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# Hen 368 lecture 5 cost and benefit evaluation methods

Lecture 5 Cos Benefits Methods

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### Hen 368 lecture 5 cost and benefit evaluation methods

1. 1. Health Economics Lecture 5 Cost and Benefit Evaluation Methods
2. 2. Rational Never intentionally choose to be worse off
3. 3. Choices What is life worth? How do we measure? Costs and Benefits?
4. 4. Cost Benefit Analysis (CBA)
5. 5. Type of Costs Direct Medical Costs Direct Non-Medical Costs Indirect Costs
6. 6. Direct Medical Costs Hospitals Physicians Nursing Homes Tests and Examinations Drugs
7. 7. Direct Non-Medical Costs Transportation Home Heath Care Diet Family Members
8. 8. Indirect Costs Time Opportunity Costs Lost Productivity
9. 9. Benefits (Diverted Costs) Prevent Illness Postpone Death Restore Health Increase Utility
10. 10. 10 9 8 7 6 5 4 3 2 1 0 Net Benefit Cost Benefit Less Cost = Net Benefit
11. 11. 10 9 8 7 6 5 4 3 2 1 0 A B C D E Cost Benefits Marginal Costs Marginal Benefits
12. 12. 10 9 8 7 6 5 4 3 2 1 0 Objective: Maximize Net Benefits Just Right too little too much Marginal Costs Marginal Benefits
13. 13. Expected Value Probability of several events
14. 14. Expected Value Identify events and outcomes Assign probabilities Must equal 100% Outcome x Probability Total of all
15. 15. Expected Value Event Probability Outcome Expected A 50% 100 50 B 30% 50 15 C 20% 20 4 Total 100% 69
16. 16. Expected Value Event Probability Outcome Expected A 80% 100 80 B 10% 50 5 C 10% 20 2 Total 100% 87
17. 17. Expected Value Event Probability Outcome Expected A 80% 120 96 B 10% 80 8 C 10% 10 1 Total 100% 105
18. 18. Discounting Present Value of the Future
19. 19. 100 75 50 25 0 500 410 Discount Rate = 7% 71 Amount Present Value 100 100 100 100 100 76 82 87 93 2014 2015 2016 2017 2018
20. 20. Present Value or PV 1 (1+r)N r = rate N = number of periods
21. 21. N PV r = 10% PV =? 1 .909 (1+r)N 2 .826 3 .751 4 .683 5 .621 1
22. 22. Value of a Life Human Capital Approach Willingness-to-Pay Approach
23. 23. Human Capital Approach Present value of all production in a life
24. 24. Human Capital Approach 100,000 a year 30 years Total = 3,000,000 10% discount Present Value = 942,691
25. 25. Human Capital Approach Only considers money no leisure no income = no value
26. 26. Willingness-to-Pay Approach How much are you willing to pay to reduce the probability of dying?
27. 27. Willingness-to-Pay Approach Value of Life = Cost divided by probability
28. 28. 10 riyals to reduce your chance of dying by 1 in 100,000? Value of Life = Cost ÷ Probability Cost = 10 Probability = .00001 Value of Life = 10 ÷ .00001 Value of Life = 1,000,000
29. 29. 500 riyals to reduce your chance of dying by 1 in 4,000? Value of Life = Cost ÷ Probability Cost = 500 Probability = .00025 Value of Life = 500 ÷ .00025 Value of Life = 2,000,000
30. 30. Willingness-to-Pay Approach Usually higher than human capital approach estimate
31. 31. What is one year of your life worth? Compare to the cost of getting it
32. 32. New Technology Surgical diagnostic devices Pharmaceutical, Biomedical research Information technology
33. 33. Health Health and Medical Costs Medical Costs New Innovation New Innovation More health for same cost Same health for lower cost
34. 34. Cost Effective Analysis CEA Compare the cost effectiveness of two or more options
35. 35. Cost Benefit Analysis What is the the dollar value of the costs and benefits? Cost Effective Analysis Given an objective, what are the costs of various alternatives to achievement?
36. 36. Incremental Cost Effective Ratio ICER -- Cost new Effectiveness new Cost old Effectiveness old -- C1 E1 C2 E2
37. 37. Cost Less Cost More More Effective Less Effective
38. 38. Option Cost Effectiveness Life Years Cost Effectiveness Current 20,000 2 10,000 A 100,000 12 8,333 B 5,000 1 5,000 C 50,000 4 12,500 D 15,000 1 15,000
39. 39. Life? Quantity versus Quality
40. 40. Quality-Adjusted Life-Years QALYs Quantity x Quality
41. 41. Higher Quality Lower Quality More Years Fewer Years
42. 42. Human Utility Index Measure Quality Scale 0 to 1 0 = death 1 = perfect
43. 43. QALY Analysis Life Years Quality QALY 1 0.75 0.75 10 0.5 5.0 5 1 5.0 10 0.1 1.0
44. 44. Human Utility Index Rating Scale Standard Gamble Time Trade-off
45. 45. Rating Scale Individuals are surveyed Results = HUI
46. 46. Standard Gamble Two choices A. Live with less than perfect condition B. Procedure with probability of perfect health or (one minus probability) of death
47. 47. Standard Gamble Two choices A. Blind B. Cure blindness or death Probability on procedure = HUI
48. 48. Time Trade-Off Two choices A. Live X years with perfect health B. Live Y years with condition X÷Y = HUI
49. 49. Cost Utility Ratio -- Cost new QALYs new Cost old QALYs old
50. 50. CEA versus CUA Option Cost Life Years CEA Health Utility Index QALY CUA Current 20,000 2 10,000 0.7 1.4 14,286 New 110,000 12 9,167 0.4 4.8 22,917 Gain 90,000 10 9,000 3.4 26,471 New 2 110,000 12 9,167 0.8 9.6 11,458 Gain 90,000 10 9,000 8.2 10,976
51. 51. Summary Scarcity requires choices Cost-Benefit Analysis - CBA What is a life worth? Human Capital vs. Willingness-to-Pay Cost Effectiveness Analysis - CEA Life Year Saved - LY Ratio Comparisons Cost Utility Analysis - CUA Health Utility Index - HUI Survey, Standard Gamble, Time Trade Off Quality-Adjusted Life Year - QALY Ratio Comparisons