SEMINAR ON

COST EFFECTIVENESS AND COST ANALYSIS

TERMINOLOGIES

1. Cost
The amount of the money that needs to be spent.

2. Quality adjusted life year (QALY)

A frequently used outcome measure that incorporates the quality and desirability
of a health state with the duration of survival; quality of life is integrated with length of
life using a multiplicative formula.

3. Cost-effectiveness: The minimum cost for a given benefit, the maximum benefit for a
given cost, or a balance of low costs and high benefits that has maximum utility.

4. Cost-effectiveness analysis (CEA)

An economic analysis in which all costs are related to a single, common effect,
usually in terms of cost expended per outcome achieved.

5. Cost-effectiveness ratio
The ratio of total costs of investment to total accrued benefits, in terms of both
dollars and benefit value.

6. Cost-utility analysis (CUA)

A type of cost-effectiveness analysis in which benefits are expressed in terms
of cost per QALY gained.
GENERAL OBJECTIVE

At end of the class, students are able to understand about the cost effectiveness and cost
analysis.

SPECIFIC OBJECTIVES

At the end of the seminar, students are able

- To define cost.
- To list out the types of cost.
- To explain cost analysis.
- To describe about the types of cost anlaysis.
- To enumerate about the cost effectiveness analysis.
- To explain about the purpose of cost analysis.
- To describe about the role of administrator in cost analysis.
- COST EFFECTIVENESS AND COST ANALYSIS
INTRODUCTION

Cost-effectiveness analysis (CEA) is a form of economic analysis that compares the

relative expenditure (costs) and outcomes (effects) of two or more courses of action. Cost-
effectiveness analysis is often used where a full cost-benefit analysis is inappropriate e.g. the
problem is to determine how best to comply with a legal requirement. Typically the CEA is
expressed in terms of a ratio where the denominator is a gain in health from a measure (years of
life, premature births averted, sight-years gained) and the numerator is the cost of the health gain.
The most commonly used outcome measure is quality-adjusted life years (QALY). Cost-utility
analysis is similar to cost-effectiveness analysis.Cost-effectiveness analysis is generally not
equivalent to cost-benefit analysis (CBA). Cost is money expended for all the resources used,
including personnel, supplies, and equipment.

COST

DEFINITION

The total amount of money that needs to be spent by an organization or a person or

government.

TYPES OF COST

1. Fixed cost: Fixed costs are those costs which stay the same regardless of the level of the
activity. They are not related to volume. They remain constant as the volume increases
and decreases over the period of time. Among fixed costs are deprivation of equipments
and buildings, salaries, benefits, utilizes, interest on loans or bonds, and taxes.

Example: Fixed costs are those which would exist even if the organization were “shut down”.

2. Variable cost: Variable costs are those cost that change depending on the level of volume.
They do relate to volume and census (patient days). They include items such as meals and
linen. The cost of supplies varies by patient census, physician orders and diagnosis.

Example: the cost of surgical dressings increases when the patient’s wound has drainage and
dressings to be changed frequently.

3. Sunk costs: Sunk costs are fixed expenses that cannot be recovered even if program is
canceled.

Example: Advertising

4. Accounting cost:
 “A measure of cost based on a number of simplifications such as an assumed useful life
for a price of equipment.”

5. Average cost:

“Full cost divided by the number of units of service or patients”

6. Cost center:

“A unit of department in an organization for which a manager is assigned responsibility

for costs.

7.Direct costs – direct costs are those expenses that directly effects patient care Ex:
salaries for the nursing personnel who provide hands on patient care is considered as direct cost.

8.Indirect costs – indirect costs are the expenditures that are necessary but don’t effect patient
care directly.

Ex: salaries for dietary or housekeeping personnels.

9.Economic cost:

“The amount of money required to obtain the use of a resource.”

10. Joint cost:

Costs that is required for the treatment of several or more types of patients. The cost
would not incur unless the organization stopped treating all of those different types of patients.

11. Opportunity costs:

A measure of cost based on the value of the alternatives that are given up in order to use
the resources as the organization has chosen.

