Health Economics- Lecture Ch04
-
Upload
katherine-sauer -
Category
Documents
-
view
219 -
download
0
Transcript of Health Economics- Lecture Ch04
-
8/3/2019 Health Economics- Lecture Ch04
1/29
Economic Efficiency
And
Cost Benefit Analysis
Dr. Katherine Sauer
Metropolitan State College of Denver
Health Economics
-
8/3/2019 Health Economics- Lecture Ch04
2/29
Outline
I. Economic Efficiency
II. Cost-Benefit AnalysisIII. Cost-Effectiveness Analysis
IV. Cost-Utility Analysis
-
8/3/2019 Health Economics- Lecture Ch04
3/29
Health policy requires that we frequently and
systematically evaluate alternatives.
e.g. preventative care vs acute care vs R&D
I. Economic Efficiency- maximizing the economys total surplus
Consumer benefits from good X can be measured by
their willingness to pay for good X.
The opportunity cost to society of producing good X
can be measured by the marginal cost of production.
-
8/3/2019 Health Economics- Lecture Ch04
4/29
D
Q
P
Demand represents
willingness to pay.
Suppose price is P1.
- in total, consumers
would buy Q1
- the total benefit toconsumers is area
A + B
- the total amount
paid by consumers isarea B
- area A is consumer
surplus
P1
Q1
A
B
-
8/3/2019 Health Economics- Lecture Ch04
5/29
S
Q
P
Supply represents the
marginal costs of
production.
Suppose price is P1.
- in total, producers
would be willing tosell Q1
- the total benefit to
producers is area
F + E- the total production
cost is area E
- area F is producers
surplus
P1
Q1
F
E
-
8/3/2019 Health Economics- Lecture Ch04
6/29
D
Q
P
The market is in equilibrium
at a price of P*.
- total benefit toconsumers is area
X + Y + Z
- consumers pay
Y + Z to producers- producers use Z
to cover costs
- consumers are left
with X as surplus- producers are left
with Y as surplus
- total surplus is
X + Y
P*
Q*
X
S
Y
Z
-
8/3/2019 Health Economics- Lecture Ch04
7/29
D
Q
P
The market is efficientbecause total surplus is maximized.
In contrast, a monopoly is not efficient
P*
Q*
S
MR
(MC )Pm
Qm
x1
x2
x3
y1 y2
y3
In a competitivemarket, consumer
surplus is x1+x2+x3.
Under a monopoly,
they have x1+x2.
In a competitive
market, producer
surplus is y1+y2+y3.Under a monopoly,
the firm has y1.
x3 + y3 are DWL
-
8/3/2019 Health Economics- Lecture Ch04
8/29
II. Cost Benefit Analysis
In a competitive market, supply and demand provide theefficient quantities of the good to the market.
Many goods do not have market signals available:
- clean air- bridges
- stop signs
Cost-Benefit Analysis (CBA) is a method for evaluating
public projects.
[ justify public works projects in depression era]
[ mandatory since 1981]
-
8/3/2019 Health Economics- Lecture Ch04
9/29
CBA measures benefits and costs in money terms.
- need to place dollar values on human life
CBA based on the idea that a project/policy will
improve social welfare if the benefits (B) exceed the
costs (C).
worthwhile project if B C >0
When alternative projects are being evaluated, their
benefit cost ratio will be looked at.
(B/C) project with highest ratio gets funded
-
8/3/2019 Health Economics- Lecture Ch04
10/29
Some Basic Principles:
A. Measuring Costs and Benefits
- costs must include opportunity costs
- public project opportunity costs often dont have a
market value- a dam to prevent flooding may destroy a
historical landmark
- benefits may not have market value either
- the dam results in a lake which can be used asa public recreation area
-
8/3/2019 Health Economics- Lecture Ch04
11/29
B. Equal Risk vs Equal Marginal Cost per Life Saved
Should society distribute resources so that each person
faces the same health risk?
- impossible
Should society distribute resources so that the marginal
cost of saving a life is equal across publicly funded
programs?- nutshell: each next dollar spent should go where
it does the most good
-
8/3/2019 Health Economics- Lecture Ch04
12/29
C. Marginal Analysis
MSC
MSB
$
MC,
MB
Percentage reduction in discharge
100
%
Q1
Societys net benefit from a
project will be maximized
when MSC is equal toMSB.
- reduce discharge by Q1%
What about a policy toreduce discharge by only
Q2%?
- at Q2, MSB > MSC
so society would gainby increasing the
reduction in discharge
How about 100%
reduction?
Q2
-
8/3/2019 Health Economics- Lecture Ch04
13/29
MSC
MSB
$
MC,
MB
Percentage reduction in discharge
100
%
Q1
Suppose the current project
is reducing discharge by
Q2%.
A project which increases
the reduction in discharge
from Q2% to Q1% wouldcreate a net benefit to
society of area A.
Q2
A
-
8/3/2019 Health Economics- Lecture Ch04
14/29
D. Discounting
- many projects have benefits or costs lasting
into the future- use present value calculations
Each periods costs and benefits are divided by a
discount factor (1+d).- societys discount rate (d)
!
