Cost Benefit Analysis (CBA)

Example

Cost Benefit ratio of giving pertussis vaccine Cost without vaccination $1,866,153 Cost with vaccination $720,862 = 2.6 : 1 Cost is 2.6 of not vaccinated for every $1 spend vaccinating. Cost more to not vaccinate

Human capital calculations

Daily or Yearly wage rate Missed time (What's missed time and who is paying for it)

CBA Advantages

Decision maker can determine whether benefits exceed the cost of implementation Decision maker can compare programs with unrelated outcomes

Benefit to Cost Ratio (or Cost to Benefit) {division}

Sum of total benefits/sum of total costs Sum of total costs/sum of total benefits Similar to incremental calculations Don't forget about discounting Cost beneficial if: Benefit-to-cost > 1 Cost-to-benefit <1

Internal Rate of Return

Specify a HURDLE RATE Find the rate of return that makes the costs and benefits equal. Accept projects with an IRR greater than the chosen hurdle rate.

What is the value of a human life?

"The major disadvantage of the benefit-cost framework is the requirement that human lives and quality of life be valued in monetary units. Many decision-makers find this difficult or unethical or do not trust analyses that depend upon such valuations" - Weinstein/Fineberg

Assigning monetary values...

"To be trained in medicine, nursing...and then be faced with some hard-nosed, cold-blooded economist placing money values on human life and suffering is anathema to many"- Mooney

Discount factor

1 divided by (1 + r)t Where r is the discount rate & t is the year the cost or savings occur

Benefit-to-cost ratios?

Alternative A would be chosen because it has a higher benefit-to-cost ratio (1.25:1 vs. 1.12:1) ***Better to higher pharmacist

Net benefit calculations?

Alternative A would be chosen because it has a higher net benefit ($68,626 vs. $30,160) ***Better to higher pharmacist

Example from chapter 7

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 (cost upfront), $30,000 year 2 & 3 (maintenance) Benefits (savings): -A $120,000 per year X 3 -B $100,000 per year X 3 Discount rate 5%

CEA/CUA

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 ***Budget

Benefit:Cost Ratio B

B:C = Benefit/Cost = $285,941 / $255,782 = 1.12:1 for every $1 spend on machine you get back $1.12

Benefit:Cost ratio A

B:C = Benefit/Cost = $343,129 / $274,503 = 1.25:1 for every $1 spend for hiring pharmacist get back $1.25

Benefit to Cost Ratio (or Cost to Benefit) cost beneficial

Benefit-to-cost > 1 Cost-to-benefit <1 ***Depends on what you put 1st

Summary

CBA measures costs AND benefits in monetary terms Can compare multiple programs with different types of outcomes Values indirect benefits using HC Values intangible benefits using WTP Can choose the "do-nothing" alternative

Comparison of CEA & CBA

CEA - cost to get one person to do something CBA - put benefit first (8.4:1) Benefit to Cost Ratio $8.4 back for every $1 that you spend

Asthma Clinic Benefits (AKA: cost savings)

Direct Medical: costs avoided because of the program- decreased physician or ED visits, decreased hospitalizations Direct non-medical: travel costs avoided, etc. Indirect: increased earnings or productivity gained because of intervention Intangible: costs of pain, suffering, anxiety, fatigue

Asthma Clinic Costs

Direct medical: drugs, laboratory tests, physician visits, pharmacist visits, ED visits, hospitalizations Direct nonmedical: travel to & from physician's office or hospital, babysitting for child, food & lodging if being treated out-of-town Indirect costs: days lost from work, loss of productivity

Asthma clinic example

ED visit for asthma Pt referred to RPh RPh provides education on triggers, drug adherence, using inhaler & peak flow meter Alternative: no clinic Patients treated in ED, then go home & follow up with private physicians

CBA

Economic analysis that assesses whether the outcome (BENEFIT) outweighs the resource inputs (COST) of a program or intervention

CBA

Grounded in welfare theory (societal impact of irrigating, flood control, public parks, etc) Can assess whether program is worthwhile (not related to external standard) May choose to do nothing if none of programs/alternatives has a positive financial benefit Comparing interventions with different outcomes Can assess whether budget should be expanded to accommodate new program ***Willingness to pay

Asthma Clinic Measuring Indirect & Intangibles

Human Capital Wage rate calculations -Census Bureau -Bureau of Labor & Statistics -Self-report Missed days -Missed work -Missed housekeeping -Restricted activity -Caregiver time

Willingness to Pay

Hypothetical -Description of service Bidding vehicle -Open-ended questions -Closed-ended questions -Bidding game -Payment card

Steps in CBA

Identify the program or intervention Identify alternatives Identify costs and benefits Measure (quantify) costs and benefits Calculate results of costs and benefits

NOAA expert panel

National Oceanic and Atmospheric Administration Organization concerned with environmental issues Recommendations have been applied to the health care sector Recommend face-to-face interviews and the closed-ended question bidding vehicle

Net Benefit (or net Cost) cost beneficial

Net Benefit > 0 Net Cost < 0

Cost benefit calculations

Net Benefit is the sum of the total benefits - sum of the total costs Benefit/cost ratio is the sum of benefits divided by sum of costs all at present value Benefits may be cost savings, costs avoided, or actual profit If discounting must be done (more than 1 year scope of project is the general rule), you would use the discount factor & add up all of the benefits & costs at the present value

Net Benefit (or net Cost) {subtraction}

Net Benefit: Difference between the total benefits & costs = Total Benefits- Total Cost Net Cost = Total Cost- Total Benefits Cost Beneficial = Net Benefit > 0 Net Cost < 0

Net Benefit B

Net benefit (NB) = Total savings - total costs Total savings = $100,000 + $100,000/1.05 + $100,000/(1.05)2 = $285,941 Total costs = $200,000 (upfront) + $30,000/1.05 (maintenance) + 30,000/(1.05)2 (maintenance) = $255,782 NB = $285,941- $255,782 = $30,160

Net Benefit A

Net benefit (NB) = Total savings - total costs Total savings = $120,000 + $120,000/1.05 + $120,000/(1.05)2 = $343,129 Total costs = $96,000 + $96,000/1.05 + 96,000/(1.05)2 = $274,503 NB = $343,129 - $274,503 = $68,626

Discounting For purposes of this class...

No discount needed for spending in same year, so we'll call that year zero First time you discount use 1 + r (year 1) Second time you discount raise to the 2nd power, etc.

CBA Disadvantages

Placing a dollar value on human life is controversial & difficult

Review of health care literature

Prevention strategies (58%) Pharmaceuticals (25%) Education & counseling (21%) Screening strategies (18%) Diagnostic tests (17%)

Discount factor Example

Program costs $5000 per year for 3 years & the discount rate is 5% What is the present value of these costs? First year $5000 ***Year 0 not discounting 2nd year $5000/1.05 3rd year $5000/(1.05)2 Added years 1,2,3 1. $5000 2. $4762 3. $4535 ***If end up with a higher number you are doing it wrong So, the present value is $14,297, or the sum of the costs for each of the 3 years This is less than the $15,000 that you would pay if you paid all of the costs today

Net Benefit

Total Benefits- Total Cost

Net Cost

Total Cost- Total Benefits

CBA ratios

Usually expressed as benefit-cost (BC), where the HIGHER the number, the more cost-beneficial Usually from the societal perspective But can be used by a business to decide whether a program or service will make or lose money

CBA Equation

Value of resources consumed/Value of the outcome

Bidding game

Would you pay....? Recommend 3 times Starting point bias