Application of Economic Evaluation in Policymaking and Clinical Decisions

Review of Cost Studies

• The lecture transitions into discussing the application of cost studies and other economic evaluations in policymaking and clinical decisions.

• Policymakers in various departments (e.g., Public Health, Health Care Policy and Financing), and health plans use these analyses to inform decisions about covered benefits.

• Cost studies focused on identifying the costs of interventions without necessarily considering the effect.

• Example: Comparing the cost of Cipro versus penicillin for treating an illness, focusing solely on cost.

Cost-Effectiveness and Cost-Utility Analysis

• Cost-effectiveness and cost-utility analysis build upon cost analysis by adding a denominator to create an ICER (Incremental Cost-Effectiveness Ratio).

• Cost (
  $\frac{Cost}{Effect}$
  ) becomes the numerator in the ICER. The unit of effect could be natural units or QALYs (Quality-Adjusted Life Years).

Cost-Benefit Analysis

• Cost-benefit analysis compares costs and benefits, with the aim of ensuring benefits outweigh the costs. The proportion is inverted; benefits are over costs.

• Formula:

  • $\frac{Benefits}{Costs}$

  • Benefits - Costs > 0

• In cost-benefit analysis, benefits are monetized, converting natural units (e.g., QALYs) into dollar values.

• Monetizing benefits means putting a dollar value on outcomes like avoided illnesses or dental caries.

• ICER is replaced by net social benefits, emphasizing the benefit to society.

• Net Social Benefit = Benefits of Intervention - Costs of Intervention

• $NSB = B<em>i - C</em>i$

• Where:

  • $B_i$ represents intervention benefits.

  • $C_i$ represents intervention costs.

Application in Policymaking and Clinical Decisions

• When applying cost-benefit analysis in policymaking and clinical decision contexts, incremental costs and benefits are considered.

• The increase in cost and the increase in monetized benefits are compared.

• Cash flows are taken into account, with benefits measured as cash inflows and costs as cash outflows.

• These cash flows are measured over time, requiring discounting to determine the present value of benefits and costs.

Net Social Benefit Over Time

• The net social benefit involves taking the difference between benefits and costs over time, considering multiple benefits and costs.

• Formula:

  • $\sum<em>{t=0}^{n-1} \frac{B</em>t}{(1+r)^t} - \sum<em>{t=0}^{n-1} \frac{C</em>t}{(1+r)^t}$

  • Where:

    • $B_t$ represents benefits at time t.

    • $C_t$ represents costs at time t.

    • $r$ represents the discount rate.

    • $n$ represents the number of periods.

• In year one, only the amount of cost incurred in that first year is considered. After year one, everything else is summarized up at a discounted rate.

Considerations for Policymaking

• The societal perspective is typically used for policy decisions.

• The time horizon is important because longer time horizons can diminish the impact of future benefits and introduce unpredictability.

• Relevant costs should be directly associated with or influenced by the decision.

• Converting qualitative benefits into monetary values is the hard part.

Cost-Benefit Analysis in the Policy Realm

• Cost-benefit analysis is used in policymaking due to the political nature of decisions.

• It helps in making a compelling case to legislators and regulators for funding, showing the best value for taxpayer money.

• When petitioning legislators, outcomes are converted into money value, which can be difficult but necessary.

Methods for Transforming Outcomes into Money

• Three approaches:

  • Human Capital Approach

  • Stated Preferences (Willingness to Pay)

  • Revealed Preferences Approach

Revealed Preferences Approach

• Revealed preferences use actual choices to estimate benefits in dollar terms, reflecting what people actually did.

Limitations of Revealed Preferences

• Revealed preferences are primarily used to value life years gained and not other outcomes.

• It involves determining the value of a statistical life.

Value of a Statistical Life

• The value of a statistical life gained attention after the 9/11 disaster when the government created a compensation program for victims' families.

Application in Economic Evaluation

• In economic evaluation, the goal is to determine the value of saving a year of life or multiple years of life.

• Revealed preferences aim to determine value of a statistical life, referring to one person in a group, not a specific individual.

Regression Analysis

• Regression function is generated to estimate the value, with wages as a function of personal and job characteristics, and the fatality or illness risk.

• Formula:

  • $Wages = \beta<em>0 + \beta</em>1(Personal\ Characteristics) + \beta<em>2(Job\ Characteristics) + \beta</em>3(Fatality\ Risk) + \epsilon$

  • Focus is on the beta three ($\beta_3$), concentrating on fatality risk, holding other factors constant.

• By assessing how much more people get paid for changes in fatality risk, a dollar value for life is determined.