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Essay Title - Economic Evaluation In Healthcare

Economic Evaluation in Healthcare- A brief critique.

Healthcare need and healthcare spending are not necessarily related. A lot of countries do not simply have the means to meet all the healthcare needs of its citizens. At the same time with emerging new technology and medical and surgical interventions there is an expectation from people that they will live longer and be treated. We are therefore faced with two dilemmas on one hand there are limited resources and on the other hand with emerging new medical know-how there are more and more choices. Increased healthcare spending may not necessarily mean better value for money therefore people are also questioning the value they get for money. Governments, healthcare funding bodies and insurance companies have to make difficult decisions i.e. whether to increase overall spending, reduce health benefits or re-allocate resources.

In an idealist environment everybody should have access to improving and maintaining their health. Available resources are limited; cost of human life has to be weighed against these scarce resources. Limited resources also mean that we are choosing one type of health benefit over another intervention which could have been used by this resource. For example a local NHS trust has a limited budget within which it must prioritize type of health benefit available to the community. The essential endeavor of any healthcare system is to maximize the health of its population but it has to do this within limited resources. Resource allocation has to be prioritized to maximize health gain from different choices. This is where health economics steps in and evaluations are made, if a project is worth pursuing and helps us in deciding to choose amongst several possible courses of action. Economic evaluation in health care thus a type of balance sheet where we draw up advantages (health benefits) and disadvantages (costs ) so that we can make appropriate choices(Robinson, 1993e).

Health authorities can only make viable decisions if we can find a way of putting a quantitative value to future advantages or disadvantages resulting from a specific type of health measure and comparing it with the monetary costs of the proposed project. The project costs are measures in terms of monetary investment, it is therefore but desirable to measure the benefits to human health in the same way. This consequently implies that prolonging human life or improving health has a monetary value attached to it. Economists who believe that we cannot attach a monetary value to human life have also developed alternative methods of cost and evaluating health related projects and investments without attaching a price tag to human life.

Economic evaluation is therefore simply “comparative analysis of two or more courses of action in terms of their costs and consequences” (Michael F. Drummond, 2005) and is a tool to assist decision making. People involved can decide whether the intervention is worth paying by comparing its benefits with the benefits forgone in paying for it.

In the British health system particularly within the context of NHS, healthcare programmes need to be evaluated before they can be implemented. The costs include cost to the healthcare sector, family and other sectors e.g. work place (loss of work).The consequences are evaluated whether the health state has changed and consequences of any change. Resources saved by new programme can also be looked at. A particular outcome of interest must be established as there are range of costs and consequences for any programme.

The need to establish cost effectiveness of new health technologies has led to different countries using various economic evaluation methods to decide public sector funding of new drugs or deciding which services could be included in health insurance (Australia, 1992., Tengs, 1996, Tengs et al., 1996). Economic evaluation is also being increasingly specified in NHS research grants and pharmaceutical industry to meet the growing requirement of demonstrating efficiency of new technologies.(Drummond, 1994)

However we must be vary of the idea that economic evaluation only tells us about the cheapest option. Economic evaluation is but one of the steps involved in decision making with limited resources (Goodacre and McCabe, 2002).

Some basic concepts and steps involved in economic evaluation:

Economists argue that efficient allocation of resources must form the basis of prioritising allocation of scarce resources. Technical efficiency aims to get maximum possible outcome form a set of resources. For example a recent trial demonstrated that 10 mg of alendronate was as efficient as 20 mg. Therefore 10 mg is technically more efficient because same outcome i.e. prevention of osteoporosis can be achieved if we use less resources(Liberman et al., 1995). Productive efficiency refers to maximizing health outcome for a particular cost or minimizing the expenditure given a health benefit or outcome. In productive efficiency we can compare relative value for money of health care interventions with comparable outcomes. Allocative efficiency stems from a broader perspective of deciding allocation of resources i.e. how these health outcomes are distributed in the community. Allocative efficiency is achieved so that resources are allocated to maximize health welfare of the community (Drummond, 1995, Drummond and Davies, 1991, Goddard and Drummond, 1991).

