Cost Benefit Analysis

Rana Sayed Fouad, PhD

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Intended Learning
Outcomes
▫ Define and describe cost-benefit
analysis (CBA).
▫ Address the advantages and
disadvantages of CBA
▫ Discuss the methods of measuring
productivity and intangible costs
▫ Compare three types of calculation
methods used with CBA
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Cost benefit analysis

▫ Cost-benefit analysis (CBA) compares both costs and benefits in

monetary units.
▫ An advantage of this type of analysis is that many different outcomes can
be compared as long as the outcomes measures are valued in monetary
units.
▫ The disadvantage is that placing economic values on medical outcomes is
not an easy task and there is no universal agreement on one standard
method for accomplishing this.
▫ CBA ratios are expressed as benefit-to-cost ratios, where the higher the
number, the more cost-beneficial.
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Example

▫ By just looking on benefit to cost ratios, a decision maker can easily

identify interventions that cost more than their benefit.
▫ Interventions with different outcomes are easily compared using cost
benefit analysis
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Conducting a cost benefit analysis

Determine the type of Identify costs and

program or intervention benefits
to be considered.

First Third

Second Fourth

Identify alternatives Calculate benefit to

cost ratio
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Conducting a cost benefit analysis

▫ In many cases, the alternative is to “do nothing.” In other cases, the

alternative could be to implement a similar program that is smaller or
larger in scale or to implement a different program (e.g. asthma clinic vs
nothing, or asthma clinic vs asthma clinic for only patients with acute
exacerbation, or asthma clinic vs diabetes clinic.
▫ There are two categories of costs, direct medical and direct nonmedical,
and three categories of benefits, direct benefits (both medical and
nonmedical), indirect benefits (productivity), and intangible benefits.
▫ CBA can incorporate as few as one category of benefits or as many as all
three of the benefit categories.
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Components of cost benefit analysis

Because of its focus on social

welfare and policy and the
incorporation of indirect
(productivity) or intangible
benefits, economists
recommend that CBAs should
be conducted from the societal
perspective.
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Costs vs Benefits

▫ In CBA, both costs and benefits are measured in monetary values. This
can sometimes cause confusion because benefits are also “cost savings”
or “costs avoided.”
▫ For example, in the asthma program, a cost to the program could be an
increase in medical costs related to visits to the pharmacy. A “cost
saving” or benefit as a result of the program could be a reduction in
medical costs for asthma-related emergency department visits. It is
important to make the distinction between the two and to make sure
that costs and benefits are properly placed within the equation.
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Measuring indirect and intangible benefits

▫ Various methods have been developed to estimate the monetary value of

health benefits. The two most common methods seen in the
pharmacoeconomic literature are the human capital (HC) approach and
the willingness to pay (WTP) approach
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Human capital method

▫ Indirect benefits are increases in productivity or earnings because of a

program or intervention.
▫ The HC approach is the most commonly used way to measure indirect
benefits
▫ HC estimates wage and productivity losses because of illness, disability,
or death.
▫ The HC approach assumes that the value of health benefits equals the
economic productivity that they permit.
▫ There are two basic components to calculating HC: wage rate and missed
time (days or years) because of illness.
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Human capital method

▫ Because the HC approach is based on wages, it is necessary to have

some estimate of income. Income estimates can be obtained from
several sources, including: the Census Bureau; the Bureau of Labor and
Statistics; self-report; or any other data source that provides income
estimates based on gender, age, or occupation. Missed time (days or
years) because of illness can be obtained by self-report.
▫ A yearly wage rate (income per year) would be calculated for a program or
intervention that would reduce long-term disability or death e.g.
pneumococcal vaccination program
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Human capital method

▫ A daily wage rate (income per year divided by number of days worked per
year) may be calculated for a program or intervention targeted at an
acute or chronic illness with short-term disability e.g. acute asthma
exacerbations.
▫ To calculate a daily wage rate both income and number of days worked
per year must be assessed. We may assume that the average person
works 240 days a year when accounting for weekends, vacation, and sick
leave. A formula to calculate number of days worked per year is:
No of days worked per year= 365- (no of weekend days + no of vacation days
+ no of sick leave days)
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Human capital method

▫ If a yearly wage rate is calculated, then assessment of the number of

years lost because of a disease or illness must be made. If a daily wage
rate is calculated, an assessment of the number of missed days because
of illness must be calculated.
▫ Missed days because of illness can fall into four groups
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Example

