Economic Analysis in Healthcare (II)

This is my second and last post about the book, which will include some quotes from the second half of the book, as well as some comments.

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“Different countries have adopted very different health care financing systems. In fact, it is arguable that the arrangements for financing of health care are more variable between different countries than the financing of any other good or service. […] The mechanisms adopted to deal with moral hazard are similar in all systems, whilst the mechanisms adopted to deal with adverse selection and incomplete coverage are very different. Compulsory insurance is used by social insurance and taxation [schemes] to combat adverse selection and incomplete coverage. Private insurance relies instead on experience rating to address adverse selection and a mix of retrospective reimbursement and selective contracting and vertical integration to deal with incomplete coverage.”

I have mentioned this before here on the blog (and elsewhere), but it is worth reiterating because you seem to sometimes encounter people who do not know this; there are some problems you’ll have to face when you’re dealing with insurance markets which will be there regardless of which entity is in charge of the insurance scheme. It doesn’t matter if your insurance system is government based or if the government is not involved in the insurance scheme at all, moral hazard will be there either way as a potential problem and you’re going to have to deal with that somehow. In econ 101 you tend to learn that ‘markets are great’, but this is one of those problems which are not going to go away by privatization.

On top of common problems faced by all insurers/insurance systems, different types of -systems will also tend to face a different mix of potential problems, some of which are likely to merit special attention in the specific setting in question. Some problems tend to be much more common in some specific settings than they are in others, which means that to some extent when you’re deciding on what might be ‘the ‘best’ institutional setup’, part of what you’re deciding on is which problem you are most concerned about addressing. In an evaluation context it should be pointed out in that context that the fact that most systems are mixes of different systems rather than ‘pure systems’, which they are, means that evaluation problems tend to be harder than they might otherwise have been. To add to this complexity as noted above the ways insurers deal with the same problem may not necessarily be the same in different institutional setups, which is worth having in mind when performance is evaluated (i.e., the fact that country A has included in the insurance system a feature X intending to address problem Q does not mean that country B, which has not included X in the system, does not attempt to address problem Q; B may just be using feature Y instead of feature X to do so).

Chapter 7 of the book deals with Equity in health care, and although I don’t want to cover that chapter in any detail a few observations from the text I did find worth including in this post:

“In the 1930s, only 43% of the [UK] population were covered by the national insurance scheme, mainly men in manual and low-paid occupations, and covered only for GP services. Around 21 million people were not covered by any health insurance, and faced potentially catastrophic expenditure should they become ill.”

“The literature on equity in the finance of health care has focused largely on the extent to which health care is financed according to ability to pay, and in particular on whether people with different levels of income make […] different payments, which is a vertical equity concern. Much less attention has been paid to horizontal equity, which considers the extent to which people with the same income make the same payments. […] There is horizontal inequity if people with the same ability to pay for health care, for example the same income, pay different amounts for it. […] tax-based payments and social health insurance payments tend to have less horizontal inequity than private health insurance payments and direct out-of-pocket payments. […] there are many concepts of equity that could be pursued; these are limited only by our capacity to think about the different ways in which resources could be allocated. It is unsurprising therefore that so many concepts of equity are discussed in the literature.”

Chapter 8 is about ‘Health care labour markets’. Again I won’t cover the chapter in much detail – people interested in such topics might like to have a look at this paper, which I concluded from a brief skim looks like it covers a few of the topics also discussed in the chapter – but I did want to include a few data:

“[S]alaries and wages paid to health care workers account for a substantial component of total health expenditure: the average country devotes over 40% of its government-funded health expenditure to paying its health workforce […], though there are regional variations [from ~30% in Africa to ~50% in the US and the Middle East – the data source is WHO, and the numbers are from 2006]. […] The WHO estimates there are around 59 million paid health workers worldwide […], around nine workers for every 1 000 population, with around two-thirds of the total providing health care and one third working in a non-clinical capacity.”

The last few chapters of the book cover mostly topics I have dealt with before, in more detail – for example are most topics covered here which are also covered in Gray et al. covered in much more detail in the latter book, which is natural as this text is mostly an introductory undergraduate text whereas the Gray et al. text is not (the latter book was based on material taught in a course called ‘Advanced Methods of Cost-Effectiveness Analysis’) – or topics in which I’m not actually all that interested (e.g. things like ‘extra-welfarism‘). Below I have added some quotes from the remaining chapters. I apologize in advance for repeating myself, given the fact that I probably covered a lot of this stuff back when I covered Gray et al., but on the other hand I read that book a while ago anyway:

“Simply providing information on costs and benefits is in itself not evaluative. Rather, in economic evaluation this information is structured in such a way as to enable alternative uses of resources to be judged. There are many criteria that might be used for such judgements. […] The criteria that are the focus of economic analysis are efficiency and equity […] in practice efficiency is dealt with far more often and with greater attention to precise numerical estimates. […] In publicly provided health programmes, market forces might be weak or there might be none at all. Economic evaluation is largely concerned with measuring efficiency in areas where there is public involvement and there are no markets to generate the kind of information – for example, prices and profits – that enable us to judge this. […] The question of how costs and benefits are to be measured and weighed against each other is obviously a fundamental issue, and indeed forms the main body of work on the topic. The answers to this question are often pragmatic, but they also have very strong guides from theory.”