Another important concept is opportunity cost which simply means that with limited resources investing in one healthcare activity means sacrificing somewhere else. The opportunity cost is thus defined by the benefits that must be given up by not allotting resources to the next best health benefit. For example in a busy emergency department if we employ more doctors to reduce waiting times for major trauma, then we might have to forego nurse practitioners managing minor A & E. Therefore reduced waiting times in major trauma comes at a cost of foregoing minor A & E waiting times. Understanding this is fundamental to health economics (Marthe R. Gold, 1996).

There are various steps involved in the process of health evaluation irrespective of which method we use.

The evaluator must also describe the intervention under consideration and its competing alternatives. This step is important because the resources used to implement the intervention in question could have been used elsewhere. The objective of the study must be clearly defined including the feasibility of type of economic evaluation, the programme under evaluation and perspective of the study. Following this the working group should set up a framework for collecting the cost and outcome data from the programme. After the plan for evaluation has been set up we must consider ethical implications for the intervention or health benefit.

After collecting and appropriately measuring data on costs and outcomes, cost effective ratios and net benefits for the programme under study are calculated. Differential timing and uncertainty must be incorporated using discounting and opportunity costs. Results should be interpreted with caution and take into consideration any implicit assumptions that have been made in this regards. Finally “which health benefit is implemented when” is decided within the context of sociopolitical opinion at that time and taking into consideration ethical principles (Drummond, 1994, Drummond, 1995, Drummond et al., 1987, Drummond, 1992, Drummond and Davies, 1991, Drummond MF, 1995, Goodacre and McCabe, 2002, Shin et al., 2008).

Types of economic evaluation:

Cost Effective Analysis (CEA)

Different health care interventions do not produce the same health outcome, therefore both the costs and consequences of the different options need to be assessed. This is done in cost effective analysis by comparing costs with outcomes which are measured in natural units e.g. per life year gained, per mm Hg drop in systolic blood pressure, per pain free day (Robinson, 1993b).

Cost effective ratio is calculated by taking the difference in cost of new strategy versus current practice and dividing it by difference in effect of new strategy versus current practice. The result we get is the price of additional outcome by changing from the existing practice to a new technique If the price we get is below the wanted level the new technique is considered cost effective Therefore costs are measured in monetary terms and consequences in different health units for example change in blood pressure, the number of cases of cervical cancer found or the number of cases of particular ill health averted.

We can use CEA if we don’t want to attach a monetary value to health benefits It also allows us to compare different types of health strategies with similar outcome. The costs are measured as units of consumed resources such as time, currency, direct costs (drugs, nursing, and doctor), and indirect costs. Benefits are measured in clinical terms for example number of lives saved, number of cases successfully treated.

Cost effective ratio is calculated and a new technique is compared with the present technique (low cost alternative) in the calculation of cost effective ratio (CE ratio)

CE ratio= Cost new strategy- Cost current practice

Effect new strategy- Effect current practice

Costs and benefits (health effects) are measured in non comparable units therefore the ratio provides a benchmark to measure relative (productive) efficiency (Phelps and Mushlin, 1991).

The result might be expressed as the cost of purchasing additional outcome by changing from current practice to the new technique e.g. 10,000 pounds per additional life year.

For example if we were to do CEA comparing best drug treatment for heart disease versus stenting. We would first calculate the difference in cost for each patient for stenting versus best drug treatment and then calculate benefit for these two. Benefit is commonly calculated in terms of quality adjusted life year (QALY) which is an index of health used to provide a clue to the benefit to be acquired from a medical procedure in terms of quality of life and survival for the patient (Carr-Hill, 1991).

