Transcript 5550_l7_2014-Evaluation

Benefit-Cost Analysis
FGS - Ch. 4
© Allen C. Goodman 2014
Some First Principles
What is the “right”
amount of a good to
provide for society?
Let’s look at consumers
surplus and
producers surplus.
More consumers
surplus makes
consumers happier!
Figure 4-1 Consumers’
Surplus
Demand
Price
Consumers’
Surplus
P1
P1
Consumer
Expenditures
0
Q1
Quantity
Some First Principles
What is the “right”
amount of a good to
provide for society?
Let’s look at consumers
surplus and
producers surplus.
More producers surplus
makes producers
happier!
Figure 4-2 Producers’ Surplus
Supply
Price
P1
P1
Producers’
Producer
Surplus
Cost to Sellers
0
Q1
Quantity
What’s the “right” quantity?
• We pick Q to maximize
sum of CS + PS.
• At Q < Q1, ↑ Q  ↑ both
CS and PS.
• At Q > Q1, ↑ Q costs
more (S) than it is worth
(D).
Figure 4-3 Efficient
Quantity
Demand
Price
Supply
Consumers’
Surplus
P1
P1
Producers’
Producer
Surplus
Cost to
Sellers
0
Q1
Quantity
What’s the “right” quantity?
• We seek to
maximize sum
of CS + PS.
• At Q < Q1, ↑ Q
 ↑ both CS
and PS.
Figure 4-3 Efficient
Quantity
Demand
Price
Supply
Consumers’
Surplus
P1
Producers’
Producer
Surplus
+
P1
Cost to
Sellers
0
Q1
Quantity
What’s the “right” quantity?
• We seek to
maximize sum
of CS + PS.
• At Q > Q1, ↑ Q
costs more (S)
than it is worth
(D).
Figure 4-3 Efficient
Quantity
Demand
Price
Supply
Societal
Costs
Consumers’
Surplus
P1
P1
Producers’
Producer
Surplus
Cost to
Sellers
0
Q1
Quantity
What’s the “right” quantity?
• We seek to
maximize sum
of CS + PS.
• At Q > Q1, ↑ Q
costs more (S)
than it is worth
(D).
Figure 4-3 Efficient
Quantity
Demand
Price
Supply
Societal
Costs
Consumers’
Surplus
P1
-
Producers’
Producer
Surplus
Societal
Benefits
Cost to
Sellers
0
P1
Q1
Quantity
Key Point
• Efficiency is ALL ABOUT
Q!
• A monopolist is BAD
because Q* < Q1.
Figure 4-3 Efficient
Quantity
Demand
Price
Consumers’
Surplus
P1
• BUT, a perfectly
discriminating
monopolist appropriates
all of the CS.
• Eq’m quantity is
EFFICIENT!
Supply
P1
Producers’
Producer
Surplus
Cost to
Sellers
0
Q*
Q1
Quantity
MR
Benefit-Cost Analysis
• In a sense, everything economists do is
benefit-cost analysis.
• Competitive markets get us to the “right”
amount.
• Why don’t we just depend on markets?
Benefit Cost
This is of particular concern with the public
health sector, in which you are considering
various types of public interventions.
Prime example, and a very successful one, is
fluoridation of water. It is something that most
(although not all) will agree has been
profoundly successful. Yet, it is unlikely to be
considered on a nonpublic basis. Moreover,
it may be subject to substantive economies of
scale.
It is also useful to consider the aspects of the
jargon, that often get confused.
Nelson and Swint, 1976
• Performed a prospective cost-benefit analysis
of fluoridating a segment of the water supply
for Houston, Texas,
• Explicitly introduced and evaluated the time
pattern of the costs and benefits. Showed that
neglect of the time structure of the costs and
benefits would significantly bias the results. A
benefit-cost ratio of 1.51 and a net present
value (or “social profit”) of $1,102,970 were
found. The results are biased downwards and
should be considered a lower bound.
W Nelson, J M Swint Cost-benefit analysis of fluoridation in Houston, Texas
Journal of public health dentistry. 01/02/1976; 36(2):88-95.
ISSN: 0022-4006
But … (June 17, 2014)
• Fluoride stays in city water
•
BY BRIAN [email protected]
• TRAVERSE CITY —An hour of public comment by more than 25
people didn’t sway a single commissioner from their previous position.
