introduction of health economics
TRANSCRIPT
“Economics is usually a rather doom-laden subject, and in this respect is linked indirectly with medicine through the observation that the only two things in life that are certain are death and taxes.”
Alan Williams
What is the purpose?
• Central problem addressed by the discipline of economics:
• resource scarcity
• The purpose behind economic analyses:• to help decision-makers faced with choices concerning
resource scarcity
Overview
• Definitions
• Macro-economics
• Microeconomics
DEFINITIONS
Utility
• a measure of the relative satisfaction from, or desirability for, the consumption of goods or services
• “a utility function is a numerical representation of preferences” (Hargreaves-Heap, 1992)
Health
• Perspective 1– health is one of many goods that can be produced in an economy, the
consumption of which produces utility– Welfarist
• Perspective 2 – health is a physical entity of which individuals have a stock, and of
which extra (gain) can be produced through the allocation of resources to health production.
– Here, health is valued for its own sake, and irrespective of whether or not it produces utility
– Extra-welfarist
Opportunity costs
• The value of the consequences forgone by choosing to deploy resources in one way rather than in their best alternative use
Efficiency - technical
• Producing output in the best way possible, without wasting scarce resources
• Meeting a given objective at least cost
Efficiency - allocative
• Producing the pattern of output that best satisfies the pattern of consumers’ wants/needs
Equity• Fairness
• Horizontal equity– Equal treatment of equals– the extent to which those who are equal with respect to health status have
equal access to healthcare
• Vertical equity– Unequal treatment of unequal's– the extent to which those who are unequal with respect to income differ with
respect to how much they have to contribute towards the cost of health care
• Economics can describe a system in terms of equity but statements about the fairness rely on value judgments
MACROECONOMICS
Financing Healthcare
• Nature of Public/Private mix:– Provision– Financing
• Methods of raising finances– Private Finance– Public Health Insurance– Direct Taxation
• Methods of paying providers:– Doctors– Hospitals
Basic systems for raising finance
• Private Health Insurance
• The insurance company covers specified risks of ill health and incurs the consequential expense
• The insurance is paid by the consumer or shared by an employer
• Premiums are based on risk status• Coverage often lacking for the poor and chronically sick• e.g. US
• Social Health Insurance (Welfare – oriented)
• Based on notion of ‘solidarity’• Usually administered by a monopolistic agent, e.g. a
designated agency (Social Insurance Fund)• Premiums tend to be related to income & not risk• Universal or part coverage• e.g. France; Germany; Luxemburg; the Netherlands
• Direct taxation
• Finance provided by a public monopoly (e.g. UK NHS)• Finance is principally raised by general or hypothecated
taxation, supplemented by out-of pocket contributions• Universal coverage• e.g. UK; Denmark; Finland; Ireland; Italy; Portugal;
Spain; Sweden
Equity in finance
• Progressive financing system– The proportion of income that is used to pay for health care
rises as income rises
• Regressive financing system– The proportion of income that is used to pay for health care
falls as income rises
• Proportional financing system– The proportion of income paid does not vary with the level
of income
Relationship between the progressivityand health care financing systems
• Evidence suggests that health care systems that are based:– Social health insurance
• Regressive
– Tax based• Tend towards progressivity
– Private health insurance• Highly regressive
11 12
16 16
19
23
0
20
40
GER AUS NZ UK CAN US
Percent reporting test results/records not available at time of appointment in past two years
Does more mean better service?
GER=Germany; AUS=Australia; NZ=New Zealand; UK=United Kingdom; CAN=Canada; US=United States.Data: Analysis of 2005 Commonwealth Fund International Health Policy Survey of Sicker Adults; Schoen et al. 2005a.Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2006.
6
9 10 11
1820
0
20
40
UK NZ CAN AUS US GER
Percent reporting that doctor ordered test that had already been done in past two years
Difficulty Getting Care After Hours Without Going to the Emergency Room
34 33 2915 15 20 20
40
2823 27
21 1519 24
20
0
20
40
60
80
AUS CAN FR GER NETH NZ UK US
Somewhat difficult
Very difficult
Base: Adults with any chronic condition who needed after-hours care
Percent reported very/somewhat difficult getting care on nights, weekends, or holidays without going to ER
Data collection: Harris Interactive, Inc.Source: 2008 Commonwealth Fund International Health Policy Survey of Sicker Adults.
