COST-EFFECTIVENESS ANALYSIS IN HEALTH CARE
Course objectives
1. Define efficiency in the context of health care based on current economic theory
2. Explain how a cost-effectiveness analysis needs to be designed, executed and analyzed
3. Apply / perform a critical appraisal on a set of cost-effectiveness analyses
4. Distinguish (analysis) between several decision rules to infer economic ‘added value’
5. Design (synthesis) a cost-effectiveness analysis
6. Evaluate cost in a CEA
7. Evaluate QALYs in a CEA
8. Evaluate (evaluation) a cost-effectiveness analysis
9. Understand the concept of time value of money and health
10. Perform an economic evaluation by integrating the knowledge above into an incremental
cost-effectiveness ratio (ICER) dealing with uncertainty and interpreting the results in terms
of it’s meaning for health care decision making
Outline Course
General Cost analysis Effect analysis Uncertainty
introduction (Application to (Application to surrounding the
economic decision- decision- ICER and
evaluation and modeling) modeling) Presentation of
decision making the critical
appraisal
Week 1 X
Week 2 X
Week 3 X
Week 4 X
Outline examination
Product (Delivery) date Grade (valuation)
Critical Appraisal Monday 09.00u after finish 30% (plus presentation)
module
Exam 26 sep 70%
WEEK 1: ECONOMIC EVALUATIONS IN HEALTH CARE
LECTURE 1.1 INTRODUCTION TO ECONOMIC EVALUTIONS IN
HEALTH CARE – Eddy Adang
Intervention vs innovation
• Invention: an idea, a sketch or a model for a new or improved device, product, process or
system
o May often be patented (not always)
o Patents are a measure of inventive output rather than innovative success
o Do not necessarily lead to innovations: majority do not
• Innovation: in an economic sense is accomplished only with the first commercial
transaction involving the new product
-> Innovation is the creation of the novel element, whereas intervention is the action of making a
change with the goal of achieving a specific outcome
,Technology push or demand pull?
• Who initiates innovation projects?
o R&D (also university, but mostly have
bad marketing)
o Marketing
• Technology push, creates demand
o Linear model from technology to
market
o Science push
• Demand pull, reaction to user demand
o Linear model from market to
technology
o Necessity is the mother of invention
Failure rate inventions/innovations
The failure rates for implementing complex innovations/inventions in healthcare organizations
are high. Estimates range from 30% to 90% depending on the scope of the organizational change
involved, the definition of failure, and the criteria to judge it.
Priorization: Criteria for adoption an innovation in health care
• Necessity/essential care
• Effectivity
• Cost-effectiveness
• Executability
• Is an important health problem involved?
• Does the procedure cure the health problem?
• Are the effects proportional to the costs? (Do I get value for
money?)
• Are costs outside the realm of individuals (vitamins and
paracetamol) and inside the realm of the collectivity (open heart
surgery)?
Health and the Economy
• Relationship between health and
economy (example: COVID-19)
• Income and Life Expectancy: As
income increases, life expectancy also
rises, but at a decreasing rate, indicating
less than proportional elasticity.
Income, Life Expectancy and…
• Health care Expenditures: Healthcare spending is growing faster than
economic growth, meaning that healthcare costs are rising more rapidly
than national income. This leads to a displacement of care, where choosing
to fund one medical intervention often means another intervention cannot
be funded — although it is not always clear which one will be forgone.
,• Drivers for health care expenditures (HCE): income, relative prices,
technology, institutional variables, ageing
o Income
▪ GDP (Gross Domestic Product, in Netherlands: BBP)
single most important variable to explain HCE
▪ Parameter estimation range 0.56 ->3
▪ Some explanation:
- Unmet need for health care
- Spend more (when income increases spend more on
care because new technology provides in new
possibilities)
- Marginal utility (how useful or enjoyable something is to you / quality of life) of
living an extra year > marginal utility of consumption
o Relative prices
▪ When labor costs increase, industries often adopt labor-saving technologies to cut
costs; however, in healthcare, this substitution is more difficult - nurses, for
example, may become more expensive, but they cannot be easily replaced by
technology as in other sectors.
