Cost benefit analysis from the four full economic evaluation

Full economic evaluation

1. Cost benefit analysis By Yisehak Azaje ( BPharm ., MSc ) 8/24/2025 1 Yisehak Azaje (BPHARM., MSc)

2. Cost-Benefit analysis Objectives Upon completing this chapter, the reader will be able to: Define and describe cost-benefit analysis (CBA). Address the advantages and disadvantages of CBA. Discuss the methods of measuring productivity and intangible costs, including the human capital (HC) and the willingness-to-pay (WTP) approaches. Compare three types of calculation methods used with CBA: net benefits (or net costs), benefit-to-cost (or cost-to-benefit) ratios, and internal rate of return (IRR). Critique a CBA composite article (reading assignment) 8/24/2025 2 Yisehak Azaje (BPHARM., MSc)

3. Cost-Benefit analysis CBA is an evaluation method for comparing the monetary value of all resources consumed (costs) in providing a program or intervention with the monetary value of the outcome (benefit) from that program or intervention. CBA seeks to place monetary values on both the inputs (costs) and outcomes (benefits) of health care Outcomes of alternative interventions is valued in monetary units ($) thus you can compare alternatives with different outcomes 8/24/2025 Yisehak Azaje (BPHARM., MSc) 3

4. It involves comparing the total benefits and costs of a policy or project to society, and using this information to  guide decision-making Scope of analysis is usually broad, addressing large societal issues. The aim is to take a societal perspective. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 4

5. Cost-Benefit analysis Advantages over other economic evaluation: Allows uniform comparison of programs or interventions with entirely different outcomes. Allows comparison of health program with non-health program/interventions Most Comprehensive Can readily combine health and non health outcome associated with a single program Disadvantage Difficult to give monetary values to health outcomes. Most difficult and most criticized [For example, how can we measure and monetize the value of human life, health, environmental quality, social justice, cultural heritage, or national security?] Result depends on dollar values assigned to life What about Quality of Life? 8/24/2025 Yisehak Azaje (BPHARM., MSc) 5

6. Cost-Benefit analysis CBA ratios are expressed as benefit-to-cost ratios, where the higher the number, the more cost beneficial. Comparison of CE ratios and CB ratios 8/24/2025 Yisehak Azaje (BPHARM., MSc) 6

7. Class-work 8/24/2025 Yisehak Azaje (BPHARM., MSc) 7

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9. Cost-Benefit analysis Types of costs measured when conducting a CBA. Input costs, usually consist of Direct medical and direct nonmedical costs. The benefits of alternatives can include; Direct medical and Nonmedical costs avoided, Indirect costs avoided (measured by human capital [HC] or willingness-to-pay [WTP] methods) and Intangible costs avoided (measured by patient preferences or WTP methods). 8/24/2025 Yisehak Azaje (BPHARM., MSc) 9

10. Conducting CBA 8/24/2025 Yisehak Azaje (BPHARM., MSc) 10

11. When to conduct CBA When a policy maker has a broader perspective and is faced with one or more of the following, CBA can be used; Must decide whether to implement a specific program. Required to choose among competing options. Has a set budget and must choose and set priorities from a group of potential projects. The intervention under consideration could produce a number of widely differing outcomes. If the interventions result in a stream of benefits and costs over time --> Choose a discount rate and construct present value. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 11

12. When to conduct CBA Both the costs and the benefits are measured and converted into equivalent dollars in the year in which they will occur. Future costs and benefits are discounted or reduced to their current value. The costs and benefits are expressed as a ratio (a benefit-to-cost ratio), a net benefit, or a net cost. A clinical decision maker would choose the program or treatment alternative with the highest net benefit or the greatest benefit-to-cost (B:C) ratio. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 12

