Economic evaluation in health care and Pharmacoeconomics

How to provide services efficiently?◦ Maximum output at a given cost, or◦ Minimum cost to get a given output

How to maximize the benefits or effectiveness from services with a limited resource base?◦ Which investments will address the most pressing

health problems and bring the greatest health gains?

◦ In other words, how to get the most value for money?

Two important questions for health managers

Economics offers a set of tools to answer the questions

Economic Evaluation

Cost minimization

Cost-Benefit Analysis

(CBA)

Cost-Effectiveness

Analysis(CEA)

Cost-Utility Analysis

(CUA)

Let us focus on the second question

More specifically on cost-effectiveness analysis

The idea is simple

Costs more

Less Effect More Effect

Costs less

Most desirable

Least desirable

In simple terms it is a ratio of two information

Cost Effectiveness = What you pay What you get

Differences

Cost

Effect

CBA

CEA

CUA

Measured in

term

s of m

oney

Measured in terms of health outcomes, e.g., averted deaths

Measured in terms of some utility index, such as DALY

Types of Economic Evaluation

Type of Analysis ResultResultConsequencesCosts

Cost Minimisation

Cost BenefitCost 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.Least cost

alternative.Identical in all

respects.

MoneyMoney

Money

Money

Cost per unit of consequence eg. cost per death

averted.

Cost per unit of consequence eg. cost per death

averted.

Cost per unit of consequence eg.

cost per DALY.

Cost per unit of consequence eg.

cost per DALY.

As for CUA but valued in money. eg willingness-

to-pay

As for CUA but valued in money. eg willingness-

to-pay

Net $ cost: benefit

ratio.

Net $ cost: benefit

ratio.

CEA

Public health

Program evaluation

Hospital procedure + drug agents

Pharmacoeconomics

Where CEA is used?

How “costly” the program / approach is?

How much “ net effect” the program / approach could generate?

What is the cost per unit of “effect”?

Is this cost per unit of effect less than other comparable programs / approaches?

Cost-effectiveness analysis: Questions it answers

Step 1: Define the program in terms of possible “interventions”

Step 2: Calculate “incremental” cost for each intervention (money value)

Step 3: Calculate “net” effects of each intervention (in terms of

health outcome)

Step 4: Divide (2) by (3) for each intervention. These are CE ratios.

Step 5: The intervention with minimum CE ratio is the most cost-effective one.

Steps to conduct CEA

Each program can be defined in terms of a “Goal” and a few alternative “interventions” to reach the goal.

For example, take a Malaria control program. The goal is:

Reduce Malaria deaths among target beneficiaries

The “possible” interventions are: Spray insecticides, or Clean environment, or Promote bed nets, or All of the above

Step 1: Define the program

Step 1 Classify costs into recurrent and non-recurrent (or, development) for each intervention. Only incremental costs.

Step 2 Annualize the development cost by dividing by the expected lifespan of the input.

Step 3 Add annualized development cost to recurrent cost and beneficiaries’ cost (if available) for each intervention.

Step 4 Subtract ‘negative’ costs (or, cost savings)

Step 2: Calculate the cost

Recurrent cost: Costs incurred on the same item more than once in a year.

For example, salary, rent, supplies, medicines, maintenance, etc.

Non-recurrent cost: Costs incurred not more than once in a year

For example, purchase of equipment, vehicle, building, etc.

Explanations of the terms

Annualization of non-recurrent cost:

Suppose you buy a vehicle for the programme at the price $5000.

The expected life span of the vehicle = 10 years

Then the annual cost = $5000 ÷ 10 = $500

Add $500 (not $5000) as the non-recurrent cost for one year.

Explanations of the terms

Beneficiaries’ cost:This is the amount of money the beneficiaries (or,

users) spent out of their own pockets for getting benefits of the intervention

For example, travel cost, drugs purchased, etc.

Explanations of the terms

Example: Malaria Control Program

Expenditure in ‘00 dollars

Interventions Development cost

(annualized)

Recurrent cost

Total project cost

Total beneficiaries

cost

Total cost

Insecticide 3.58 99.01 102.59 646.21 748.80 Clean environ 9.48 251.65 261.13 734.09 995.22 Bed net 20.89 225 245.89 721.10 966.99 All components 35.99 238.43 274.42 806.04 1080.46

Step 3: Calculate the “effect”

Measurement of Effects

Measure effectiveness not efficacy◦ Efficacy = measure of effect under ideal conditions (can it work?)◦ Effectiveness = effect under ‘real life’ conditions (does it work?)◦ Efficacy does not imply effectiveness

Measure (count) in natural physical units◦ Number of lives/life years saved / deaths averted

◦ Change in cholesterol levels

Measure final not intermediate outcomes◦ Intermediate outcomes reflect change in clinical indicators◦ Final outcomes reflect change in health status

Step 1 Calculate the number of deaths “before” or “without” intervention for each type of interventions.

