COMP102 M2
- Economic evaluation can be conducted
Importance & Meaning of
Economic Evaluation
- We do not have the ability to satisfy the desires
of all people all the time because we live in a
world of scarce resources
- Different people have different objectives. We
must make choices, and often these choices are
difficult
- Example: Beneficial projects compete for the
same resources. Investing in a new
mammography-screening program may
preclude the hospital from expanding its prenatal
care program.
- Every day we are forced to make choice among
competing alternatives.
Economic Evaluation
- It is the comparative analysis of alternative
courses of action in terms of both their costs and
consequences.
- Since it is a comparative analysis, there must be
at least 2 alternatives, or interventions, under
consideration.
- Since it examines alternatives courses of action,
we do not examine a treatment option in
isolation from all other treatment options. We
compare options that are reasonable
alternatives to treating a well-defined medical
condition.
- Since the comparisons are made in terms of
costs and consequences, the specific costs are
largely determined by the perspective taken
(individual patient, health insurance company,
government agency, etc.) and the
consequences are the benefits that acquire
primarily to individuals.
- It can answer the following questions:
o How do you really know you’re making
the most of your limited resources?
o How do you decide between two
promising program options when you
can only afford one?
o How do you demonstrate to decision-
makers that the benefits of your
program are worth the costs?
- Evaluation of an intervention, program, or
strategy’s effectiveness looks at how well it
reaches its intended goal of improved health
outcomes. In contrast, economic evaluation
helps us understand the cost factors related to
an intervention.
prospectively or retrospectively. For example,
economic evaluation can be used before
recommending broad implementation of an
effective program or strategy.
Types of Economic Evaluation
1. Cost-of-Illness Studies
- “What is the cost?”
- The quantification of the economic burden of a
specific disease provides information on the cost
structure related to that disease for a specific
population in a well-defined geographic area.
- The aim of this study is to identify and measure
all the costs of a particular disease, including the
direct, indirect and intangible dimensions. The
output (in monetary terms) is an estimate of the
total burden of a particular disease to society.
- Providers use this type of analysis to guide
medical decision making when the clinical
effectiveness of treatment options are
equivalent.
- There are 2 methods of costing illness:
o Prevalence approach – estimates the
total cost of a disease incurred in a
given year
o Incidence Approach – involves
calculating the lifetime costs of cases
first diagnosed in a particular year,
providing a baseline against which new
interventions can be evaluated.
- COI studies do not answer questions related to
the most effective options for treating disorders.
To answer questions concerning optimal
resource allocation, coat-benefit analysis or
cost-effectiveness analysis can be used.
2. Cost-Benefit Analysis
- It is the process of comparing the projected or
estimated costs and benefits associated with a
project decision to determine whether it makes
sense from a business perspective.
- It involves tallying up all costs of a project or
decision and subtracting that amount from the
total projected benefits of the project or decision.
- If the projected benefits > costs, an argument
can be made that the decision is a good one to
make. If otherwise, the company may want to
rethink the decision or project.
- If a company wants to maximize profits and
remain competitive in the marketplace, the net
gain from a project (benefits minus costs) should
also be maximized. The financial analysis of
 alternative investment projects is known as
Capital budgeting.
- Capital budgeting is not applicable for not-for-
profit environment. Hence, public sectors make
these decisions insulated from the full discipline
of the market that directs private sector
managers.
- A simple extension of capital budgeting is CBA.
CBA compared all the costs and benefits arising
from a program or project. CBA is to the public
(not-for-profit sectors) while capital budgeting is
to the private (for-profit sectors).
- Elements:
 Given Budgetary constraints, CBA is
often used to justify expenditures on
specific public sector projects.
 The ratio of benefits to costs can be
calculated, and only those projects with
a benefit-cost ratio greater than or equal
to one are accepted.
 Benefits and costs accumulate over
time. Hence, they must be adjusted for
the time value through present value
discounting.
o “A dollar today is worth more
than a dollar in the future.”
o Since most people have a
positive time preference, future
costs & benefits must be
discounted to make them
comparable with current costs &
benefits
 Suppose you invest 50,000.00 in a 12
month Certificate of Deposit (CD) with
a guaranteed 10% annual return. One
year from now, the initial investment
would be worth 55,000.00
 General Formula:
 Discontinuing is an opposite
perspective. If an individual wants to
have FVn in “n” years, then PV would
have to be invested at an interest of “r”
percent.
 General Formula:
 The same relationship may be used to
estimate the present value of a stream
of earnings, Y1, per year for “n” years.
 Assuming a constant discount rate (r)
over time, the expression can be
written as:
 To solve for the net benefits stream
(NB) over time.
 If the benefits stream is positive,
projects can be accepted.
- Valuing Benefits:
 CBA requires that all benefits and costs
be values in monetary terms.
 Placing a value on life may be unsettling
to many, but monetization of benefits is
necessary to calculate a benefit-cost
ratio
 Benefits are typically valued using the
willingness-to-pay approach. An
individual’s willingness to pay for health
improvement depends on 4 factors:
o Wealth
o Life expectancy
o Current health statues
o Possibility of substituting current
consumption for future
consumption.
