Discounting in Health Economic Evaluation!

> Is health tradable?
> Which lottery?
> Positive time preference
> Discounting
> Why do we discount?
> How to discount?
> Impact of discounting
> Discounting in HEE - uniform discounting and differential discounting
> Choosing a discount rate
> Guidelines on discounting
> Discounting future values
> Take home message

1. Discounting in Health Economic Evaluation! Dr. Amit Dang  | Founder and CEO | President ISPOR - Mumbai MarksMan Healthcare Solutions LLP

2. Is health tradable? “ … the whole notion of having the opportunity to choose to invest in health technology now or in the future means that health is tradable over time in exactly the same way as wealth”

3. Which Lottery? Suppose you decided to buy a single lottery ticket You have a choice between equally priced tickets for 2 tax free lotteries The probability of winning the two lotteries is identical One lottery pays out 50,000 INR per year for 20 years; the other pays out 1,000,000 INR immediately For which lottery you would buy the ticket and why?

4. Positive Time preference We have time preference for cost incurred and outcomes obtained in different periods In general, individuals prefer to experience a good (e.g. health care) or consume a product #now relative to doing so in the #future. Risk that death will reduce the chance of future consumption Preference for early rather than late consumption Our valuation depends upon, when we incur the costs or obtain the outcomes We tend to prefer to consume immediate benefits to those occurring in the future Because costs and outcomes in different time periods are not directly comparable; their comparison requires conversion to a common time point.

5. Discounting A mathematical procedure for adjusting future costs and outcomes of health-care interventions to “present value” Adjusting for differences in the timing of costs (expenditure) compared to health benefits (outcomes ) It is a standard practice in decision modeling to incorporate risk aversion and the decreasing value of assets and events in the future. Commonly used in cost-effectiveness analysis to 'make fair' comparisons of programmes , whose costs and outcomes occur at different times . No discounting is applied to the current year as the relevant costs or benefits are already in present value terms.

6. Why do we discount? Discounting seeks to take into account the impact of time on how those costs and outcomes are valued . I ndividuals prefer to experience health care technology #now relative to doing so in the #future . Hence, one needs to compensate an individual to make it worthwhile for them to delay consuming something today until some specified period in the future. The amount of compensation required reveals an individual’s discount rate – or the societal rate of time preference H igher discount rate (or longer delays ) – Lower net present value In dividuals consider high value of consuming a health care technology #now compared with delaying that same consumption for some period into the #future .

7. How to discount? I offer Vallish a choice between receiving 1,000 INR today or a higher sum of money if he waits for 12 months. H e tells me I would need to pay him at least 1,100 INR in 12 months for him to forgo the 1,000 INR today. By choosing the 1,100 INR in a year’s time to forgo the 1,000 today INR, Vallish has revealed that the present value of the, 1,100 INR in one year’s time, is 1,000 INR. Vallish has a positive rate of time preference. This is measured by his discount rate of 10% (i.e. 100 INR is 10% of 1,000 INR). The value to Vallish’s today, of 1,100 INR in a year’s time, is 1,000 INR (or 1,100 INR/1 + 10 % as per formula). To persuade Vallish to wait one year for the 1,000 INR, we had to offer him an additional 10%. If we only had to offer Vallish 1,050 INR in a year’s time, his discount rate would be 5%. To invest in future health outcomes, society needs to forgo current consumption, and the discount rate should reflect this opportunity cost.

8. Case study Hypothetical Cancer Screening Promotion Campaign cost – 450$ Cost of screening – 100$ The costs of the intervention occur upfront while the outcomes (benefits) accrue slowly over time.

9. Findings Without discounting, the total benefits over five years are $500, outweighing the campaign cost of $450. There is a net benefit of $50 to the society from this program. Discounting the benefits decreases the total benefits in today’s dollars. At 5 % discount rate - the program has a small positive benefit (of $ 5) At 10% discount rate - there would be a net loss to society The present value of the benefits is lower, as we move farther, from the present year, regardless of the discount rate. Moving from a zero discount rate for outcomes to a rate of 10% changes the result from one of supporting spending in cancer screening (there is a net-benefit to society) to not supporting such spending (there is a net cost to society).