Water fluoridation in Traverse City will continue, following a 5 to 1 vote
on Monday. Commissioner Jim Carruthers cast the lone no vote.
• “It’s nothing unusual,” said Carruthers, who has forced a roll-call vote
on the issue for six years. “Maybe one day I’ll win, but I don’t expect
to.”
• Dental and health professionals outnumbered fluoride foes more than 2
to 1. They stressed the benefits of fluoride to prevent tooth decay in
both children and adults. They cited studies and their own anecdotal
experiences, telling commissioners they see greater tooth decay
among patients who don’t have fluoride in their water.
• Opponents expressed concerns about impurities in the fluoride
solutions and possible negative health consequences from the
additive.
http://www.record-eagle.com/local/x1927803388/Fluoride-stays-in-city-water
From Dr. Strangelove
• http://www.youtube.com/watch?v=rKR3
2ImWYzw
Terms
• Efficiency  Marginal Benefit = Marginal Cost. In principle,
it would pay to do all projects up to where marginal benefit =
marginal cost. This is our standard economic analysis.
• Benefit-Cost  A way of ranking alternative projects, that
typically aren't brought forward by the market. We may want
to consider health care interventions, and I'll do some
analytical stuff in a moment. In a sense, it tries to provide
some market signals for goods for which markets do not
exist.
• Cost-Effectiveness (Efficiency)  This is often confused,
particularly by non-economists. It does not require satisfying
any type of efficiency calculation. Basically, it assumes that a
project that is chosen is beneficial. You then want to consider
the cheapest way to produce it. DOES NOT imply efficiency.
TC
TB
TB, TC
W = TB(Q) – TC(Q)
ΔW/ΔQ = TB'(Q) - TC'(Q) = 0
MB = MC
0
Quantity
MB 
B
Q
TC
MC 
C TB
Q
Cost Efficient – everywhere on this curve
TB, TC
Efficient (MB=MC)
W = TB(Q) – TC(Q)
ΔW/ΔQ = TB'(Q) - TC'(Q) = 0
MB = MC
B/C > 1
0
Quantity
Measuring Benefits
• Key feature of benefit-cost analysis is measurement
of the benefits.
• Key in the measurement of the benefits is the
estimation of the willingness-to-pay for them. This is
the inverse demand curve.
• In contrast to situation where we are saying “here is
the price; how much are you willing to buy?” we say
instead, “here is an amount; how much would you be
willing to pay?”
Willingness to pay
• One of the major problems is that since we do not
usually have market signals (which is why we are doing
benefit cost analysis), we have to guess what the
willingness to pay is. We could save thousands of lives
by lowering the speed limit to 15 M.P.H. Why don't we?
• We have moved to automobiles that are much much
cleaner than they were in the 1950s and 1960s. There
is an interesting question as to how we measure the
benefits of the cleaner cars, as opposed to the costs.
Many studies argue that we have cars that are
essentially cleaner than optimal, given the marginal
benefits.
QALYs
• Health community has resisted putting a $ value on
health benefits. There are a lot of equity
considerations:
– Should the lives of poor people, elderly, or rich people, be
valued differently than the lives of others?
– Lots of this moves from economics to ethics.
• Health community has embraced the idea of Quality
Adjusted Life Years, or QALYs. Idea is to adjust
incremental years by the quality of life.
What is the idea?
• Can you have 0
QALY?
• Can you have
negative QALY?
Example
• Someone faces an intervention (rather than
dying) that can increase the expected time of
death from age 70 to age 90.
• For the first 10 years, life will be fine. For the
next 10, not so good.
• Each of the first 10 year increment is equivalent
to 1 QALY. Each of the next 10 is equivalent to
0.5 QALY.
• So, the effectiveness of the intervention is:
– 10 years * (1 QALY/year) + 10 years* (0.5 QALY/year)
= 15 QALYs.
• Then, calculate cost/QALY.
Example – Breast Cancer
Treatment
Cost per QALY
• Paclitaxel generates 0.5111 QALYs and
docetaxel (Taxotere®) 0.6016 QALYs - a
difference of 0.0905 QALYs, equivalent to an
additional 33 days of perfect health (0.0905 x
365).
• The additional costs of docetaxel amount to
£220 per patient, which means that it costs
£2,431 (£220/0.0905) to generate an
additional QALY by using docetaxel.
Link
Hutton J, Brown R, Borowitz M et al. A new decision model
for cost-utility comparisons of chemotherapy in recurrent
metastatic breast cancer. PharmacoEconomics 1996; 9 (Suppl 2):
8-22.