13. When to conduct CBA CBA also can be used: When comparing treatment alternatives in which the costs and benefits do not occur simultaneously. When comparing programs with different objectives. To evaluate a single program or compare multiple programs. However, valuing health benefits in monetary terms can be difficult and controversial. The expression of some health benefits as monetary units is neither appropriate nor widely accepted Therefore, unless the benefits of a program or treatment alternative are expressed appropriately in dollars, CBA should not be employed. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 13

14. When to conduct CBA Of all pharmacoeconomic evaluation methods, CBA is probably used the least. …Valuing indirect costs monetarily and intangible benefits (using the WTP approach), the valuation of outcomes such as productivity and quality of life is difficult to perform reliably and meaningfully. Because of difficulties in measuring indirect and intangible benefits , many CBAs measure and quantify direct costs and direct benefits only. Some researchers assert that these should not be considered “true” CBAs because they do not take into account the indirect costs and benefits. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 14

15. Steps in conducting CBA identify clearly/ Determine the type of program or intervention to be considered. Identify alternatives. In many cases, the alternative is to “do nothing.” In other cases, the alternative could be to implement a similar program that is smaller or larger in scale or to implement a different program. For example, a clinical pharmacist would like to start an asthma clinic. The alternative could be to compare the costs and benefits of having an asthma clinic with not having an asthma clinic. Or 8/24/2025 Yisehak Azaje (BPHARM., MSc) 15

16. ….. to compare implementing an asthma clinic with implementing a diabetes clinic. After the program or intervention and alternatives are identified, the next step is to identify the costs and benefits . Some researchers only consider an analysis to be a “true” CBA if, in addition to the direct benefits , a monetary evaluation of the indirect benefits, other sector savings , or the actual health benefits (using, for example, willingness-to-pay [WTP] measures) are incorporated into the analysis 8/24/2025 Yisehak Azaje (BPHARM., MSc) 16

17. Steps in conducting CBA Determine the perspective of the study (societal perspective is recommended) Define time frame, analytic horizon and discount rate Identify the effects of the intervention for all health and non health outcomes and classify them as either benefit or costs. Assign values Determine and calculate summary measures Evaluate the results with SA. Prepare results. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 17

18. Difference between costs and Benefits In CBA, both costs and benefits are measured in dollar values. For example , in the asthma program, a cost to the program could be an increase in medical costs related to visits to the pharmacy . A “cost saving” or benefit as a result of the program could be a reduction in medical costs for asthma-related emergency department visits. It is important to make the distinction between the two and to make sure that costs and benefits are properly placed within the equation. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 18

19. Difference between costs and Benefits CBA is difficult to perform because it requires that both costs and benefits be measured in (or converted into) monetary terms. Human Capital Approach. Willingness-to-Pay Approach. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 19

20. Measuring indirect and intangible costs Various methods have been developed to estimate the monetary value of health benefits. The two methods seen in the PE literature are the Human Capital approach and the WTP approach. Human Capital Method Indirect benefits are increases in productivity or earnings because of an intervention. HC estimates wage and productivity losses because of illness, disability, or death. The HC approach assumes that the value of health benefits equals the economic productivity that they permit. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 20

21. Measuring indirect and intangible costs There are two basic components to calculating HC: Wage rate and missed time (days or years) because of illness. Because the HC approach is based on wages, it is necessary to have some estimate of income. Income estimates can be obtained from several sources, including: the Census Bureau; the Bureau of Labor and Statistics; self-report; or any other data source that provides income estimates based on gender, age, or occupation. Missed time (days or years) because of illness can be obtained by self-report. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 21

22. Measuring indirect and intangible costs Wage Rate Calculations Depending on the type of study, a yearly wage rate or a daily wage rate can be calculated. A yearly wage rate (income per year) would be calculated for a program or intervention that would reduce long-term disability or death. For example, a pneumococcal vaccination might result in preventing premature death. Thus, it would be appropriate to use a yearly wage rate and assess the value of the number of years saved because of the intervention. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 22

