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Principles of Economic Evaluation (Cost-Effectiveness in Health Care)

Economic Evaluation & Decision-Making Context

  • Economic evaluations compare health interventions on both costs and consequences.

  • Need an incremental analysis: compute an Incremental Cost-Effectiveness Ratio (ICER) and combine it with a decision rule.

  • Core decision rules covered in this lecture:

    • Dominance (strong)

    • Cost-Effectiveness Thresholds (CET) applied to ICERs

    • Extended Dominance (weak)

    • QALY League Tables

    • Recognition of challenges in applying thresholds in practice

  • Goal: support resource-allocation decisions so that benefits gained exceed opportunity costs.

Worked Population Example: Public-Health Interventions

  • Interventions (population-level costs & effects)

    • Stop-smoking, Nicotine Replacement Therapy (NRT): \$200{,}000 → 40 % quit

    • Stop-smoking, Advertising: \$100{,}000 → 5 % quit

    • Stop-smoking, Intensive programme: \$900{,}000 → 50 % quit

    • Park improvements: \$400{,}000 → 50 % ↑ park use

    • Free swimming (children): \$100{,}000 → 50 % ↑ swimming

    • Vaccination: \$800{,}000 → 75 % vaccinated

    • Heating grant (elderly): \$400{,}000 → 10 % ↓ pneumonia

  • Same table recast with QALYs (illustrative):

    • NRT: 80 QALYs, Advertising: 10, Intensive: 100, Park: 4, Swimming: 2, Vaccination: 100, Heating grant: 10.

  • Demonstrates need for comparable outcome metric (e.g., QALY) when ranking very different programmes.

Typology of Economic Evaluation

  • Cost Minimisation Analysis (CMA)

    • Costs measured in ; outcomes assumed identical.

    • Rule: choose least-cost alternative.

  • Cost-Effectiveness Analysis (CEA)

    • Costs in ; consequences in natural units (e.g., life-years, mm Hg).

    • Decision metric: \text{Incremental cost per natural-unit gained}.

  • Cost-Utility Analysis (CUA)

    • Consequences valued as utilities (QALYs or DALYs).

    • Decision metric: \text{ICER = \$ per QALY (or DALY)}.

  • Cost-Benefit Analysis (CBA)

    • Both costs and benefits monetised; decision metric: net benefit or benefit-cost ratio.

Average vs Incremental Cost-Effectiveness

  • Average Cost-Effectiveness Ratio (ACER):
    \text{ACER} = \frac{\text{Cost}}{\text{Effect}}
    Example: Treatment A: \frac{3000}{0.3}=10{,}000/\text{QALY}.

  • ICER: compares two options A & B
    \text{ICER}{B-A}=\frac{CB-CA}{EB-E_A}
    Example: Move A→B: \frac{7000-3000}{0.4-0.3}=\frac{4000}{0.1}=40{,}000/\text{QALY}.

  • Graphical depiction on cost-effectiveness plane reinforces incremental nature.

Cost-Effectiveness Plane & Quadrants

  • Axes: Incremental Effect (x), Incremental Cost (y).

  • Quadrant meaning:

    • SE (−ΔCost, +ΔEffect): New dominates (cheaper & more effective).

    • NW (+ΔCost, −ΔEffect): New dominated by existing.

    • NE (+ΔCost, +ΔEffect): Trade-off → needs threshold.

    • SW (−ΔCost, −ΔEffect): Usually rejected on clinical grounds.

Decision Rule 1: Dominance (Strong)

  • If new intervention both cheaper & more effective, it dominates.

  • If more expensive & less effective, it is dominated.

  • Useful for quick eliminations but limited because most new technologies lie in NE quadrant.

Decision Rule 2: Extended Dominance (Weak)

  • Applies when >2 alternatives.

  • Steps to identify:

    1. Rank by effectiveness.

    2. Remove strongly dominated options.

    3. Compute ICERs between adjacent options.

    4. Remove any option whose ICER is higher than that of a more effective alternative (i.e., increasing effectiveness does not raise ICER monotonically).

  • Logic: a mix (weighted combination) of two alternatives can out-perform a middle option.