STAGES OF COSTS:

Costs have two stages:

1. Acquisition cost: when some asset or service is purchased, the resource given in
exchange represents the acquisition cost.
2. Expired cost: once the asset is fully consumed, it becomes an expired cost or an expense.

FACTORS AFFECTING COST

 The volume of service provided is the greatest factor affecting costs. Other factors
include length of patient stays, salaries, price of the material, case mix, seasonal factors, and
efiiciencies (such as simplification of procedures and quality management to prevent errors that
increase patient complications and increase costs). Still other factors that have an impact on cost
are regulation and competition for market share; third party payers; the age and size of the
agency; type and amount of services provided; the agency’s mission; and relationships among
nurses, physician and other personnel.

COST CONTAINMENT

The goal of the cost containment is to keep cost within acceptable limits for volume
inflation, and other acceptable personnels. It involves the following:

1. Cost awareness.

2. Cost monitoring.

3. Cost management.

4. Cost avoidance.

5. Cost reduction.

6. Cost control.

COST AWARENESS:

It focuses the employees attention on costs. It increases organizational awareness of what

costs are, the process available for containing them, how they can be managed, and by whom.

COST MONITORING:

It focuses on how much will be spent where, when and why. It identifies, reports and
monitors costs. Staffing costs should be identified. Recruitment, turnover, absenteeism, and sick
time are analysed, and inventories are controlled.

COST MANAGEMENT:

It focuses on what can be done by whom to contain costs. Programs, plans, objectives,a nd
strategies are important. Responsibility and accountability for the control should be established.
A committee can identify long and short range plans and strategies.

COST AVOIDANCE:
 It means not buying supplies, technology, or services. Supply and equipment cost should be
carefully analyzed. Costs and effectiveness of disposable versus reusable items are compared.
The receipts, storage and delivery of disposables and labour and processing cost of reusable
items are part of the analysis. The least expensive and most effective supplies, equipment, and
services should be identified and expensive and less effective items avoided.

COST REDUCTION:

It means spending less for goods and services. The amount of reduction depends on the size
of the agency, previous efficiency, skills of managers, and cooperation of employees.

COST CONTROL:

It is effective use of available resources through careful forecasting, plaaning, budget

preparation, reporting and monitoring.

COST ANALYSIS

It is the system of analyzing the relationship between the fixed and the variable cost.

TYPES OF COST ANALYSIS

1. Cost benefit analysis [CBA]

2. Cost benefit ratio [CBR]
3. Cost effectiveness analysis [CEA]
4. Cost-of-illness analysis
5. Cost-minimization analysis
6. Cost utilization analysis
7. Cost consequences analysis

1. COST BENEFIT ANALYSIS [CBA]

Cost benefit analysis [CBA] is measurement of the relative costs and benefits
associated with a particular project or task.

The cost benefit analysis is a tool which is useful in setting priorities for various sources
of action to meet objectives, and provide an estimate of the net financial value associated with
each course of action (eg. Manpower and labour, material and equipment, facilities). All the
inputs and outputs have to be converted into momentary terms because all inputs (ie costs) and
all the outcomes (ie benefits) are valued in money terms.

OR
 It is a procedure by which all the costs resulting from installing and operating a system are
determined and converted to a money amount and the ratio is calculated to reflect the
relationship of costs and benefits.

OR

Cost benefit analysis [CBA] is tool with great potential for the decision makers so long as
he or she recognizes the difficulty in determine the true costs and benefits of various alternatives.
This tool can especially useful when trying deciding between alternative expenditure of money.”

BASIC APPROACHES OF COST BENEFIT ANALYSIS

Two basic approaches for cost-benefit analysis (CBA) are-

 Ratio approach
 Net benefit approach.
Ratio approach: The ratio approach indicates the amount of benefits (or outcomes) that
can be realized per unit expenditure on a technology vs. a comparator. In the ratio approach, a
technology is cost beneficial vs. a comparator if the ratio of the change in costs to the change in
benefits is less than one.
Net benefit approach: The net benefits approach indicates the absolute amount of money
saved or lost due to a use of a technology vs. a comparator. In the net benefits formulation, a
technology is cost-beneficial vs. a comparator if the net change in benefits exceeds the net
change in costs.

