This document discusses economic evaluation in healthcare decision making. It defines economic evaluation as using scientific methods to compare costs and benefits of alternative interventions. The main types of economic evaluation are described as cost-effectiveness analysis, cost-utility analysis, cost-benefit analysis, and cost-minimization analysis. The document outlines the generic steps in economic evaluation including defining the question, identifying and valuing costs and benefits, analyzing costs and benefits, and determining decision rules based on incremental cost-effectiveness ratios. Limitations of economic evaluation for resource allocation are discussed, noting that many factors beyond cost-effectiveness play a role in funding decisions.

1. Economic evaluation in healthcare
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2. Economic evaluation and
priority setting
How does economic evaluation fit with a
priority setting process such as PBMA?
Can economic evaluation guide resource
allocation decisions?
2
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3. This leads to these
questions
1. What is economic evaluation?
2. How is it done?
3. What are the results?
4. What are the limitations of economic
evaluation, specifically with respect to
resource allocation decisions?
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4. What is Economic
Evaluation?
Economic evaluation is a set of scientific methods to
assist decision-makers in making choices between
alternative interventions
Concerned with efficiency not just effectiveness
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
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5. Basic premise
Economic evaluation is about comparing the
costs and benefits of an intervention with the
cost and benefits of an alternative intervention
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6. Efficiency Concepts
Technical efficiency
How to do something using as few resources as possible
(e.g. LEAN process)
Allocative efficiency
About what to do
About whether to do something rather than how to do it
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7. Economic Principles
Opportunity cost
The benefits associated with the best alternative use of a
bundle of 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
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8. Types of Economic Evaluation
Cost-Effectiveness Analysis (CEA)
Difficult to compare across programs as outcome measure is intervention-specific, therefore better suited
to addressing technical efficiency
Cost-Utility Analysis (CUA)
Can be used to address technical efficiency or allocative efficiency because it allows for comparison across
programs as outcome measure is generic
Cost-Benefit Analysis (CBA)
Easiest to compare across programs but requires putting a dollar value on health conditions
Cost-Minimization Analysis (CMA)
When benefits are constant under all alternatives being considered (special case, only costs are compared)
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9. Nature of Economic
evaluation
Impact on health status  Survival
Program A
 Quality of life
 Intervention costs
Impact on health care costs  Hospitalisations
 Drugs, procedures etc.
Target
patient
group
Impact on health status  Survival
 Quality of life
 Intervention costs
Program B Impact on health care costs  Hospitalisations
 Drugs, procedures etc.
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10. How is it done: Generic steps in economic
evaluation
(1) Define study question and perspective
Describe alternatives
(2) Identify, measure and value costs and benefits
Measure costs and benefits in physical units relevant to the
analysis
(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)
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11. Study Perspective
Study question determines perspective
Perspective determines costs/ consequences considered
e.g. societal, government, third party payer, provider
Societal - widest possible range of costs/ consequences
Provider – narrowest perspective
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12. Costs
Identify, measure and value all resource use
impacts
Direct health care costs (e.g. costs of intervention)
Direct personal costs (e.g. transportation)
Indirect costs (e.g. productivity losses)
AND, all savings
Valuation using opportunity costs
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13. Benefits
Cost-Effectiveness Analysis
Measure benefits in natural units e.g. Blood pressure, weight
Cost-Utility Analysis
Measure benefits in terms of QALYs (Quality-Adjusted-Life-
Years) or equivalent
Cost-Benefit Analysis
Measure benefits in terms of dollar valuations
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14. Quality Adjusted Life Years (QALYs)
Full
1.0 Health
Final 0.8
Initial 0.6
0.4
0.2
0.0 Dead
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15. Quality Adjusted Life Years (QALYs)
Intervention
0.8
0.6
Quality of Life
QALYs Gained =
(20)*.8 – (14)*.6 = 7.6
Base case
0 14 20
Life Years
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16. Results: Incremental Cost-Effectiveness Ratio
(Costnew – Costold)
= ICER
(Effectivenessnew – Effectivenessold)
ICER = C / E
Incremental Incremental health
resources required effects gained by using
by the intervention the intervention
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17. A simple decision rule
ICER for new program ≤ $20,000/QALY
Decision: adopt new program
ICER for new program> $20,000/QALY
Decision: do not adopt new program
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18. Grades of recommendation
$100,000/QALY
More Costly
D
E C
$20,000/QALY
B
Decrease in QALYs Increase in QALYs
F A
Less Costly
The Cost-Effectiveness Acceptability Plane
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19. A. Compelling evidence for adoption
$100,000/QALY
More Costly
D
E C
$20,000/QALY
B
Decrease in QALYs Increase in QALYs
F
A
Less Costly
New technology is equally or more effective & less costly
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20. B. Strong evidence for adoption
$100,000/QALY
More Costly
D
E C
$20,000/QALY
B
Decrease in QALYs Increase in QALYs
F A
Less Costly
New technology more effective, incremental cost/QALY ≤$20,000
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21. C. Moderate evidence for adoption
$100,000/QALY
More Costly
D
E C
$20,000/QALY
B
Decrease in QALYs Increase in QALYs
F
A
Less Costly
New technology more effective, incremental cost/QALY more than $20,000 and less than $100,000
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22. D. Weak evidence for adoption
$100,000/QALY
More Costly
D
E C
$20,000/QALY
B
Decrease in QALYs Increase in QALYs
F
A
Less Costly
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New technology more effective,Mitton & Francois Dionnecost/QALY Resource Allocation | 22
$100,000

23. E. Compelling evidence for rejection
$100,000/QALY
More Costly
D
E C
$20,000/QALY
B
Decrease in QALYs Increase in QALYs
F A
Less Costly
New technology is less effective, MittonequallyDionne | Priority Setting & Resource Allocation | 23
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24. F. Less costly and less effective
$100,000/QALY
More Costly
D
E C
$20,000/QALY
B
Decrease in QALYs Increase in QALYs
$20,000/QALY F A
Less Costly
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25. Limitations of Economic
evaluation
Potential challenges to validity
But more importantly, with respect to resource allocation
decisions:
• Does a low ICER mean that the new drug/ technology is
‘cost-effective’?
• What does an ICER actually mean in terms of budget
impact?
• What about other factors affecting the
decision, objectives other than maximizing health impact
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26. Conclusion
Economic evaluation or CEA methods are well developed;
many studies now include an economic component
In some cases, CEA is an ideal tool, but in most cases it plays
a role within a broader framework
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27. The many factors in funding decisions
Public expectations
Safety
Politics and public image Efficacy Productivity, satisfaction and QOL
Physician support
Effectiveness
DECISION
Cost-effectiveness Budget Impact
Moral and ethical Regulatory Issues
concerns
Societal values
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