Economic Evaluation of
Health Interventions
Basic Concepts
Farid Abolhassani M.D.
Resources
 Time and abilities of individuals
 Land and natural resources
 Capital
 Knowledge of production processes
Money is not defined by
economists as a resource in itself
Economic Evaluation: Definition
The comparative analysis of
alternative courses of action in terms
of both their costs and consequences
Economic Evaluation
Cost/Effectiveness Ratio
InputA
CostsA - CostsB
InputB
Program A
Cost
Conseq
Comparator B
OutputA
ConseqA - ConseqB
OutputB
Analytic Techniques
Analytic
technique
Measure of costs
Measure of
consequences
Cost-Effectiveness
Money units
Analysis
Physical units
Cost-Utility
Analysis
Money units
QALYs or DALYs
Cost-Benefit
Analysis
Money units
Money units
QALYs
Perfect
Health
1
Health-related Quality of Life
With
program
A
B
Without
program
0
Death 1
Duration (Years)
Death 2
DALYs
Perfect
Health
Perfect
Health
0
Health-related Quality of Life
With
program
A
B
Without
program
1
Death 1
Duration (Years)
Death 2
Expected
Death
When to Use which
Analytic Technique
Analytic
technique
Indication
Cost-Effectiveness Comparing programs that have the
Analysis
same outcomes
Cost-Utility
Analysis
Comparing programs that have multiple
outcomes related to both quantity and
quality of life
Cost-Benefit
Analysis
Comparing programs that have
heterogeneous impacts on welfare
Viewpoints for Economic Evaluation
 Societal viewpoint
 Stakeholders’ viewpoints
– Government
– Ministry of health
– Public / private providers
– Other sectors
– .....
Discounting: Rationales
 Taking time preference into account
 Avoiding a paradoxical result: a justifiable
health improving intervention should never
be undertaken
The Cost-benefit Approach To
Decisions
The major challenge of daily living:
Should I do activity x ?
Economists’ answer to this question:
If B(x) > C(x) Then
Do x
Otherwise
Do not do x
End if
B(x) and C(x) could always be expressed in
monetary terms
Reservation Price: Definition
The minimum amount of money one
asks to give up something
Or
The minimum amount of money one is
ready to pay to benefit from something
The Role of Economic Theory
Many economists believe that:
Useful insights into our behavior can be
gained by assuming that we act as if
governed by the rules of rational decision
making.
Common Pitfalls in Decision Making
 Ignoring implicit costs
 Failing to ignore sunk costs
 Focusing on only some of the relevant
costs
Common Pitfalls in Decision Making
 Ignoring implicit costs
 Failing to ignore sunk costs
 Focusing on only some of the relevant
costs
‫به سينما ميرويد يا ‪. . . .‬‬
‫منفعت‬
‫‪9000‬‬
‫هزينه‌ي‌فرصت‬
‫هزينه‌‬
‫اياب وذهاب‬
‫‪1000‬‬
‫تنقالت‬
‫‪2500‬‬
‫لذت‬
‫بليط‬
‫‪1000‬‬
‫دستمزد‬
‫‪5000‬‬
‫جمع‬
‫‪4500‬‬
‫جمع‬
‫‪6000‬‬
‫‪3000‬‬
‫‪10500‬‬
‫‪7500‬‬
‫مطبوع‬
‫نامطبوع‬
‫‪1000‬‬
‫‪-2000‬‬
‫‪5000‬‬
Cost of Activity x
Cost of activity x =
Direct costs + Opportunity cost
Opportunity Cost
The highest
valued alternative
sacrificed in order to choose an option
is called the opportunity (real) cost
of that option
The Benefit of Activity x
 Benefit of a pleasant activity =
Direct Benefit + Reservation Price
 Benefit of an unpleasant activity =
Direct Benefit – Reservation Price
‫به سينما ميرويد يا ‪. . . .‬‬
‫منفعت‬
‫‪9000‬‬
‫هزينه‌ي‌فرصت‬
‫هزينه‌ي‌مستقيم‬
‫اياب وذهاب‬
‫‪1000‬‬
‫تنقالت‬
‫‪2500‬‬
‫لذت‬
‫بليط‬
‫‪1000‬‬
‫دستمزد‬
‫‪5000‬‬
‫جمع‬
‫‪4500‬‬
‫جمع‬
‫‪6000‬‬
‫‪3000‬‬
‫‪10500‬‬
‫‪7500‬‬
‫هزينه‌رفتن‌به‌سينما‬
‫مطبوع‬
‫نامطبوع‬
‫‪1000‬‬
‫‪-2000‬‬
‫‪5000‬‬
Common Pitfalls in Decision Making
 Ignoring implicit costs
 Failing to ignore sunk costs
 Focusing on only some of the relevant
costs
Sunk Cost: Definition
Costs that are beyond
recovery at the moment
a decision is made
Marginal Analysis
Tomans / Number
Marginal benefit of pizza
2000
1000
Marginal cost of pizza
0
1
- 500
2
3
4
Number
Common Pitfalls in Decision Making
 Ignoring implicit costs
 Failing to ignore sunk costs
 Focusing on only some of the relevant costs
Buick or Toyota?
Cb = 100 + 0.05d
Cost
Cb
Ct
500
Ct = 300 + 0.025d
300
100
0
4000
8000
distance
The Invisible Hand
Wholly unaware of the effects of their
actions, self-interested consumers often
act as if driven by what Adam Smith
called an invisible hand to produce the
greatest social good.
Components of Economic Evaluation
 Costs
– C1: Health care sector costs
– C2: Patient and family costs
– C3: Other sectors costs
 Consequences
– Resources saved
– Health effects: QALYs or DALYs
– Benefits
Benefits: Assigning Monetary Value
 Human capital approach
 Willingness to pay approach
– Actual health change focus
– Global WTP
How To Use
Cost-effectiveness Analysis?
Possible Outcome in the
Two-alternative Case
Effectiveness of
A vs. B
Cost of A
vs. B
More
Same
Less
More
?
B
B
Same
A
A or B
B
Less
A
A
?
A or B?
Program
A
Program
B
Lives saved
(E)
1382
1723
Cost (C)
1812
2622
C/E ratio
1.31
1.52
Incremental Analysis
Program
A
Program
B
Incremental
B-A
Lives saved
(E)
1382
1723
341
Cost (C)
1812
2622
810
C/E ratio
1.31
1.52
2.38
More Than Two
Mutually Exclusive Alternatives
Effect
L
M
J
K
Dominant
I
H (status quo)
Cost
Dominated
Extended Dominance
Effect
L
J
M
K
Cost
More Than Two
Mutually Exclusive Alternatives
Effect
L
M
J
K
I
H (status quo)
Cost
Equity Considerations
 Costs
– Viewpoints
– Valuation of lost work time
 Preferences
– Age weighting
– Discounting
– Valuation
 Distribution of costs and consequences
Distributional Equity
Economic Incidence:
Upon whom does something fall?
Economic Incidence
 Fiscal incidence
 Expenditure/utilization incidence
 Net-incidence