2. COST BENEFIT RATIO [CBR]

“It is the numerical relationship between the value of the financial cost of a program and the
value of benefits”

“It is defined as the ratio of the Value of benefits of an alternative to the value of
alternative cost.”

Z= present value of economic benefits

Present value of economic cost.

Cost benefit analysis is often used in the public sector where there is no net income to
serve as a guideline.

In order to determine the ratio, it is necessary to assign value to both the cost and the
benefits in monetary terms. In practice, it is difficult to assign monetary values to health care
outcomes. It is difficult to measure the value of life and even more difficulty in measuring the
difference in health outcomes that do not involve life or death.
 Cost benefit analysis is designed to consider the social cost and benefits attributable to
the project. The benefits are expressed in monetary terms to determine whether a given program
is economically sound, and to select the best out of several programs.

3.COST-OF-ILLNESS ANALYSIS: A determination of the economic impact of an illness or

condition (typically on a given population, region, or country) e.g., of smoking, arthritis or
bedsores, including associated treatment costs

4.COST-MINIMIZATION ANALYSIS: A determination of the least costly among alternative

interventions that are assumed to produce equivalent outcomes

5.COST-UTILITY ANALYSIS (CUA): A form of cost-effectiveness analysis that compares

costs in monetary units with outcomes in terms of their utility, usually to the patient, measured,
e.g., in QALYs

6.COST-CONSEQUENCE ANALYSIS: A form of cost-effectiveness analysis that presents

costs and outcomes in discrete categories, without aggregating or weighting them

7.COST EFFECTIVENESS ANALYSIS [CEA]:

“A technique that measure the cost of alternatives that generate the same outcome”

OR

Cost effectiveness analysis is the technique for choosing, from alternative courses of
action, a preferred choice when objectives are not clear in such areas as sales, costs or profits.

OR

It is a desired effect of careful planning.

OR

It means getting the most for your money.

OR

The product is worth the price.

Cost effective methods are those search for the last costly way of achieving a
defined result. Cost effective analysis are easier to make as that is clear. It helps the administrator
in managing his health resources. The problem is to find the way of achieving the objective at
lower cost”

A more cost effectiveness analysis [CEA] oriented approach would consider

different approaches to save a life, and find out which one cost least, that would be the cost
effective that generate similar outcomes.
For ex: suppose a hospital has been treating a certain type of patient using a particular approach
is cost effective, we must first establish that the clinical money than the old approach. If a new
approach generates the exact outcome for less money then it is cost effective.

STEPS IN COST EFFECTIVENESS ANALYSIS:

1. Identify the program goal or client outcome to be achieved.

2. Identify at least 2 alternatives means of achieving the desired outcomes.
3. Collect baseline data on clients.
4. Determine the cost associated with each program activity.
5. Determine the activities of each group of clients will receive.
6. Determine the client changes after the activities are completed. Combine the cost, amount
of activity and outcome information to express costs relatives to outcome of program
goals.
7. Compare cost outcome information for each goal to present cost effectiveness analysis

COST EFFECTIVENESS ANALYSIS BASICS

A general misconception is that CEA is merely a means of finding the least
expensive alternative or getting the “most bang for the buck.”In reality, CEA is a comparison
tool; it will not always indicate a clear choice, but it will evaluate options quantitatively and
objectively based on a defined model. CEA was designed to evaluate health care interventions,
but the methodology can be used for non health economic applications as well. It can compare
any resource allocation with measurable outcomes to any other resource allocation with
measurable outcomes.

CONDUCTING, EVALUATING, AND USING ANALYSES

Increasing numbers of analyses are conducted in academia or research
organizations and published in peer-reviewed journals. Government organizations use analyses
to help shape public policy. Health insurers use CEAs to determine which kinds of health
interventions to cover.

