TOPIC SEVEN
ECONOMIC EVALUATION OF HEALTH INTERVENTIONS
7.1 INTRODUCTION
The topic introduces to the student the cost concept and how they concept is used ineconomic
evaluation of healthcare programmes. Governments provide many goods and services to
public. In Kenya the government is the main player in the provision of health careservices and
evaluation of alternative programmes/interventions need to be evaluated. Such projects involve
expenditures of large amount of money provided. The study of economic evaluation equips
students with necessary skills used in evaluating different programmes/interventions and how
effective they are in relation to their benefits and costs.
7.2 TOPIC OBJECTIVE
At the end of this lecture you should be able to:
Understand the meaning and basis of cost as a concept
Be aware of the possibility of using cost concepts to undertake economic evaluation
Be introduced to the possibilities of using cost benefit analysis and cost effectiveness
analysis in assessing the performance of health care activities
To explain the effects of scope and viewpoint of an economic evaluation.
To describe direct, indirect and intangible costs
To outline the methods needed for costing in an economic evaluation and to give
examples of costing methods and cost data types.
1
,7.3 Definition of Cost
- Economists define a cost as the value of resources used to produce a good or services.
However, the way these resources are measured can differ. There are two main alternatives
with respect to measurement of these resources: financial and economic costing.
- Financial cost represents actual expenditure on goods and services purchased. Costs are thus
described in terms of how much money has been paid for the resources used in the project or
services. In order to ascertain the financial costs of a project, we need to know the price and
quantity of all the resources used or, alternatively, the level of expenditure on these goods and
services.
- Economists conceptualize costs in broader way. They define costs in terms of the alternative
uses that have been forgone by using resources in a particular way. These economic or
opportunity costs recognize the cost of using resources as these resources are then unavailable
for productive use elsewhere.
- The basic ideas are that is that things have a value that might not be fully captured in their
prices. It is not difficult in many health programmes to identify resources inputs for which little
or no money is paid: volunteers working without payment; health messages broadcasts without
charge; vaccines or other suppliers donated or provided at large discount by organizations or
individuals. Thus, the values of these resources to society, regardless of whopays for them, are
measured by opportunity cost.
- Economic cost then include the estimated value of goods or services for which there were no
financial transaction or when the price of a specific good did not reflect the cost of using it
productivity elsewhere. The main ways that financial and economic costs differ is in the way
they treat:
o Donated goods and services
o Others inputs whose prices and incorrect or distorted.
o Valuation of capital items.
2
, - The theory and the concept of cost arise from the fact that economic resources are scarce by
nature. Had it not been for the scarcity of resources, the concept and theory of cost may not
exist as such.
o Scarcity has two sides:
▪ The infinite nature of human wants
▪ The finite or limited nature of resources available to produce goods and
services.
7.4 Types of costs
“What is a cynic? A man who knows the price of everything and the value of nothing‟ (Oscar
Wilde)
- Costs can be defined in many ways, but generally can be considered as direct, indirect and
intangible.
o Direct costs are those immediately associated with an intervention such as staff
time, consumables etc.
o Indirect costs might include a patient‟s work loss due to treatment.
o Intangible costs may be things like pain, anxiety, quality etc.
- Benefits, however, can be analyzed in three different ways reflecting the different types of
economic analysis used in evaluation.
o First, benefits can be examined in terms of the immediate (direct) effects on health.
These are usually clinically defined units appropriate to the area of study, such as
„lives saved‟, „reduction in tumor size‟, „change in blood pressure‟ etc.
o Second, benefits from an intervention can be considered in more generic terms such
as the impact on general well-being/ happiness/ satisfaction, these are more generally
labeled as „utilities‟. The utility of an intervention to an individual is its benefit.
Measures such as the Quality Adjusted Life Year (QALY) are used to quantify this.
o Third, benefits might be considered in the same terms as costs, which means that
benefits must be valued in monetary terms by some means.
- Whatever kind of economic evaluation may be applied, the costs must be assessed.