!T
tt
tt
d
CBPV
1 1
- T is the number of time periods
- t = 0 in the present
-
8/3/2019 Health Economics- Lecture Ch04
15/29
Often it is assumed that d is equal to the market interest
rate.
- rate at which willing to give up currentconsumption for future consumption
- rate of return on investment
As t gets larger, the PV falls.-This assumes we discount the distant future
more heavily.
- Is this fair to future generations?
Some argue for setting d lower than the current market
interest rate.
(smaller d means greater emphasis on the future)
-
8/3/2019 Health Economics- Lecture Ch04
16/29
E. Adjustments
i. Risk Adjustments
Some projects are riskier than others.
Public projects represent the public at large.- public at larges view of risk might be hard to
discern
- Stiglitz recommends using a lower discount
rate to reflect the publics role.- certainty equivalent
-
8/3/2019 Health Economics- Lecture Ch04
17/29
ii. Distributional Adjustments
Government projects often result in a change in the
distribution of income.
- often concentrated benefits with diffuse costs
After projects are ranked by their benefit-cost ratio,
rankings can be subjectively altered to reflect their
effect on income distribution.
- many favor higher rankings for projects forlow income people
-
8/3/2019 Health Economics- Lecture Ch04
18/29
F. Inflation
Inflation estimates are often wrong so use the real
discount rate (not nominal rate) for the present value
calculations.
G. Valuing Human Life
It is difficult but necessary to put a value on human life.
3 main approaches:
human capital approach
willingness to accept approach
contingent valuation approach
-
8/3/2019 Health Economics- Lecture Ch04
19/29
i . Human Capital Approach:
- estimates the present value of an individuals
future earnings- popular for legal applications
- measures the loss of national output from
mortality/morbidityor
measures the production gains from saving or
extending a life
- does not take into account an individuals
willingness to pay to avoid injury/death
-
8/3/2019 Health Economics- Lecture Ch04
20/29
ii. Willingness to Accept Approach:- the flip side of willingness to pay
- the compensation you would require to accept
an additional risk to life/limb
- derived from labor economic theory
(compensating differentials)
- theoretically no limit on WTA
-
8/3/2019 Health Economics- Lecture Ch04
21/29
iii. Contingent Valuation: elicits individuals valuation
of alternative contingent risks.
- poses sets of questions like:
If you faced an X high risk of heart attack, how
much would you be willing to pay for a medical
procedure that would reduce your risk to Y?
-
8/3/2019 Health Economics- Lecture Ch04
22/29
Dollar value of a life:
-
8/3/2019 Health Economics- Lecture Ch04
23/29
III. Cost-Effectiveness Analysis
CEA may be more practical than CBA.
CEA compares the costs of achieving a particular
objective. (e.g. # of lives saved)
Assumption: the objective is desirable (even if it hasnt
been measured in monetary terms)
- now we dont have to worry about trying to
quantify the benefits- still need to quantify costs
-
8/3/2019 Health Economics- Lecture Ch04
24/29
The CEA ratio:
01
01
EE
CCCEAR
!
- compares incremental costs to incremental output- costs are measured in dollars
- output is the chosen health status measure
- to compare across projects, the output measures mustbe the same
-
8/3/2019 Health Economics- Lecture Ch04
25/29
IV. Cost-Utility Analysis
- practical variation of CEA
A. QALY (quality adjusted life years)
Each project is evaluated on the basis of its incremental
costs per extra QALY.
QALY assigns a value q to represent the quality of life
for each year.
0 = death1 = perfect health
-
8/3/2019 Health Economics- Lecture Ch04
26/29
!
!duration
ii
ii
d
qFQALY
max
1 )1(
Fi = probability that the person is alive at age i
qi = quality weight between 0 and 1
d = time discount factor
-
8/3/2019 Health Economics- Lecture Ch04
27/29
Ex: Treatment has a probability of 90% for extending
life by one year, a probability of 50% for extending life
by two years, and a probability of 0% for extendinglife by three years.
The quality weights are 0.8 for year one and 0.6 for
year two.
The discount rate is 0.05 each year.
96.0)05.01(
)0)(0()05.01()6.0)(5.0(
)05.01()8.0)(9.0(
321!
!QALY
This QALY could be used in the denominator of the
CEA ratio.
-
8/3/2019 Health Economics- Lecture Ch04
28/29
B. Praise for QALYs
Provides another technique for judging public projects.
Accounts for the notion that each person is entitled to a
life in which he or she can use a basic set of capabilities
to achieve personal goals in life.
Importantly, these capabilities would include basic
health and functioning.
-
8/3/2019 Health Economics- Lecture Ch04
29/29
C. Critique of QALYs
They are not consistent with standard Pareto basedwelfare economics.
A developing criticism of CUA with QALYs focuses on
the methods linear valuation of medical interventions asthe simple sum of quality gains times life-years saved
times the number of people treated.
It has long been pointed out that QALYs tend to place areduced value on older people when evaluating a medical
intervention.