COST-EFFECTIVENESS RATIO
The cost-effectiveness ratio is simply the sum of all benefits divided by the sum of all costs. This
is comparable to a return on investment calculation; however, the benefits are not
measured in terms of just dollars, but in a ratio that incorporates both health outcomes
and dollars.

Cost-Effectiveness Ratio = ∑ (All benefits)

∑(All costs)
WHY EMPLOYERS USE CEA?

✓ Supports objective decision making: Decision makers can consider options in a

comparable and objective way that provides support for the final decision.

✓ Brings clarity to data sources and outcomes: CEA evaluates options in similar terms to
avoid “comparing apples to oranges.”

✓ Allows for strategic review of organizations: CEA might justify some operational
centers operating at a loss to increase overall return on investment, employee health,
or both.

✓ Can be used in a host of operational and benefits areas including:

• Screening coverage
• Pharmacy
• Strategic Planning
• Labor Relations
• Disease Management
• Disability Management
• Wellness and Prevention Programs

✓ Presents evidence that can help gain support for changes in benefits plans or
employer-sponsored health programs.

COST EFFECTIVENESS MODEL

Interactive Pneumococcal Vaccination Policy Model

Vaccination of children in developing countries against pneumococcal infection has great

potential to save lives and reduce disability. The pneumococcus (Streptococcus pneumoniae) is
the leading bacterial cause of acute lower respiratory infections, which in turn, are a major cause
of child mortality. It also causes meningitis, other forms of invasive bacterial disease, and ear
infections (Otitis Media).

The economic burden caused by pneumococcal infection can be great and can be felt on the
family, health system, and national level. Routine vaccination of infants against pneumococcus
needs substantial investment by governments, non-governmental organizations, and donors.

The Interactive Pneumococcal Conjugate Vaccination Policy Model was developed by infectious
disease specialists, computer scientists and decision analysts based at the University of Medicine
and Dentistry of New Jersey, in collaboration with the Department of International Health at
Johns Hopkins Bloomberg School of Public Health. It underwent an extensive expert review
process, drawing on experts in the fields of pneumococcal epidemiology and disease burden,
penumococcal conjugate
vaccinology, health economics, and policy.

This Interactive Pneumococcal Conjugate Vaccination Policy Model allows the health benefits,
costs, and cost-effectiveness of childhood pneumococcal conjugate vaccine to be projected
according to an evidence-based approach. It is designed for users with familiarity using personal
computers but with limited experience conducting health economic analyses. Wherever possible,
the model is pre-populated with inputs drawn from the highest quality data sources.

This model addresses the need for streamlined cost-effectiveness analysis tools to assist decision
makers in understanding the economic and health benefits associated with vaccine introductions.

This Interactive Pneumococcal Vaccination Policy Model was developed through an expert
panel process. The panel reached consensus on the key assumptions about epidemiology, vaccine
efficacy, costs and model outputs projecting the cost-effectiveness of pneumococcal conjugate
vaccine for infants in GAVI-eligible countries. Members of the panel were chosen for their
expertise in pneumococcal epidemiology, vaccine-related health economics, public health, and/or
preventive medicine in GAVI-eligible settings.

STRATEGIC TIPS FOR INTERPRETING A CEA

✓ Consider perspective. Which parties are incurring costs and which parties are
receiving benefits? Many studies take a broad societal perspective; they are usually not
written for an employer audience.

✓ Identify the strategies under comparison. Does the study compare different
alternatives (treat using drug A vs. treat using drug B) or examine incremental
changes in the same health intervention (screen every two years vs. screen every four
years)?

✓ Be aware of the analytic horizon. When are costs incurred and when are benefits
received? Most studies use a 3-5% annual discount rate to adjust both costs and
benefits to a present value, but if a benefit is not received until 10 years after an
intervention begins, this is important information to note.

✓ Analyze all stated assumptions. Are the assumptions built into the economic model
clearly defined, and are they valid for employers?

✓ Examine the sensitivity analysis. How do differences in data inputs affect the
outcome? Think how this relates to the health characteristics of your employee
population.

