Techniques of Economic Evaluation on

Healthcare
Scheme of Presentation

Economic Evaluation:
1. Principles and Application
2. Formulation of Evaluation
3. Types of Economic Evaluation:
a. Cost Benefit Analysis (CBA)
b. Cost-consequences analysis (CCA)
c. Cost-effectiveness Analysis (CEA)
d. Cost-utility analysis (CUA)
e. Benefit Incidence Analysis (BIA)
4. Measurements of Health Benefits
a. Quality Adjusted Life Years (QALY)
b. Disability Adjusted Life Years (DALY)
c. Healthy Years Equivalent (HYE)
Fundamental Questions behind Economic Evaluation

An economic evaluation is a comparison of the costs and outcomes of health

care interventions. As such it provides a measurement of economic efficiency

• How much should spend on healthcare

i

• How do ensure the spending is efficient

ii

• How do assess the outcome on the basis of efficiently

iii using resources
Why economic evaluation is important ?
Without systematic analysis,
it is difficult to identify
clearly the relevant
alternatives

The perspective (or

viewpoint), assumed in an
analysis is important

Without some attempt at

quantification, informal
assessment of orders of
magnitude can be misleading

Systematic approaches
increase the explicitness and
accountability in decision-
making

Economic evaluation involves a comparative analysis of alternative courses of action

Source: Drummond et.al, 2015
Taxonomy of measures of health outcome

Source: Drummond et.al, 2015

Principles of Economic Evaluation: Understanding alternative costs and benefits
• Identification of the possible
alternative courses of action,
What are the • Different decisions can be made to
offer for different subgroups
alternatives? • Health care systems face choices
available source across different
areas
• Choose the alternative measures of
Which measure of health that are available
• Generic measure of health-related
benefit? qualityof life (HRQoL) has
advantages
How can the costs and
benefits of each • Relevant studies needs to be sought
systematically, interpreted and then
alternative be find appropriateness

estimated?
What will be given up • Alternative is sufficient to justify
any additional on the value of what
as a consequence of is given up by others (opportunity
additional costs? costs)
Principles of Economic Evaluation: Making decision on healthcare

Incremental • Cost-effectiveness plane

cost-effectiveness • Incremental health benefits (like Δh = 2 QALYs per
ratios, patient treated) at some positive incremental cost
thresholds, and • May also expressed as the equivalent health care
net benefit system resources or incremental net monetary benefit

• Price charged for a health technology

What price for a • Identify the maximum price the health care systems
new technology? can afford to pay for health care inputs across the
subgroups of patients
Principles of Economic Evaluation: Cost Effectiveness threshold
Some implicit or explicit assessment of a cost-effectiveness threshold is unavoid

i Questions of fact and questions of value

• it is essential to have clarity about what the threshold ought to represent and, therefore, what type of
evidence to consider

ii Opportunity costs fall on health

• Cost-effectiveness threshold representing opportunity costs in terms of health is relevant in most
health care systems (like limits on increasing funding for health care through additional taxation;
premiums/payment etc.)

iii Opportunity costs fall on consumption

• Opportunity costs fall on the consumption of other goods and services rather than health
• Intervention will turn on whether the health benefits are regarded as more valuable than the
consumption losses
Principles of Economic Evaluation: Decision making from multiple alternatives
• Decision requires identifying the possible alternative courses of action that could be taken
to improve the health of patients who face a choice between mutually exclusive
alternatives
Chose one from multiple Incremental Cost Effectiveness Ratio
(ICER)
Extendedly dominated alternatives
relevant alternatives

Net benefit and multiple alternatives

Non-mutually-exclusive alternatives
Subgroups and patient characteristics: each subgroup can be considered separately;
identifying which of the mutually exclusive alternatives available to each subgroup should be regarded
as cost-effective by either comparing the ICERs of non-dominated strategies to a threshold
Priority-setting and defining a benefit package: systems can decide which interventions
to make available for which conditions and patient populations
• Explore the principles of economic evaluation?
Cost Benefit Analysis (CBA)

