Economics: Cost Benefit Analysis - LECTURE 1 (EXAM 2)

Direct non-medical costs include: A. Travel to & from physician's office or hospital B. Babysitting for child C. Food & lodging if being treated out of town D. All the above

D

Net benefit is the sum of the total benefits - sum of total costs AND benefit/cost ratio is the sum of benefits divided by sum of costs all at present value. Benefits may be: A. Cost savings B. Costs avoided C. Actual profit D. All the above

D

Wage rate calculations are done via: A. Census Bureau B. Bureau of Labor & Statistics C. Self-report D. All the above

D

Which of the following is TRUE regarding the Internal Rate of Return (IRR)? A. Specify a hurdle rate B. Find the rate of return that makes the costs and benefits equal C. Accept projects with an IRR greater than the chosen hurdle rate D. All the above

D

Direct medical costs include: A. Drugs B. Lab tests C. Physician visits D. Pharmacist visits E. ED visits F. Hospitalizations G. All the above

G

Discount factor:

(1) / (1 + r)^t *r = discount rate* *t = year the cost or savings occur*

Example of intangible cost vs benefit:

*Asthma* Intangible cost: inability to play sports due to pain & fear of not being able to breathe Intangible benefit: Avoiding the panic & fear associated with not being able to breathe

*EXAMPLE:* Which option would you choose based on Net benefit calculations & benefit-to-cost ratio calculations?

-Alternative A would be chosen because it has a higher net benefit ($68,626 vs. $30,160) -Alternative A would be chosen because it has a higher benefit-to-cost ratio (1.25:1 vs. 1.12:1)

Steps in CBA:

1. Identify the program or intervention 2. Identify alternatives 3. Identify costs and benefits 4. Measure (quantify) costs & benefits 5. Calculate results of costs & benefits

Discounting rules:

1. No discount needed for spending in the same year (0 discount year 1) 2. First time you use discount, use 1 + r (year) 3. Second time you discount, raise to the 2nd power, etc

-grounded in welfare theory (societal impact of irrigating, flood control, public parks) -can assess whether program is worthwhile (not related to external standard) -may choose to do nothing if none of the programs/alternatives has a positive financial benefit -comparing interventions with different outcomes -can assess whether budget should be expanded to accomodate new program A. CBA B. CEA/CUA

A

CBA ratios are usually expressed as benefit-cost (BC) where the __________ the number, the more cost-beneficial. A. Higher B. Lower

A

CBA ratios are usually from the societal perspective but can be used by a business to decide whether a program or service will make or lose money. A. True B. False

A

The discount factor should be used to determine the net present value (NPV) SEPARATELY for the costs and for the benefits. A. True B. False

A

When performing cost benefit calculations and discounts must be done, you would use the discount factor & add up all of the benefits & costs at the present value. A. True B. False

A *discounting is done if the project is more than 1 year*

Cost Benefit Analysis (CBA) is an economic analysis that assesses whether the outcome (benefit) outweighs the resource inputs (cost) of a program or intervention. A. True B. False

A *equation: value of resources consumed /value of the outcome*

The major disadvantage of the benefit-cost framework is the requirement that human lives and quality of life be valued in monetary units. A. True B. False

A *many decision makers find this difficult or unethical OR do not trust analyses that depend upon such valuations*

Net benefit = Total benefits - Total costs Net costs = Total costs - Total benefits A. True B. False

A *net benefit = >0* *net cost = <0*

Benefit to cost ratio = Sum of total benefits/sum of total costs Cost to benefit ratio = Sum of total costs/sum of total benefits A. True B. False

A *similar to incremental calculations* *cost beneficial if: benefit-to-cost >1 OR cost to benefit <1*

Which of the following is/are advantages of CBA? *select all that apply* A. Decision maker can determine whether benefits exceed the cost of implementation B. Decision maker can compare programs with unrelated outcomes C. Placing a dollar value on human life if controversial & difficult