  • Example (Costs, QALYs):

    • Standard: 5{,}000, 1

    • D: 10{,}000, 2 → ICER 5{,}000/QALY

    • B: 35{,}000, 4 → ICER 12{,}500/QALY (adjacent).

    • C: 25{,}000, 3 has ICER 15{,}000/QALY vs standard → higher than B’s ICER; C is extendedly dominated.

    • After removal: only Standard, D, B, A remain; final frontier ICERs: 5{,}000, 12{,}500, 20{,}000 per QALY.

Decision Rule 3: ICER vs Cost-Effectiveness Threshold (CET)

  • If neither dominance rule applies, compare ICER with threshold \lambda (lambda, sometimes k).

  • If \text{ICER} < \lambda → deemed cost-effective.

  • Interpretation of \lambda:

    • Opportunity cost of resources displaced.

    • Equals ICER of last programme funded before budget exhausted.

    • Proxy for marginal willingness-to-pay for a QALY.

  • Country practice:

    • NICE (England): historical implicit range £20–£30 k per QALY; research suggests real NHS opportunity cost ≈ £12.9 k (Claxton 2015).

    • WHO (historical): <1×GDPpc = highly cost-effective; 1–3× = cost-effective; >3× = not.
      • Criticised for ignoring budget impact; guidance now discouraged.

    • Newer empirical estimates: 0.5×GDPpc (LICs) to 1×GDPpc (most settings) based on opportunity-cost methods (Ochalek, Woods, Pinchon-Riviere, 2016–23).

Exercises & Illustrations

  • Smoking CEA Exercise:

    • Advertising: 100{,}000 cost, 500 quitters → ACER 200/\text{quitter}.

    • NRT: 200{,}000, 4 000 quitters → ACER 50/\text{quitter}.

    • Incremental NRT vs Advertising: \Delta C = 100{,}000, \Delta E = 3{,}500 → ICER ≈ 29/\text{quitter}.

  • Technology choice (threshold $30 k):

    • T1: 125{,}000, 8.2 QALYs → front-runner.

    • T2: 180{,}000, 6.9 → dominated (more cost, fewer QALYs).

  • Technology choice (threshold $40 k): (T1 8.2; T2 10; T3 13 QALYs)

    • Establish ICER frontier, compare to $40 k.

  • Additional exercise (T1, T2, T3 different numbers) repeats extended dominance evaluation.

QALY League Tables

  • Early approach: rank interventions by /QALY and fund top until budget spent.

  • Objectives:

    1. Benchmarking: place result in broader context.

    2. Resource allocation: shift money from low-rank to higher-rank interventions.

  • Example (UK £1990):

    • Cholesterol diet therapy: £220/QALY

    • Hip replacement: £1 180/QALY

    • Haemodialysis: £21 970/QALY

    • Neurosurgery for malignant tumour: £107 780/QALY

  • Limitations:

    • Heterogeneous study methods (discounting, perspective, time horizon, utility elicitation) reduce comparability.

    • Choice of comparator affects ICER heavily (e.g., A2 vs standard vs A2 vs A1).

Practical & Ethical Challenges with CETs

  • Threshold may be arbitrary if opportunity cost information lacking.

  • Budget impact vs affordability not captured solely by ICER.

  • Equity concerns:

    • Standard QALY weights everyone equally; may not reflect social preferences for severity or age.

    • Potential remedies: equity weights, alternative thresholds, equity-informative CEA.

  • HTA bodies (e.g., NICE) may also weigh:

    • Not in a qualitative manner

    • Clinical effectiveness certainty

    • HRQoL measurement adequacy

    • Innovation degree

    • Alternative treatments

    • Disease severity / end-of-life context

Summary of Decision Rules

  • Use dominance to cull clearly inferior/superior options.

  • Use extended dominance to ensure efficiency along the cost-effectiveness frontier.

  • Compare remaining ICERs to a context-appropriate threshold \lambda.

  • If \text{ICER} < \lambda and other HTA considerations acceptable, adopt; otherwise reject or request more evidence.

  • Ongoing research continues to refine thresholds and incorporate equity systematically.