Cost Effectiveness

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Cost Effectiveness

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Introduction

• _{Cost-effectiveness analysis (CEA) is a form of economic analysis that}

compares the relative costs and outcomes (effects) of different courses of action

• _{It is a method of comparing the cost and effectiveness of two or more}

alternatives.

• _{Such comparisons are useful when one of the alternatives being}

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• _{The goal of cost-effectiveness analysis to determine if the value of an}

intervention justifies its cost.

• _{Cost-effectiveness involves more than determining cost, it also}

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Related terms

• _{Cost Effectiveness analysis looks at economic decision making to}

weigh up the costs and effects of a particular economic action. It is a way to measure the costs and the benefits from a decision.

• _{In cost–utility analysis the benefits are expressed as quality-adjusted}

life-years (QALYs) and in cost–benefit analysis in monetary terms.

• _{(benefits = effects) ≠ effectiveness}

• _{Cost–utility analysis is the most sophisticated form of}

pharmaco-economic analysis in that it takes into account the improvement in

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Applications

• _{The concept of cost-effectiveness is applied to the planning and}

management of many types of organized activity.

• _{It is widely used in many aspects of life.}

• _{In the acquisition of military tanks, for example, competing designs}

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Applications – cont…

• _{If a tank's performance in these areas is equal or even slightly inferior}

to its competitor, but substantially less expensive and easier to

produce, military planners may select it as more cost-effective than the competitor.

• _{Conversely, if the difference in price is near zero, but the more costly}

competitor would convey an enormous battlefield advantage through special ammunition, radar fire control and laser range finding,

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Why CEA?

• _{CEA is most useful when analysts face constraints which prevent them}

from conducting cost-benefit analysis.

• _{The most common constraint is the inability of analysts to monetise}

benefits.

• _{CEA is commonly used in healthcare, for example, where it is difficult}

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Calculations

• _{CE ratio = C1/E1} • _{EC ratio = E1/C1}

• _{where: C1 = the cost of option 1 (in £); and E1 = the effectiveness of option 1 (in}

physical units).

• _{The first equation above represents the cost per unit of effectiveness (e.g. £s spent}

per life saved).

• _{Projects can be rank ordered by CE ratio from lowest to highest.} • The most cost-effective project has the lowest CE ratio.

• The second equation is the effectiveness per unit of cost (e.g. lives saved per £ spent).

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Cost

• _{Costs are seen differently from different points of view.}

• _{In economics the notion of cost is based on the value that would be}

gained from using resources elsewhere – referred to as the opportunity cost.

• _{In cost-effectiveness analysis it is conventional to distinguish between}

the direct costs and indirect or productivity costs associated with the intervention, as well as what are termed intangibles, which, although they may be difficult to quantify, are often consequences of the

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Different types of costs

• _{Direct costs: medical drugs; staff time; equipment, patient transport;}

out-of pocket expenses.

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• _{It is essential to specify which costs are included in a}

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Types of interventions

• _{A distinction must be made between those interventions that are}

completely independent and mutually exclusive

• _{Independent interventions are those where the costs and effects of}

one intervention are not affected by the introduction or otherwise of other interventions

• _{Mutually exclusive interventions are those where implementing one}

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Average CEA and incremental CEA

• _{An average C/E ratio is equal to the total cost of a programme divided}

by the effectiveness of the prorgamme compared to “doing nothing” (i.e the base-case alternative)

• _{An incremental C/E ratio is the incremental cost of a programme}

divided by the incremental effectiveness compared to the next most effective programme

• _{If only one programme is compared with “doing nothing” then the}

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Discussions

• _{According to cost-effectiveness analysis, program Z should be given}

priority over X since it has a lower CER

• _{However, in order to decide which program to implement, the extent}

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CEA for mutually exclusive

programs

• _{For mutually exclusive interventions, it is essential to use incremental}

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• _{The alternative interventions are ranked according to their}

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Discussions

• _{The negative ICER for P2 means that by adopting P2 rather than P1}

there is an improvement in life-years gained and a reduction in costs.

• _{The ICER for P3 works out to be 120, which means that it costs £120}

to generate each additional life-year gained compared with P2

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When to use CEA?