Cost-benefit analysis (CBA) is a comparison of interventions and their consequences in which both
costs and resulting benefits (health outcomes and others) are expressed in monetary terms

CBA compare two or more treatment alternatives using the summary metric of net monetary/social
benefit, which is the difference between the benefit of each treatments (expressed in monetary
units) less the cost of each

Net Monetary/Social Benefit (NSB)= Benefits - Costs

where benefits and costs are measured in terms of shadow or
accounting prices of inputs and not of actual market prices
Steps on Cost Benefit Analysis

 Step 1: Compile lists

• Compile a comprehensive list of all the costs and benefits associated with the
potential action or decision

 Step 2: Give the costs and benefits a monetary value

• Once you have two comprehensive lists of costs and benefits for the action, assign
monetary values to each individual cost or benefit

 Step 3: Set up the equation and compare

• Take the sum of the benefits (the sum of all the monetary values assigned to the
benefits of the action) and the sum of the costs (all the monetary values of the costs
of the action) and plug them into the BCR equation
Advantages and Disadvantages of CBA

Advantages
 CBA is a helpful tool for businesses/individuals to undertake when considering a new course of
action

 Running a CBA for a potential decision can help visualize the implications & impact of that action

Disadvantages
For bigger decisions with a longer time horizon, CBAs can sometimes fail to take into account
other factors that might not be significant in the short term but would impact the long term

Performing a CBA can often put projects or decisions in a purely numerical point of view, which
may fail to take into account unforeseen events or circumstances
Cost Effective Analysis (CEA)

CEA is a method for assessing the gains in health relative to the costs of
different health interventions. It is not only criterion for deciding how to
allocate resources, but also directly relates the financial and scientific
implications of different interventions

CEA 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 
Cost Effective Analysis (CEA) – Incremental Cost Effective Ratio
Incremental Cost Effective Ratio = It is defined as difference in cost between two possible interventions, divided by the
difference in their effect. It represents the average incremental cost associated with 1 additional unit of the measure of
effect

( ∆ 𝐶𝑜𝑠𝑡 ) 𝐶𝑜𝑠𝑡 𝑡𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡 − 𝐶𝑜𝑠𝑡 𝑐𝑜𝑛𝑡𝑟𝑜𝑙

𝐼𝐶𝐸𝑅= , 𝑖. 𝑒
( ∆ 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑛𝑒𝑠𝑠 ) 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑡𝑟𝑒𝑎𝑡𝑚𝑒𝑛𝑡 − 𝐸𝑓𝑓𝑒𝑐𝑡𝑖𝑣𝑒𝑐𝑜𝑛𝑡𝑟𝑜𝑙
Costs are usually described in monetary units, while effects can be measured in terms of health
status

Advantages: 1) Lack of an adequate alternative, 2) Seriousness of condition (e.g., tend to favor interventions
that treat serious life-threatening conditions), 3) Affordability from the patient perspective, and 4) Predefined
ethical objectives.

Disadvantages: 1) It gives no information on the size or scale of the intervention being considered, and 2)
There are statistical challenges in measuring differences between ICERs.
Cost Effective Analysis (CEA) – Cost Effective Plane (CEP)
Model CEP

CEP is used to visually

represent the differences
in costs and health
outcomes between
treatment alternatives in
two dimensions, by plotting
the costs against effects on
a graph. Health outcomes
(effects) are usually plotted
on the X axis and costs on
the Y axis

Source: Parkinson, B, 2014 https://www.researchgate.net/publication/251875944

Advantages and Disadvantages of CEA

 Advantages
Easier to produce since it uses common study clinical end-points
Requires less resources since the health outcome is typically already being
measured from the effectiveness component
Tends to be easier for clinicians to interpret since it uses familiar clinical end-
points.

