Measuring Costs and Benefits in Health Care

Francois Dionne, PhD

Contact: fdionne@telus.net

Overall Plan

Overview

• Economic evaluation• Priority setting in health care• Why these presentations or: how does

this relate to quality improvement initiatives?

Why bother with this?

• “Financial challenges”• Two types of initiatives:1)Will provide net savings2)‘Purchases’ improved quality

In the background

• Health authorities – cost control, avoiding crisis• Providers – drive service utilization• Ministry of Health- meddling• Politicians – quick wins, announcements• Public expectations about service

“If we are ever going to get the ‘optimum’ results from our national expenditure on the NHS we

must finally be able to express the results in the form of the benefit and the cost to the population of a particular type of activity, and the increased benefit that would be obtained if more money

were made available.”

Cochrane AL. Effectiveness and Efficiency: random reflections on health services. Nuffield Provincial Hospitals Trust, London, 1972..

Therefore, the pursuit should be…

• Cost effectiveness rather than just clinical excellence (efficiency versus effectiveness)

• In order to do this must link costs and benefits (or, improved quality, but at what cost)

Economic evaluation

Economic Principles

• Opportunity cost– The benefits associated with the best alternative use of

those resources is the opportunity cost• The Margin

– Marginal Cost = cost of one more unit of output/consumption

– Marginal Benefit = benefit from one more unit of output/consumption

Efficiency Concepts

• Technical efficiency– The delivery of an intervention is taken as given– Technical efficiency is about how best to achieve that

delivery• Allocative efficiency

– All interventions have to fight with each other for implementation

– It is about whether to do something rather than how to do it (and can also be about how much to do)

What is Economic Evaluation?

• Economic evaluation is a set of methods to assist decision-makers in making choices between alternative interventions

• Based on principles of welfare economics– maximise the well-being of the community– ‘Fair’ choices require a systematic comparison of

costs (resources) and consequences (outcomes or benefits) of alternative health programs

Incremental Analysis

Target patient group

Survival Quality of lifeNew Program

Old Program

Impact on health status

Impact on health care costs

Impact on health status

Impact on health care costs

Survival Quality of life

Hospitalisations Drugs, procedures etc..

Hospitalisations Drugs, procedures etc..

DIFFERENCE

Types of Economic Evaluation

• Cost-Effectiveness Analysis– Measure benefits in natural units e.g. changes in blood pressure– Difficult to compare across programs

• Cost-Utility Analysis– Measure benefits in terms of QALYs (or equivalent)– Easier to compare across programs

• Cost-Benefit Analysis – Measure benefits in terms of dollar valuations– Across programs and compare health and non-health programs

Generic steps in economic evaluation

(1) Define study question and perspective– Describe alternatives, determine study perspective

(2) Identify, measure and value costs and benefits– Measure costs and benefits in physical units relevant for study

perspective, value costs and benefits

(3) Analysis of costs and benefits– Discounting, incremental (additional) costs and benefits of

alternatives, sensitivity analysis on key parameters

(4) Decision rule– Incremental Cost-Effectiveness Ratios (ICERs) e.g. cost per QALY

thresholds, other decision-making criteria

Study Perspective

• Study question determines perspective• Perspective determines costs/ consequences considered

– e.g. societal, government, provider, third party payer• Societal - widest possible range of costs/ consequences

Costs

• Identify, measure and value all resources impacted by the initiative that have a positive opportunity costs

• Direct health care costs (e.g. costs of treatment)• Direct personal costs (e.g. transportation)• Direct non-health costs (e.g. administration, legal system)• Indirect costs (e.g. productivity losses)• Valuation of opportunity costs - market prices/shadow prices

0.0

1.0

Effectiveness: Quality Adjusted Life Years (QALYs)

0.4

0.2

0.6

0.8

Initial

Final

FullHealth

Dead

Dialysis

Transplant

QALYs Gained = 7.6

00 1414 2020Life Years

0.80.8

0.60.6

Qualit

y o

f Li

fe

Quality Adjusted Life Years (QALYs)

Incremental Cost-Effectiveness Ratio

(Costnew – Costold)

(Effectivenessnew – Effectivenessold)