Step 2 Calculate the number of deaths “after” or “with” intervention for each type of interventions

Step 3 Subtract (2) from (1). This is the net gain or “effect” of the intervention.

Step 3: Calculate the “effect”

Deaths without (before) intervention: How many people died or expected to before intervention.

This can be calculated from the pre-intervention or baseline mortality rate. This information is available from baseline survey data.

Deaths with (after) intervention: How many people are still dying after the intervention.

This can be calculated from end-line survey. Alternatively, it can be estimated on various assumptions

Explanations of the terms

Item Without intervention (Base)

With intervention

(1) Covered population

10000 5000

(2) Number of deaths

30 10

(3) Mortality rate (per 1000)

3 2

(4) Difference in rate

1

(5) Deaths averted [(4) × (1) ] ÷ 1000 = 5 deaths

Example for intervention “bed net”

Step 1 Divide the “effect” for each intervention by its cost.

Step 2 Find the intervention with minimum CE ratio.

Step 4 & 5: Calculate the “CE ratio”

Intervention 1

Intervention 2

Intervention 3

Intervention 4

Total cost 748 995 967 1080

Deaths averted 4 12 5 6

Costs per death averted (CE ratio)

187 83 193 180

Example from Malaria Control

Example: pharmacoeconomics

Program 1 Program 2

A Target population 10000 100

B Number reached 1000 50

C Coverage (B/A X 100) 10% 50%

D Impact (unit effects) 100 40

E Effectiveness (D/A X 100) 1% 40%

F Drug program cost ($) 10,000 200

G Efficiency (F/B) $10 / person $ 4 / person

H Cost-effectiveness (F/D) $100 / unit $5 / unit

Two drug programs

Example 2

Alternative dosage of lovastatin in secondary prevention of heart disease (Goldman et al 1991, JAMA 265: 1145-51)

Ages 65-74Daily dose

Cost ($bn)

Life years Cost/Life year

20 mg. 3.615 348,272 10,400

40 mg. 7.051 477,204 14,800

Example 3: Clinical Trial Results

Variable Spironolactone Eplerenone

Relative risk of death due to heart failure

75.2% 86.2%

Per patient cost of drug (36

months)$50.28 $1,230.00

Cost of drug per death prevented

$440.00 $53,000.00

Pitt B et al. The New England Journal Medicine 1999;341(10):709-717

Pitt B et al. The New England Journal Medicine 2003;348(14):1309-1321

It helps set health priorities by comparing various health interventions on economic grounds

It helps the managers use scarce resources in a more efficient way

However, it reflects only the economic aspects of an intervention. For final selection of an intervention, other aspects need to be considered

How to use the information for programme management?

Problem # 1 Program’s goal is not “to reduce deaths”, but “to reduce death + suffering”?

Solution: In this case, “effect” of intervention also includes reduction of

morbidity rate. But how will you add reduction in mortality and reduction in morbidity (they are different!)?

The solution is to translate the project’s “output” into some outcome index, such as Disability Adjusted Life Years or DALY. That is:

Number of deaths averted = X number of DALYNumber of disability-free years created = Y number of DALYSo, total effect = X + Y

Problems: how do you handle the situation if………

Problem # 2 So far the discussion is based on the assumption that the program is for less than or equal to one year. What if it spreads over multiple years?

Solution: In this case, we have to apply “discounting” process.

That is, both costs and “effects” need to be discounted to present value.

Problems: how do you handle the situation if………

An example (where both the problems

are solved)

Blindness Control Program

Step 1

Calculate discounted cost

Example: Blindness control project, India

Total discounted project costs (in Million Rs.)

Year Developmentcost

(annualized)

Recurrentcost

Total projectcost

Totalbeneficiaries

cost

Total cost Discountfactor @ 3%

Presentvalue (at1994-95)

1994-95 3.58 99.01 102.59 646.21 748.80 0.971 726.991995-96 9.48 251.65 261.13 734.09 995.22 0.943 938.091996-97 20.89 225 245.89 721.10 966.99 0.915 884.931997-98 35.99 238.43 274.42 806.04 1080.46 0.888 959.971998-99 44.12 280.63 324.75 766.68 1091.43 0.863 941.481999-00 60.80 297.41 358.21 685.20 1043.41 0.837 873.842000-01 76.71 353.9 430.61 712.79 1143.40 0.813 929.692001-02 80.56 311.32 391.88 692.76 1084.64 0.789 856.22Total 332.13 2057.35 2389.71 5764.87 8154.58 7111.22

Step 2: EffectsStep 1 Calculate the “output” of the project per year (e.g.

treated cataract cases).