 Disadvantages
Inability to make inter-disease comparisons
Cannot measure opportunity cost of shifting resources
Challenge to define and justify the most appropriate ‘effectiveness’ end-point
 Cost Utility Analysis (CUA)
 Cost-utility analysis expresses the value for money in terms of a single type of health outcome. This approach
incorporates both increases in survival time (extra life-years) and changes in quality of life (with or without
increased survival) into one measure.
 An increased quality of life is expressed as a utility value on a scale of 0 (dead) to one (perfect quality of life).
The ICER in this case is usually expressed as the incremental cost to gain an extra quality-adjusted life-year
(QALY)
Visual Analog Scale:

Example:

Survival (Yrs.) Quality of life QALYs Cost

Treatment A 5 50% 5 x 50% = 2.5 Yrs 11,000

Treatment B 4 60% 4 x 60% = 2.4 Yrs 10,000

ICER = (11,000-10,000) / (2.5-2.4) = 10,000 per QALY, 1 QALY is “1 year of life for a person in perfect health”
Source:Fragoulakis, v. et.al,
2015

An increased duration of life of one year (without change in quality of life), or an increase in quality of life from 0.5 to 0.7 utility units for five years, would both result in a gain of one QALY
Steps of Cost Utility Analysis

Identification of two or more alternatives

Identification of perspectives

Determination of Costs

Determination of outcomes in utility terms

Calculation of cost utility ratio

Decision Making
Advantages and disadvantages of CUA

 Advantages
Comparison of different health programs/policies are possible since it takes same units of
measure (money/QALY)
Combines more than one measure of effectiveness
Combines mortality and morbidity into a single measure
CUA provides more comprehensive analysis over CBA since it consider quality of life
 Disadvantages
Constraint of measuring utilities
Limitation of quantifying patients all problems
Measuring QALY is often criticized because of its complexity of calculation
It does not consider societal costs and benefits
Weights used for each diseases are often different researchers leading difficulty to compare
Cost Consequence Analysis (CCA)

CCA is a form of health economic evaluation study in which all direct and
indirect costs and a catalog of different outcomes of all alternatives are listed
separately

No specific preference for one costing approach or one

outcome. Consequently, the result is not a definite cost-
outcome ratio

The decision maker has to form their own opinion

concerning the relative importance of costs and outcomes
Advantages and Disadvantages of CCA

 Advantages
Easily understood and applied by decision makers
Able to present a broader range of health and non-health costs and benefits
Alternative approaches to measuring costs and outcomes

 Disadvantages
No specific or definitive guidance on cost-effectiveness thresholds
Limited generalizability
Decisions based on CCA may not be transparent or run the risk of cherry
picking positive results

Source: NIHR
Benefit Incident Analysis (BIA)

BIA is a technique that used to assess the distributional impact of government spending on
health care, or particularly the extent to which different SES* benefit from govt. subsidies

 Underlying premise of such analyses is that govt. funds, and services provided with these
funds, should disproportionately benefit the lowest SES and a BIA is conducted to assess
whether government spending is in fact ‘pro-poor’ or not

 BIA can usefully be applied to assessing the appropriateness of the distribution of benefits
from using any health service relative to the need for care

Source: McIntyre, D, Ataguba, J E, 2010

 Steps of Benefit Incident Analysis

Select measure of Estimate the utilization Calculate the unit cost

living standard/SES and of different services by of each type of health
rank population individuals/SES services

Compare the Aggregate benefit of Multiply utilization

distribution of utilization expressed in rates by unit costs for
healthcare service terms of monetary each type health
benefits for the target Units by services by
groups individual/SES individual/SES*

if the distribution of public subsidies only is being considered, deduct direct user fee or out-of-pocket
payments for each type of health services by individual/SES Source: McIntyre, D, Ataguba, J E, 2010
Strength and weakness of BIA

 Strength
Simple to estimate given the availability of a household survey and reasonable govt.
statistics
It would be helpful to government in alerting the impacts of interventions
Help to justify or re-allocate the funding to reach poor
Comparison is possible since the value of Benefits are converted into money-metric
terms

