Economic evaluation can be thought of as efficiency evaluation. Two questions underlie economic evaluation: Is a planned or existing health care service worth providing, relative to other healthcare services, given the consumption of the same resources? Is the affected population satisfied with a planned or existing health care service (and its consumption of resources), compared to some other health care service that would consume the same resources? Economic evaluation is important to health care managers because the supply of resources is finite and they must thus make choices about what resources to devote to health care services.
Given the changes in how health care is organized (for example, health care reform, managed care), managers often seek formal methods of making resource allocation decisions, so they can evaluate health care outcomes associated with consumption of resources. Such systematic methods can identify possible and appropriate alternatives (von Neumann and Morganstern (1993). Economic analysis of health services focuses on costs and resulting consequences of providing services. This analysis can be thought of as identifying the inputs and outputs associated with health services.
Economic evaluation determines the unit cost for the resulting unit of health benefit. Epidemiologic data are used to measure the relationship between health benefits and costs of providing a health service. Four major types of economic evaluation are used in designing health care for populations: cost analysis, cost-benefit analysis, cost-effectiveness analysis, and cost-utility analysis. This research paper will describe two of these types of evaluation methods and how they relate to population health management. These two are the cost-benefit analysis and the cost-effectiveness analysis.
Cost-Benefit Analysis Many healthcare managers confuse cost-benefit and cost-effectiveness analysis, often failing to make a distinction between the two. Cost-benefit analysis evaluates programs with different objectives, while cost-effectiveness analysis compares different approaches to achieving the same objective. Cost-benefit analysis can also evaluate programs with similar objectives, but in practice it is not typically used for this purpose. Both cost-benefit and cost-effectiveness analysis are useful tools for health care policy formulators.
Both kinds of analysis involve information-gathering techniques, with the information structured and analyzed to guide policymakers and planners. The distinction between the two types of analysis is in the method of valuing the desired outcomes, the health benefits. In cost-benefit analysis, all health benefits and costs are expressed in monetary terms. Health benefits (for example, added years of life, number of lives saved, and so on) are converted to monetary terms, using valuations associated with work productivity. While in cost-effectiveness analysis, only costs are expressed in monetary terms, with health benefits
represented in natural units. Because cost-benefit analysis is based on comparing the health benefits of programs in monetary terms, it is expressed in one of two ways: the cost per unit of health benefit, or the health benefit per unit of cost. The intent of this analysis is to determine the best use of resources. Because all costs and health benefits are expressed in dollars, cost-benefit analysis has the ability to determine the “worth” of providing a health care service or program (Nas,1996). Cost-benefit analysis indicates the absolute benefit of health care services in dollars.
It is typically employed when the health care service or program of interest is not being compared to other services or programs with the same managerial or clinical objective. For example, cost-benefit analysis is useful when evaluating the decision whether to build a new hospital or to provide better roads to the hospital. In addition, cost-benefit analysis can evaluate the service or program of interest compared to “doing nothing. ” The constraint of expressing health benefits in strictly monetary terms has made cost-benefit analysis in health care less popular than other comparative constructs.
Those who propose not using cost-benefit analysis argue that expressing health benefits in monetary terms is unethical and immoral (Petitti, 1994). There are studies in health care that use cost-benefit analysis, but these focus on technical efficiency instead of economic efficiency. The perspective of these cost-benefit studies is of the health care entity of interest, and not society. These studies use economic assumptions and principles that are relevant to a societal perspective; true cost-benefit ratios are not calculated because costs and benefits that may occur over time are neglected (Nas, 1996).
Cost-Effectiveness Analysis Cost-effectiveness is a method that compares the costs and outcomes associated with health services provided with the intent to improve health. Cost-effectiveness analysis, as with cost-benefit analysis, illustrates the cost of achieving one unit of health benefit by providing a health service. Cost-effectiveness analysis involves estimating incremental costs and health benefits of a particular health service compared with some alternative health service(s). This comparison is important when choosing between alternatives in resource allocation (Petitti, 1994).
Cost-effectiveness analysis is based on the premise that “for any given level of resources available, society … wishes to maximize the total aggregate health benefits conferred” (Weinstein and Stason, 1997). In contrast, cost-benefit analysis has been criticized because it fails to take into account the societal perspective. Cost-effectiveness analysis focuses on the economic concept of opportunity cost. Opportunity cost evaluates the cost of a health service or program relative to use of the required resources in another health service or program.
In other words, the opportunity cost of some resource is its value in some other use. The true cost of a resource then, is not its market price, but the lost opportunity for using it in some other way (Petitti, 1994). Moreover, according to Petitti (1994), cost-effectiveness analysis evaluates the comparative effects of using a given set of resources for the provision of different health care services. Central to this analysis is the cost-effectiveness ratio, which represents the difference between the costs of alternative health services divided by the difference in the health out comes of these alternative health services.
Health outcomes are a measure of effectiveness. Cost-effectiveness analysis is best used when comparing health services or programs with similar objectives. Cost-utility analysis, through the use of the measure of quality-adjusted life years (QALYs), allows for a broader application of cost-effectiveness analysis. QALY is a construct that incorporates many health dimensions into a single measure. QALY is a measure of health outcome weighted according to the quality of life at a given point in time or during a specific period of time.
The number of QALY represent the number of healthy years of life relative to actual health outcomes. QALY fall into the general category of health-related quality-of-life measurements. Health-related quality of life is a measurement that aggregates quality and quantity of life, as well as a function of trade-off between quality and quantity. The QALY combines the benefit of reduced mortality and morbidity. It also adjusts the quality-of-life measure by weighting a year of life by a factor ranging from 1 to 0.
