Week 1. Lecture 1 & 2: Introduction & Theory
DERIVING A MONETARY VALUE OF A QALY
Study QALYs in three dimensions:
> Under risk
> Over time (discounting)
> At the societal level (equity)
Decision tree:
> Square = decision note, circle = chance note
> Decision theory is about making these decisions (dialysis vs transplant)
Economic evaluation
- Comparison of costs and benefits
- Central question: how can we express the benefits of health care numerically?
Approached to economic evaluations
- Ignore health - cost minimization
- Express benefits as life-years gained
Original derivation of the QALY model
- Express benefits as life-years gained and adjust for the quality of life
Alternative route to derive the QALY model
Cost Benefit Analysis (CBA) versus Cost Utility Analysis (CUA/CEA)
> CBA = cost and effects in monetary terms, CUA = costs monetary and effects in QALYs
- In case of non-dominance (new programme produces better outcomes at additional costs),
CUA gives us price of achieving a goal in terms of incremental costs of a QALY gained
- But we don’t know yet if such a goal is worth achieving given the opportunity costs of the
resources consumed
- Need to place a money value on health outcomes (implicitly or explicitly) to make any
resource allocation decision using CUA data
1
,Then we come to the term:
Allocative efficiency
- Choice of what health care to provide: which programmes are worthwhile, given the
alternative uses of resources?
- This is done by assigning relative values to health and non-health related goals
- Compare to technical/productive efficiency:
How to provide health care → strive for minimum input for given output
You need a CBA if you want allocative efficiency, if you want to determine if you spend more
or less then you need to look at allocative efficiency.
Principles of CBA
- There must be a common unit of measurement
- All the benefits and costs of the program/project must be measured in terms of their
equivalent money value
- The CBA valuations should represent consumers’ or producers’ valuation
- The valuation of benefits and costs should reflect preferences revealed by choices
- The benefits are usually measured by market choice
- The marginal benefit should be equal to the market price
- The gross benefits of consumption are an area under the demand curve
→ The valuation could be obtained by market price
→ If people value something a lot, the price goes up
> Total revenue = obtained by producers selling the product
> The benefits are usually measured by market choices
> Profit = total revenue - costs
> The marginal benefit should be equal to the market price
> The marginal benefit should be equal to the market price
> The gross benefits of consumption are an area under the demand curve
Advantages of CBA
- It helps to allocate scarce resources to programs that maximise societal economic benefit
- It studies the full economic impact of all potential outcomes of an intervention
> CBA takes societal perspective
- It enables comparing different programs having different health outcomes, or health
programs to non-health programs
- It allows analysts to examine its distributional aspects; who will receive these benefits and
who will bear the costs
2
,Limited use of CBAs
- CEA and CUA are more common than CBA
- Societal perspective often not fully explored
- Reasons:
> Practical measurement problems (hard to give (health) a value)
> Nature of the commodity health care (giving lifes a value..)
Low income people have lower ability to pay (even if they wanted to) so LIC will have lower
WTP than higher income groups. → So it will lead to more inequality which =NOT desired.
→ No market prices in HE, so you need to do for example surveys to indicate which price
people are willing to pay. The true value is hard to measure.
→ Inequity between rich and poor in WTP, because poor people have less ability to pay. This
could lead to more inequity. If we have some treatment which is given to a high income
group, it indicates more effect, because they want to pay more, so the valuation looks higher.
If the same treatment is given to poor people, the valuation will be lower, while it is the same
treatment.