 Weakness
Main coverage is focused on public subsidized services and ignores impact of positive
economies of scale by major health intervention such as vector control
Based only on current income/consumption not consider the future benefits
Concept of value of services and quality of care is not considered
Little attention over the behaviors and constraints of individuals and household members
• Explore the Cost Benefit Analysis
• Explain the Cost Effective Analysis
• Explain the Cost Utility Analysis
• Explore the Cost Consequence Analysis
• Explain the Benefit Incident Analysis
• Give a note on five types of economic analysis
Quality Adjusted Life Years (QALY)
 What is Quality Adjusted Life Years (QALYs) ?
-- Composite indicator of Length of life (LY) health related Quality of Life (QoL) to a
single index
-- Health related QoL quantified by applying the concept of “Utility” and weighted to a
score for that particular state of Health
-- QoL scale ranges between One to Zero (Perfect Quality Health =1, Death =0)
-- QALY is estimated by multiplying Length of life (LY) with Quality of Life (QoL)

1 QALY = 1 LY x 1 QoL
OR

1 QALY = 2 LY x 0.5 QoL

OR

1 QALY = (1 LYA x 0.5 QoLA) + (1 LYB x 0.5 QoLB)

Quality Adjusted Life Years (QALY) - Example

Source: https://www.eupati.eu/health-technology-assessment/measuring-health-related-quality-life-hrqol/
Strengths and Limitations of QALY

• Strengths
• QALY combines changes in morbidity (quality) and mortality (amount) in a
single indicator.
• It easy to calculate via simple multiplication, although the prior estimation of
utilities associated with particular health states is a more complicated task.
• QALYs form an integral part of one particular type of economic analysis within
health-care, i.e. cost-utility analysis (CUA)

• Limitation
• There is no sound theoretical basis for using QALY
Disability-Adjusted Life Year (DALY)

DALY is a measurement of the gap between current health status and an

ideal health situation where the entire population lives to an advanced
age, free of disease and disability

One DALY can be thought of as one lost year of "healthy"

life

DALYs for a disease or health condition are calculated as the

sum of the Years of Life Lost (YLL) due to premature mortality
in the population and the Years Lost due to Disability (YLD)
for people living with the health condition or its consequences
Calculation of DALY - Basic
DALY = YLL + YLD
where,
YLL = Years of life lost due to premature mortality
YLD = Years lived with disability

YLL = N x L
where,
N = Number of deaths
L = Standard life expectancy at the age of death (in Years)

YLD = I x DW x L
where,
YLD = Years lived with disability
I = Number of incident cases
DW = Disability weight
L = Average duration of disability (Years)

• Product of the incidence and duration provide an estimate total time lived with disability, as per approach used by
DALY
Major difference in QALY and DALY

QALY DALY

Life Expectancy is
Calculation the Life
used in QALYs, it
Expectancy is
depends on the
constant in DALY
situation

QALY and DALY Disability weights

Disability weights
used in QALY
as similar in elicited from
used in calculating
DALYs are not
conceptual, but patients or general
preference based
public
they are different in
some important QALYs weights can DALYs weights in
way take on any value contrast can only
depending upon the take on one of seven
health state discrete values

DALYs age weights

is used which gives
QALYs age weights
lower weights to
is not being used
years of the young
and the elderly.
Healthy Years Equivalent (HYE)
HYE is a measure of outcome of health care programs that combines two outcomes of interest:
quality of life and quantity of life. Unlike QALYs, HYEs fully represent patients' (or other
individuals') preferences, as a result of the way they are calculated from each individual's utility
function

Source of weights is subjective in QALY, but may be converted to estimate health-status weights
using Standard Gambling (SG) that are consistent with Neumann Morgenstern expected Utility
theory

In QALY, preferences are used to evaluate quality of life, but not the quantity of
life or the sequence of duration of different health condition over time

In HYE, estimates the preference for life time health profiles in which preferences
over health status and health state duration are estimated jointly from an
individual’s underlying expected utility function
Healthy Years Equivalent (HYE) – Standard Gambling Approach
 First Gamble: Subjects are asked to choose between certain outcome of living with a chronic
condition of constant health quality for specified number of years () and gamble between
immediate death and living the same number of years with full health

