Resource valuation

The theoretically correct unit cost for a resource is its’ opportunity cost. That is, the value o f the forgone benefits because the resource is not available for its next best alternative use’^^. However, the pragmatic approach to valuing marketed resources is to use existing market prices, unless there is some reason to do otherwise, for example, if prices are subsidised by a third party. One major non-market resource input into health care programmes is increased productivity due to ‘renewed’ health. Since increased productivity does not have a readily available market value, one method o f valuation is to use the human capital approach (HCA). The HCA places monetary weights on healthy time using appropriate gross market wage rates (ie. gross earnings before any deductions plus employer-paid benefits) but there are a number o f practical and methodological controversies surrounding this. For example, imperfections in the labour market may mean that market wages do not reflect the marginal productivity o f workers. It has also been argued that the HCA overestimates the true cost to society if an individual is unable to participate in the workforce either through ill health or in order to receive health care particularly following short-term absences’ The friction

cost method, unlike the HCA, states that losses in production could be compensated for by a worker on his \ her return to work or by colleagues covering the usual workload o f the worker while he \ she is absent from their usual duties'^^’'^^. Moreover, for long­ term absences, an employer is likely to hire a replacement worker if unemployment exists in the economy. The basic idea is that the amount o f production lost due to illness is dependent on the amount o f time organisations need to restore the initial production level. Thus, losses in productivity derived using the friction cost method are likely to be much lower than those derived using the more traditional HCA.

It is important that a perspective (or viewpoint) is specified in an economic evaluation as this is the major determinant o f which categories o f cost should be included in an analysis. For example, if a patient perspective is adopted, the analysis need only include the costs that the patient is liable for; all other costs can be excluded. Other possible perspectives include a societal or that o f a purchaser (eg. a Health Authority) perspective. A societal perspective is usually preferred by analysts because it includes all costs and benefits irrespective o f individual liability’^’. In practice, however, the perspective taken is usually dictated by the specific research question being addressed. It should also be noted that in the instance o f CUA, the inclusion o f patient and family costs is viewed by some health economists as ‘double-counting’; it is believed that the utility score may already incorporate the valuations o f time savings to the patient and / or his / her family’

3.1.3 Adjustments for differential in timing (discounting)

Neoclassical welfare economics states that society has a positive rate o f time preference.

It is believed that society values an event that happens in the present more than if the same event occurred in the future. The rate at which the value placed on an event declines over future time is known as the societal rate o f time preference. This process is taken into account in an economic evaluation by discounting the value o f future costs and benefits (those that accrue at least one year after the programme has begun) using

Where NPV is the net present value, Fn is the future cost or benefit in year n and r is the societal rate o f time preference. For example, a cost o f £1,000 in 10 years time discounted at 6% per annum has a NPV o f £558. At a practical level, the social rate o f time preference is difficult to measure so national governments usually announce an annual discount rate for all public sector projects.

Although in the majority o f published studies future costs are discounted, opinion is divided as to the appropriateness o f discounting health outcomes. One rationale for discounting costs is that individuals can choose where to invest their resources. For some, however, it is difficult to conceive o f individuals investing in flows o f health or trading flows o f health over time. Additionally, it is argued that discounting the benefits o f treatments gives less weight to future generations and there is some limited evidence to suggest that individuals may discount health benefits at a lower rate to costs. Thus, there is no definitive agreement as to the appropriateness o f discounting future health benefits.

In the thesis, all baseline costs were discounted at 6% per annum whereas future benefits o f treatment were discounted at 0%; the impact o f discounting health outcomes was investigated in the sensitivity analysis (see section 3.1.5).

3.1.4 Synthesising the information

The incremental cost-effectiveness ratio is the statistic used to assess relative levels o f efficiency and is calculated for treatments A and B as:

ICER = [CostA - Costs] / [EffectSA - Effectss] (Equation 3.2)

Where CostA and Costs are the costs and EffectSA and Effectss are the effects associated with programmes A and B respectively. For example, if programmes A and B had net present costs o f £2,000 and £500 per year respectively and produced net present QALYs o f 8 and 2 per year respectively, the ICER would be £250 ([£2,000 - £500]-[8 QALYs - 2 QALYs]) per QALY gained. In other words, compared to programme A, it costs an additional £250 per QALY gained if resources were instead allocated towards programme B. The lower the ICER the more efficient the programme being assessed; but there is no absolute cut-off level as to what does or doesn’t constitute a cost-

effective programme. In this instance, it is dependent upon the decision-makers willingness to pay £250 per additional QALY.

In situations where the cost-effectiveness o f three or more programmes is being evaluated, the programmes should be ranked in order o f increasing effectiveness and incremental analyses then performed. For example, if programme C produced 1 QALY but cost only £100, then programme C should be evaluated relative to B and programme B to A. However, if programme C produced 4 QALYs but still cost £100, it should be evaluated relative to programme A and programme B relative to programme C. In situations where a programme is both more costly and less effective than its’ comparitor(s) or vice versa, it isn’t necessary to calculate an ICER since in this instance one treatment is clearly superior on monetary and clinical grounds.