▫ Assume that the population served by an asthma clinic is made up of

adults with an average income (including fringe benefits) of $40,000 and
240 days worked per year.
▫ The daily wage rate (average income/number of days worked per year)
would be $40,000/240 = $167/day.
▫ An average of 20 days a year were missed from work before participating
in the asthma clinic, and an average of 7 days a year were missed from
work after participating in the asthma clinic.
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Example

▫ Multiplying the daily wage rate times the number of missed days results
in the value of lost productivity. In other words, the value of 20 days lost
from work is $3,340, and the value of 7 days lost from work is $1,169.
▫ The difference between before and after the program is $2,171, which is
the cost savings or the indirect benefit of the program or intervention
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Human capital method

Advantages Disadvantages
• Straightforward and easy to measure • It may be biased against specific
• Income estimates can be obtained or groups of people, namely unemployed
estimated from publicly available individuals
sources, and days lost from illness can • The HC assumption that the value of
be readily obtained from the patient or health benefits equals the economic
another secondary source productivity they permit may also be
biased.
• HC does not incorporate values for
pain and suffering if these values do
not impact productivity
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Willingness to pay method

▫ The WTP method can value both the indirect and intangible aspects of a
disease or condition.
▫ The WTP method determines how much people are willing to pay to
reduce the chance of an adverse health outcome.
▫ It incorporates patient preferences and intangible benefits such as quality
of life differences.
▫ Contingent valuation (CV), in which the respondent is asked to value a
contingent or hypothetical market, is a direct method that is used to elicit
the dollar values or the WTP amounts.
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Willingness to pay method

▫ WTP values can be collected through face-to-face interviews, mail,

telephone, or via the Internet.
▫ To elicit WTP values, respondents are presented with a hypothetical
market describing the benefits of a particular health care intervention
(e.g., program, pharmaceutical, medical device). Respondents are then
asked to value the health care intervention in a dollar amount, percent of
income, or health care premium.
▫ Measuring WTP using the CV method should include two general
elements, a hypothetical scenario and a bidding vehicle.
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Willingness to pay method

▫ The hypothetical scenario should include a description of the health care

program or intervention.
▫ The intent of the scenario is to provide the respondent with an accurate
description of the good or service that he or she is being asked to value.
▫ In addition, the scenario should detail the amount of time the person
should expect to spend, as well as the benefit (e.g., percent improvement
in the condition) of the intervention.
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Willingness to pay method

After the program or intervention has been adequately described,

respondents are then asked to “bid,” or place a value on the program or
intervention. Bids can be obtained through a variety of bidding vehicles
Closed-ended questions
Open-ended question
Respondents are asked
ask respondents how
whether they will pay a
much they would be WTP
specified dollar amount for
for the program or
the program or
intervention.
intervention or not

Bidding Game Payment card

resembles an auction in provides the respondent
that several bids are with a list of possible WTP
offered to reach a person’s amounts (i.e., payment
maximum WTP. card) to choose from
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Willingness to pay method

Open ended questions are least used because results in wide range of variability in WTP.
Patients in societies where most medical costs are covered by insurance systems do not know
how to value health care programs

Closed ended questions are also called “take it or leave it” questions. Only one question is
asked, so only one WTP value can be elicited from a respondent. Thus, a very large sample
would be required to determine the overall WTP value.

Bidding method is useful to try to arrive at a person’s maximum WTP value. It is time
consuming and is best conducted via a face-to-face interview. The WTP values can be
biased depending on how high (or low) the first bid is. This is called “starting point bias.”

Payment card is very easy to use, and it provides respondents with a range of values to choose
from. Providing respondents with a range of values can bias their WTP values (range bias).
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Willingness to pay method

Advantages Disadvantages

Useful for intangible benefits It is difficult to set a value over

Embodies patient hypothetical benefit
preferences and choice Liable to bias: range bias, starting
point bias, compliance bias, and
strategic bias.
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Calculating results of cost and benefit

▫ CBA can be presented in the following three formats:

1. Net benefit calculations
2. Benefit-to-cost ratios
3. Internal rate of return (IRR).
▫ When evaluating interventions, it is important to assess the method
used.
▫ Another issue to consider when choosing a method for displaying the
results is the time horizon for the project. If retrospective data are
collected for more than 1 year or if the project inputs or outcomes are
estimated for more than 1 year into the future, it is important to adjust or
discount these costs to one point in time.
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Net benefit (or net cost) calculation