 The probability of living the same number of years in full health at which the subject is
indifferent between certain outcome and the gamble is labelled P* (equivalent to the SG utility
used in QALY)

 Second Gamble: Subject is asked to choose between a certain outcome of a given number of
years in full health (T) and a gamble between full health for () years with probability P* and
immediate death with probability (1-P*). The value of T is varied until the subject is indifferent
between the prospects and this value is HYE
SG approach advantage:
• Can estimate health-status values is the fact that, under certain assumptions, it yields health status weights
consistent with expected utility theory and provides an intuitive, cardinal measure of health status between 0 and
1 that can be used to estimate QALY
SG approach limitation:
• Empirically not accurately describing the choice behavior because individual preference are probably not linear
in probabilities as required for expected utility theory
• Theoretical assumption required for QALYs to be consistent with utility theory Mehrez and Gafni (1989)
• Explain about Quality Adjusted Life Years (QALY)
• Explain about the Disability Adjusted Life Years (DALY)
• Difference between DALY and QALY
Major Sources of Health & Healthcare Data (Survey Data)
National Family Health Survey
Longitudinal Ageing Study in India
(NFHS)
(LASI)
• NFHS-4 (2015-16)
• LASI-1 (Pilot) – 2010
• NFHS-3 (2005-06)
• LASI-1 (Main) (Yet to release)
• NFHS-2 (1998-99)
• NFHS-1 (1992-93)

Annual Health Survey (AHS)

National Sample Survey
• AHS-1 (2010-11)
Organization Survey (NSSO)
• AHS-2 (2011-12)
• NSSO – 42nd Round (86-87)
• AHS-3 (2012-13)
• NSSO - 52nd Round (95-96)
• NSSO – 60th Round (2004)
District Level Health Survey (DLHS)
• NSSO – 71st Round (2014)
• DLHS-1 (1998-99)
• NSSO – 75th Round (2017-18)
• DLHS-2 (2002-04)
• DLHS-3 (2007-08)
• DLHS-4 (2012-13)
Major Sources of Health & Healthcare Data (System Data)

Census
• Census – 2001
• Census – 2011
Civil Registration System (CRS)
Sample Registration System (SRS) • Vital Statistics of India (2009-
• SRS Statistical Report (2011 to 2017)
2017) • MCCD Report (2009-2017)
• SRS Bulletin (Apr-1999 to May- Health Management Information
2019) System (HMIS)
• Maternal Mortality in India • HMIS Data (2014-2020)
(2011-2013, 2014-2016, 2015- • MCTS Data- RCH Data
17)
• Cause of Death in India (2004-
2013)
 Note: This presentation is a draft and made for only discussion purpose. Many of its
contents were directly taken from books/papers/notes etc. available from library/internet
facilities. Do not use this material for any other use since the referred materials have copy
rights
Reference for further reading
Text book;
1. Guinness, D., & Wiseman, V. (2011). Introduction to health economics. (2nd ed)
Berkshire: Open University Press
 