If the difference in cost is 10, 000 pound and 0.5 QALY are saved then cost effective ratio for using stents would be 20,000 pounds per QALY. When we use QALY as unit of measurement then it is more commonly called CUA or cost utility analysis (Robinson, 1993c). Cost utility analysis is thus an adaptation of CEA where we measure the effect of an health intervention using an integrated score which measures both quantitative and qualitative aspects of health i.e. a utility based measure such as QUALY (Torrance, 1986). The use of a single measure of health allows for comparison of diverse healthcare outcomes and thus both allocative and productive efficiency can be calculated.

Only programme with similar health outcome can be compared with CEA. We can also use CEA to assess how much it would cost to expand an existing health intervention. Therefore programme which has the same health outcome can be compared to find the option that prevents the most cases at the least cost.

CEA does not tell us about the least expensive choice but we can choose between less expensive and at least as effective, more expensive with an additional cost and worth the additional cost or less expensive and less effective (extra benefit provided by the competing drug is not worth the additional cost). For example generic drugs are equally effective but less expensive than particular branded formulations (Eddy, 1992).

Within the realm of CEA incremental cost effective analysis is used to order treatments with similar outcome according to both costs and benefits.

Cost minimization analysis is utilized when the health outcomes are identical then it is only essential to measure the costs and select the least costly treatment.

Cost benefit analysis (CBA):

Cost benefit analysis evaluate expenditure decisions to efficiently allocate scarce resources. The monetary benefits of a project must outweigh the costs To calculate CBA the cost of projected inputs should be compared to the monetary value of intended benefits. All costs and benefits are included regardless of who bears them and who they accrue to. This happens under the principal that it may be possible to redistribute some of the gains from the winners to fully compensate the losers (pareto effect). CBA is thus a full economic and monetary evaluation of health outcomes.

There are largely three approaches to the monetary valuation of health outcomes namely human capital approach, revealed preference studies and contingent valuation studies

Human capital approach:

Successful use of a health program is seen as an investment in human capital the return of this investment is the value of healthy time produced which can be measured by the person increased production at work It thus puts monetary value on human productivity and uses market wage rates to calculate them The value of programme is calculated in terms of present value of future earnings (Drummond et al., 1987).

Revealed preference studies:

Wage risk studies are published in which the objective is to study the relationship between particular health risks associated with a hazardous job and the wage rated individuals acquire to accept that job (Marin, 1982).

In contingent valuation studies or willingness to pay studies survey methods are used with hypothetical approach Respondents are required to think about the possibility of an actual market existing for a programme and the maximum they would be willing to pay for it the consumers are asked to hypothetically consider what they would sacrifice in terms of other commodities for particular health benefit (Diener et al., 1998).

CBA thus require us to evaluate the consequences of the program in monetary units allowing for the direct comparison of the incremental cost of the programme with its incremental benefits in the same units i.e. pounds the difference between these two values is the net productive value (NPV) or net social benefit of the programme in monetary terms.

For example for a cardiac service for 5 Years the cost of investment is 5 million pounds and for a hypothetical life span of the facility for 4 years, 2 million pounds is the expected health benefit per year. The health benefit is discounted to express all future costs (let it be 5%) Net productive value would be the sum of discounted benefits minus the initial investment.

NPV= 1.95M+1.81M+ 1.72M+ 1.64 M -5M= 2.12 M

Net productive value is thus 2.12 million and we should take up the project as the monetary health benefit outweighs the investment on the health service.

Differences and similarities between CBA and CEA:

Both CBA and CEA attach a monetary value to investment and health benefits are quantized in some monetary or non monetary form. CBA in addition also attaches monetary value to health benefits. People can question that we cannot put a money tag to every health benefit example pain relief. CBA thus determines in advance the monetary value of QALY of life and then calculates the net benefit. Human capital approach method for valuing health improvement does not take into consideration people who are economically inactive example children. Revealed preference studies may be based on consumer choice while contingent valuation studies are hypothetical and experimental in nature and it may be difficult to measure willingness to pay.