Incremental resources required

by the intervention

Incremental health effects gained by

using the intervention

ICER = C / E

= = ICER

A simple decision rule

ICER for new program ≤ $50,000/QALYDecision: adopt new initiative

ICER for new program > $50,000/QALYDecision: do not adopt new initiative

$20,000/QALY$20,000/QALY

$100,000/QALY$100,000/QALY

CC

BB

DD

EE

AA

Decrease in QALYs Increase in QALYs

More Costly

Less Costly

Grades of recommendationGrades of recommendation

The Cost-Effectiveness Acceptability Plane

$20,000/QALY$20,000/QALY

$100,000/QALY$100,000/QALY

CC

BB

DD

EE

AA

Decrease in QALYs Increase in QALYs

More CostlyCostly

Less Costly

New technology is as/ more effective & less costly

A. Compelling evidence for adoptionA. Compelling evidence for adoption

$20,000/QALY$20,000/QALY

$100,000/QALY$100,000/QALY

CC

BB

DD

EE

AA

Decrease in QALYs Increase in QALYs

More CostlyMore Costly

Less Costly

B. Strong evidence for adoptionB. Strong evidence for adoption

New technology more effective, incremental cost/QALY ≤$20,000New technology more effective, incremental cost/QALY ≤$20,000

$100,000/QALY$100,000/QALY

CC

BB

DD

EE

AA

New technology more effective, incremental cost/QALY ≤$100,000

C. Moderate evidence for adoptionC. Moderate evidence for adoption

Increase in QALYs

More Costly

Less Costly

Decrease in QALYs

$20,000/QALY$20,000/QALY

$20,000/QALY$20,000/QALY

$100,000/QALY$100,000/QALY

CC

BB

DD

EE

AA

Decrease in QALYs Increase in QALYs

More Costly

Less Costly

New technology more effective, incremental cost/QALY > $100,000

D. Weak evidence for adoptionD. Weak evidence for adoption

$20,000/QALY$20,000/QALY

$100,000/QALY$100,000/QALY

CC

BB

DD

EE

AA

Decrease in QALYs Increase in QALYs

More CostlyMore Costly

Less Costly

New technology is less effective, or as effective, and more costly

E. Compelling evidence for rejectionE. Compelling evidence for rejection

How is economic evaluation used?

• Lots of examples of local decisions using economic evaluation as an input into decision process

• National cost-effectiveness guidance has made some impact on real-world decisions– Demonstration of clinically-important benefit is still paramount– Economic analysis is more important when there is substantial

budgetary impact– There are broader contextual factors (systems, organizational and

ethical considerations) that influence priority setting decisions

CDR Recommendations

PBAC recommendations

0

20000

40000

60000

80000

100000

120000

140000

Accept

Reject

Incr

emen

tal c

ost/

extr

a Q

ALY

gain

ed

Evaluations

Take home messages

• Economic evaluation methods are well developed but that does not mean simple to apply

• C/E does not take into account all factors that are considered in decision-making in health care organizations- multiple objectives – it is about EFFICIENCY

• Very helpful to identify dominant strategies but a threshold is a rudimentary measurement of opportunity cost- one that leads to ever increasing spending

Group exercise #1

Economic evaluation• Each group choose an ‘intervention’ related to safety or

quality improvement

• Design an economic evaluation to assess the incremental costs and benefits– What is your study perspective?– What is the comparator?– What costs need to be collected?– How will you measure benefits ? For how long? What

about possible non-participation?

• 30 minutes group work, no reporting back- focus on questions

Priority setting in health care

Francois Dionne, PhD

Contact: fdionne@telus.net

Background

Resource allocation

• Allocation of health care funds according to defined populations is a global phenomenon

• Basic notion within health authorities is that of a limited funding envelope– Not enough resources to meet all needs

• Surveys have reported uncertainty amongst decision makers on how best to set priorities and allocate resources, i.e. economic evaluation is not sufficient

Decisions

• Decision-makers need to determine:– what health care services to provide– for whom to provide services– how to provide services– where services should be provided

… in order to meet local and/ or system level objectives including improved access, health gain…within a set budget

How is that typically done?