• _{CEA is most useful before a program has begun, as it enables the}

comparison of two different courses of action. Think about using it at the program design stage therefore as well as at the evaluation stage.

• _{CEA can also be used to build counter-factual scenarios comparing the}

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• _{Think about which of CBA or CEA more appropriate? This depends on}

how easily benefits can be monetized.

• _{The best cost-effectiveness analyses take a broad view of costs and}

benefits, including indirect and longer-term effects, reflecting the interests of all stakeholders who will be affected by the program.

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• _{Cost-effectiveness is only one of a number of criteria that should be}

employed in determining whether interventions are made available.

• _{Issues of equity, needs and priorities, for example, should also form}

part of the decision-making process

• _{Care should be exercised in interpreting cost-effectiveness studies to}

ensure that all underlying assumptions have been made explicit and the context and perspective of the study are adequately reported.

• _{All cost-effectiveness analyses should be subjected to sensitivity}

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Sensitivity analysis

• _{The need for sensitivity analysis arises because of a number of}

factors. These include:

• _{Methodological issues arising from different approaches and methods} employed in the evaluation

• _{Potential variation in the estimates of costs and effects used in the evaluation} • _{Extrapolation from observed events over time or from intermediate to final}

health outcomes

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Sensitivity analysis – cont…

• _{ICERs therefore require some indication of the confidence that can be}

placed in them

• _{What would happen, for example, if the ‘true cost’ of one of the}

treatment strategies was somewhat higher or lower than the estimate used in the investigation, or if there were significant changes in the

life-years gained or other parameters used?

• _{Sensitivity analysis tests all the assumptions used in the model and}

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Sensitivity analysis – cont…

• The use of probabilistic sensitivity analysis is now recognised as the

appropriate format for undertaking and reporting sensitivity analysis, via a cost-effectiveness plane and acceptability curve

• _{These are generated by costs and effects data being simulated repeatedly}

(usually 1,000 times) to generate a vector of CERs, which are plotted on the cost-effectiveness plane, and from which the cost-effectiveness

acceptability curve is derived.

• _{This indicates the likelihood that the CER lies below a certain threshold}

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When to implement CEA?

• _{Prospective analysis takes place prior to the start of a pilot or at-scale}

program

• _{“Roughly how cost-effective could this proposed program be?”} • _{“How big an impact must this achieve to meet our threshold?”}

• _{Retrospective analysis takes place after an evaluation of the program}

is completed

• _{“Exactly how cost-effective was that pilot program?”}

• _{“Roughly how cost-effective might this program be if rolled out at}

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Three Key Challenges in Doing CEAs

• _{Absence of incentives to do CEA}

• _{What if the program was effective but not really cost-effective?}

• _{No editorial requirement to show CEA in most social-science journals} • _{Assumptions are required}

• _{Number of assumptions are needed to complete the analysis (e.g. multiple} outcomes, spillover effects, exchange rates, discounting, inflation, etc.)

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• _{Costs are hard to gather}

• _{Collecting cost data not seen as key part of evaluation unlike impact} measures, so it is not routinely provided in a standardized way

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CEA Process

• _{A CEA is a multi−step process.}

• _{After defining the policy of interest, an analyst conducts a cost}

assessment and an effectiveness assessment for each alternative measure for implementing the policy, and then integrates these assessments into a decisional analysis.

• _{In general, CEA is most relevant when different policy measures yield}

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CEA process – cont…

• _{First, carrying out a CEA requires identifying the specific policy}

objective

• _{Second, the analyst examines to what extent this objective is already}

met (distance to target), and establishes a baseline

• _{Third, the analyst identifies the potential sources of pressures and}

impacts related to the policy objective

• _{Fourth, the analyst decides which policy interventions can reasonably}

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CEA process – cont…

• _{Fifth, the costs of the policy measure need to be determined}

• _{The sixth step is to determine the effectiveness: The analyst must}

carefully select appropriate measures of effectiveness

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1. CEA weighs up the financial costs and effects of a particular economic action

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2. CEA is used instead of CBA when: a. You can find the effects of an action b. You can't monetize the benefits

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3. In CE ratios:

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4. Which is not a type of cost: a. Direct

b. Indirect c. Virtual

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5. For mutually exclusive interventions, we use: a. ICER

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