CBA thus implies monetary value for health benefits which might not always be plausible and not all health benefits would be measurable. It has thus been argued that the major disadvantage of benefit cost framework is that human life and quality of life is valued in monetary units.(Robinson, 1993a, Stalhammar, 1996)

CEA and CBA also differ in non dominance circumstances where a new health programme produces better outcomes at additional costs. CEA tells us number of new diseases which will be detected or additional amount of QALY’s achieved however it cannot tell us whether the opportunity costs are worth achieving. CBA converts all costs and benefits to money we can thus compare programmes not only in health care but also use in deciding allocation of scant resources (Stoddart, 1982). CEA on the other hand can only compare programmes that produce similar units of outcome such as QALY.

CBA and CEA differ in measurement of consequences CEA outcome is measured in natural units therefore it is more adaptable to various clinical outcomes e.g. number of episode free days in an asthma programmes, blood pressure reduction in mm Hg. Two competing programmes can hypothetically be compared with CUA comparing their QALY.CBA consequences on the other hand are measured in monetary value. They have a broader scope that they can be used in non health scenarios as well but there are ethical issues involved when we have to attach price to human life.

CEA is concerned with productive efficiency and outcomes restricted to health benefits CBA is broader in scope it can also decide allocative efficiency as it assigns relative values ( NPV) to both health and non health related projects. CEA avoids the difficult step of attaching a price tag to health benefits thus avoiding a variety of ethical issues it is able to compare projects with the same outcome.

CBA takes into account monetary outcome of multiple benefits, CEA however only considers one outcome. CBA can deal with joint costs CEA however cannot account for joint costs and can calculate marginal cost effective ratios along several dimensions.(Torrance et al., 1981)

CBA has a net monetary profit rule therefore any intervention which shows maximum net positive value is chosen whereas in CEA a project is considered efficient if it maximizes the benefit from the project or minimizes the cost of the project. CBA is therefore more concerned with whether objective is worth achieving given the opportunity costs of resources used in the project. CEA on the other hand is concerned with technical efficiency where outcomes are health benefits.(Drummond et al., 1987, Drummond and Davies, 1991, Drummond MF, 1995, Rice, 1994, Robinson, 1993a, Robinson, 1993c, Robinson, 1993b, Robinson, 1993d, Robinson, 1993e)

CEA doesn’t take into account externalities and spill over effects but they can be accounted for in the CBA analysis. Time dependent change in costs is discounted for in CBA while in CEA it may be hidden.(Drummond et al., 1987, Drummond and Davies, 1991, Goddard and Drummond, 1991)

Phelps and Mushlin argue ( 1991) that both techniques are comparable as they require monetary evaluation of health outcomes However while CBA puts a price on QALY, CEA simply calculates the costs per QALY. (Phelps and Mushlin, 1991)

CBA can be used to compare programmes with different units of outcome CBA can analyse a wide variety of projects thus comparison can be made making CBA the broadest of measures. CEA is only able to compare outcomes which use the same unit of benefit and can therefore only compare similar programmes. CBA is a comprehensive monetary evaluation and needs input of time and money to carry out this evaluation whereas CEA can be estimated relatively easily as the health benefits are quantised in natural units. While carrying out CBA two potential pitfalls are possible key costs and benefits which can be missed and the result may be skewed and therefore not present the best option Therefore CBA requires a more rigorous and detailed economic evaluation than CEA. On the other hand relying too much on available data can create false assurance in numbers without sensitivity analysis when we have not taken into account the uncertainty in some of the key numbers.(Drummond et al., 1987)

CEA approach is narrow and doesn’t take into account whole range of non health benefits QALY may not take into account how healthy that life is going to be. An individual may not value all life years equally depending on stage of life that individual is at. Resource saving specially in long term programmes may not be acknowledged by cost effective analysis for example reduction of institutional care and using community based schemes for long term care of chronic illnesses can help in saving resources which can be allocated to alternative programmes. However Torrence et al (Torrance et al., 1981) argue in their research that cost effective analysis can also incorporate resource saving depending on how we have incorporated the costing .

