Lecture Slide 8

Economic Evaluation
 Economic Evaluation
• Involves application of techniques of economic
appraisal to interventions that affect human
health.

• This field has grown rapidly of late within both

public and private sector, that now funding
agencies require economic evaluation of
interventions proposed before being considered

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 Economic Evaluation…
• Recall the three fundamental problems
• Scarcity
– (what ever resources are available, they are insufficient to
support all possible activities)
• Choices
– (because resources are scarce, we must choose between
different ways of using them)
• Opportunity cost
– (by choosing to use resources in one way, we forego other
opportunities to use the same resources

• On the basis of these concepts, resources are used

efficiently if and only if the value of what is gained from
their use, exceeds the value of what is forgone by not
using them in other ways.
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 Economic Evaluation…
• Rationing Health Care
• Health care expenditures globally have been
increasing faster than GDP growth
– Expensive new technologies
– Increasingly demanding consumers
– Ageing population
• Logically, this cannot go on, because in the end we
would spend all GDP on health care

• We need to contain these health care expenditures, but

this would mean rationing care, including restricting or
refusing access to certain interventions
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 Questions that economic evaluation
attempts to answer

• Is this health procedure or program or service worth

doing, other than other procedures or things on which we
could have spent these resources?

• Are we satisfied that the health care resources should be

spent in this way, rather than in some other way?

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 Questions that economic evaluation
attempts to answer…
• Of course these questions are best answered if
economic evaluation is followed with other
evaluations that focus on
Efficacy
– Can this intervention work, or bring more good than
harm?
Effectiveness
– Does it work? It is also about acceptability
Availability
– Is it reaching those in need? Or accessible to all who
could benefit from it?
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 Why economic evaluation is important
• To systematically identify the relevant alternative
programs. Its is imperative that when new programs or
interventions come on board, we should extensively
describe existing ones, to enable identify the ‘new’ thing
that a new intervention is bringing.

• Economic evaluation helps to put into consideration

different perspectives, or otherwise called the view point.
It is better to understand the worthiness of any
intervention from multiple perspectives: patient, provider,
or even community. This is because, whereas the
program could look good for the funder, it may not be
worth undertaking, from the community perspective

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 Why economic evaluation is important…

• To measure uncertainty that surrounds orders of

magnitude. This is about measuring opportunity costs
and comparing them with benefits of a program. It is also
related to changes in results when economic variables
that constitute economic models may contextually
change. It becomes reasonable to establish at what point
does an intervention become sustainably cost-effective

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 What economic evaluation does

Consequences
Program A A
Choice
Consequences
.Comparator B
B

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 Different Types of Economic Evaluation
• Cost-Benefit Analysis

• Under this approach, we look at the benefits of the

program or intervention, versus the costs of that
intervention.

• It basically compared discounted incremental costs and

discounted incremental benefits.

• Benefits are defined strictly in monetary terms, so are

the costs. To analyze benefits, approaches such as WTP
to undertake a project are used.

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 Cost-Benefit Analysis…

• Costs are defined as the amount of compensation losers

are willing to accept to allow the project go on

• If the program costs exceed its benefits, then NSB is

negative and the program would not be worthwhile to
undertake

• Alternatively, if the ratio of costs to benefits is greater

than unity, then its worthwhile

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 Cost-benefit analysis…

bi ci
(t )  (t )
NSB  t 1
n

(1 r )
t 1

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 Cost-Benefit Analysis…
• If NSB is greater than zero, then it would be beneficial to
implement the program or intervention

• The good thing with CBA is that its broader. It attempts to

convert all benefits and costs into monetary values and
then makes comparison.

• Health and non-health programs can actually be

compared. Different programs do not have to have the
same outcome units

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 Cost-Benefit Analysis…

• The challenge though has been assigning money values

to particular health outcomes for example human life,
quality of life. This is difficult and unethical

• Moreover, the most commonly used method under CBA

is WTP, which intrinsically favors diseases of the influent
and ignoring the poor

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 Cost-effectiveness analysis
• With cost effectiveness analysis, costs and
effectiveness measures for an intervention are
obtained. Under this approach, outcomes are
not necessarily in monetary terms.