“[M]any support economic evaluation as a useful technique even where it falls short of being a full cost–benefit analysis [‘CBA’ – US], as it provides at least some useful information. A partial cost–benefit analysis usually means that some aspects of cost or benefit have been identified but not valued, and the usefulness of the information depends on whether we believe that if the missing elements were to be valued they would alter the balance of costs and benefits. […] A special case of a partial economic evaluation is where costs are valued but benefits are not. […] This kind of partial efficiency is dealt with by a different type of economic evaluation known as cost-effectiveness analysis (CEA). […] One rationale for CEA is that whilst costs are usually measured in terms of money, it may be much more difficult to measure benefits that way. […] Cost-effectiveness analysis tries to identify where more benefit can be produced at the same cost or a lower cost can be achieved for the same benefit. […] there are many cases where we may wish to compare alternatives in which neither benefits nor costs are held constant. In this case, a cost-effectiveness ratio (CER) – the cost per unit of output or effect – is calculated to compare the alternatives, with the implication that the lower the CER the better. […] CBA seeks to answer whether or not a particular output is worth the cost. CEA seeks to answer the question of which among two or more alternatives provides the most output for a given cost, or the lowest cost for a given output. CBA therefore asks whether or not we should do things, while CEA asks what is the best way to do things that are worth doing.”

“The major preoccupation of economic evaluation in health care has been measurement of costs and benefits – what should be measured and how it should be measured – rather than the aims of the analysis. […] techniques such as CBA and CEA are […] defined by measurement rather than economic theory. […] much of the economic evaluation literature gives the label cost-minimisation analysis to what was traditionally called CEA, and specifically restricts the term CEA to choices between alternatives that have similar types of effects but differing levels of effect and costs. […] It can be difficult to specify what the appropriate measure of effect is in CEA. […] care is […] required to ensure that whichever measure of effect is chosen does not mislead or bias the analysis – for example, if one intervention is better at preventing non-fatal heart attacks but is worse at preventing fatal attacks, the choice of effect measure will be crucial.”

“[Health] indicators are usually measures of the value of health, although not usually expressed in money terms. As a result, a third important type of economic evaluation has arisen, called cost–utility analysis (CUA). […] the health measure usually used in CUA is gains in quality-adjusted life years […] it is essentially a composite measure of gains in life expectancy and health-related quality of life. […] the most commonly used practice in CUA is to use the QALY and moreover to assume that each QALY is worth the same irrespective of who gains it and by what route. […] Similarly, CBA in practice focuses on sums of benefits compared to sums of costs, not on the distribution of these between people with different characteristics. It also does not usually take account of whether society places different weights on benefits experienced by different people; for example, there is evidence that many people would prefer health services to put a higher priority on improving the health of younger rather than older people (Tsuchiya et al., 2003).”

“Because CEA does not give a direct comparison between the value of effects and costs, decision rules are far more complex than for CBA and are bounded by restrictions on their applicability. The problem arises when the alternatives being appraised do not have equal costs or benefits, but instead there is a trade-off: the greater benefit that one of the alternatives has is achieved at a higher cost [this is not a rare occurrence, to put it mildly…]. The key problem is how that trade-off is to be represented, and how it can then be interpreted; essentially, encapsulating cost-effectiveness in a single index that can unambiguously be interpreted for decision-making purposes.”

“Although cost-effectiveness analysis can be very useful, its essential inability to help in the kind of choices that cost–benefit analysis allows – an absolute recommendation for a particular activity rather than one contingent on a comparison with alternatives – has proved such a strong limitation that means have been sought to overcome it. The key to this has been the cost-effectiveness threshold or ceiling ratio, which is essentially a level of the CER that any intervention must meet if it is to be regarded as cost-effective. It can also be interpreted as the decision maker’s willingness to pay for a unit of effectiveness. […] One of the problems with this kind of approach is that it is no longer consistent with the conventional aim of CEA. Except under special conditions, it is not consistent with output maximisation constrained by a budget. […] It is useful to distinguish between a comparator that is essentially ‘do nothing about the problem […]’ and one that is ‘another way of doing something about that problem’. The CER that arises from the second of these is […] an incremental cost-effectiveness ratio (ICER) […] in most cases the ICER is the correct measure to use. […] A problem [with using ICERs] is that if only the ICER is evaluated, it must be assumed that the alternative used in the comparator is itself cost-effective; if it is not, the ICER may mislead.”

