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\$200{,}000 → 40 % quit

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

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

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

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

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

    • Heating grant (elderly): $400,000\$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 ;outcomesassumedidentical.</p></li><li><p>Rule:chooseleast−costalternative.</p></li></ul></li><li><p>Cost−EffectivenessAnalysis(CEA)</p><ul><li><p>Costsin; outcomes assumed identical.</p></li><li><p>Rule: choose least-cost alternative.</p></li></ul></li><li><p>Cost-Effectiveness Analysis (CEA)</p><ul><li><p>Costs in; consequences in natural units (e.g., life-years, mm Hg).

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

  • Cost-Utility Analysis (CUA)

    • Consequences valued as utilities (QALYs or DALYs).

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

  • Cost-Benefit Analysis (CBA)

    • Both costs and benefits monetised; decision metric: net benefitorbenefit−costratio.</p></li></ul></li></ul><h3id="5dd3a462−7a4e−491e−a813−9bcc0afff0a9"data−toc−id="5dd3a462−7a4e−491e−a813−9bcc0afff0a9"collapsed="false"seolevelmigrated="true"><markdata−color="red"style="background−color:red;color:inherit;">AveragevsIncrementalCost−Effectiveness</mark></h3><ul><li><p>AverageCost−EffectivenessRatio(ACER):<br>benefit or benefit-cost ratio.</p></li></ul></li></ul><h3 id="5dd3a462-7a4e-491e-a813-9bcc0afff0a9" data-toc-id="5dd3a462-7a4e-491e-a813-9bcc0afff0a9" collapsed="false" seolevelmigrated="true"><mark data-color="red" style="background-color: red; color: inherit;">Average vs Incremental Cost-Effectiveness</mark></h3><ul><li><p>Average Cost-Effectiveness Ratio (ACER):<br>\text{ACER} = \frac{\text{Cost}}{\text{Effect}} <br>Example:TreatmentA:<br>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}<br>Example:MoveA→B:<br>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</p></li><li><p>D:</p></li><li><p>D:10{,}000, 2→ICER→ ICER5{,}000/QALY</p></li><li><p>B:</p></li><li><p>B:35{,}000, 4→ICER→ ICER12{,}500/QALY(adjacent).</p></li><li><p>C:(adjacent).</p></li><li><p>C:25{,}000, 3hasICERhas ICER15{,}000/QALYvsstandard→higherthanB’sICER;Cisextendedlydominated.</p></li><li><p>Afterremoval:onlyStandard,D,B,Aremain;finalfrontierICERs:vs standard → higher than B’s ICER; C is extendedly dominated.</p></li><li><p>After removal: only Standard, D, B, A remain; final frontier ICERs:5{,}000,,12{,}500,,20{,}000perQALY.</p></li></ul></li></ul><h3id="4f2a4db0−916e−443d−b208−a3d1756d0c02"data−toc−id="4f2a4db0−916e−443d−b208−a3d1756d0c02"collapsed="false"seolevelmigrated="true">DecisionRule3:ICERvsCost−EffectivenessThreshold(CET)</h3><ul><li><p>Ifneitherdominanceruleapplies,compareICERwiththresholdper QALY.</p></li></ul></li></ul><h3 id="4f2a4db0-916e-443d-b208-a3d1756d0c02" data-toc-id="4f2a4db0-916e-443d-b208-a3d1756d0c02" collapsed="false" seolevelmigrated="true">Decision Rule 3: ICER vs Cost-Effectiveness Threshold (CET)</h3><ul><li><p>If neither dominance rule applies, compare ICER with threshold\lambda(lambda,sometimes(lambda, sometimesk).</p></li><li><p>If).</p></li><li><p>If\text{ICER} < \lambda→deemedcost−effective.</p></li><li><p>Interpretationof→ deemed cost-effective.</p></li><li><p>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{,}000cost,500quitters→ACERcost, 500 quitters → ACER200/\text{quitter}.</p></li><li><p>NRT:.</p></li><li><p>NRT:200{,}000,4000quitters→ACER, 4 000 quitters → ACER50/\text{quitter}.</p></li><li><p>IncrementalNRTvsAdvertising:.</p></li><li><p>Incremental NRT vs Advertising:\Delta C = 100{,}000,,\Delta E = 3{,}500→ICER≈→ ICER ≈29/\text{quitter}.

      • Technology choice (threshold $30 k):

        • T1: 125{,}000,8.2QALYs→front−runner.</p></li><li><p>T2:, 8.2 QALYs → front-runner.</p></li><li><p>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 λ\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.