Several Non-Trivial Issues
• What about children? How do we
evaluate their QALYs?
• Who evaluates their QALYs?
• Do you add adult + children's QALYS?
• How are QALYs developed?
Geometric Treatment
Ed and Harry
• At age 10, Harry and
Ed both have certain
levels of health, 10
each.
• Assume that Ed (easy)
can gain health at a
lower incremental cost
than Harry (hard).
Hence, a given level of
expenditures will give
Ed 20 incremental
points but would give
Harry only 10.
• Suppose half of the
people are like Ed and
half are like Harry.
30
Ed
10
10
20
Harry
Harry and Ed
30
• What if we think that
Harry and Ed should
have the same QALYs?
Draw 45 degree line.
45o
Ed
SH = SE  8
• What if we think that
Harry and Ed should
get the same inputs?
10
• Why?
10
20
Harry
What’s the most cost-effective
place?
30
Highest mean!
SE+SH ≈ 22
Mean = (20+0)/2 = 10
• Thought experiment.
Most cost effective
place is where we get
the highest mean
score. Why?
• We can draw a line
with a slope of –1.
This line gives us
places with equal
totals. Start with S = SE
+ SH = 10.
45o
SE+SH= max
Ed
SE+SH=20
Mean = (8+8)/2 = 8
SE+SH=10
10
Mean = (0+10)/2 = 5
10
20
Harry
Good example
Manns, Meltzer, Taub, Donaldson, Health
Economics 12, 949-958, 2003, “Illustrating the
impact of including future costs in economic
evaluations: an application to end-stage renal
disease.”
(1) How does high cost of ongoing dialysis affect
cost/QALY?
(2) What impacts do “future costs” have?
(3) Do QALYs represent adequate measures of
benefits for ESRD (end-stage renal disease)?
Future Costs for ESRD
Ongoing dialysis 3 times per week and/or
transplantation.
Unrelated medical and non-medical
expenditures.
Both could end up being big!
They looked at a comparison between synthetic
(new) hemodialysers and cellulose (older)
hemodialysers.
Discounted QALYs at 5% per year.
Various Analyses
(1) inclusion of the cost of the dialyser only,
excluding the cost of related medical care;
(2) inclusion of the cost of the dialyser and of
related medical costs, such as dialysis and
transplantation, assuming that all patients are
treated with in-center hemodialysis;
(3) inclusion of the cost of the dialyser and both
related and unrelated medical costs; and
(4) inclusion of the cost of the dialyser and all
related and unrelated medical costs and
nonmedical expenditures.
Items 3 and 4
(3) The cost of unrelated health care (including the annual
cost of non-kidney failure-related medications and the
annual mean cost of non-kidney failure related
hospitalisation) for hemodialysis patients using
synthetic dialysers was estimated from a local study
(Table 1).
(4) Non-medical expenditures were estimated by
calculating lifetime total net resource use for patients by
adding age-specific estimates of average consumption
[28,29] net of earnings [6,30]. Average consumption by
age was estimated with data from the Canadian Survey
of Household Spending and included the annual
consumption of non-medical and medical goods.
ITEM: In baseline analyses, the estimates considered for
each of the above variables were for 60-year-old men.
Major findings
Over a 19 year horizon, synthetic dialysers  an extra
0.38 QALYs/patient compared to cellulose. They were
also more expensive.
Looking ONLY at intervention (dialyser only), cost/Q
gained = $5,036.
When Related Costs included (costs of dialysis and
transplantation*), cost/QALY gained = $83,501
When all future costs included, cost/QALY gained =
$121,124!
Magnitude of increases was largely related to high costs
of future dialysis and possible transplantation.
*Includes nursing salary, physician charges,overhead, cost of kidney
failure-related admissions, and cost of erythropoietin.
These are HIGH!!!
• “Critical value” is often taken as $50 000/Q.
• Why do we provide hemodialysis if costs are so
high?
– Cost estimates for future care are critical. How good are
they?
– Are some QALYs different than others?
• W/O dialysis, patients with ESRD WILL DIE!
Possibly a QALY that prevents certain death is
more valuable than one resulting from an
improvement in the probability of survival or of
experiencing a higher quality of life.
• AG: Also, if you’re going to add future costs to the
formula, you’ll have to increase the “critical value.”