✓ Understand all metrics. How did the author present the cost-effectiveness ratio?
Most studies measure the costs of increased quality of life ($/quality adjusted life year
gained), disability prevented ($/disability adjusted life year prevented) or of life saved
($/life year gained). A study that measures quality adjusted life years is called a
cost-utility analysis, a specific type of CEA.

NEW METRIC USED IN COST-EFFECTIVENESS ANALYSIS: THE DALY

The disability-adjusted life year (DALY) was introduced by the
World Health Organization and the World Bank in1993 and has been used since, with some
variations, for two related purposes.
A. to measure the “burden of disease,” the extent to which premature deaths and
disabilities cause a loss of health status compared to everyone’s living to old age
in good health. The other purpose is
B. to compare the value of health interventions that have multiple or different
health outcomes occurring at different ages. In particular, it allows for measuring
and comparing health outcomes other than saving lives.

In cost-effectiveness analysis, the DALY represents the number of years of

disability-free life that would be gained from a particular health intervention—yielding a cost per
DALY where cost data are available or can be inferred. Gaining a DALY through a health
intervention reduces the burden of disease; it is the same as averting the loss of a DALY. The
calculation includes assumptions about severity (if the health condition is not fatal), the age at
which an illness or intervention occurs, the duration of ill health with and without the
intervention, and the remaining life expectancy at the age when the gain occurs.
DALYs allow analysts to compare the cost-effectiveness of different
interventions and different health outcomes, by expressing diverse health outcomes in a common
unit. As a result, it can help guide where best to invest scarce health resources. For example, a
coronary artery bypass costs, on average across world regions, US$37,000 per DALY gained—
far beyond the per capita income of most countries—compared with an average of only US$409
for the polypill (several medications for preventing heart disease in a single pill). The latter is a
“best buy” for developing countries. However, both interventions are much less cost-effective
than saving life years of a middle-aged person by treating active tuberculosis (and thereby
preventing transmission) at a cost as low as US$15 per DALY. Figure 2 illustrates the relative
costs of these and other health interventions.

COST EFFECTIVENESS IN IMPROVING HEALTH CARE

Cost-effective care is that judged to provide good health value for expenditure. Health value
refers to the benefits of a particular medical intervention, which might include longer life, better
quality of life, or both. Expenditures should include not only the costs of a test or treatment itself,
but the subsequent costs it might cause, including additional medical interventions, work
disability, costs of longterm care, and so forth.

Cost-effectiveness analysis is a method for assessing the gains in health relative to the costs
of different health interventions. It is not the only criterion for deciding how to allocate
resources, but it is an important
one, because it directly relates the financial and scientific implications of different interventions.
The basic calculation involves dividing the cost of an intervention in monetary units by the
expected health gain measured in natural units such as number of lives saved.

PRINCIPLES WHICH ARE BASIC TO COST EFFECTIVENESS IN HEALTH CARE:

 Government health care programs should be screened for cost effectiveness.

 Health education and physical fitness should be primary curricular items in our entire
educational system from elementary through secondary schools. Healthy life-styles for
adults should include continued health education, disease prevention and physical exercise.
 Health promotion and disease prevention must receive primary emphasis on all health care
plans with payment for such medical care being equal to or greater than that provided for
acute medical care.
 Major efforts must be made throughout the profession to promote and emphasize quality
ambulatory care provided by those best trained to provide such care -- the family
physician.
 There should be incentives provided to both physicians and patients to maximize value in
health care: highest quality at lowest costs.
 Medical education should emphasize cost awareness and cost effectiveness at all levels of
education -- undergraduate, graduate and continuing medical education programs.
 Patients must be educated regarding the necessity of their involvement in cost-effective
medical care and in cost containment. This can be achieved through informational
programs emphasizing personal responsibility for healthy life-styles and cost-effective
medical care. The use of health insurance deductibles and co-payments are also useful
tools in emphasizing cost containment but these should not be prohibitive in achieving
access to quality health care.

PURPOSE OF COST ANALYSIS

1. The administrator utilizes data provided by a cost study to interpret the needs of the
nursing units and to gain financial support for the unit.