CBA has closer ties with accepted economic theories is not always relevant to the particular context and background of health resource allocation. CEA uniquely tries to approach specific concerns of healthcare sector. CEA may have different implication for society as whole and different implications for various social and economic groups which face different risks. Creating a policy from a single result may be difficult. Making policy from different results may not be technically feasible or may suggest discrimination.

Within the context of NHS where people pay tax contribution to NHS and don’t have to pay for a particular service individually CEA addresses the efficiency of a particular health benefit whereas CBA works on the assumption of willing to pay and people in NHS are not familiar with purchasing access to individual programmes. Therefore CEA is better suited in NHS where we are more concerned about the efficiency of health benefit within a fixed budget. Mcguire Henderson and Mooney state that “The claim of CBA and CEA is not that they make decisions rather it is they assist in the decision making process.”(McGuire A, 1992)

CBA does appear to have introduced business like decision making into the public expenditures where the health benefit is quantized in monetary terms. Axnick et al attempted a cost benefit analysis of measles immunization where they attached a dollar value to each life saved and disability averted (Axnick et al., 1969, Koplan and Axnick, 1982, Witte and Axnick, 1975).

CEA makes an assumption that saving lives is a priority and helps us evaluate where to put our money efficiently with a given budget to save most lives. A landmark study by Neuhauser et al showed that an economic decision is unavoidable even a seemingly cheap test may not be cost effective if it is repeatedly performed and it is easy for health care systems to overspend (Neuhauser and Lweicki, 1975).CBA thus evaluates both the goals and costs whereas CEA assumes the goals and calculates the least costly way of getting it.

Economic evaluations whether CBA or CEA do not incorporate the importance of distribution of costs and consequences among different patient or population groups. There are a wide range of social and political considerations in deciding health care programmes; sometimes a health intervention may be warranted because it benefits the elderly. There is a social and political desire to prefer those who are worst off. There is reluctance to discriminate strongly against patients who may have less potential for health than others. QALY may not be the best marker of state of health and severity and potential weights have been suggested for a super QALY (Dolan et al., 2003, Dolan and Olsen, 2001, Menzel et al., 2002, Olsen et al., 2003). Diasability adjusted life years ( DALY) has been introduced as a new concept where we can talk of DALY averted where DALY gives higher scores for time spent with disability and lower score for time spent without it. Fair innings theory also weighs QALY differently for people who have experienced few QALY before intervention (Marra et al., 2007).

The choice of approach is thus also decided by social and economic considerations of the society as a whole and may differ from place to place and people to people. For example individual’s willingness to pay may be influenced by income levels for a treatment that significantly reduces the risk of death, which would then differentiate between rich and poor families and the whole purpose of equity in health would be defeated. Further more individuals are not accustomed to paying an explicit value on illness or death. The human capital approach may be more relevant as it determines the economic cost of disease or condition for a definite period of time or for determining the cost savings of a specific procedure or intervention. This approach is also limited for programmes involving socially or economically disadvantaged since society tends to value its members for reasons which may be unrelated to productive capacity. Human capital approach also undervalues factors such as pain and suffering (Rice, 1994).

Identifying and measuring intangible and indirect costs can be difficult in cost benefit as well as cost effective analysis e.g. cost of support of primary carer, cost of building and computer equipment which because they are being used by many services may not be always possible to calculate.

Spill over effects of health intervention are difficult and may not be explicit in either CEA or CBA it is therefore difficult to know how a health intervention aimed for a particular area might affect another area it is difficult to estimate these implicit outcomes but they must be taken into account. For example a healthcare preventive programme for bird flu in one area has strong implications for other neighboring areas as well.

Example Case studies:

Within the NHS the decision to implement a new anticancer drug treatment is based on CEA where for example maximum budget is £12,000 per QALY. Drug A has the same effect at £10,000 per QALY and Drug B has same effect at 14,000 per QALY then drug A is chosen as it more cost effective. However to account for the uncertainties in costing sensitivity analysis is also undertaken to make so we have range of costs (confidence interval) incorporating probability of any change in circumstances e.g. severity of illness. Sensitivity allows us to consider best case and worst case scenarios (Banta and Luce, 1983). With sensitivity analysis we find there is a wide fluctuation in cost of drug A (cost of £8,000- £ 20,000 per QALY) compared to Drug B (cost of £8,000 to £14,000 per QALY). Therefore though initially Drug A was more cost effective but with sensitivity analysis it makes more sense to choose drug A to account for uncertainties in costing.