23. Measuring indirect and intangible costs Note that income or wages should include fringe benefits. A daily wage rate (income per year divided by number of days worked per year) may be calculated for an intervention targeted at an acute or chronic illness with short-term disability. A person may not be adversely affected by the disease state on a continual basis 8/24/2025 Yisehak Azaje (BPHARM., MSc) 23

24. Measuring indirect and intangible costs For example, asthma, a chronic disease state, may include episodic asthma attacks. Thus, a person may only experience problems with the disease state on a periodic basis. … both income and number of days worked per year must be assessed. We may assume that the average person works 240 days a year when accounting for weekends, vacation, and sick leave. A formula to calculate number of days worked per year is: Number of days in a year (365)- Number of weekend days (104)- Number of vacation days (14)- Number of sick-leave days (7)= 240. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 24

25. Measuring indirect and intangible costs Missed Time (Days or Years) Because of Illness If a yearly wage rate is calculated, then assessment of the number of years lost because of a disease or illness must be made. If a daily wage rate is calculated, an assessment of the number of missed days because of illness must be calculated. Because many pharmaceutical interventions involve chronic disease states with intermittent episodes, we will use an example calculating the daily wage rate and number of missed days. Missed days because of illness can fall into four groups. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 25

26. Measuring indirect and intangible cost Notice that for housekeeping and child care, estimates of productivity loss are estimated (imputed) even though no payments are directly associated with these activities. Using the asthma clinic example, we will calculate an indirect benefit. Assume that the population served by the clinic is made up of adults with an average income (including fringe benefits) of $40,000 and 240 days worked per year. The daily wage rate (average income/number of days worked per year) would be $40,000/240 = $167/day. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 26

27. Measuring indirect and intangible costs An average of 20 days a year were missed from work before participating in the asthma clinic, and an average of 7 days a year were missed from work after participating in the asthma clinic. Multiplying the daily wage rate times the number of missed days results in the value of lost productivity. In other words, the value of 20 days lost from work is $3,340, and the value of 7 days lost from work is $1,169. The difference between before and after the program is $2,171, which is the cost savings or the indirect benefit of the program or intervention . 8/24/2025 Yisehak Azaje (BPHARM., MSc) 27

28. Measuring indirect and intangible costs 8/24/2025 Yisehak Azaje (BPHARM., MSc) 28

29. Measuring indirect and intangible costs HC Method often used in court cases, e.g., court awards the family of a man who dies at 35 in a car accident the amount of his expected PV of lifetime earnings = $650,000. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 29

30. Measuring indirect and intangible costs The main advantage of the HC approach is that it can be made operational rather easily. According to the human-capital approach, the value of life is determined by the contribution the individual could make to the social product. Its relatively easy application is outweighed by serious economic and ethical shortcomings. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 30

31. Limitations of HC approach The method excludes cost of pain and suffering due to illness. It ignores the non-financial costs of pain, suffering, and grief which are often associated with illness. It does not assign any cost of illness to persons who are retired or live off nonabour income. People who are not working for pay (e.g., homemakers, students, retirees) are valued at 0! (Even for the employed, time away from the job is valued at 0.) Valuing benefits in terms of rates of pay neglects the health benefits that accrue to people who are not employed-for example, non-working wives and retired people. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 31

32. Limitations of HC approach Wage difference may reflect wage discrimination instead of differences in productivity. Implies that people with higher wages have higher social value. Does not account for labor market imperfections, e.g., discrimination. Biased as favours white, adult males that have highest earning potential. The precise social rate of discounting is unknown. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 32

33. Willingness-to-Pay Method The willingness to pay approach seeks to establish the value that people attach to health care outcomes by asking them how much they would be prepared to pay to obtain the benefits or avoid the costs of illness. Directly estimate welfare gains/losses. Developed in response to the problems of obtaining reliable estimates of the value of outcomes that are not routinely traded in any easily observed market place. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 33

34. Willingness-to-Pay Method Individuals are asked to state max. willingness to pay(WTP) or willingness to accept (WTA) to ensure that the welfare gain occurs or to tolerate the welfare loss. In contrast to the human-capital approach, the willingness-to-pay approach is based on the concept of subjective utility. Value is in the eye of the beholder!! 8/24/2025 Yisehak Azaje (BPHARM., MSc) 34