• Resource allocation based on historical patterns (across the board changes) with incremental adjustments

• Incremental adjustments are based on:– Politics and the ‘squeaky wheel’– New technologies: Economic evaluation (limited)

What is required? (or, what would be nice)

A pragmatic decision-making approach that….– Aligns resources strategically with system goals and

community needs – Leads to publicly defensible decisions based on available

evidence and community values– Facilitates stakeholder engagement around improving

benefit with limited resources– Supports the public accountability of health care

decision-makers

This leads us in the direction of Program Budgeting and Marginal Analysis (PBMA)

• Formal framework to assist decision-makers in making resource allocations decisions

• Combines medicine, economics and ethics• Used since the 1970’s in health care

PBMA

Program Budgeting1. What resources are available in total?2. In what ways are these resources currently spent? 3. What part of the budget can be changed?

Basic thinking behind PBMA

Basic thinking behind PBMA

Marginal Analysis1. What are the main candidates for more resources and what would be their effectiveness?2. Are there any areas of care which could be provided to the same level of effectiveness but with less resources, thereby releasing resources to fund candidates for more resources?3. Are there areas of care which, despite being effective, should have less resources because a candidate for more resources is more effective (per $ spent)?

PBMA process

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1. Determine aim & scopeof decision making.

4. Develop decision criteriawith stakeholder input.

3. Clarify existing resource mix.

5. Identify and investmentand disinvestment options.

7. Validate recommendations,provide formal decision review process and implement decisions.

8. Evaluate & improve.

6. Evaluate options andmake resource allocationrecommendations.

2. Form priority settingcommittee.

Determine aim and scope of activity

• Is the aim to bridge a deficit situation, to allocate new funding, to consider possible re-allocations of existing funding…

• What parts of the organization are included in the process implementation?

The Advisory Panel

• Multi-disciplinary mix of stakeholders– Decision-makers, clinician leaders– Finance/information personnel– Sometimes, consumer/community representatives

• Manager of the process

Mapping resource use

• Summary of information about services provided across the continuum of care

– Run rate versus budget

Decision Making Criteria

• Basis for priority setting decisions• Operationalization of organizational objectives• Specified at outset of process in explicit manner• Should not overlap (mutually exclusive)• Need to clearly define• Embody organizational values (weights)

Proposal submission

• Business case template • Targets on investments and/or disinvestments• Process guidelines and formal, explicit submission

process• Genuine disinvestment and investment- system

perspective• Transition costs in business case• Validation from decision support

Benefit measurement

• Multi-attribute decision analysis (MCDA)• Score proposals against criteria• Combine the scores to get a single measure of each

proposal’s impact- common measurement metric for all proposals

Use of ‘evidence’

DeterminingOperational Priorities

DeterminingOperational Priorities

Population Needs

Population Needs

Provincial Requirements

/ Targets

Provincial Requirements

/ Targets

Evidence from the literature: clinical and

cost-effectiveness studies

Evidence from the literature: clinical and

cost-effectiveness studies

Stakeholder InputThe CommunityStaff / Doctors

Board

Stakeholder InputThe CommunityStaff / Doctors

Board

Financial DataFinancial DataService Utilization

Output / Outcomes Data

Service UtilizationOutput / Outcomes

Data

Business Plan Priorities

Business Plan Priorities

Practice Guidelines &

Standards

Practice Guidelines &

Standards

Physician roles

• Advocacy vs. system perspective• Critical appraisal of competing evidence from a

range of sources and settings• Assessment of clinical evidence from systematic

reviews• Expert opinion when ‘good evidence’ lacking

Ruta et al. 2005

Public roles

• Values in relation to health care objectives• Specific input on decision criteria (weights)• Participation on advisory panels?

Expected outcomes

• Resource shifts consistent with strategic objectives

• Evidence driven decisions• Ownership of resource allocation

decision process• Transparent and defensible decision

making• Clinician engagement and partnership

Success factors

• Shared vision– Stakeholder buy-in– Transparency

• Credible commitment– Resources for process– Incentives to encourage participation

• Follow-through (execution)– Facilitating change process

• Learning/ quality improvement

Take home messages

• Pragmatic framework required that can compare alternatives for resource use and draws on evidence base

• Enables organization to move towards improved allocation of resources

Group exercise #2

Setting priorities

• Let’s assume the improvement initiative you worked on previously underwent an economic evaluation and was found to have an estimated cost per QALY gained that is considered ‘acceptable’

• It is also the case that your organization has a formal, structured priority setting process in place

• Your job is to develop a short proposal to support the implementation of your initiative

• Be explicit about the benefit gains in relation to your pre-defined criteria