Schneider Institute for Health Policy Heller School Brandeis University September 2001 1 Donald S....

1Schneider Institute for Health PolicyHeller SchoolBrandeis UniversitySeptember 2001

Donald S. Shepard, Ph.D.Schneider Institute for Health Policy

Heller School, MS 035Brandeis University

Waltham, MA 02454-9110 USA

Tel: 781-736-3975 • Fax: 781-736-3965Web: http://www.sihp.brandeis.edu/shepard

E-mail: [email protected]

Module ISeptember 5, 2001 – October 22, 2001

Cost-effectiveness of health programsIn health services and other sectors

HS 422f


Practical information

• Teaching assistant: [email protected]

• Administrative assistant: Linda Purrini, Next to library in Heller

781-736-3930

[email protected]

• Cost of packet (including diskette): $6.00


Web page


Overview of topics

1. Principles

2. Measuring effectiveness

3. Applications

4. Policy uses


Comparison: depreciation and amortization

Accountant perspective Explanation

Copier machine

(illustration)Straight line depreciationInitial capital cost 500.00$ Useful life 5Annual depreciation Initial capital cost / useful life 100.00$

Economist perspective

Annual amortizationA constant amount, paid annually, which covers both the principal and

Information neededInitial capital cost 500Useful life 5

Real rate of interestRate assuming no inflation and no risk, no adminstrative cost 3%

Annual amortization =PMT(3%,5,-500) $109.18


Calculations: future value andpresent value

FV 1000R 0.03N 5PV?

PV = FV [1/(1+R)^N] 862.61 PV 5R 0.03N 5FV?

FV = PV (1+R)^N 5.80


Calculations: expected cost

Cost if event occurs 100Probability is 1%Cost x probability, FV 1FV of expected cost 1R 0.03N 5PV=B5*(1/(1+B6)^B7) 0.862609


by Donald S. Shepard, Ph.D.

Schneider Institute for Health PolicyHeller School, MS 035Brandeis University




Wednesday, Sept. 5 andMonday, Sept 10:

Principles of Cost-Effectiveness Analysis







Monday, Sept. 17Measuring effectiveness and other CEA

considerations







Monday, Sept. 24 Applications of Cost-Effectiveness Analysis







Monday, Oct. 1: Policy Uses of Cost-Effectiveness Analysis







Monday, Oct. 15: Modeling in Cost-Effectiveness Analysis







Monday, Oct. 22 : Applications of cost-effectiveness analysis to

other sectors







Wednesday, Sept. 5 andMonday, Sept 10:

Principles of Cost-Effectiveness Analysis


Key book

Gold, Marthe R. et al. Chapter 6 “Estimating Cost in Cost-Effectiveness Analysis”, Cost-Effectiveness in Health and Medicine. Oxford University Press, New York, 1996, pp.176-209.

• (Reports the findings of the 1993 U.S. Panel on Cost-Effectiveness Analysis.)


Key article - 1

• Weinstein, M.C., Siegel J.E., Gold, M.R., Kamlet, M.S., and Russell L.B. “The Recommendations of the Panel of Cost-Effectiveness Analysis in Health and Medicine.” JAMA 1996; 276:1253-1258.

(This article presents the background, issues, considerations, and final recommendations of the 1993 U.S. Panel on Cost-Effectiveness Analysis for the reference case analysis.)


Consensus Statement

Recommendations of the Panel on Cost-Effectiveness in Health and Medicine Milton C. Weinstein, PhD; Joanna E. Siegel, ScD; Martha R. Gold, MD, MPH; Mark S. Kamlet, PhD; Louise B. Russell, PhD; for the Panel on Cost-Effectiveness in Health and Medicine

Objective. To develop consensus-based recommendations for the conduct of cost-effectiveness analysis (CEA). This article, the second in a 3-part series, de scribes the basis for recommendations constituting the reference case analysis, the set of practices developed to guide CEAs that inform societal resource allocation decisions, and the content of these recommendations.

Participants: The Panel on Cost-Effectiveness in Health and Medicine, a nonfederal panel with expertise in CEA, clinical medicine, ethic, and health outcomes measurement, was convened by the US Public Health Service (PHS).

Evidence: The panel reviewed the theoretical foundations of CEA, current practices, and alterative methods used in analyses. Recommendations were developed on the basis of theory where possible, but tempered by ethical and prag- matic considerations, as well as the needs of users.

Consensus Process.-The panel developed recommendations through 2.5 years of discussions. Comments on preliminary drafts prepared by panel working groups were solicited from federal government methodologists, health agency officials, and academic methodologists.

Conclusions.-The panel's methodological recommendations address (1) components belonging in the numerator and denominator of a cost effectiveness (C/E) ratio; (2) measuring resource use in the numerator of a CIE ratio; (3) valuing health consequences in the denominator of a CIE ratio; (4) estimating effectiveness of interventions; (5) incorporating time preference and discounting; and (ti) handling uncertainty. Recommendations are subject to the "rule of reason," balancing the burden engendered by a practice with its importance to a study. If researchers follow a standard set of methods in CEA, the quality and comparability of studies, and their ultimate utility, can be much improved.

JAMA 1996;276:1253-1258

From the Departments of Health Policy and Management (Dr Weinstein) and Maternal and Child Health (Dr Siegel), Harvard School of Public Hearth. Boston. Mass; Office of Disease Prevention and Health Promotion, US Public Health Service. Washington. DC (Dr Gold): Heinz School. Carnegie Melton University, Pittsburgh, Pa (Dr Kamlet); and the Institute for Health, Health Care Policy, and Aging Research. Rutgers University, New Brunswick, NJ (Dr Russell).