35. Willingness-to-Pay Method It can value both the indirect and intangible aspects of a disease or condition. It determines how much people are willing to pay to reduce the chance of an adverse health outcome. It is grounded in welfare economic theory, and it incorporates patient preferences and intangible benefits such as quality of life differences. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 35

36. Willingness-to-Pay Method… Contingent valuation is a method of asking individuals to value an option they are not now choosing. In some circumstances, this is the only feasible method for valuing a public good. For example, there is no obvious market price to use to value saving a rare species of owl. Contingent valuation (CV), in which the respondent is asked to value a contingent or hypothetical market It is a direct method that is used to elicit the dollar values or the WTP amounts. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 36

37. Willingness-to-Pay Method… WTP values can be collected through face-to-face interviews, mail, telephone, or via the Internet. To elicit WTP values, respondents are presented with a hypothetical market describing the benefits of a particular health care intervention (e.g. pharmaceutical, medical device). Respondents are then asked to value the health care intervention in a dollar amount, percent of income, or health care premium . 8/24/2025 Yisehak Azaje (BPHARM., MSc) 37

38. Willingness-to-Pay Method… Measuring WTP using the CV method should include two general elements, a hypothetical scenario and a bidding vehicle. Hypothetical Scenario The hypothetical scenario should include a description of the health care program or intervention (e.g., medication therapy management program, new drug therapy). 8/24/2025 Yisehak Azaje (BPHARM., MSc) 38

39. Willingness-to-Pay Method… The intent of the scenario is to provide the respondent with an accurate description of the good or service that he or she is being asked to value. In addition, the scenario should detail the amount of time the person should expect to spend, as well as the benefit (e.g., percent improvement in the condition) of the intervention 8/24/2025 Yisehak Azaje (BPHARM., MSc) 39

40. Willingness-to-Pay Method… Bidding Vehicles After the program or intervention has been adequately described, respondents are then asked to “bid,” or place a value on the program or intervention. Bids can be obtained through a variety of formats, such as open-ended questions, closed-ended questions, a bidding game, or a payment card. Example: National Oceanic and Atmospheric Administration Recommendations 8/24/2025 Yisehak Azaje (BPHARM., MSc) 40

41. NOAA recommends face-to-face interviews and the dichotomous choice (closed-ended) bidding vehicle. Face-to-face interviews are time consuming and may be cost prohibitive for some researchers. The use of the dichotomous choice format requires a large sample size to accommodate the varying bid levels. But there are obviously huge problems with this approach. It is very hard to design a survey that elicits true willingness to pay. People can say most anything in a survey that has no real consequences for their lives. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 41

42. Willingness-to-Pay Method… Advantages of WTP Advantages of using the WTP as an outcome measure in pharmacoeconomics . Individuals may demand health care purely from the information provided by it. This is particularly true for diagnostic tests. Sometimes individuals like to be part of the decision making process so they demand the info provided by health care. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 42

43. Willingness-to-Pay Method… The process of health care can provide utility or disutility. No one assumes that individuals particularly enjoy receiving health care but they prefer certain types of methods over others. People may gain utility from knowing that health care exists, if not for themselves, for other people (altruistic view). WTP reveals individuals’ attitudes towards risk. How health conscious or motivated are you? v. Incorporates patients preferences (values) for use in the decision making process. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 43

44. Willingness-to-Pay Method… Disadvantages of WTP Protest response Especially in pre-paid health care system people don’t actually pay for health care, the WTP method can give rise to a lot of protest responses if people misunderstand the task. Some people don’t understand the hypothetical nature of the technique and think that we are using their WTP amount to set charges for health care. They protest by either saying nothing or zero. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 44

