Cost & Benefit Analysis Studies 1.Cost Identification Analysis (or Cost of Illness Studies) –What’s economic burden of the illness? 2.Cost-Minimization

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Cost & Benefit Analysis Studies

1. Cost Identification Analysis (or Cost of Illness Studies)– What’s economic burden of the illness?

2. Cost-Minimization Analysis– What’s cheapest way to ameliorate an illness?

3. Cost-Benefit Analysis– What’s optimal level of care?

4. Cost-Effectiveness (& variant Cost-Utility) Analysis– What’s cheapest way to achieve a particular

improvement in health?

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I. Cost Identification Analysis

• Cost identification studies– Measure the total cost of a given medical

condition or type of health behavior on the overall economy

• Total cost - three major components:1. Direct medical care costs

2. Direct nonmedical costs

3. Indirect costs


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Cost Identification Analysis

• Direct medical care costs– Incurred by medical care providers

• Hospitals, physicians, and nursing homes– All necessary medical tests and examinations– Administering medical care– Any follow-up treatments

• Direct nonmedical costs– All monetary costs imposed on any nonmedical care

personnel, including patients• Transportation to and from the medical care provider• Home care; specific dietary restrictions


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• Indirect costs– Time costs associated with implementation of

the treatment– Opportunity cost of the patient’s (or anyone

else’s) time that the program affects• Lost productivity (& wages) to economy


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• Behan & Cox (2011) – Total Cost of Obesity in US & Canada in 2009

• $300 Billion– $128 Billion in Medical Costs– $172 Billion in costs from excess disability and mortality

• Sobocki et al. (2006)– Cost of depression in Europe

• 118 billion euros (Direct costs = 42 billion euros)


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• Dall et al (2010)– Direct and indirect costs of diabetes in 2007

• $218billion– $153 billion direct medical costs– $65 billion indirect expenses such as lost work days and

permanent disability

• The American Heart Association– Cost of cardiovascular disease and stroke

• $448.5 billion in 2008



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II. Cost-Minimization Analysis

• Identifies which alternative treatment has the lowest cost– Is laparoscopic hysterectomy less costly than

standard surgery– Is kidney transplant less costly than dialysis for

end stage renal disease– Is repositioning and mobilization less costly

than special dressings and ointments for treating pressure ulcers in hospital (8% patients get them still)


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Cost Minimimization Analysis

• Coast et.al. (1998)– Cost of hospital in the home care in UK was

25% less than full hospital care

• Loubeau, Loubeau & Jantzen (2001– Breakeven point for kidney transplant vs.

dialysis is 39 months.

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III. Cost-Benefit Analysis

• Objective #1: Assess whether the Total Benefits of health care activity are greater than the Total Costs

• Objective #2: Assess whether the Total Benefit/Total Cost ratio for differing types of care are equal

• Objective #3: find the level of health care activity that maximizes net benefits to society


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Cost-Benefit Analysis

• Similar decision making process as finding the level of production that maximizes net profit to a business

• TNSB = TSB – TSC– TSB - total social benefit in consumption

• Money value of the satisfaction generated from consuming the god or service

– TSC - total social cost of production• Money value of all the resources used in producing

the good or service


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• TNSB from medical services

TNSB(Q) = TSB(Q) - TSC(Q)– Q – quantity of medical services

• Maximize TNSB(Q)– Choose Q at which the difference between TSB

and TSC reaches its greatest level



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FIGURE 3–1Determination of the Efficient Level of Output

The TSB curve represents the monetary value of the total social benefit generated from consuming medical care. The curve is positively sloped to reflect the added monetary benefits that come about by consuming more medical care. The curve bows downward to capture the fact that society experiences diminishing marginal benefit with regard to medical care.

Quantity of medical services (Q)

TSB

Q0

TNSB is maximized when the vertical distance between the two curves is greatest and that occurs at Q0 level of medical services.

A

The TSC curve represents the TSC of producing medical care and is upward sloping because total costs increase as more medical care is produced. The curve bows toward the vertical axis because the marginal cost of producing medical care increases as more medical care is produced.