6256 56
3630
3944
60
Diabetics Who Received Recommended Preventive Care Services
3639
31
40
5955
67
43
0
20
40
60
80
AUS CAN FR GER NETH NZ UK US
Base: Adults with diabetes
Percent received all four diabetes services*
Data collection: Harris Interactive, Inc.Source: 2008 Commonwealth Fund International Health Policy Survey of Sicker Adults.
* Hemoglobin A1c checked in past six months; feet examined for sores or irritations in past year; eye exam for diabetes in past year; and cholesterol checked in past year.
Infant Mortality Rates
* 2001.Data: International estimates—OECD Health Data 2005;State estimates—National Vital Statistics System, Linked Birth and Infant Death Data (AHRQ 2005a).Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2006.
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and
Japa
nFi
nlan
dSw
eden
Nor
way
Spain
Fran
ceA
ustr
ia
Cze
ch R
epub
licG
erm
any
Bel
gium
Den
mar
k
Italy
Switz
erla
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ethe
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sA
ustr
alia
Portu
gal
Irela
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e
Uni
ted
Kin
gdom
Can
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New
Zea
land
*U
nite
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tes
0
5
10
2.2
3.0 3.03.3 3.5
4.1 4.1 4.1 4.2 4.2 4.4 4.4 4.5 4.55.0 5.0 5.0 5.0 5.1 5.2 5.4 5.6
7.0
Infant deaths per 1,000 live births
International variation
Greater expenditure +Poorer outcomes
Market failure
• Lack of perfect competition• Monopolies • Distribution of market power and prices
• Imperfect Knowledge• Health is uncertain• Moral hazard• Adverse selection• Agency relationship ->Supplier Induced Demand
• Externalities • Specifically in the USA:
– Administrative complexity and costs– Unwillingness to ration health care– Lack of Universal overage -> no risk pooling
USA: Health Expenditure Growth 2000–2005 for Selected Categories of Expenditures
12.0
8.6 8.0 7.96.1
10.7
0
5
10
15
20
Total Hospital care Physician &clinical services
Nursing home &home health
Prescriptiondrugs
Prog. admin. &net cost of
private healthinsurance
Average annual percent growth in health expenditures, 2000–2005
Source: A. Catlin et al., “National Health Spending in 2005: The Slowdown Continues,”Health Affairs, Jan./Feb. 2007 26(1):142–53.
Percentage of National Health ExpendituresSpent on Health Administration and Insurance, 2003
Net costs of health administration and health insurance as percent of national health expenditures
1.9 2.1 2.12.6
3.34.0 4.1 4.2
4.8
5.6
7.3
0
2
4
6
8
France
Finlan
d
Japan
Canada
United K
ingdom
Netherla
nds
Austria
Australi
a
Switzerla
nd
German
y
United S
tates
a b c *
a2002 b1999 c2001*Includes claims administration, underwriting, marketing, profits, and other administrative costs;based on premiums minus claims expenses for private insurance.Data: OECD Health Data 2005.Source: Commonwealth Fund National Scorecard on U.S. Health System Performance, 2006.
Moral Hazard
• Presence of incentives which encourage individuals to act in ways that incur costs which they do not bear themselves
• Consumers pay nothing at the point of consumption, therefore use health care more often than if they did pay
• Effects:– Fewer incentives to adopt a healthier lifestyle.– Welfare loss - resources could have been used
elsewhere in the economy to provide more benefit.
Adverse Selection
• Information asymmetry between insurer and insured.• low risk individuals choose not to purchase
insurance.• Insurance system collapses OR• Insurers learn people’s risks (i.e. solve problem of
information asymmetry), then set low price policies for low risk people and high price policies for high risk people.
• high risk individuals priced out of the market• gaps in insurance coverage.
Uninsured Rates High Among Adults with Low and Moderate Incomes
15 17 18
33 37 37
1724 28
9
9 9 9
1615 16
1111
13
9
76 2 33
7 9
0
25
50
75 Insured now, time uninsured in past year
Uninsured now
Percent of adults ages 19–64
Note: Income refers to annual income. In 2001 and 2003, low income is <$20,000, moderate income is $20,000–$34,999, middle income is $35,000–$59,999, and high income is $60,000 or more. In 2005, low income is <$20,000, moderate income is $20,000–$39,999, middle income is $40,000–$59,999, and high income is $60,000 or more. Source: S.R. Collins et al., Gaps in Health Insurance Coverage: An All-American Problem, Findings from the Commonwealth Fund Biennial Health Insurance Survey, The Commonwealth Fund, April 2006.