A & B

-assumes decision-maker wants to maximize achievement of a defined objective within a specified budget -assesses program relative to an external standard (budget constraint or threshold cost-effectiveness ratio) -decision to expand budget can only be made relative to opportunity cost that may fall outside of health care itself -assume choosing one of the alternatives for patients who need treatment A. CBA B. CEA/CUA

B

Human capital calculations include: A. Wage rate calculations (daily or yearly) B. Missed days/time C. Both A & B

C

Indirect costs include: A. Days lost from work B. Loss of productivity C. All the above

C

The National Oceanic and Atmospheric Administration (NOAA) is an organization concerned with environmental issues and its recommendations have been applied to the health care sector. These recommendations include: A. Face-to-face interviews B. Closed-ended question bidding vehicle C. Both A & B

C

Which of the following is considered a disadvantage of CBA? A. Decision maker can determine whether benefits exceed the cost of implementation B. Decision maker can compare programs with unrelated outcomes C. Placing a dollar value on human life if controversial & difficult

C

Intangible costs include: A. Pain B. Suffering C. Anxiety D. Fatigue E. All the above

E

Willingness to pay is hypothetical and can include bidding vehicles such as: A. Open-ended questions B. Close-ended questions C. Bidding game D. Payment card E. All the above

E

*KNOW* Which of the following is TRUE regarding CBA? A. CBA measures costs AND benefits in monetary terms B. CBA can compare multiple programs with different types of outcomes C. CBA values indirect benefits using Human Capital (HC) D. CBA values intangible benefits using Willingness to Pay (WTP) E. With CBA, you can choose the "do-nothing" alternative F. All the above

F

*EXAMPLE:* Alternative A = hire RPh Alternative B = Automated dispensing machine Costs: A: $80,000 salary plus 20% fringe benefits x 3 years B: $200,000 year 1, $30,000 year 2 & 3 Benefits (savings): A: $120,000 per year X 3 B: $100,000 per year X 3 Discount rate = 5% 1. Calculate Net Benefit (NB) for Alternative A? 2. Calculate the Benefit:Cost Ratio for A?

Net benefit = Total benefits - Total costs Discount first: Total Costs: (A) Year 1: $96,000 = $96,000 Year 2: $96,000/1.05 = $91428 Year 3: $96,000/(1.05)^2 = $87074 Total Costs = $274502 Total Benefits: (A) Year 1: $120,000 = $120,000 Year 2: $120,000/1.05 = $114,285 Year 3: $120,000/(1.05)^2 = $108,843 Total Benefits = $343,128 Net Benefit = $343128-$274502 = $68,626 Benefit:Cost Ratio: $343,128/$274502 = 1.25:1

*EXAMPLE:* Alternative A = hire RPh Alternative B = Automated dispensing machine Costs: A: $80,000 salary plus 20% fringe benefits x 3 years B: $200,000 year 1, $30,000 year 2 & 3 Benefits (savings): A: $120,000 per year X 3 B: $100,000 per year X 3 Discount rate = 5% 1. Calculate Net Benefit (NB) for Alternative B? 2. Calculate the Benefit:Cost Ratio for A?

Net benefit = Total benefits - Total costs Discount first: Total Costs: (B): Year 1: $200,000 = $200,000 Year 2: $30,000/1.05 = $28,571 Year 3: $30,000/(1.05^2) = $27,210 Total Costs = $255,781 Total Benefits: (B) Year 1: $100,000 = $100,000 Year 2: $100,000/1.05 = $95,238 Year 3: $100,000/(1.05^2) = $90,703 Total Benefits = $285,941 Net Benefit = $285,941 - $255,781 = $30,160 Benefit:Cost Ratio: $285,941/$255,781 = 1.12:1

Discounting example: Program costs $5000 per year for 3 years & the discount rate is 5% What is the present value of these costs?

Year 1: $5000 = $5000 Year 2: $5000/1.05 = $4761.9 Year 3: $5000/(1.05)^2 = $4535.1 Present value is $14,297 (without discount, value would be $15,000)