2. It can be used to show the portion of the requested funds being used for research
programs.

3. It will show the relationship of the faculty salaries to the cost per student.

4. It assists the administrator in measuring change and provides the necessary data which
can serve as a guide in modifying the program.

5. It gives the supporting data when the board of trustees, central administrators, legislators,
foundations and other groups question the high cost of nursing education.

6. It provides valuable information for institutions questions of higher learning that wish to
establish a new baccalaureate program.
STEPS OF ANALYSIS:

1. A clear statement of objectives.

2. Identifying all alternative actions that can achieve the objectives.

3. Identifying all the costs and all benefits with each alternative.

4. Converting all costs and all benefits for each alternative to momentary value, and
quantitive evaluation of costs and benefits of each.

5. Selection of the best cost- effective approach.

THE ROLE OF THE ADMINISTRATOR IN COST ANALYSIS

1. Understanding methods of cost analysis and participating with cost study of nursing units
and for the college. The administrator needs to know the cost of operating the nursing
education unit in order to make wise education decisions. A school of nursing should
operate economically and efficiently.

2. The administrator interprets the cost analysis to the faculty and others, and she gains
support for the study. She interprets findings to the personnel at the college and at the
health services agencies.

3. The administrator participates in the cost analysis committees: the cost analysis
committee is composed of the finance officer, dean of the college, a nurse faculty
member, the administrator of the school of nursing, representatives from the central
administrator of the health service agencies and directors of nursing service for the
various agencies involved.

4. The administrator encourages and leads to members of the overall study staff.

CONCLUSION:

Cost-Effectiveness in Health and Medicine is the product of over two years of

comprehensive research and deliberation by a multi-disciplinary panel of economists, ethicists,
psychometricians, and clinicians.
This study published in the Journal of the American Medical Association shows that nicotine
patch therapy, in conjunction with physician counseling, is a cost-effective approach to smoking
cessation. This is an example of information in published CEAs that can support coverage
decisions and justify health improvement
programs.

COST-EFFECTIVENESS OF THE TRANSDERMAL NICOTINE PATCH AS AN ADJUNCT

TO PHYSICIANS' SMOKING CESSATION COUNSELING

K. Fiscella and P. Franks

Primary Care Institute, Highland Hospital, Rochester, NY, USA.

OBJECTIVE: To determine the incremental cost-effectiveness of the transdermal nicotine

patch.
PATIENTS: Male and female smokers aged 25 to 69 years receiving primary care.
INTERVENTION: Addition of the nicotine patch to physician-based smoking cessation
counseling.
RESULTS: The use of the patch produced one additional lifetime quitter at a cost of $7,332. The
incremental cost effectiveness of the nicotine patch by age group ranged from $4,390 to $10,943
per QALY for men and $4,955 to $6,983 per QALY for women. A clinical strategy involving
limiting prescription renewals to patients successfully abstaining for the first two weeks
improved the cost-effectiveness of the patch by 25%.
CONCLUSIONS: The findings provide support both for the routine use of the nicotine patch as
an adjunct to physicians’ smoking cessation counseling and for health insurance coverage of
nicotine patch therapy.

Annual Review of Public Health

Vol. 29: 383-397 (Volume publication date April 2008)

PUBLIC HEALTH SERVICES AND COST-EFFECTIVENESS ANALYSIS

H. David Banta and G. Ardine de Wit

Cost-effectiveness analysis as an aid to decision making has been increasingly

publicized and discussed during the past two to three decades. However, the total body of cost-
effectiveness analyses in health care is actually rather small, and high-quality studies are rather
rare. Furthermore, the applications of economic analysis to health policy have been hampered by
a number of problems, including those that are methodological and contextual. We consider a
number of areas of public health policy but pay special attention to a growing area of inquiry and
application: the overall coverage of health services. Cost-effectiveness analysis has played a
relatively small role in general coverage decisions, but in recent years, it has been applied
increasingly to decisions concerning pharmaceutical coverage. We speculate on concerning
reasons for this particular focus in cost-effectiveness analysis. Future progress will depend
heavily on discussion and consensus building.
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