- Choosing a discount rate
 The present value of net-benefits stream
inversely related to the discount rate.
o Higher discount rates place
more importance on costs and
benefits realized early in the life
of the program.
 o Costs & benefits realized far into
the future are discounted
substantially
 The typical discount rate ranges from
1.5% to 6%
- Steps in Conducting CBA
1. Define the objective of the intervention,
the baseline, and the alternative options
to achieve the object respectively
2. Quantify the investment costs of each
option compared to the baseline
3. Identify and quantify the positive and
negative welfare effects of each
alternative option compared to the
baseline
4. Value the welfare effects in monetary
terms, using market prices and
economic valuation methods.
5. Calculate the present value of costs and
benefits occurring at different points in
time using an appropriate discount rate.
6. Calculate the Net Present Value (NPV)
or Benefit/Cost (B/B) ratio of each
alternative option
7. Perform a sensitivity analysis
8. Select the most efficient intervention
option
3. Cost-Effectiveness Analysis
- It is a tool that aids in decision-making where the
costs and effectiveness of 2 alternatives are
compared
- It is a way to quantify trade-offs between
resources used and health outcomes achieved
without having to value health outcomes in
monetary terms
- “decision-makers’ approach”
- Maximizes the level of health for a given
population subject to budget constraints
- Its goal is to determine if the value of the
program or intervention justifies the cost.
- Elements:
 CEA relates the costs of 2 or more
treatment options to a single, common
consequences that differ among
options.
o Tx options may be different
treatments for the same
conditions (i.e., kidney dialysis
compared to kidney
transplantation)
 Usefulness of CEA is more limited when
the effectiveness of treatment option are
measured differently or when there are
multiple measures of effectiveness.
 Aside from using CBA (to address CEA
limitation), Cost-utility analysis can be
used. It is a special case of CEA that
addresses quality of life concerns
through the use of quality-adjusted life
years (QALYs)
- Incremental Cost Effectiveness Ratio:
 When decision makers have limited
budgets, CEA provides a systematic
method to achieve best overall health
benefit for a given population
 When the most effective treatment
option for a medical condition is also the
least expensive, the choice is easy.
Difficulty arises when the most effective
treatment option is the most expensive
 ICER provides a way to compare the
difference in costs and effectiveness of
2 treatment options using the formula:
 When CEA is used, the ff are defined:
the treatment option being studied (tx B)
and the alternative treatment option for
comparison (tx A).
o If CA > CB and EA < EB, option A
is both more costly and less
effective. Hence, treatment
option B dominates
o If CA < CB and EA > EB, option B
is more costly and less effective.
Hence, treatment option A
dominates
o In both cases, the choice is
simple. The most effective
treatment option is COST-
SAVING
o However, if CA < CB and EA <
EB, the choice is not as obvious,
and CEA is in order.
 Gain in effectiveness is plotted in the y-
axis and the net present value of the
total costs on the x-axis.
  When each treatment option is
represented by a point on the graph, it is
easy to see that the higher the point, the
more effective the treatment and the
farther to the right, the more expensive
the treatment.
 The options that form the solid line
(ABDFG) represent the economically
rational subset of tx options.
 Points that lie below the line (CE)
represent options that are dominated by
those that are on the slid line.
 As the slope of the line gets flatter, the
ICER increases, providing a clear
depiction of the theoretical construct
called the “flat of the curve”.
commonly used by local or national level
decision makers for planning purposes
especially when expenditure in one budget is
offset by savings in another.
- BIA can predict how a change in the mix of
interventions used for a condition affects the
trajectory spending on that condition.
- Uses of BIAs:
o Budget planning
o Forecasting
o Estimating impact of HT change on
health insurance premiums
o Estimating potential discal impact of
pursuing an intervention at the national
level
- Interpretation: The higher the cost, the lower
the affordability.
- 6 steps of BIA:
1. Characterize the population with the
potential to be impacted by the
intervention
2. Select the time horizon
3. Determine the current and future mix of
interventions
4. Estimate intervention costs
5. Estimate changes in disease-related
costs
6. Present results

- Steps in conducting CEA

1. Define the objective involved
2. Determine the extent to which the
objective is met
3. Identify sources of pollution and impacts
now and in the future over the
appropriate time horizon
4. Identify measures to bridge the gap
between the reference (baseline) and
target situation
5. Assess the effectiveness of these
measures in reaching the objective
6. Assess the costs of these measures.
7. Rank measures in terms of increasing
unit costs.
8. Assess the least cost way to reach the
objective
4. Budget Impact Analysis
- This helps estimate financial consequences right
after adopting a new treatment option, program,
or intervention.
- This is usually performed after performing CEA
to help inform decision makers when developing
reimbursement policies within the resource
constraints of the health care system.
- The budget impact is usually calculated using a
budget impact model (in 3-5 years). BIMs are