▪ Real HCE increase (parameter estimate 0.41 growth) when the relative price
increases
▪ Some explanation:
- Baumol effect, but wages have to be in line with the rest of economy to attract
enough labor (despite rising costs in labor-intensive sectors)
- Demand HC price-inelastic, HCE increases (people will still seek care even if
prices go up -> HCE increases)
o Technology
▪ Cost-increasing effect of technological change
▪ Some explanation:
- Conditions become treatable that were not before
- New treatments added to benefit package without substitution old technologies
- More chronic conditions (keeping more patients alive but not cured)
- New technologies (drugs) often very expensive
- Most new technologies are in the upper right quadrant of the CE-plane (more
expense, more effective)
- Marginal CE > Average CE (providing one additional unit of care is more expensive
than the average cost of all previous units, causing the overall average cost to rise
as more care is delivered)
o Institutional factors
▪ No clear answer to direction HCE (findings for up and down)
▪ Parameter estimation range (-0.13;+0.78)
▪ Some explanation:
- Positive for public insurance coverage (higher spending because more people
have access to healthcare)
- Negative for gate keeping (where primary care doctors control access to
specialists -> reducing unnecessary specialist visits and lowering overall costs)
o Ageing
▪ Higher HCE as older people use much more health care than younger people
▪ Partly a Red Herring (While age seems like an obvious reason for higher healthcare
costs (since older people generally need more care), it doesn’t fully explain why
spending rises)
▪ Pattern is associated with the high cost of (time to) dying (Significant part of
healthcare expenditure is linked to the period close to death, rather than simply age
, itself -> costs spike in the final months or years of life, regardless of how old
someone is)
▪ Proximity (time) to death larger effect on HCE than age (confirmed by several
scholars) (how close a person is to death affects healthcare costs more than their
actual age)
▪ Illustration of red herring:
- Technology important explaining variable as it is lavished on patients with
relatively limited remaining life expectancy (Can lead to very high costs even when
the patient’s remaining life expectancy is limited)
▪ Rise of Palliative care (Aims to improve comfort and quality of life rather than
prolong life at all costs -> shift can help manage costs and improve patient well-
being)
Typical economics: Choices everywhere…
• As a patient, you want to have the best hospital care, but also a hospital close at home. How
do you select the right hospital?
• As a doctor, you want to have sufficient time to talk to the patient, but you also want to help
other patients within a reasonable waiting time. How do you decide the right length of a
consultation?
• As a hospital director, you want to invest in a new cancer treatment facility, but you also
want to give the nurses a raise. How can you spend your budget most wisely?
• As a policy maker, you want to invest in healthcare, but also in education. How to best spend
taxpayers’ money?
→ Cost-effectiveness and economics -> Normative framework trying to help you making
decisions in a rational way
Economics: A study of choice
• Scarcity: no unlimited amount of resources available
• Resources: Labour, capital, land, entrepreneurship, nature, etc.
• Choice: how to allocate scarce resources?
• Microeconomics: study individual choices
• Macroeconomics: study allocation decisions in the economy as a whole
• Normative and positive economics
Normative economics
• What ought to be (‘Wat zou moeten’)
• In decision theory, the von Neumann–Morgenstern (VNM) utility theorem shows that,
under certain axioms of rational behavior (logische regels), a decision-maker faced with risky
(probabilistic) outcomes of different choices will behave as if he or she is maximizing the
expected value (kijkt naar alle mogelijke uitkomsten, hoeveel ze opleveren (‘utility’) en hoe
waarschijnlijk die uitkomsten zijn) of some function defined over the potential outcomes at
some specified point in the future. This function is known as the von Neumann–Morgenstern
utility function (wiskundige manier om aan te geven hoeveel waarde of voorkeur iemand
hecht aan elke mogelijk uitkomst van een keuze). The theorem is the basis for expected
utility theory. → Deze theorie helpt verklaren hoe rationele mensen keuzes maken als ze te
maken hebben met kansen en onzekerheid, door te veronderstellen dat ze keuzes maken die
hun verwachte “tevredenheid” maximaliseren.
