a
state of ill health for a period of time, or being restored to perfect health but
having a shorter life expectancy.
• Standard gamble (SG): Respondents are asked to choose between remaining in a
state of ill health for a period of time, or choosing a medical intervention which
has a chance of either restoring them to perfect health, or killing them.
• Visual analogue scale (VAS): Respondents are asked to rate a state of ill health on
a scale from 0 to 100, with 0 representing being dead and 100 representing
perfect health. This method has the advantage of being the easiest to ask, but is
the most subjective.
• Another way of determining the weight associated with a particular health state
is to use standard descriptive systems such as the EuroQol Group's EQ-
5D questionnaire, which categorises health states according to five dimensions:
mobility, self-care, usual activities (e.g. work, study, homework or leisure
activities), pain/discomfort and anxiety/depression.
Use of Quality of life years /QALY
• Data on medical costs are often combined with QALYs in cost-utility
analysis to estimate the cost-per-QALY associated with a health care
intervention. This parameter can be used to develop a cost-
effectiveness analysis of any treatment.
• This incremental cost-effectiveness ratio (ICER) can then be used to
allocate healthcare resources, often using a threshold approach.
• In the United Kingdom, the National Institute for Health and Care
Excellence, which advises on the use of health technologies within
the National Health Service, has since at least 2013 used "£ per QALY"
to evaluate their utility
Measure if DALY

Years of Life Lost (YLL): YLL is the

number of years of life lost due to
premature death.

Years Lived with Disability (YLD):

YLD is the number of healthy years
lost due to disability from the
condition until remission or death.
Advantage of CUA
• To measure health care costs and interventions
• To evaluate the effect of a nursing intervention on patient outcomes
when one of these outcomes is QOL
• To compare use of a nursing process management with a disease
process (hypertension) management
• To assess cost utility for both medical interventions and nursing
interventions
• To compare current practice and the change in practice need
Cost minimization analysis
Cost-minimization is a tool used in pharmacoeconomics to compare the cost per
course of treatment when alternative therapies have demonstrably equivalent
clinical effectiveness. Therapeutic equivalence (including adverse reactions,
complications and duration of therapy) must be referenced by the author
conducting the study and should have been done prior to the cost-minimization
work. Since equal efficacy and equal tolerability is already demonstrated, there is
no requirement to find a common efficacy denominator as would be the case when
conducting a cost-effectiveness study.
The author is not precluded from doing so through the use of "cost/cure" or
"cost/year of life gained". If efficacy and tolerability is demonstrated, however, then
a simple comparison of "cost/course of treatment" can suffice for the purpose of
comparing two or more therapeutically equivalent treatment alternatives. When
conducting a cost-minimization study, the author needs to measure all costs
(resource expenditures) inherent to the delivery of the therapeutic intervention
and that are relevant to the pharmacoeconomic perspective. The optimal choice is
that which can be provided for the lowest cost
Cost minimization analysis is a specific type of analysis in which the outcomes of
the two or more healthcare interventions are assumed equal. Therefore economic
evaluation is based solely on comparative costs and result is least cost alternative.
Cost consequences Analysis
• Cost consequences is a form of cost effectiveness analysis comparing
alternative interventions or programs in which the components of
incremental costs (e.g., additional therapies, hospitalization) and
consequences (e.g., health outcomes adverse effects) are computed
and listed, Without aggregating these results (e.g., into a
costeffectiveness ratio).
• Cost consequences analysis is a means to estimate whether the value
of results obtained is worth the investment. In a costconsequencesn
analysis, instead of combining the costs and effects, all the costs and
outcomes are reported separately.
Cost consequences Analysis Advantages And
Disadvantage
• Simple to use and evaluates the • There is a difficulty of comparing
entire program of care outcomes between different
• Allows decision makers to interventions in order to
impute their own values to the prioritize them.
different costs and
consequences Incorporates
several outcome measures and
easy to interpret the findings
• Used to evaluate practice
guidelines and disease state
management programs