Threshold value
- Can be based on:
> Opportunity cost (supply-sided) approach
> WTP (demand-sided) approach)
Opportunity cost approach
- Fixed health care budget
- Each new technology will displace some existing services
- Cost per QALY of new intervention should be lower than these to be considered
cost-effective
- Also called the shadow price of the budget constraint
- Used in UK
WTP approach
- Links CUA with welfare economics
- Compares cost per QALY of intervention to WTP-based threshold value
- May tell something about welfare effects of new intervention
- Utility loss of foregone private consumption equivalent to utility gain due to an increase of 1
additional QALY (WTP-Q)
- Flexible budget
Welfare economics
- Addresses normative questions because it embodies value judgements
- Key assumptions:
1. Social welfare is made up from the welfare of each individual member of society
2. Individuals are the best judges of their own welfare
3
, Pareto principles
1. Actual Pareto improvement:
policy makes at least 1 person better off and no person worse off
> Then we should use the policy
2. Potential Pareto improvement (Kaldor-Hicks criterion):
policy creates gainers and losers, but gainers could compensate losers and remain
better off themselves after the change.
→ Economist of 19th century
Approaches to estimate WTP
- Review of past decisions,
e.g. court awards for injury compensation or previous government health care funding
decisions (danger of circularity)
- Human capital approach/method
- Monetary value of preventing fatalities (value of a statistical life: VSL)
- Contingent valuation
= stated preference approach
- Discrete choice experiments (DCEs) with a cost attribute
^ VSL
- The higher the value of life, the higher the wage gap
- Marginal rate of substitution between wealth and mortality risks
- Commonly used in economic evaluation of life-saving policies in transport and
environmental economics
- Estimation can be done by SP or RP
- RP: wage-risk studies (wage premium for jobs with greater risks of death)
Weaknesses:
→ Wide variation of estimates
→ Context and job-specific
- WTP-Q can be estimated from VSL by using present-discounted-value formula:
^Contingent Valuation: choices to be made
- Perspective: individual or societal (inducing altruism)
- Open-ended or closed-ended
> What are you willing to pay - open
> Are you willing to pay this or this - closed
- Sample: patiënt-specific or general population
- QALY change based on QoL or life expectancy improvement
- General health improvement or specific disease
- Payment vehicle (e.g. insurance premium, out of pocket, taxes)
Example risk of death approach (VSL): Road injuries
U: Unconscious followed by Death
You face an annual risk of 6 in 100 000 to end up in state U due to a road accident.
How much are you willing to pay for a safety device that reduces this risk with 1 in 100 000?
4
DERIVING A MONETARY VALUE OF A QALY
Study QALYs in three dimensions:
> Under risk
> Over time (discounting)
> At the societal level (equity)
Decision tree:
> Square = decision note, circle = chance note
> Decision theory is about making these decisions (dialysis vs transplant)
Economic evaluation
- Comparison of costs and benefits
- Central question: how can we express the benefits of health care numerically?
Approached to economic evaluations
- Ignore health - cost minimization
- Express benefits as life-years gained
Original derivation of the QALY model
- Express benefits as life-years gained and adjust for the quality of life
Alternative route to derive the QALY model
Cost Benefit Analysis (CBA) versus Cost Utility Analysis (CUA/CEA)
> CBA = cost and effects in monetary terms, CUA = costs monetary and effects in QALYs
- In case of non-dominance (new programme produces better outcomes at additional costs),
CUA gives us price of achieving a goal in terms of incremental costs of a QALY gained
- But we don’t know yet if such a goal is worth achieving given the opportunity costs of the
resources consumed
- Need to place a money value on health outcomes (implicitly or explicitly) to make any
resource allocation decision using CUA data
1
,Then we come to the term:
Allocative efficiency
- Choice of what health care to provide: which programmes are worthwhile, given the
alternative uses of resources?
- This is done by assigning relative values to health and non-health related goals
- Compare to technical/productive efficiency:
How to provide health care → strive for minimum input for given output
You need a CBA if you want allocative efficiency, if you want to determine if you spend more
or less then you need to look at allocative efficiency.