TSC

B

Costs and benefitsof medical services

0

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• TSB - increase at a decreasing rate – Diminishing marginal benefit

• Successive incremental units of medical services generate continually lower additions to social satisfaction

– Slope: MSB(Q) = ΔTSB/ΔQ• MSB - marginal social benefit from consuming a unit

of medical services• MSB decreases with quantity since the slope of the

TSB curve declines due to diminishing marginal benefit


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• TSC - increase at an increasing rate– Increasing marginal costs of producing medical

services.– Slope: MSC(Q) = ΔTSC/ΔQ

• MSC - marginal social cost of producing a unit of medical services

• MSC increases with output as the slope of the TSC curve gets steeper due to increasing marginal cost


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• Maximize TNSB– Slope of TSB = slope of TSC– MSB(Q) = MSC(Q)

– At output level Q0 • Allocative efficiency - best quantity of medical

services


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• MSB curve - negatively sloped– Diminishing marginal benefit

• MSC curve - positively sloped – Increasing marginal costs, respectively

• Efficient amount of medical services: Q0 – Where MSB = MSC



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FIGURE 3–2Under- and Overprovision of Medical Services

Quantity of medical services (Q)Q0

Costs and benefits of medical services

If QL amount of medical care is produced, then the MSB exceeds the MSC and society would be better off if more medical services were produced. If QR amount of medical care is produced, then the MSB is less than the MSC and too much medical care is produced.

MSB

A MSC

B

C

QRQL

G

F

E

H The MSB curve stands for the marginal social benefit generated from consuming medical care and is downward sloping because of the notion of diminishing marginal benefit.

The MSC curve stands for the marginal social cost of producing medical care and is upward sloping because of increasing marginal costs.

TNSB is maximized at Q0 level of medical care where the two curves intersect. At that point, the MSB of consuming medical care equals the MSC of production.

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• TNSB – Area below MSB curve but above MSC curve

• Sum of net marginal social benefits

– Area ABC = maximum TNSB that society receives if resources are allocated efficiently


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• For QL < Q0 : MSB > MSC– Too few medical services are being produced– Deadweight loss: ECF

• Lost amount of net social benefits• Cost associated with an underallocation of resources

to medical services


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• For QR > Q0 : MSC > MSB– Too many medical services are being produced– Deadweight loss GCH

• Net cost to society from producing too many units of medical services and therefore too few units of all other goods and services.


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• NMSB(Q) = MSB(Q) - MSC(Q)– NMSB - net marginal social benefit the society

derives from consuming a unit of the good

• If NMSB > 0– Total net social benefit increases if an additional

unit of the good is consumed

• If NMSB < 0– Society is made worse off if an additional unit of

the good is produced and consumed



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Cost Benefit Number Example

No. of Total Marginal Decline in Total Marginal NetFlu Shots Costs Costs Illnesses Benefits Benefits Benefits

0 40K --- 0 0 01000 60K 20 1500 150K 150 90K2000 80K 20 3000 300K 150 220K3000 100K 20 3600 360K 60 260K4000 120K 20 3900 390K 30 270K5000 140K 20 4000 400K 10 260K

Note: assume each illness prevented generates $100 in extra benefits


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Steps for Cost/Benefit Analysis

• Must identify two relations– Health Production Function, i.e., how does

medical care influence health• Benefits from improvement in health must be

“monetized” to dollar benefits• More years worked, less suffering, less future health

care spending

– Medical Care Production Function, i.e., what are the costs of differing levels of care


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Practical Issues of Using Cost-Benefit Analysis

• What are the opportunity costs of medical care?

• Benefits in future must be discounted to today’s $

• Quality differences in health inputs/outputs are difficult to measure & compensate for

• How to place a dollar value on better health, e.g., value of saved life, less pain & suffering


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Human capital approach

• Many medical interventions– Extend or improve the quality of life

• Human capital approach– Value of a life = the market value of the output

produced by an individual during his or her expected lifetime

– Estimate the discounted value of future earnings resulting from an improvement in or an extension of life


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FIGURE 3–3Present value of lifetime earnings, males & females, 2000


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• Present value of lifetime earnings– Initially increases with age

• Value of lifetime earnings that accrue mainly in the middle adult years are discounted over a shorter period of time

– Peak - between the ages of 20 and 24– Then decreases with age

• Productivity and number of years devoted to work decrease

– Sensitive to the discount rate


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• Shortcomings– Unable to control for labor market imperfections

• Gender, racial, other forms of discrimination

– Doesn’t take into account• Value of any pain and suffering averted because of a

medical treatment• Value an individual receives from the pleasure of life

itself

– A chronically unemployed person• Has a zero or near-zero value of life


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Willingness-to-pay approach

• Willingness-to-pay approach– How much money people are willing to pay for

reductions in the probability of dying, injury• Labor market wage differences – how much extra do

dangerous jobs have to pay to induce workers to risk their lives?