A factor of 1 represents perfect health and 0 represents death. QALY weights are obtained from one of several sources. The weights represent utility values (preferences) derived from individual judgment, judgment of groups of individuals, and published literature (which is the most common source). Individual utility values are obtained through direct rating, standard reference gamble, and time trade-off methods (Gold, Siegel, Russell, and Weinstein, 1996). Direct rating involves the assignment of linear utility values across two anchored scalar endpoints.
Utility values are assigned in relation to a most-preferred health state (usually assigned the value of 1) and a least-preferred state (usually assigned a value of 0). The resulting utility values will range from 1 to 0. The standard reference gamble is a traditional method, based on cardinal utility theory (von Neumann and Morganstern, 1993). This method assesses preferences for health states relative to other states at various chances of being in a specific health state. Preferences are obtained for various health states in relation to a most-preferred and least-preferred state.
Time trade-off is a method developed for health care decision making. This method measures the relative desirability of being in specific health states as the time in each state is varied. Intermediate health states are compared to the best and worst health state (Torrence, Thomas, and Sackett, 1992). Role of Epidemiology A specific application of epidemiology to economic evaluation focuses on the adjustment of Medicare capitation payments based on disease risk factors. Medicare capitation payments are routinely adjusted by the average adjusted per-capita costs formula.
Disease risk factors can be incorporated into this formula to more accurately adjust payments. Such factors include prior hospitalization, prior physician visits, number of cigarettes smoked per day, number of cigarette pack-years of smoking, systolic blood pressure, serum cholesterol level, blood sugar level, forced vital lung capacity, and two-year probability of cardiovascular disease (Torrence, Thomas, and Sackett, 1992). In one study, these risk factors were added to the average adjusted per-capita costs model, which consisted of age, sex, and institutional status.
The study confirmed the expected relationships between Medicare payments and prior utilization and disability. Results also demonstrated an association of risk factors for chronic disease and Medicare payments. The contribution of this study includes the identification of epidemiologic risk factors, as well as utilization and disability level, as appropriate adjusters of Medicare capitation payments (Schauffler, Howland, and Cobb, 1992). The clinical decision to employ prophylactic therapy is often associated with controversy.
An example is misoprostol prophylaxis for the prevention of non-steroidal, anti-inflammatory drug-induced gastrointestinal complications. Treatment of nonsteroidal anti-inflammatory drug-induced gastroduodenal ulcers is not definitive and has several clinical options. If the nonsteriodal anti-inflammatory drug therapy can be terminated, most ulcers heal within four to eight weeks. However, in many cases, suspension of drug therapy is not possible (Weinstein and Stason, 1997). The study stated that the cost-effectiveness of misoprostol prophylaxis is of interest to both clinicians and managers.
Routinely coprescribing misoprostol to prevent nonsteroidal drug-induced gastrointestinal complications has clinical importance and profound cost implications. Consensus does not exist on whether the prophylactic use of misoprostol cotherapy is cost-effective. A study used the marginal cost-effectiveness ratio to compare misoprostol prophylaxis with noprophylaxis, in an attempt to determine if its additional cost was worthwhile (Loh, 1998). This study used a decision analytic model that incorporated costs, expected events, and the probability of these events.
Effectiveness was defined as the number of episodes of clinically relevant gastrointestinal complications that were averted. The study population was divided into three groups: universal prescription program (misoprostol prophylaxis for all), targeted prescription program (misoprostol prophylaxis for high-risk group only), and no misoprostol prophylaxis. The marginal cost-effectiveness ratio is defined as: difference in costs cost effectiveness = difference in effectiveness where cost is quantified as the sum of the costs of misoprostol, ambulatory care, inpatient medical care, and inpatient surgical care.
Effectiveness was measured as the number of gastrointestinal complications averted (Loh, 1998). The study calculated both direct and overhead costs. Direct costs were those associated with misoprostol therapy. Estimating per unit cost was accomplished by converting charge data to cost data, by adjustment using the cost-to-charge ratio for the study institution. Overhead costs were determined according to the study institution’s designated cost centers, which included ambulatory care, patient care services, institutional operations, and medical affairs. Resource utilization and primary diagnosis were determined by medical record review.
Study eligibility was based on the following criteria: primary diagnosis of gastrointestinal complications in arthritis patients (DRG 174–180) taking nonsteroidal anti-inflammatory drugs, and patients receiving medical care from May 1994 to August 1996. The study evaluated the cost-effectiveness of using misoprostol universally and in a targeted high-risk population, relative to not using misoprostol. Study results indicated that not using misoprostol would result in two clinically relevant gastrointestinal complications, with an associated cost of $16,000. If misoprostol were used in all
patients, 1. 5 clinically relevant gastrointestinal complications would occur, with $9,400 in costs. In the targeted program, 1. 6 clinically relevant complications would be experienced, with resulting costs of $11,400 (Loh, 1998). Further analysis of the study reviewed the cost-effectiveness and determined that it would cost $15,000 to prevent one additional gastrointestinal complication. On average, the universal use of misoprostol in chronic nonsteroidal anti-inflammatory drug users is more cost-effective than either no use or the targeted prophylaxis program.
Summary Economic evaluation is an important aspect of healthcare management because of the increasing emphasis on population-based health care. At present, there are a variety of economic evaluations that are available to healthcare managers. These evaluations enable them to decide on how best to utilize and apply their resources to compete other health organizations. Public policy formulation typically requires choosing among several alternative programs to provide health care to populations. Strategic planning activities depend on economic evaluation.
The planning for provision of health care services is a complex task with many explicit and implicit concerns. Hence, healthcare managers should use these evaluations as they provide relevant and valuable insights to health care organizations.
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