A complete list of the Panel on Cwt-Effectiveness in Health and Medicine membership and staff appears at the end of this article.

Corresponding author: Martha Gold, MD, MPH, Office of Disease Prevention and Health Promotion, 200 Independence Ave SW, Room 7386, Washington, DC 20201.

JAMA, October 16, 1996-Vd 276, No. 15 Cost-effectiveness in Health and Medicine-Weinstein et al1253


Cost-effectiveness ratio

• Numerator: net use of health resources

• Denominator: net improvement in QALYs


Standard reference case

• Standard set of assumptions for consistent analyses

• Comparator is the status quo

• Uses a discount rate of 3%


by DONALD S. SHEPARD, PhDMARK S. THOMPSON, PhD

Public Health Reports 94:535-544, 1979

Web: http://www.sihp.brandeis.edu/shepard/downloads

First Principles of Cost‑Effectiveness Analysis in Health


1. DEFINE THE PROGRAM2. COMPUTE NET COSTS3. COMPUTE NET HEALTH EFFECTS4. APPLY DECISION RULES5. PERFORM SENSITIVITY ANALYSIS

Steps inCost‑Effectiveness Analysis


1. DEFINE THE PROGRAM

• Develop alternative approaches to the problem

• Define precisely programs to be analyzed (who, what, where, when, and how)


• Compute gross program costs• Compute monetary savings• Discount costs and savings to present value• Compute net costs (gross costs less savings)

2. COMPUTE NET COSTS


Add• Additional years with full health• Additional years of disease• Improvement in health (no extension of

life)• Negative effects (inconveniences and

morbidity)

3. COMPUTE NET HEALTH EFFECTS(IN TERMS OF ADITIONAL YEARS

OF HEALTHY LIFE)


• Identify case based on signs of net costs and net effects

• Apply rule for appropriate case

4. APPLY DECISION RULES


• Vary uncertain parameters and recompute costs and health effects

• Examine effects on decision

5. PERFORM SENSITIVITY ANALYSIS


Compute cost‑effectiveness (CE) ratio

CE =

Net costs (in monetary terms, e.g., dollars)

Net health effects (in utility terms, e.g., DALYs or QALYs)


Example of a cost‑effectiveness (CE) ratio

(Routine vaccinations in Ecuador, National, 1985 )

CE =

US $675,000

(Net costs)

10,410 DALYs gained

(Net health effects based on 347 toddler deaths averted, at 30 DALYs per death averted)

CE = $65 per DALY gained


Decision rules in cost‑effectiveness analysis

Net effects

Net costs positive Net costs zero or negative

Positive Case 1: Compute cost effectiveness ratio; select most cost-effective programs for improving health (lowest ratios)

Case 2: Program economically valuable. Should generally be implemented

Zero or negative

Case 3. Program benefits offset by morbidity and inconvenience. Program should generally not be implemented

Case 4: Compute cost effectiveness ratio; select most cost-effective programs for reducing costs (highest ratios)


Conceptual uses of cost-effectiveness analysis

• Objective: Develop more cost-effective programs

• Start with an existing or proposed program• Identify potential modifications that improve

effectiveness (e.g., more powerful intervention, improved patient adherence)

• Identify potential modifications that reduce costs (e.g., offer intervention only to selected clients, deliver faster, use lower cost personnel)


Conclusions

• Cost-effectiveness analysis can be a useful tool in allocating resources

• Quantitative application requires data about program effectiveness compared to the absence of program

• Conceptual uses are very powerful tools to plan alternative design


Cost analysis

• Introduce cost exercise


“Refrigerator Costing” Exercise

A health center needs to have an operating refrigerator to maintain the potency of vaccines . The table below shows the resource requirements for four type of refrigerators based on subjective estimates and an study for 100 centers in Uganda. The capital costs include the initial inventory of spares and repair requirement. Solar refrigerators and equipment have a 10-year useful life. Other types have a 5-year useful life. Quantities for operation are annual. Use a real interest rate of 3 percent per year. Complete the table (all the yellow cells) with data and computations.


“Refrigerator Costing” Exercise

Electricity Solar Kerosene GasI- PersonnelHours 50 60 100 70Unit Cost ($) 0.50 0.50 0.50 0.50Total Costs ($)II- RepairsExpert (number) 0 1 0 1Unit Cost ($) 80.00 80.00 80.00 80.00Local (number) 1 0 2 0Unit Cost ($) 20.00 20.00 20.00 20.00Total Costs ($)III-Source of EnergyUnit of measurement kwh liters kgQuantity 500 200 165Unit Cost ($) 0.20 0.50 0.90 Total Costs ($)IV- Capital CostRefrigerator cost($) 600.00 5200.00 900.00 800.00Useful life (years)Discount Rate (%)Annualized Cost($)

Grand Total

(Go to sheet 2)

A health center needs to have an operating refrigerator to maintain the potency of vaccines . The table below shows the resource requirements for four type of refrigerators based on subjective estimates and an study for 100 centers in Uganda. The capital costs include the initial inventory of spares and repair requirement. Solar refrigerators and equipment have a 10-year useful life. Other types have a 5-year useful life. Quantities for operation are annual. Use a real interest rate of 3 percent per year. Complete the table (all the yellow cells) with data and computations.

REFRIGERATOR OPTIONS: ANNUAL COSTS Professor Donald Shepard. Rev 11/00

Schneider Institute for Health Policy Heller School Brandeis University September 2001 1 Donald S....

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