10. Impact OF DISCOUNTING “ … the principle of discounting has greatest application to health-care programs for which most of the costs are incurred at the present moment and health benefits occur in the far future”

11. Discounting in health ECONOMIC EVALUATIONS

12. UNIFORM discounting Based on the fact that the impact of time is independent of the nature of future events (i.e., whether they are costs or benefits) Results in consistency in defining preferences for health-care programs that cost money and yield health outcomes at different moments in time Uniform discounting guarantees equal priority to all such programs if the value of health remains constant over time Limitations May not accurately represent the values of a society Does not reflect the longitudinal time preferences of individuals (or groups) “The philosophical rationale for constant-rate discounting is the concept of longitudinal equity, i.e. that society should make allocation decisions in such a way that present and future cohorts are treated equally, regardless of when they come into existence”

13. DIFFERENTIAL discounting Using different discount rates for costs and consequences; or L ower discount rates for benefits as compared to costs Easy to justify any policy by choosing, sufficiently : High discount rate for costs Low discount rate for benefits Long time horizon

14. health ECONOMIC EVALUATIONS Cost Benefit Analysis (CBA ) Form of economic evaluation in which both costs and benefits are given in monetary units. CBA of interventions affecting health requires procedures which directly or indirectly are equivalent to discounting the “value of future health” effects at the same rate as costs . Cost Effectiveness Analysis (CEA ) Most common analysis used to decide different treatments for the same condition. Costs are measured in monetary units; whereas health benefits are measured as outcome measures in natural units Life years gained Quality-adjusted life years (QALYs) Symptom-free days (mortality or reduced morbidity)

15. Choosing a Discount Rate “ … when health effects can be valued in monetary terms, as in CBA, they should be discounted at the same rate as costs. If health effects are measured in quantities (e.g. quality adjusted life years) as in CEA and the value of health effects is increasing over time, discounting the volume of health effects at a lower rate than costs is a valid method of taking account of the increase in the future value of health effects”

16. Guidelines on discounting? Countries that use guidelines for economic evaluations in health care support uniform discounting Prescribed discount rates vary mostly between 3% and 5%

17. Economic growth Favorable financial condition Availability of healthcare options Unit quantity of healthcare u sage Healthier population “There is also a possibility that with greater economic growth, the value of health may increase relative to other goods. In such a scenario, a lower discount rate should be applied to health effects than monetary effects while discounting future values” Recently in UK, health outcomes had to be discounted using a rate of 1.5% to 2.0% and the costs using a rate of 6% Discounting future values Value of health relative to other goods

18. Take home messages It is impossible to decide whether uniform or differential discounting should be applied. The different options seem to be more a matter of belief or disbelief in market forces rather than empirical science. At the very least, standard methods of discounting should be used for studies that are likely to be compared with each other. The most commonly used method at present (uniform discounting using a constant non-zero discount rate, commonly 3% or 5%) leads to prioritization of immediate treatment at the expense of prevention and works against long-term public health measures including some evidence-based screening and pediatric vaccination programs.

19. Striking the balance Given the explosive growth in economic evaluation and its inclusion at a national policy level in many countries, it is imperative that consistent principles of discounting are determined both nationally and internationally. Since countries differ according to national wealth, arguably the desirable balance between health-care programs providing short v/s long-term benefits may also differ considerably For e.g. developing countries may choose to set high discount rates, to focus national policy on immediate health problems. Alternatively , national panels could be commissioned for the purpose of setting discount rates for health economic research. Given that economic evaluations should support health-care decisions at a national level, government agencies responsible for health-care financing and delivery should play a leading role in such panels

20. “One can trade wealth now for health in the future or preserve wealth now at the price of reduced future health”

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22. exercise An ongoing investment in health care for reduction in cardiovascular risk using low dosage aspirin therapy, entails an expenditure of $100 per annum over 15 years, and costs were discounted in the following scenarios: Case scenario I Variable discounting - 6 % in years 1 to 5 and 2% in years 6 to 15 Case scenario II Constant discounting – 6% for 15 years Calculate the following: Net present Value (NPV) in both the scenarios?

23. Answers Case scenario 1 - $1260 Case scenario 2 - $ 1029