• Utility part of QALYs (Quality Adjusted Life Years)
Course objectives
1. Define efficiency in the context of health care based on current economic theory
2. Explain how a cost-effectiveness analysis needs to be designed, executed and analyzed
3. Apply / perform a critical appraisal on a set of cost-effectiveness analyses
4. Distinguish (analysis) between several decision rules to infer economic ‘added value’
5. Design (synthesis) a cost-effectiveness analysis
6. Evaluate cost in a CEA
7. Evaluate QALYs in a CEA
8. Evaluate (evaluation) a cost-effectiveness analysis
9. Understand the concept of time value of money and health
10. Perform an economic evaluation by integrating the knowledge above into an incremental
cost-effectiveness ratio (ICER) dealing with uncertainty and interpreting the results in terms
of it’s meaning for health care decision making
Outline Course
General Cost analysis Effect analysis Uncertainty
introduction (Application to (Application to surrounding the
economic decision- decision- ICER and
evaluation and modeling) modeling) Presentation of
decision making the critical
appraisal
Week 1 X
Week 2 X
Week 3 X
Week 4 X
Outline examination
Product (Delivery) date Grade (valuation)
Critical Appraisal Monday 09.00u after finish 30% (plus presentation)
module
Exam 26 sep 70%
WEEK 1: ECONOMIC EVALUATIONS IN HEALTH CARE
LECTURE 1.1 INTRODUCTION TO ECONOMIC EVALUTIONS IN
HEALTH CARE – Eddy Adang
Intervention vs innovation
• Invention: an idea, a sketch or a model for a new or improved device, product, process or
system
o May often be patented (not always)
o Patents are a measure of inventive output rather than innovative success
o Do not necessarily lead to innovations: majority do not
• Innovation: in an economic sense is accomplished only with the first commercial
transaction involving the new product
-> Innovation is the creation of the novel element, whereas intervention is the action of making a
change with the goal of achieving a specific outcome
,Technology push or demand pull?
• Who initiates innovation projects?
o R&D (also university, but mostly have
bad marketing)
o Marketing
• Technology push, creates demand
o Linear model from technology to
market
o Science push
• Demand pull, reaction to user demand
o Linear model from market to
technology
o Necessity is the mother of invention
Failure rate inventions/innovations
The failure rates for implementing complex innovations/inventions in healthcare organizations
are high. Estimates range from 30% to 90% depending on the scope of the organizational change
involved, the definition of failure, and the criteria to judge it.
Priorization: Criteria for adoption an innovation in health care
• Necessity/essential care
• Effectivity
• Cost-effectiveness
• Executability
• Is an important health problem involved?
• Does the procedure cure the health problem?
• Are the effects proportional to the costs? (Do I get value for
money?)
• Are costs outside the realm of individuals (vitamins and
paracetamol) and inside the realm of the collectivity (open heart
surgery)?
Health and the Economy
• Relationship between health and
economy (example: COVID-19)
• Income and Life Expectancy: As
income increases, life expectancy also
rises, but at a decreasing rate, indicating
less than proportional elasticity.
Income, Life Expectancy and…
• Health care Expenditures: Healthcare spending is growing faster than
economic growth, meaning that healthcare costs are rising more rapidly
than national income. This leads to a displacement of care, where choosing
to fund one medical intervention often means another intervention cannot
be funded — although it is not always clear which one will be forgone.
,• Drivers for health care expenditures (HCE): income, relative prices,
technology, institutional variables, ageing
o Income
▪ GDP (Gross Domestic Product, in Netherlands: BBP)
single most important variable to explain HCE
▪ Parameter estimation range 0.56 ->3
▪ Some explanation:
- Unmet need for health care
- Spend more (when income increases spend more on
care because new technology provides in new
possibilities)
- Marginal utility (how useful or enjoyable something is to you / quality of life) of
living an extra year > marginal utility of consumption
o Relative prices
▪ When labor costs increase, industries often adopt labor-saving technologies to cut
costs; however, in healthcare, this substitution is more difficult - nurses, for
example, may become more expensive, but they cannot be easily replaced by
technology as in other sectors.