3
ECONOMIC EVALUATION OF HEALTH INTERVENTIONS
7.1 INTRODUCTION
The topic introduces to the student the cost concept and how they concept is used ineconomic
evaluation of healthcare programmes. Governments provide many goods and services to
public. In Kenya the government is the main player in the provision of health careservices and
evaluation of alternative programmes/interventions need to be evaluated. Such projects involve
expenditures of large amount of money provided. The study of economic evaluation equips
students with necessary skills used in evaluating different programmes/interventions and how
effective they are in relation to their benefits and costs.
7.2 TOPIC OBJECTIVE
At the end of this lecture you should be able to:
Understand the meaning and basis of cost as a concept
Be aware of the possibility of using cost concepts to undertake economic evaluation
Be introduced to the possibilities of using cost benefit analysis and cost effectiveness
analysis in assessing the performance of health care activities
To explain the effects of scope and viewpoint of an economic evaluation.
To describe direct, indirect and intangible costs
To outline the methods needed for costing in an economic evaluation and to give
examples of costing methods and cost data types.
1
,7.3 Definition of Cost
- Economists define a cost as the value of resources used to produce a good or services.
However, the way these resources are measured can differ. There are two main alternatives
with respect to measurement of these resources: financial and economic costing.
- Financial cost represents actual expenditure on goods and services purchased. Costs are thus
described in terms of how much money has been paid for the resources used in the project or
services. In order to ascertain the financial costs of a project, we need to know the price and
quantity of all the resources used or, alternatively, the level of expenditure on these goods and
services.
- Economists conceptualize costs in broader way. They define costs in terms of the alternative
uses that have been forgone by using resources in a particular way. These economic or
opportunity costs recognize the cost of using resources as these resources are then unavailable
for productive use elsewhere.
- The basic ideas are that is that things have a value that might not be fully captured in their
prices. It is not difficult in many health programmes to identify resources inputs for which little
or no money is paid: volunteers working without payment; health messages broadcasts without
charge; vaccines or other suppliers donated or provided at large discount by organizations or
individuals. Thus, the values of these resources to society, regardless of whopays for them, are
measured by opportunity cost.
- Economic cost then include the estimated value of goods or services for which there were no
financial transaction or when the price of a specific good did not reflect the cost of using it
productivity elsewhere. The main ways that financial and economic costs differ is in the way
they treat:
o Donated goods and services
o Others inputs whose prices and incorrect or distorted.
o Valuation of capital items.
2
, - The theory and the concept of cost arise from the fact that economic resources are scarce by
nature. Had it not been for the scarcity of resources, the concept and theory of cost may not
exist as such.
o Scarcity has two sides:
▪ The infinite nature of human wants
▪ The finite or limited nature of resources available to produce goods and
services.
7.4 Types of costs
“What is a cynic? A man who knows the price of everything and the value of nothing‟ (Oscar
Wilde)
- Costs can be defined in many ways, but generally can be considered as direct, indirect and
intangible.
o Direct costs are those immediately associated with an intervention such as staff
time, consumables etc.
o Indirect costs might include a patient‟s work loss due to treatment.
o Intangible costs may be things like pain, anxiety, quality etc.
- Benefits, however, can be analyzed in three different ways reflecting the different types of
economic analysis used in evaluation.
o First, benefits can be examined in terms of the immediate (direct) effects on health.
These are usually clinically defined units appropriate to the area of study, such as
„lives saved‟, „reduction in tumor size‟, „change in blood pressure‟ etc.
o Second, benefits from an intervention can be considered in more generic terms such
as the impact on general well-being/ happiness/ satisfaction, these are more generally
labeled as „utilities‟. The utility of an intervention to an individual is its benefit.
Measures such as the Quality Adjusted Life Year (QALY) are used to quantify this.
o Third, benefits might be considered in the same terms as costs, which means that
benefits must be valued in monetary terms by some means.
- Whatever kind of economic evaluation may be applied, the costs must be assessed.
3