References:
2. Dakin, H, Devlin, N, Feng, Y, Rice, N, O'Neill, P, and Parkin, D. (2015) The Influence of
Cost-Effectiveness and Other Factors on NICE Decisions. Health Economics, 24, 1256–
1271. doi: 10.1002/hec.3086.
3. Drummond, M.F., Sculpher, M.J., Claxton, K., Stoddart, G.L. and Torrance, G.W.
(2015) Methods for the Economic Evaluation of Health Care Programmes, Oxford
University Press
4. Murray, Christopher J L et al (2012) Disability-adjusted life years (DALYs) for 291
diseases and injuries in 21 regions, 1990–2010: a systematic analysis for the Global
Burden of Disease Study 2010. The Lancet , Volume 380 , Issue 9859 , 2197 – 2223
5. Mauskopf J., Rutten F, Schonfeld W. (2003) Cost-Effectiveness League Tables: Valuable
Guidance for Decision Makers? Pharmaco Economics, 21:991-1000
 Reference for further reading (Additional):
1. QALY
• Quality-adjusted life year, utility theory and health-years equivalents; Abraham Mehrez and Amiram Gafni ; accessed from-
http://mdm.sagepub.com/content/9/2/142
• Problems and solutions in calculating quality-adjusted life years (QALYs) Luis Prieto* and José A Sacristán ; accessed from-
http://www.hqlo.com/content/1/1/80
• Measuring Health-related quality of life (HRQoL) ; accessed from
https://www.eupati.eu/health-technology-assessment/measuring-health-related-quality-life-hrqol/
• Measures of population health: General perspective on Quality adjusted life years and Disability adjusted life years; Natrah s, Sharifa Ezat WP ;
Malaysian Journal of Public Health Medicine 2011, Vol. 11(2): 27-31
• Pettitt DA, Raza S, Naughton B, et al. (2016) The Limitations of QALY: A Literature Review. J Stem Cell Res Ther 6: 334.doi:10.4172/2157-
7633.1000334
• Measuring Health-related quality of life (HRQoL) accessed from eupati.eu/health-technology-assessment/measuring-health-related-quality-life-hrqol/
2. HYE
• The Healthy-years Equivalents: How to Measure Them Using the Standard Gamble Approach ;ABRAHAM MEHREZ, PhD, AMIRAM GAFNI, PhD
mdm.sagepub.com
• Healthy-years equivalent: wounded but not yet dead Expert Rev. Pharmaco-economics Outcomes Res. 9(3), 265–269 (2009)

3. ECONOMIC EVALUATION
• Three techniques to support option appraisal and evaluation; accessed from Institute of Public Care ipc@brookes.ac.uk
• Health Economic Evaluation: Important Principles and Methodology; Luke Rudmik, MD; Michael Drummond, PhD
• Economic Evaluation of Health Care Programs ; Don Lewis School of Economics and Information Systems University of Wollongong
• Economic Evaluation for Global Health Programs; Carol Levin, University of Washington, Department of Global Health, 206-744-3790,
clevin@uw.edu
• An introduction to economic evaluation; S Goodacre, C McCabe
 Reference for further reading (Additional):
1. DFLE
• Jagger C, Cox, B, Le Roy S, EHEMU. Health Expectancy Calculation by the Sullivan Method. Third Edition. EHEMU Technical Report September
2006.

2. DALY
• Metrics: Disability-Adjusted Life Year (DALY) Quantifying the Burden of Disease from mortality and morbidity accessed from-
https://www.who.int/healthinfo/global_burden_disease/metrics_daly/en/
• The Global Burden of Disease concept-a summary
• Augustovski F et al. Measuring the benefits of healthcare: DALYs and QALYs– Does the choice of measure matter? A case study of two preventive
interventions. Int J Health Policy Manag. 2018;7(2):120–136. doi:10.15171/ijhpm.2017.47
• ICMR, PHFI and IHME, India: Health of the Nation’s States The India State-Level Disease Burden Initiative. New Delhi 2017
• GBD 2017 Online Tools Overview ; Data resources for GBD 2017 are available at http://ghdx.healthdata.org/gbd-2017 , Information on the GBD
study is available at http://www.healthdata.org/gbd
• https://vizhub.healthdata.org/gbd-compare/
• https://vizhub.healthdata.org/gbd-compare/india
3. COST UTILITY ANALYSIS
• Economic Evaluation and Health Care; Cost-utility analysis, Institute for Health Policy Studies, University of Southampton, BMJ 1993;307:859-62
• Cost Utility Analysis- an Overview; accessed from- https://www.sciencedirect.com/topics/nursing-and-health-professions/cost-utility-analysis
4. COST CONSEQUENCE ANALYSIS
• Cost-consequences analysis - an underused method of economic evaluation
5. BENEFIT INCIDENCE ANALYSIS
• How to do (or not to do) ... a benefit incidence analysis; Di McIntyre and John E Ataguba et.al. ; accessed from-
https://academic.oup.com/heapol/article/26/2/174/592398
• A User’s Guide to Poverty and Social Impact Analysis