▪ Real HCE increase (parameter estimate 0.41 growth) when the relative price
increases
▪ Some explanation:
- Baumol effect, but wages have to be in line with the rest of economy to attract
enough labor (despite rising costs in labor-intensive sectors)
- Demand HC price-inelastic, HCE increases (people will still seek care even if
prices go up -> HCE increases)
o Technology
▪ Cost-increasing effect of technological change
▪ Some explanation:
- Conditions become treatable that were not before
- New treatments added to benefit package without substitution old technologies
- More chronic conditions (keeping more patients alive but not cured)
- New technologies (drugs) often very expensive
- Most new technologies are in the upper right quadrant of the CE-plane (more
expense, more effective)
- Marginal CE > Average CE (providing one additional unit of care is more expensive
than the average cost of all previous units, causing the overall average cost to rise
as more care is delivered)
o Institutional factors
▪ No clear answer to direction HCE (findings for up and down)
▪ Parameter estimation range (-0.13;+0.78)
▪ Some explanation:
- Positive for public insurance coverage (higher spending because more people
have access to healthcare)
- Negative for gate keeping (where primary care doctors control access to
specialists -> reducing unnecessary specialist visits and lowering overall costs)
o Ageing
▪ Higher HCE as older people use much more health care than younger people
▪ Partly a Red Herring (While age seems like an obvious reason for higher healthcare
costs (since older people generally need more care), it doesn’t fully explain why
spending rises)
▪ Pattern is associated with the high cost of (time to) dying (Significant part of
healthcare expenditure is linked to the period close to death, rather than simply age
, itself -> costs spike in the final months or years of life, regardless of how old
someone is)
▪ Proximity (time) to death larger effect on HCE than age (confirmed by several
scholars) (how close a person is to death affects healthcare costs more than their
actual age)
▪ Illustration of red herring:
- Technology important explaining variable as it is lavished on patients with
relatively limited remaining life expectancy (Can lead to very high costs even when
the patient’s remaining life expectancy is limited)
▪ Rise of Palliative care (Aims to improve comfort and quality of life rather than
prolong life at all costs -> shift can help manage costs and improve patient well-
being)
Typical economics: Choices everywhere…
• As a patient, you want to have the best hospital care, but also a hospital close at home. How
do you select the right hospital?
• As a doctor, you want to have sufficient time to talk to the patient, but you also want to help
other patients within a reasonable waiting time. How do you decide the right length of a
consultation?
• As a hospital director, you want to invest in a new cancer treatment facility, but you also
want to give the nurses a raise. How can you spend your budget most wisely?
• As a policy maker, you want to invest in healthcare, but also in education. How to best spend
taxpayers’ money?
→ Cost-effectiveness and economics -> Normative framework trying to help you making
decisions in a rational way
Economics: A study of choice
• Scarcity: no unlimited amount of resources available
• Resources: Labour, capital, land, entrepreneurship, nature, etc.
• Choice: how to allocate scarce resources?
• Microeconomics: study individual choices
• Macroeconomics: study allocation decisions in the economy as a whole
• Normative and positive economics
Normative economics
• What ought to be (‘Wat zou moeten’)
• In decision theory, the von Neumann–Morgenstern (VNM) utility theorem shows that,
under certain axioms of rational behavior (logische regels), a decision-maker faced with risky
(probabilistic) outcomes of different choices will behave as if he or she is maximizing the
expected value (kijkt naar alle mogelijke uitkomsten, hoeveel ze opleveren (‘utility’) en hoe
waarschijnlijk die uitkomsten zijn) of some function defined over the potential outcomes at
some specified point in the future. This function is known as the von Neumann–Morgenstern
utility function (wiskundige manier om aan te geven hoeveel waarde of voorkeur iemand
hecht aan elke mogelijk uitkomst van een keuze). The theorem is the basis for expected
utility theory. → Deze theorie helpt verklaren hoe rationele mensen keuzes maken als ze te
maken hebben met kansen en onzekerheid, door te veronderstellen dat ze keuzes maken die
hun verwachte “tevredenheid” maximaliseren.
• Utility part of QALYs (Quality Adjusted Life Years)