“The basis of economic costing is […] quite distinct from accounting or financial cost approaches. The process of costing involves three steps: (1) identify and describe the changes in resource use, both increases and decreases, that are associated with the options to be evaluated; (2) quantify those changes in resource use in physical units; and (3) value those resources. […] many markets are not fully competitive. For example, the wages paid to doctors may be a reflection of the lobbying power of medical associations or restrictions to licensing, rather than the value of their skills […] The prices of drugs may reflect the effect of government regulations on licensing, pricing and intellectual property. Deviations of price from opportunity cost may arise from factors such as imperfect competition […] or from distortions to markets created by government interventions. Where these are known, prices should be adjusted […] In practice, such adjustments are difficult to make and would rely on good information on the underlying costs of production, which is often not available. Further, where the perspective is that of the health service, there is an argument for not adjusting prices, on the grounds that the prevailing prices, even if inefficient, are those they must pay and are relevant to their budget. […] Where prices are used, it is important to consider whether the option being evaluated will, if implemented, result in price changes. […] Valuing resource use becomes still more difficult in cases where there are no markets. This includes the value of patients’ time in seeking and receiving care or of caregivers’ time in providing informal supportive care. The latter can be an important element of costs and […] may be particularly important in the evaluation of health care options that rely on such inputs.”

“[A]lthough the emphasis in economic evaluation is on marginal changes in costs and benefits, the available data frequently relate to average costs […] There are two issues with using average cost data. First, the addition to or reduction in costs from increased or decreased resource use may be higher, lower or the same as the average cost. Unfortunately, knowing what the relationship is between average and marginal cost requires information on the latter – the absence of which is the reason average costs are used! Secondly, average cost data obscure potentially important issues with respect to the technical efficiency of providers. If average costs are derived in one setting, for example a hospital, this assumes that the hospital is using the optimal combination of inputs. If average costs are derived from multiple settings, they will include a variety of underlying production technologies and a variety of underlying levels of production efficiency. Average costs are therefore less than ideal, because they comprise a ‘black box’ of underlying cost and production decisions. […] Approaches to costing fall into two broad types: macro- or ‘top-down’ costing, and micro- or ‘bottom-up’ costing […] distinguished largely on the basis of the level of disaggregation […] A top-down approach may involve using pre-existing data on total or average costs and apportioning these in some way to the options being evaluated. […] In contrast, a bottom-up approach identifies, quantifies and values resources in a disaggregated way, so that each element of costs is estimated individually and they are summed up at the end. […] The separation of top-down and bottom-up costing approaches is not always clear. For example, often top-down studies are used to calculate unit costs, which are then combined with resource use data in bottom-up studies.”

“Health care programmes can affect both length and quality of life; these in turn interact with both current and future health care use, relating both to the condition of interest and to other conditions. Weinstein and Stason (1977) argue that the cost of ‘saving’ life in one way should include the future costs to the health service of death from other causes. […] In practice, different analysts respond to this issue in different ways: examples may be found of economic evaluations of mammography screening that do […] and do not […] incorporate future health care costs. Methodological differences of this sort reduce the ability to make valid comparisons between results. In practical terms, this issue is a matter of researcher discretion”.

The stuff included in the last paragraph above is closely linked to stuff covered in the biodemography text I’m currently reading, and I expect to cover related topics in some detail in the future here on the blog. Below a few final observations from the book about discounting:

“It is generally accepted that future costs should be discounted in an economic evaluation and, in CBA, it is also relatively non-controversial that benefits, in monetary terms, should also be discounted. In contrast, there is considerable debate surrounding the issue of whether to discount health outcomes such as QALYs, and what the appropriate discount rate is. […] The debate […] concentrates on the issue of whether people have a time preference for receiving health benefits now rather than in the future in the same way that they might have a time preference for gaining monetary benefits now rather than later in life. Arguments both for and against this view are plausible, and the issue is currently unresolved. […] The effect of not discounting health benefits is to improve the cost-effectiveness of all health care programmes that have benefits beyond the current time period, because not discounting increases the magnitude of the health benefits. But as well as affecting the apparent cost-effectiveness of programmes relative to some benchmark or threshold, the choice of whether to discount will also affect the cost-effectiveness of different health care programmes relative to each other […] Discounting health benefits tends to make those health care programmes with benefits realised mostly in the future, such as prevention, less cost-effective relative to those with benefits realised mostly in the present, such as cure.”