• Consumer safety purchases – how much do people spend to avert deaths and avert injury

• Survey data – how much do people say they would pay to avoid death or injury

• Willingness to Pay Evidence– From wage differences, value of life saved = .6

mil to 16.2 mil.– From consumer purchases, value of life saved

= .07 mil. to 4 mil. (smoke detector spending, auto safety devices)

– From surveys, value of life saved = 1 mil to 15.6 mil.

• Although wide range, upper bound is around $16 million or so per life saved

Value of Saved LifeBasis ($1000s)

Desire for prompt coronary care 66Auto air bag purchases 360

Smoke detector purchases 370EPA sulfur scrubbers 500

Seat belt use 540Law enforcement 850

EPA water radium regs 2500Dangerous factory wages 3200

OSHA safety rules 3500Premium tire purchases 3600

Airline safety rules 11800


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Willingness-to-pay approach

• πˣ V = C • V = C / π

– Value of the human life lower-bound estimate

• Advantage– Measures the total value of life and not just the

job market value


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Should College Students Be Vaccinated?

• Meningococcal disease• Jackson et al. (1995)

– Cost-benefit analysis – policy to vaccinate all college students

– Benefits - from a decrease in the number of cases of meningococcal disease

– Cost of implementing a vaccination program for all college students


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• Costs– Cost of the vaccine ($30) multiplied by the

number of doses needed• 2.3 million freshmen• 80% receive the vaccine

– Estimated cost of any side effects• One severe reaction per 100,000 students

vaccinated ($1,830 per case)

– $56.2 million a year


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• Benefits include– Medical costs diverted

• Treatment costs per case = $8,145• Costs for cases occurring in the 2nd, 3rd, and 4th

years of college - discounted at 4%• $3.1 million at 15 times the baseline rate

– Estimated value of lives saved • Human capital approach - value of lost earnings• Each life saved =$1 million

TABLE 3–1Estimated Benefits and Costs for the Vaccination of College Students against Meningococcal Disease (in millions of $)

Incidence would double w/o vaccine

Incidence would be 15X w/o vaccine

Cost of the Vaccination Program Total Benefits Direct Medical Benefits Indirect Benefits—Value of Lives Saved Net Benefits—(Benefits – Cost)

$56.2 9.3 0.5 8.8

-46.9

$56.263.83.160.7

7.6


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• Estimated costs, baseline times 2– Outweigh the benefits by more than $46 million

• Net benefits, baseline times 15– $7.6 million.

• Estimated possible rate: 2.6 times– Costs outweigh the benefits


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Should school kids (5-18) be vaccinated for flu?(Jordana. S. et al. 2008)

• Costs per household = $36– Acquisition, Administration and Adverse events

• Benefits per household = $208– Direct – outpatient, hospitalization, Rx, OTC $105– Indirect – productivity loss, time costs due to illness

$103

• Net Benefits per household = $172• Benefits/Costs per household = $208/36 = 5.8


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Costs and Benefits of New Medical Technologies

• Advances in medical technology– Driving force behind rising medical costs– Profound effect on health and well-being of

millions of people• Overall mortality & disability rates in the United

States have fallen consistently since World War II.


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• Impact of medical technology on health– Total product curve for medical care

• Relationship between health and amount of medical care consumed

– New medical technology - improves health • Total product curve - rotates upward• Each unit of medical care consumed now has a

greater impact on overall health


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• Cutler and McClellan (2001)– Benefits outweigh the costs– Heart attack

• 1984 – 1998: increase life expectancy by 1 year• Net benefit: $60.000; Payoff 7 to 1

– Low-birthweight infants• Net benefits = $200,000 per infant; Payoff 6 to 1

– Depression– Cataracts– Breast cancer


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Cost-Effectiveness Analysis

• Cost-effectiveness analysis CEA– Health care benefits are often long-term and

intangible, making them difficult to monetize.– CEA doesn’t try to monetize benefits– Typically it shows the marginal cost of

producing a life year saved or the marginal cost of averting a death for differing treatments

– Basically a Marginal Cost/Marginal Benefit calculation


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Cost Effectiveness Study Findings

• Medicaid mandate (1990) that all states provide prenatal care to <133% poverty women– insured increased from 12% (1979) to 43%

(1992)– Medicaid cost/client increased $224– Infant mortality decreased from 11.5 to 8.5%– Marginal cost per life save = $840K– Pretty cheap

• Joyce et al explain 75% decrease in neonatal mortality (1950 – 1996) as due to – Increased teen family planning (.6 lives per

1000 participants)– Increased neonatal ICUs (2.8 lives per 1000

participants)– Increased prenatal care (4.5 lives per 1000

participants)– Cost for each 1000 extra participants are 122K,

13.6 mil. and 176K– MC/MB (cost per life saved) are 203K, 4.8 mil.

and 39K, respectively. Prenatal care cheapest!