If we were to consider incorporating a childhood immunization vaccine which we could assume would save 100 deaths and 200 invasive cases. While costing for the vaccine we would have to include not only the cost of each vaccine but all direct and indirect costs of the personnel, equipment and loss of earnings for the parents who would have to come with their children for immunization. The potential benefit would be the monetary gain from the deaths averted and invasive cases saved. The model could use the economic value of life lost prematurely, direct and indirect costs from hospitalization and disability from disease. The model should also include indirect cost of lost wages for parents or carers to take care of their sick children. The monetary value of lost productivity can be calculated using human capital approach which would equal the wage rate. Discounting and sensitivity analysis must be incorporated in the model. The total cost fort the vaccine is say 20 million pounds in simplistic estimates and total benefit is 23 million pounds we can say that there is a net benefit of 3 million pounds. If we had to decide resource allocation for another treatment say resource allocation for monthly ultrasound screening for all pregnant women in a population where pregnancy rates were low and the NPV was say only 50 thousand pounds but the same investment then we can say that investing on immunization makes more sense in health economics.. A paper by Shin et al while calculating cost benefit analysis for haemophillus influenza type B ( Hib) vaccine concluded that the “economic efficiency of integration of the integration of the Hib immunisation in Korea is low because of the low incidence rate of Hib disease and high price of the vaccine”.(Shin et al., 2008)


The decision whether to use cost effective or cost benefit analysis is dependant on a number of factors One important factor to be considered whether the worth of two alternative interventions is being considered then CBA is more appropriate On the other hand CEA does assume that the intervention is worth pursuing. Practical considerations can also dictate which economic evaluation will be used. Even if CBA is desirable not all health outcomes can be accounted for in CBA. CBA is also a more time consuming intensive effort which itself requires monetary input. If the investment in consideration is small and we don’t want to quantize health outcomes then CEA can be considered.

The number of published healthcare economic evaluation has dramatically increased. In a review Elixhauser et al ( 1993) cited 3206 articles published between 1979 and 1990 (Elixhauser et al., 1993). Surely cost effective and cost benefit economic evaluations will grow as the researchers and policy makers become familiar with these ideas. Even then many people are uncomfortable with the ethical implications of economic evaluation in health.

All of these methods focus on efficiency not equity. Theoretically once we have efficient outcome equity can be achieved by redistribution. In a practical setting however redistribution can be very difficult to implement. For example an efficient outcome might mean health advantage for the wealthy and no change for the poor. If the aim of health sector is equity then it cannot always go hand in hand with efficiency. Ethical issues therefore often arise in the economic evaluation process (Drummond et al., 1987).

However decision makers when faced with ethical dilemmas would make implicit judgments without economic evaluation i.e. the judgment may not be good value for money. Economic evaluation methods allow judgments and values to be explicit. Economic evaluation analysis alone should never be used to make a decision; it should be combined with other considerations. Russell et al compare the role of cost effective analysis to a consumer report article which gives useful information about a product but lot of other factors are considered before making a decision (Russell et al., 1996).

Economic evaluation can guide choices among alternative medicines, treatment regimens and services based on a combination of costs and outcomes. Results and interpretations are further influenced by the perspective i.e. there is no one right answer.

Unlike profit oriented decisions in the market place in the context of health; CEA and CBA both attempt at quantizing the social benefits and social costs in analysing health projects. However it is sometimes very difficult as all the actual costs and benefits cannot be put down in monetary terms without some drawbacks.

Economic evaluation is just one part of a broader scope of factors which are considered when health benefit related project or policy decisions are implemented.


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