45. Zero bid problem It is related to the previous problem in that we have to determine if a zero response is a genuine WTP for zero (the person doesn’t value the service at all) or they are protesting to the technique. Estimates vary widely Price may be less than true WTP, value will be understate Derived on the basis of what people say rather than do . 8/24/2025 Yisehak Azaje (BPHARM., MSc) 45

46. Cognitively demanding The process of thinking of your max WTP is actually quite hard to do. Many individuals struggle with it. People answer in the way that is expected of them. Difficulty of understanding probability 8/24/2025 Yisehak Azaje (BPHARM., MSc) 46

47. The Benefits: Revealed preference Another approach to valuing time is to use revealed preference; let the actions of individuals reveal their valuation. For example, if one compared house prices for two houses, one of which was 5 minutes closer to the workplace, this would effectively “cash out” the value of saved commuting time. In practice, this approach runs into problems because the two homes are not identical. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 47

48. Some of the differences (e.g., housing attributes) can be observed and accounted for with cross sectional regression. Decomposing a sale price by its attributes is the basis of hedonic market analysis. Other differences are either hard to measure or unobserved, however, which leads to bias. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 48

49. Measuring indirect and intangible costs 8/24/2025 Yisehak Azaje (BPHARM., MSc) 49

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51. Calculating results of costs and benefits 8/24/2025 Yisehak Azaje (BPHARM., MSc) 51

52. When evaluating interventions, it is important to assess the method used. Another issue to consider when choosing a method for displaying the results is the time horizon for the project. If retrospective data are collected for more than 1 year or if the project inputs or outcomes are estimated for more than 1 year into the future, it is important to adjust or discount these costs to one point in time. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 52

53. The net and ratio calculations for both proposals Although four calculations are shown in the table, the benefit-to-cost ratio and the net benefit calculation are used most often because the higher the result, the more costbeneficial an option becomes. Using the criteria outlined above for cost-beneficial programs, it is apparent that both programs are cost-beneficial using both the net and ratio methods of calculations. However, when comparing net calculations, proposal B is more cost-beneficial than proposal A (net benefit = $2,500 versus $1,000), but proposal 8/24/2025 Yisehak Azaje (BPHARM., MSc) 53

54. A is more cost-beneficial than proposal B (benefit-to-cost ratio = 2.0 versus 1.5) when using ratio calculations. The ratio and the net calculation may indicate that different options are the most beneficial. In this example, in which both proposals are cost-beneficial, the decision maker may consider other issues, such as the amount of money available for investment. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 54

55. The net and ratio calculations for both proposals Whereas A would require $1,000 input costs, proposal B would require $5,000. Another consideration may involve the return on investment. Proposal A, with a 2:1 benefit-to-cost ratio, has a higher return than proposal B (i.e., 1.5:1 benefit-to-cost ratio). A third consideration is the actual net benefit amount. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 55

56. Proposal B has a higher net benefit than proposal A ($2,500 versus $1,000). The choice between proposal A and B would depend on the goals (both programmatic and financial) of the organization. Caution should be used when interpreting ratio calculations because even when using the same monetary estimates, results can change depending on whether some costs are placed in the numerator as input costs or the denominator as cost savings; 8/24/2025 Yisehak Azaje (BPHARM., MSc) 56

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58. Calculating results of costs and benefits 8/24/2025 Yisehak Azaje (BPHARM., MSc) 58

59. Calculating results of costs and benefits Guidelines for interpretation of ratios If the B:C ratio is greater than 1, the program or treatment is of value. The benefits realized by the program or treatment alternative outweigh the cost of providing it. If the B:C ratio equals 1, the benefits equal the cost. The benefits realized by the program or treatment alternative are equivalent to the cost of providing it. If the B:C ratio is less than 1, the program or treatment is not economically beneficial. The cost of providing the program or treatment alternative outweighs the benefits realized by it. 8/24/2025 Yisehak Azaje (BPHARM., MSc) 59

60. Thank You! 8/24/2025 Yisehak Azaje (BPHARM., MSc) 60