• Other estimates– Annual Spiral CT scanning costs 116K per life

year saved for heavy smokers & 2.3 mil. For ex-smokers (vs. traditional chest x-rays)

– Simvastatin to person diagnosed with heart disease costs 5-10K per LYS

– Cost effectiveness of annual breast cancer screening (mammogram)

• Age 50-69, cost per year of life saved = $21,400• Age 40-49, incremental cost-effectiveness ratio =

$105,000 per life-year saved


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Cost-Utility Analysis (CUA)

• Critics of CEA: life-years are not always the same for differing treatments– Some care leads to many life-years but poor

quality of life– Other care leads to few life-years but greatly

enhanced quality of life– Cost-utility analysis (CUA) estimates the benefit

side in terms of life-years saved adjusted for quality of well-being

– 1 = perfect health and 0 = death

• Calculates the marginal cost per quality adjusted life year (or life saved)– Calculated rank for all medical services– MCQALYS = Marginal Cost/Marginal

Benefit/QWB where Benefit is LYS after treatment and QWB ranges from 0 to 1

– E.G. Jogging from 30-60 prevents 78.1 coronary heart disease events and produces 1138 QALYS (adjusted by QWB = .8) yielding MCQALYS of $11300

– Treating mild angina = MCQALYS of $40K– Treating hypertension = MCQALYS of $25-65K

• Calculates the marginal cost per quality adjusted life year (or life saved)– Calculated rank for all medical services– MCQALYS = Marginal Cost/Marginal

Benefit/QWB where Benefit is LYS after treatment and QWB ranges from 0 to 1

– E.G. Jogging from 30-60 prevents 78.1 coronary heart disease events and produces 1138 QALYS (adjusted by QWB = .8) yielding MCQALYS of $11300

– Treating mild angina = MCQALYS of $40K– Treating hypertension = MCQALYS of $25-65K


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Cost-Utility Analysis

• Neumann et al. (2000) – Effectiveness of prescription drugs

• Mean ratio of $11,000 per quality-adjusted life-year

– Immunization - $2,000 per QALY– Medical procedures - $140,000 per QALY.– Surgery - $10,000 per QALY – Screening at $12,000 per QALY

• Stone et al. (2000)– Effectiveness of clinical preventive services

• Median cost utility ratio = $14,000 per QALY


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Cost-Utility Analysis

• Digital vs. film mammography– Digital - superior in its ability to detect cancer for

certain subpopulations• Far more expensive

– Tosteson et al. (2008)• Replacement of all-film mammography screening with

all-digital = cost $331,000 per QALY gained• Targeted-digital mammography screening

– Women 50 and younger - $26,500 per QALY– Women 50 and younger plus women older than 50 with

dense breasts - $84,500 per QALY


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TABLE 3–2An Example of Cost Effectiveness and Cost-Utility Analysis

Treatment option

Cost Life-years gained

Health-utility index

QALY

Current procedure

New procedure

$20,000

$110,000

2 years

8 years

0.7

0.4

1.4

3.2


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Autologous Blood Donations Are They Cost Effective?

• Autologous blood donation– Donor and recipient are the same person

• Allogeneic blood donation– Donor and recipient are different people

• Autologous blood donation– Safer– More costly

• More administrative and collection expenses• Higher discarding costs


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TABLE 3–3Estimated Cost Effectiveness of Autologous Blood Donations

Total Hip Replacement

Coronary-arteryBypass grafting

AbdominalHysterectomy

TransurethralProstatectomy

Additional costper unit of autologousblood transfused

QALY per unit transfused

Cost effectiveness(row one/row two)

$68

0.00029

$235,000

$107

0.00022

$494,000

$594

0.00044

$1,358,000

$4,783

0.00020

$23,643,000

Documents

Cost & Benefit Analysis Studies 1.Cost Identification Analysis (or Cost of Illness Studies) –What’s economic burden of the illness? 2.Cost-Minimization