• Under CEA, effectiveness measures often

include life-years saved, disability days averted,
cases detected, gains in quality of life due to an
intervention, and other morbidity as well as
mortality consequences.

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 Cost-effectiveness analysis
• Because its often hard to find long term outcomes,
researchers normally used intermediate outcomes,
which eventually get linked to final outcomes. To do this,
models have been handy (Markov for example) although
many treat them with a lot of suspicion.

• Costs and effects may occur in the future and as such,

they should both be discounted. There has been big
discussion on this in literature and the matter is not
conclusive yet

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 Examples of costs
• Direct costs
– Machinery/equipment, buildings, training,
salaries/wages, consumable supplies, etc

• Indirect costs
– Time of volunteers, communities, etc

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 Examples of health benefits
• Reduced morbidity: malaria cases
reported per month
• Reduced pain
• Reduced mortality
• Increased productivity
• Quality adjusted life years (QALYs)
• Disability adjusted life years (DALYs)

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 Cost-effectiveness Analysis…
Once you have established the costs of both programs,
and the effectiveness of the same, then you construct an
incremental cost effectiveness ratio

Cost  Cost
ICER  A B

Benefit  Benefit
A B

The decision rule is to compare with

-Budget
-GDP per capita
-cost per QALY or DALY (whatever measure of health
benefit used).

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 Cost Utility analysis
• This is focused on the quality of health outcomes
generated from a health program. It is almost similar to
cost-effectiveness analysis, except that CUA measures
incremental effects in terms of QALYs gained.

• In CEA, the measures of primary effectiveness include

lives saved, life yeas gained, etc and used as a
denominator. Because these measures may differ across
programs CEA, cannot compare those programs. CUA
brings in a common denominator that allows
comparisons

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 Donor Funding
• CEA does not address issues of opportunity cost of
funding alternative interventions
• Thirdly, for programs with more than one outcome, CEA
would not accommodate them
• Thus CUA, comes in to cure these ills, by creating
methodology that would combine different outcomes into
one single measure

• Measurements are in forms of utilities/preferences,

scales/ranks, that are attached to health states.

• Different methods of measuring preferences TTO, SG,

VAS, PTO, etc [weights elicited]
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 Cost Minimization
• This is an approach that looks at what is the
minimum cost of achieving a certain outcome,
given different interventions, or approaches to
achieving that outcome.

• Under CMA, the effects of intervention and

comparator are assumed to be the same and
only the costs need to be compared

• It is about efficiency of programs. Of these many

programs, which one uses lesser costs?
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 Cost Minimization
• The challenge is the lack of clarity what ‘same’ means

• Often same effect size often implies that a trial for

example was underpowered to show no statistically
significant difference.

• ‘The absence of evidence does not imply evidence of

absence’

• Indeed CMA is rarely used

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 Stages of undertaking an economic
evaluation
1) Define the question.
2) Define the alternative interventions to be evaluated
(design)
3) List the costs and outcomes (identification)
4) Quantify and value the costs and outcomes including
adjustments (measurement)
5) Compare the costs and outcomes (analysis)
6) Qualify the findings in light of uncertainty (sensitivity)
7) Present and discuss your findings including all issues of
concern to users

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Step by Step Policy question

Approach to Research study question and design

CEA
Intervention description

Cost estimation Health impact estimation

Cost-effectiveness ratio

Assessment of impact of uncertainty

Information on
Analysis, presentation, interpretation contextual factors

Other factors
affecting the
decision Decision making process

Decision
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 Other considerations (in addition to EE)
• Technical, administrative and legal feasibility of
alternatives
• Resource availability
• Long-term sustainability
• Acceptability to different stakeholders –
community, health worker, etc
• Social, political and economic effects
• Environmental and ecological effects – DDT

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 Other considerations
• Gender effects – particularly effect of activity on
women (and children)
• Equity effects – distribution across different
socio-groups
• Possible knock-on effects – e.g. creating
demand for other services
• Development objectives outside health sector

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