Step 2 Translate “output” into Disability Adjusted Life Year (DALY) on the basis of utility values. Multiply with average life expectancy after intervention. This is DALY with intervention.

Step 3 Translate “no output” into DALY. Multiply with average life expectancy without intervention. This is DALY without intervention.

Step 4 Discount both DALYs and subtract Step 3 from Step 2.

Utility values It is a state of health indicated in 0 - 1

range, where 0 = death, 1 = perfect health.

Thus utility value closer to zero implies more severity (as perceived by the patient) than the same closer to 1.

ExampleHealthyLife with menopausal symptomWatery diarrhea, severe anemia InfertilityPhysical limitation with some painDeaf, dumb, or, blindDead

10.990.900.800.670.39

0

DALY Multiply the output (number of patients treated)

with respective utility values (i.e., utility without problem). This will be DALY with intervention.

Multiply the same number assuming that no intervention is done with respective utility values (i.e. utility with problem). This will be DALY without intervention.

Calculating net effect Discount DALY (1) with intervention

and (2) without intervention at the same rate (3% or 5%).

Subtract (2) from (1). This is net effect of the project.

Example: Calculating and

discounting DALYs

Calculation of accumulated Disability Adjusted Life Year (DALYS):

With Intervention (3% discount rate)

Year Accumulated DALYs Discount factorDiscounted

value1 689540.337 0.970873786 669456.63792 1472858.235 0.942595909 1388310.1473 2242312.335 0.915141659 2052033.4314 3102397.902 0.888487048 2756440.3535 3920483.349 0.862608784 3381843.3766 4651633.872 0.837484257 3895670.1367 5412220.497 0.813091511 4400630.5448 6151433.571 0.789409234 4855998.4659 6151433.571 0.766416732 4714561.617

10 6151433.571 0.744093915 4577244.28811 6151433.571 0.722421277 4443926.49312 6151433.571 0.70137988 4314491.74113 6151433.571 0.68095134 4188826.93314 6151433.571 0.661117806 4066822.26515 6151433.571 0.641861947 3948371.13116 5461893.234 0.623166939 3403671.28917 4678575.336 0.605016446 2830615.02118 3909121.236 0.587394608 2296196.73519 3049035.669 0.570286027 1738822.43720 2230950.222 0.553675754 1235223.04721 1499799.699 0.537549276 806216.242222 739213.074 0.521892501 385789.7599

Total 66351162.09

Eaxmple (contd.)

Without intervention (3% discount rate)

Year Accumulated DALYs Discount factorDiscounted

value1 343449.21 0.970873786 333445.8352 733607.55 0.942595909 691495.47553 1116860.55 0.915141659 1022085.6174 1545255.66 0.888487048 1372939.645 1952731.17 0.862608784 1684443.0616 2316905.76 0.837484257 1940372.0987 2695742.01 0.813091511 2191884.9458 3063932.43 0.789409234 2418696.5549 3063932.43 0.766416732 2348249.081

10 3063932.43 0.744093915 2279853.47711 3063932.43 0.722421277 2213449.97712 3063932.43 0.70137988 2148980.56113 3063932.43 0.68095134 2086388.89414 3063932.43 0.661117806 2025620.28515 3063932.43 0.641861947 1966621.63616 2720483.22 0.623166939 1695315.20117 2330324.88 0.605016446 1409884.87718 1947071.88 0.587394608 1143699.52319 1518676.77 0.570286027 866080.141220 1111201.26 0.553675754 615245.195721 747026.67 0.537549276 401563.645522 368190.42 0.521892501 192155.8191

Total 33048471.54

Example: Calculating net effect

Discounted DALYsDiscountrate With intervention

(millions)Withoutintervention(millions)

Net DALY gain(millions)

Net DALY gainper surgery

3% 66.35 33.05 33.30 4.24

5% 54.13 26.96 27.17 3.46

Final step: Cost-effectiveness ratio Divide total discounted cost by net DALY gain

Compare it with other programs or approaches. The lower is the value the better.

Example: Cost per DALY

Scenario

Parameter Low Medium HighUnit cost (persurgery)

Rs 905 Rs. 905 Rs. 830

Net DALYgained persurgery

1.178 4.24 6.89

Cost per DALY(in Rs.)

768.25 213.44 Rs. 120.46

Cost per DALY(in $)

24 6.67 3.76

Example: Comparison with other programs

Interventions Cost per DALY ($)

Immunization against Polio plus DPTin high-mortality environment

$ 20

ARI treatment for young children inhigh mortality environment

$ 20

Immunization against Hepatitis-B $ 25 - $ 50

Primary and secondary prevention ofcardio-vascular disease

$ 150

Medical and surgical management ofcancers

$ 1000