26
52
35
16
4
24
49
28
13
4
Total Low income Moderate income
Middle income
High income
2001 2003 2005 2001 2003 20052001 2003 20052001 2003 20052001 2003 2005
28
53
41
18
7
Supplier induced demand• Agency relationship – information asymmetry between patients (who
demand health care) and doctors (who supply health care)
• doctor acts as agents for the patient, s/he demands health care on the patient’s behalf
• Supplier (doctor) brings about a level of consumption that is different from that which would have occurred if the consumer (patient) had been fully informed and able to chose their own level of care.
• A problem if the best interests for the doctor are not the same as the best interests for the patient.
Paying Doctors – no method is perfect, but some are better!
• Fee for Service• Rewards according to volume of service provided• Problems: Supplier Induced Demand (SID); cost inflation
• Capitation• Payment according to number of registered patients• Problems: Increase list size; refer patients to specialists
• Salaried• Monthly/hourly, based on level/rank, increases if promoted• Problems: Discontinuity of care as result of doctor’s quest for
promotion; label of ‘employee’ undesirable; lack of competition & motivation
Who does Obama think he is?
Or possibly...
Theory of Second Best – Rationale for Government Intervention
• Market failure in health care is often unavoidable
• The ‘theory of second best’ states that if one of the criteria for Pareto optimum in unattainable then it becomes no longer desirable to ensure the other criteria are attained
• In this situation the optimum state, the second-best allocation of resources, is only achieved if we do not aim to ensure the other criteria are met
• Importantly, whilst there is only one state where we have Pareto optimality, there are a multitude of second best optimum states
What
• Universal coverage• Regulate Insurance companies
• 80% of premiums to be spent on medical care• Pre-existing conditions • Rescission• <26 cover through parents
• Close Doughnut hole• Incentivise Primary Care on quality not volume• Health Insurance Exchanges
• Increase market power to 3rd party payer
MICROECONOMICS
Economic Evaluations• Objective:
• to promote the efficient use of health care resources• to ensure the maximum total benefit is derived from the finite resources
available• to provide explicit means of linking evidence and scientific and social value
judgments with decisions• to provide information to decision makers of the implications of their decisions
• Definitions– ‘opportunity cost’
• the value of the consequences forgone by choosing to deploy a resource in one way rather than in its best alternative use
– ‘economic evaluation’• a comparative analysis of alternative courses of action in terms of both costs
and consequences
So does economic evaluation impacton Technology Coverage Decisions?
Why?
• Hard to implement savings: budget silos and other pressures
• Time horizons - lack of long term planning in policy cycles
• Rationing taboo• Interactive• Amount to little incentive to use EE
• Can increase uncertainty:
There is nothing a government hates more than to be well-informed; for it makes the process of arriving at decisions much more complicated and difficult.
Keynes (quoted in Sharpe 1975)
• Utilitarianism:
Cost-benefit analysis can help you choose different routes to a goal you have agreed, but it cannot help you choose goals. For that we have politics.