Principles of CBA
- There must be a common unit of measurement
- All the benefits and costs of the program/project must be measured in terms of their
equivalent money value
- The CBA valuations should represent consumers’ or producers’ valuation
- The valuation of benefits and costs should reflect preferences revealed by choices
- The benefits are usually measured by market choice
- The marginal benefit should be equal to the market price
- The gross benefits of consumption are an area under the demand curve
→ The valuation could be obtained by market price
→ If people value something a lot, the price goes up
> Total revenue = obtained by producers selling the product
> The benefits are usually measured by market choices
> Profit = total revenue - costs
> The marginal benefit should be equal to the market price
> The marginal benefit should be equal to the market price
> The gross benefits of consumption are an area under the demand curve
Advantages of CBA
- It helps to allocate scarce resources to programs that maximise societal economic benefit
- It studies the full economic impact of all potential outcomes of an intervention
> CBA takes societal perspective
- It enables comparing different programs having different health outcomes, or health
programs to non-health programs
- It allows analysts to examine its distributional aspects; who will receive these benefits and
who will bear the costs
2
,Limited use of CBAs
- CEA and CUA are more common than CBA
- Societal perspective often not fully explored
- Reasons:
> Practical measurement problems (hard to give (health) a value)
> Nature of the commodity health care (giving lifes a value..)
Low income people have lower ability to pay (even if they wanted to) so LIC will have lower
WTP than higher income groups. → So it will lead to more inequality which =NOT desired.
→ No market prices in HE, so you need to do for example surveys to indicate which price
people are willing to pay. The true value is hard to measure.
→ Inequity between rich and poor in WTP, because poor people have less ability to pay. This
could lead to more inequity. If we have some treatment which is given to a high income
group, it indicates more effect, because they want to pay more, so the valuation looks higher.
If the same treatment is given to poor people, the valuation will be lower, while it is the same
treatment.
Threshold value
- Can be based on:
> Opportunity cost (supply-sided) approach
> WTP (demand-sided) approach)
Opportunity cost approach
- Fixed health care budget
- Each new technology will displace some existing services
- Cost per QALY of new intervention should be lower than these to be considered
cost-effective
- Also called the shadow price of the budget constraint
- Used in UK
WTP approach
- Links CUA with welfare economics
- Compares cost per QALY of intervention to WTP-based threshold value
- May tell something about welfare effects of new intervention
- Utility loss of foregone private consumption equivalent to utility gain due to an increase of 1
additional QALY (WTP-Q)
- Flexible budget
Welfare economics
- Addresses normative questions because it embodies value judgements
- Key assumptions:
1. Social welfare is made up from the welfare of each individual member of society
2. Individuals are the best judges of their own welfare
3
, Pareto principles
1. Actual Pareto improvement:
policy makes at least 1 person better off and no person worse off
> Then we should use the policy
2. Potential Pareto improvement (Kaldor-Hicks criterion):
policy creates gainers and losers, but gainers could compensate losers and remain
better off themselves after the change.
→ Economist of 19th century
Approaches to estimate WTP
- Review of past decisions,
e.g. court awards for injury compensation or previous government health care funding
decisions (danger of circularity)
- Human capital approach/method
- Monetary value of preventing fatalities (value of a statistical life: VSL)
- Contingent valuation
= stated preference approach
- Discrete choice experiments (DCEs) with a cost attribute
^ VSL
- The higher the value of life, the higher the wage gap
- Marginal rate of substitution between wealth and mortality risks
- Commonly used in economic evaluation of life-saving policies in transport and
environmental economics
- Estimation can be done by SP or RP
- RP: wage-risk studies (wage premium for jobs with greater risks of death)
Weaknesses:
→ Wide variation of estimates
→ Context and job-specific
- WTP-Q can be estimated from VSL by using present-discounted-value formula:
^Contingent Valuation: choices to be made
- Perspective: individual or societal (inducing altruism)
- Open-ended or closed-ended
> What are you willing to pay - open
> Are you willing to pay this or this - closed
- Sample: patiënt-specific or general population
- QALY change based on QoL or life expectancy improvement
- General health improvement or specific disease
- Payment vehicle (e.g. insurance premium, out of pocket, taxes)
Example risk of death approach (VSL): Road injuries
U: Unconscious followed by Death
You face an annual risk of 6 in 100 000 to end up in state U due to a road accident.
How much are you willing to pay for a safety device that reduces this risk with 1 in 100 000?
4