▫ The net benefit (or net cost) calculation simply presents the difference
between the total costs and benefits.
Net benefit = total benefits - total costs
Net cost = total costs - total benefits
▫ Interventions would be considered to be cost-beneficial if: Net Benefit >
0 or Net Cost < 0
▫ Sometimes economists prefer net benefit over benefit to cost ratio since
net benefit is less easily manipulated by reporting costs as negative
benefits
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Benefit-to-Cost (or Cost-to-Benefit) Ratio Calculations

▫ CBA results can also be calculated by summing up the total benefits and
dividing by the total costs.
▫ The ratio may be expressed as a benefit-to-cost ratio or a cost- to-
benefit ratio.
▫ Depending on how the ratio is calculated, interventions are cost-
beneficial if: Benefit-to-cost > 1 or Cost-to-benefit < 1
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Example

Suppose a decision maker had to choose between two proposals for

implementation. Also assume that the projects are for 1 year, so discounting
is not needed.
Proposal A: Cost = $1,000; Benefit = $2,000
Proposal B: Cost = $5,000; Benefit = $7,500

The benefit-to-cost ratio and the net benefit calculation are used most
often because the higher the result, the more cost-beneficial an option
becomes.
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Example
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Example

In this case they measured costs from societal perspective as the difference
in present value of gross domestic product (GDP) lost in a scenario without
social distancing to GDP lost with social distancing.
Total benefits (savings)= (0.287-0.188)+ (0.00218-0.000941) +(21.8-9.41) =
12.5 trillion
Total cost= 13.7- 6.49= 7.21 trillion
Net benefit= total benefit- total cost= 12.5-7.21=5.29 trillion
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Internal rate of return (IRR)

▫ The internal rate of return (IRR) is the rate of return that equates the present
value (PV) of benefits to the PV of costs
▫ The goal is to find the rate of return that would make the costs and benefits
equal.
▫ After the IRR is calculated, it is compared with a specified hurdle rate. The
decision rule for IRR is to accept all projects with an IRR greater than the hurdle
rate.
▫ If the IRR is greater than the hurdle rate, then it means that the project can yield
higher rate of return compared with some other investment (e.g. interest rates
for savings).
▫ IRR is difficult to calculate by hand. Computer programs and special functions
on calculators are available for determining IRR.
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Composite article (CBA)

Title: Willingness to pay for delay in progression of Alzheimer’s disease by

unpaid caregivers
Background: Alzheimer’s disease (AD) is a chronic neurodegenerative disorder
involving progressive loss of memory and other cognitive functions,
personality and behavioural changes, and ability to carry out usual activities.
Over time AD leads to a loss of independence and institutionalization is often
required. The cost of AD in terms of the burden on family and caregivers is
high. Over 5 million Americans have Alzheimer’s disease, treatment costs
were estimated at $200 Billion in the US in 2012, and unpaid care by relatives
and other caregivers amounts to another $210 billion (references included)
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Composite article (CBA)

Objective: This study aimed to measure the cost-benefit of a potential new

medication that slows the progression of AD, from the perspective of a
nonpaid caregiver.
Methods: In 2019, a sample of 100 staff members and 100 professors at a
local university were recruited to answer a hypothetical question about a new
(theoretical) AD medication.
The scenario included a slowing of AD progression with minor, tolerable,
adverse events from the medication. They were asked what they would be
WTP for year’s supply of this medication (assuming it was not covered by
medical insurance).
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Composite article (CBA)

Assume You Are a Caregiver to an Elderly Relative
Starting point
The patient has a diagnosis of mild Alzheimer’s disease plus behavioral and
psychological symptoms of dementia. He has problems in the following areas:
decreased knowledge of current and recent events, some deficit in memory of
his personal history (e.g., forgetting the name of a previous employer);
difficulty concentrating; decreased ability to travel, handle finances, etc. He
shows no problems in the following areas: orientation to time and place,
recognition of familiar persons and faces, and ability to travel to familiar
locations.
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Composite article (CBA)

He now requires help with complex occupational and social tasks (e.g.,
handling finances, planning dinner parties) but can still survive in the
community. When family asks him, he denies that anything is wrong. He also
shows a flat mood and withdrawal from challenging situations. He is generally
happy and interested in life.
Likely outcome after 1 year with no treatment
After 1 year, the patient has the following symptoms: The Alzheimer’s disease
has progressed and he can no longer survive without some assistance. He is
now unable to recall some major relevant aspects of his current life including
his address and telephone number, names of his grandchildren and the name
of the university he graduated from.
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Composite article (CBA)