Burke (2004)
Types of economic evaluation
• Cost Minimisation Analysis (CMA)‐• Cost Benefit Analysis (CBA)‐• Cost Effectiveness Analysis (CEA)‐• Cost Utility Analysis (CUA)‐
Cost minimisation analysis (CMA)‐
• All relevant consequences of alternatives are equivalent• Treatments equally effective• Cost is the only differentiating factor
• Special case of CEA
• Decision rule: least costly option is most efficient implies dominance
• Caution on use– Uncertainty around estimates of effect– Can only evaluate therapies that produce identical outcomes
Cost Benefit analysis (CBA)‐
• Relates to welfare economics
• All benefits and all costs expressed in monetary terms
• Not used a great deal in health – mainly experimental studies
• Valuing benefits:– Human Capital Approach– Stated preference
• Contingent valuation - WTP
– Revealed preference• Wage-risk studies
CBA: pros and cons• Pros:
– Broader in scope than CEA/CUA compare with other public sector ‐expenditure
– Broader scope in measuring benefits (eg to carers) – Can assess whether a programme is worthwhile, without reference to
any external standard -> society has already valued health benefit.– More suited for one-off decision making – Addresses both technical and allocative efficiency
• Cons:– Difficulties with valuation of health outcomes in monetary terms
» value of human life can be subject to bias according to income inequity» UK setting, ability to pay difficult to comprehend
Cost effectiveness analysis (CEA)‐
• Consequences in most appropriate natural or physical units
• Results in terms of cost per unit effect• lives saved/complications avoided/symptom free
days/cancers detected
• Can address technical efficiency
• Decision rule: dominance or CE ratio
CEA: pros and cons• Pros:
– Clear and easily understood– Common– Popular – Simpler methodology
• Cons:– Cannot address allocative efficiency – Can only compare therapies whose effects are measurable in the same units– Often no obvious main outcome– One-dimensional -> limited consideration of morbidity– There may be significant differences in secondary outcomes– Not preference based– Does not incorporate uncertainty
Cost utility analysis (CUA)‐
• Outcomes measured in Quality Adjusted Life Years (QALYs) gained (or variant)
• Combines life years and quality of life
• Results in cost per additional QALY gained
• Can be used to compare across treatment areas
• Decision rule: dominance or CU ratio
• Required by decision makers (e.g. NICE)‐
CUA: pros and cons
• Pros:– Summarises mortality and QoL into a single measure– Comparability with other diseases– Address both technical and allocative efficiency
• Cons:– Can only assess allocative efficiency if all programmes assessed
simultaneously – Cost & effort– Dependent on method/scale used– Decision making must invoke an external criterion of value (NICE
threshold).
QALY• Combines:
• Length of life• Health-related quality of life
• QALY = Σ(length of life) x (QoL)• QOL – measuring utility:
– HRQOL questionnaire• EQ-5D
– 5 dimensions, 5 items– Mobility, self care, usual activities, pain / discomfort, anxiety / depression
• HUI2– 7 dimensions, 7 items– Sensation, mobility, emotion, self care, cognition, pain, fertility
– Direct valuation• Visual analogue• Standard Gamble• Time trade-off
• QALYs imperfectly reflect individual preferences
Costing
• Costing Perspective:• Societal • 3rd Party payer
• Types of cost:– Direct costs
• Direct health care costs• Direct non-health care costs
– Indirect (productivity) costs• Indirect health care costs• Indirect non-health care
costs
A cost-per-QALY league table:Where to draw the line?
Discounting• A preference for benefits today rather than in the future
• The future is uncertain• Positive economic growth (since WWII) individuals might expect to be more wealthy in the
future
• The process that enables a comparison between the value of a commodity consumed in the future with the value of that same commodity consumed now
• Allowance needs to be made for the differential timing of costs and consequences
• Discounting future costs to present values
• NICE recommendations 2003/2004 :• 3.5% on costs and 3.5% on benefits
The Incremental approach• An incremental economic evaluation answers the following
question:• ‘What is the difference in costs and the difference in consequences of option A
compared to option B?’
• The incremental cost effectiveness ratio is:‐
ICER = Difference in costs Difference in consequences
– Calculates the cost per extra unit of benefit
The Cost-Effectiveness Plane
Dominance
• NW quadrant• alternative is both more costly and less effective than
current (activity dominated)
• SE quadrant• alternative is both more effective and less costly than
current (activity dominates)
• “NW never invest, SE always invest”
• NE Quadrant– New treatment is both more costly and more effective
than current– How much is society willing to pay (λ)?
• SW Quadrant– the alternative is less costly but less effective than current
treatment– If much less costly but slightly less effective, money saved
could in principle be used to better effect on other patient group
• NE Quadrant: – Decision rule: if the activity is more effective but higher cost then for
it to be cost-effective the ICER must be less than the ceiling ratio λ– IF λ > ΔC/ΔE, the activity is cost-effective– IF λ < ΔC/ΔE, the activity is not cost-effective
• SW Quadrant:– Decision rule: if the activity is cheaper but less effective then the
decision rule is reversed – IF λ < ΔC/ΔE, the activity is cost-effective– IF λ > ΔC/ΔE, the activity is not cost-effective– Mirror image
C-E Plane
The importance of signs!
A negative ICER means dominance
A positive ICER could be in the SW quadrant
Summary
“We are not defeatist prophets of gloom and doom, obsessed with death and taxes, but active workers for improvement, concerned to improve the quality of people’s lives to the maximum feasible extent. That is why I think that health economics is the cheerful face of the dismal science.”
Alan Williams
Or are we!