Cost-Effectiveness Problem

You have a $1.5 billion budget to spend
on any combination of these programs:
Per-Patient
# of
Option HBUs Cost (k$) Patients
A
4.0
$750 500
B
3.6
$150 850
C
3.1
$360 1200
D
3.0
$400 290
E
2.9
$300 2000
F
2.9
$650 1000
G
2.8
$230 300
H
2.8
$500 500
Issue: Limited Resources

Assumption: There’s not enough money to
fund every effective treatment (screening
program, etc.)

Goal: Get the most health for our money.
How can we allocate our fixed budget to
provide the most health care?
Answer: Cost-Effectiveness

Determine how much health per dollar
each intervention provides - its “costeffectiveness” and how many of these
interventions are needed

Fund interventions in decreasing order of
cost-effectiveness until the budget is
spent.
Cost-effectiveness

Fund I,B,G,E,C,D, and H for 291 patients:
15,374.8 HBUs (3.06 per 5031 people)
Per-Patient
# of
Option HBUs Cost (k$) Patients
I
2.7
$100 100
B
3.6
$150 850
G
2.8
$230 300
E
2.9
$300 2000
C
3.1
$360 1200
D
3.0
$400 290
H
2.8
$500 500
A
4.0
$750 500
F
2.9
$650 1000
Population
HBUs
Cost (k$) k$/HBU
270
$10,000
37
3060
$127,500
42
840
$69,000
82
5800
$600,000
103
3720
$432,000
116
870
$116,000
133
1400
$250,000
179
2000
$375,000
188
2900
$650,000
224
Effectiveness only

Result: Fund A-D and E for 1498 patients:
13,994.2 HBUs (3.21 per 4338 people)
Per-Patient
# of
Option HBUs Cost (k$) Patients
A
4.0
$750 500
B
3.6
$150 850
C
3.1
$360 1200
D
3.0
$400 290
E
2.9
$300 2000
F
2.9
$650 1000
G
2.8
$230 300
H
2.8
$500 500
I
2.7
$100 100
Population
HBUs
Cost (k$) k$/HBU
2000
$375,000
188
3060
$127,500
42
3720
$432,000
116
870
$116,000
133
5800
$600,000
103
2900
$650,000
224
840
$69,000
82
1400
$250,000
179
270
$10,000
37
Perspective

Patient perspective
Cost to patient (may be 0 due to insurance)
 Health to patient


Payer’s perspective
Cost to payer (employer, HMO, insurance)
 Health to patient pool


Social perspective
Cost to society, including lost productivity
 Health to society

Measuring Costs
Costs are usually measured in dollars,
adjusted for inflation over time.
 Costs differ from charges, which include
profits, market effects, etc.
 Costs should include future related
medical costs and savings. Future costs
are discounted

Future Costs

Some argue that costs should include all
future costs and savings (wages, etc.) If you
do this:
Life-extending interventions become less costeffective than life-enhancing interventions,
because you’re usually extending low-quality life.
 Life-saving interventions become less costeffective in the elderly, who are net consumers,
than in the young, who are net producers.

Benefit, Effectiveness, Utility
Cost-benefit analysis:
Benefit in dollar units
(e.g. willingness to pay for result)
 Cost-effectiveness analysis:
Benefit in health units
(e.g. AIDS cases prevented, lives saved)
 Cost-utility analysis:
Benefit in utility (quality-of-life) units
(e.g. QALYs)

Measuring Effectiveness
The recommended measure for costeffectiveness is the quality-adjusted life
year, a common unit for comparison.
 QALYs =  (time in state * utility of state)



1 year of life in perfect health is as good as 2
years of life in 0.5 utility health.
Under $50,000 or $100,000/QALY is
widely regarded as “cost-effective”
Graphing the CE Ratio
CEA problem 2
From Stinnett & Paltiel’s CEA short course
You must choose which of 5 mutually exclusive
programs to fund. You currently fund option A.
Considering your other decisions, you’re willing to
spend up to an additional $200,000 per QALY.
Option Cost (k$) QALYs
A
460
16.4
B
860
17.1
C
1,000
17.9
D
1,260
17.7
E
1,830
18.3
Marginal CEA
(aka Incremental CEA)

What if we have to weigh programs
against each other, or determine if a new
treatment is better to give than the
current standard?

Marginal CEA focuses on how much more
health could we get by spending an
additional amount
CEA Problem 2
Step 1: Order the programs by cost. If some
option costs more and delivers less than another,
eliminate it from consideration.
Option Cost (k$) QALYs
A
460
16.4
B
860
17.1
C
1,000
17.9
D
1,260
17.7
E
1,830
18.3
CEA Problem 2
Step 2: Calculate a marginal CE ratio for each
program, relative to the one above it.
Option Cost (k$)
A
460
B
860
C
1,000
E
1,830
Marginal
QALYs k$/QALY
16.4
17.1
571
17.9
175
18.3
2075
CEA Problem 2
Step 3: Eliminate any program that has a higher
marginal CE ratio than the program below it.
Option Cost (k$)
A
460
B
860
C
1,000
E
1,830
Marginal
QALYs k$/QALY
16.4
17.1
571
17.9
175
18.3
2075
If you’d spend $571k more to get 17.1 more
QALYs, instead spend $175k more to get 17.9.
CEA Problem 2
Step 4: Recalculate marginal CE ratios and choose
the program that has the largest marginal CE ratio
that’s less than the threshold CE ratio ($200,000).
Option Cost (k$)
A
460
C
1,000
E
1,830
Marginal
QALYs k$/QALY
16.4
17.9
360
18.3
2075
In this case, neither C nor E meets our
threshold. We should continue to fund A.
CEA Guidelines
The Panel on Cost-Effectiveness in Health and Medicine (1993)
1. Reference case analysis
Societal perspective (resource allocation)
 Compare interventions with status quo
 Use QALYs; based utilities on community
preferences, not patient preferences
 Use direct and indirect costs, but need not
include unrelated future health and nonhealth costs. Discount costs at 3%.

2. Perform sensitivity analysis
Conclusions
Cost-effectiveness analysis asks how to
spend a fixed budget for the most health
 The cost-effectiveness of an intervention
is usually reported as its cost-per-QALY
ratio.
 Interventions with lower $/QALY are more
cost-effective and should be preferred to
interventions with higher $/QALY