He always knows his own name and is usually able to remember the names
of his wife and children. He still retains knowledge of many major facts
regarding himself and others. He shows some disorientation to time and to
place. He has difficulty counting back from 40 by fours or from 20 by twos. He
now requires assistance with choosing the proper clothing to wear but does
not require assistance with toileting or eating. In addition, he shows delusion
behavior (once or twice daily he accuses his spouse of being an impostor or
thinks that people are stealing things from him), pacing (he frequently walks
around the house without purpose), anxiety (several times a day he is afraid
to be left alone) and inappropriate physical aggression once or twice a week.
He is frequently up all night and must be supervised carefully.
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Composite article (CBA)

Likely outcome after 1 year with treatment
The patient is currently receiving treatment for these symptoms. His drug
therapy involves taking one tablet once per day. He saw the prescribing
physician every 2 weeks for a month and then monthly for 3 months, and
now he sees him/ her only every 3 months. After taking this medication daily
for 1 year, he continues to show problems in the same areas, but the
problems have not progressed. He showed an initial improvement and now, 1
year later, is back where he started.
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Composite article (CBA)

Adverse effects
In addition, the medication makes him feel queasy, unsteady on his feet and
dizzy. These symptoms make him uncomfortable but he has been tolerating
them.
Putting yourself in the place of the patient’s caregiver, what is the total
amount you would be willing to pay for this treatment for 1 year, taking into
consideration these adverse effects, to avoid his progressing to the more
severe stage?
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Composite article (CBA)

Results: The mean yearly WTP for this scenario was $5,000 (95% CI 3,000 to
10,000) for staff and $9,000 (95% CI 4,000 to $20,000) for professors. If the
cost for a new medication that met this profile was less than $5,000 per year,
the majority of caregivers would find it of value
Limitations: The sample of respondents was recruited from one location, and
may not be representative of the general population. In addition, current
caregivers might give different WTP estimates based on their experiences in
coping with an AD patient.
Conclusions: Unpaid caregivers would be willing to pay a significant amount
out of pocket to delay the progression of AD.
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Composite article (CBA)

1. Complete Title: Did not use the term cost-benefit analysis, but instead
WTP. Did not specify a treatment (since it was hypothetical). It did specify
that the responses were elicited from unpaid caregivers.
2. Clear Objective: “This study aimed to measure the cost-benefit of a
potential new medication that slows the progression of AD, from the
perspective of a nonpaid caregiver. This was clear.
3. Appropriate Alternatives: This was an example of a “with-or-without”
study. The scenario described the progression if the AD patient was not
treated versus if they were treated with the new medication.
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Composite article (CBA)

4. Alternatives Described: Since the medication is theoretical, it was only

described as a once a day dose taken orally.
5. Perspective Stated: The perspective of the study was stated as the unpaid
caregiver for a patient with AD. In the scenario presented, both costs and
benefits of delayed progression would impact the caregiver.
6. Type of Study: The study could be categorized as a CBA because outcomes
were valued in dollars using a willingness-to-pay technique.
7. Relevant Costs: The only input costs considered were the costs of the new
theoretical medication. Increased visits to get the medication, and changes in
utilization of other services were not addressed.
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Composite article (CBA)

8. Relevant Outcomes: Willingness-to-pay estimates are developed to

monetize a variety of benefits—including intangible costs/benefits (e.g.,
increase in adverse events and decrease in stress and worry of caring for a
patient with AD). To what extent the average respondent is able to
incorporate all of these outcomes into their estimate is a matter of study and
debate.
9. Adjustment or Discounting: Since respondents were asked to estimate
their WTP for only 1 year, neither adjustment nor discounting was needed.
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Composite article (CBA)

10. Reasonable Assumptions: The main assumptions included (1) the

scenario described the most important aspects of the treatment (2) such a
treatment could be developed, and (3) respondents accurately estimated the
value of this treatment.
11. Sensitivity Analyses: WTP differed by job category of respondent.
Professors indicated a higher WTP value than university staff. It has been
noted that higher income of respondents may correlate with a higher WTP
estimate. It would have been useful to recruit respondents with experience
caring for a patient with AD in order to compare their responses to those
without this experience.
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Composite article (CBA)

12. Limitations Addressed: As stated, the convenience sample chosen limits

generalization, and lack of respondents with experience may reduce validity
of estimates.
13. Generalizations Appropriate: As stated in the limitations, because
respondents were recruited from only one location, generalization may not
be appropriate.
14. Unbiased Conclusions: It depends on the strength of the WTP
methodology as to whether these conclusions are valid. More information on
how the scenario was developed, and more testing in different populations
would strengthen the findings.
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THANKS!
Any questions?