Evidence informed decision making: what does …...Economics can support health policy DECISION...

Evidence informed decision making: what does health economics

contribute?

Christopher McCabe PhD

Capital Health Endowed Research Chair

University of Alberta

Overview

• What is health economics

• What is opportunity cost

• What is value?

• Testing a hypothesis versus making a decision

• Introducing Economic Evaluation & decision making

• The cost of uncertainty/the value of research

• Questions

Health economics for policy making is about making decisions

What is health economics?

"HealthEconPlumbing". Licensed under Public Domain via Wikipedia -http://en.wikipedia.org/wiki/File:HealthEconPlumbing.gif#mediaviewer/File:HealthEconPlumbing.gif

What is opportunity cost?

http://www.bbc.com/news/magazine-33133712

What is opportunity cost?

• If we can’t have everything, how do we choose?

• Minimise the value of what we give up?

• Opportunity cost of Choice A is the next most highly valued use of the resources that are consumed as a result of choosing A.

• If the Opportunity Cost is greater than the value we get from A – we’ve made a bad decision.

What is value?

• For an individual:

– The utility/welfare/satisfaction that you receive from the consumption of resources.

• What gives you value is completely individual.

• For a society its more complex:

– Sum of the utility/welfare/satisfaction that all citizens receive from the consumption of society’s resources? (Welfarism/extra-welfarism)

– The value that society attaches to the pursuit of specified societal objectives. (Social Decision Making)

• Welfarism & Extra-welfarism require the specification of a Social Welfare Function– Arrow’s impossibility theorem demonstrates that

it is logically impossible to identify a single Social Welfare Function that would obtain majority support.

• Social Decision Making assumes that policy objectives identified by legitimate social agents (i.e. government) are expressions of a latent Social Welfare Function.

What is the difference between testing a hypothesis and making a decision?

You can’t not make a decision

Evidence for decision making vs. hypothesis testing

• Hypothesis testing decision rule:

– e.g. comparing mortality using Treatment A vs. Treatment B

– If the probability the observed difference between A & B is due to random chance >0.05 (0.001), we reject the hypothesis of a systematic difference between the two treatments.

Making a decision

12 Month Mortality Probability observed difference is random chance

Which treatment will you choose

Treatment A 56/100

Treatment B 45/100

12%

Treatment A and B cost the same, have the same side effect profile and are both tablets. You need to be treated today or you will definitely die this month.

For decisions we use the expected value – because we can’t not make the decision

Introducing economic evaluation

What is economic evaluation?

• Economic evaluation is the comparative analysis of alternative courses of action in terms of their costs and consequences

• A cost analysis is not a complete economic evaluation

• Reporting the costs and outcomes of a single course of action is not an economic evaluation

Why do we need economic evaluation?

• Scarcity, choice, opportunity cost

• Economic evaluation aims to ensure the benefits of programmes that are implemented exceed their opportunity costs

• Help target scarce resources to the greatest effect (World Bank 1993)

What is Cost Effectiveness Analysis?

Method Cost Outcome

Cost effectiveness Monetary value Natural Units

(e.g. life years saved)

Cost benefit Monetary value Monetary value

Cost utility Monetary value Utility values

(e.g. Quality Adjusted

Life Years)

0 Health care

expenditures

Health benefit per $1,000

Economic evaluation and opportunity cost

Current treatments covered

by health care system

Budget

Treatments not covered by

the health care system

Worse Than

Current

Better value

Worse value

Opportunity cost

0 Health care

expenditures

Economic evaluation and opportunity cost

Budget

Opportunity cost

New opp. cost

Health benefit per $1,000

0 Health care

expenditures

Health benefit per $1,000

Economic evaluation and opportunity cost

Budget

Opportunity cost

New opp. cost

Net Health Effect

of changing how

the health care $

is spent

Uncertainty and the value of research

Decision Uncertainty

• The risk of making the wrong decision– Probability that the expected benefit will not be observed

• The cost of making the wrong decision– The value of the expected benefit foregone plus any

additional costs incurred.

• The expected cost of the wrong decision determines how much decision makers should consider uncertainty– If the wrong decision was costless, uncertainty wouldn’t

matter

Probability of Making the Wrong Decision

Willingness to Pay for Health (QALYs)

Probability

0

0.2

0.4

0.6

0.8

1

1.2

$2,000 $5,000 $10,000 $15,000 $20,000 $25,000 $30,000 $35,000 $40,000 $45,000

Cost Effectiveness Acceptability Curve

40% chance the technology is not cost effective

0 Health care

expenditures

Health benefit per $1,000

The value of benefit foregone

Budget

Opportunity cost

New opp. cost

Shadow price of

the budget

constraint

Expected Cost of the Wrong Decision

• Expected Total Cost of Wrong Decision

– Probability of making the wrong decision

– Value of Health Foregone (Lambda)

– Population affected by the condition

Treatment Health Benefit

A B

State of the world 1 9 12

State of the world 2 12 10

State of the world 3 14 20

State of the world 4 11 10

State of the world 5 14 13

Expectation 12 13

The decision maker – looks at the Expectation and chooses Treatment B.

Treatment Health Benefit

Optimal Choice

Maximum health benefit

Health Loss

A B

State of the world 1

9 12 B 12 0

State of the world 2

12 10 A 12 2

State of the world 3

14 20 B 20 0

State of the world 4

11 10 A 11 1

State of the world 5

14 13 A 14 1

Expectation 12 13 13.8 0.8

Treatment Health Benefit

Optimal Choice

Maximum health benefit

Health Loss

A B

State of the world 1

9 12 B 12 0

State of the world 2

12 10 A 12 2

State of the world 3

14 20 B 20 0

State of the world 4

11 10 A 11 1

State of the world 5

14 13 A 14 1

Expectation 12 13 13.8 0.8

Expected health benefit with current information

Treatment Health Benefit

Optimal Choice

Maximum health benefit

Health Loss

A B

State of the world 1

9 12 B 12 0

State of the world 2

12 10 A 12 2

State of the world 3

14 20 B 20 0

State of the world 4

11 10 A 11 1

State of the world 5

14 13 A 14 1

Expectation 12 13 13.8 0.8

Expected health benefit with perfect information

Treatment Health Benefit

Optimal Choice

Maximum health benefit

Health Loss

A B

State of the world 1

9 12 B 12 0

State of the world 2

12 10 A 12 2

State of the world 3

14 20 B 20 0

State of the world 4

11 10 A 11 1

State of the world 5

14 13 A 14 1

Expectation 12 13 13.8 0.8

Expected health loss (from imperfect information)

Treatment Health Benefit

Optimal Choice

Maximum health benefit

Health Loss

A B

State of the world 1

9 12 B 12 0

State of the world 2

12 10 A 12 2

State of the world 3

14 20 B 20 0

State of the world 4

11 10 A 11 1

State of the world 5

14 13 A 14 1

Expectation 12 13 13.8 0.8

EVPI = Expected health loss * value of health ()

• Expected value of perfect information

• Value of health foregone if the decision proves to be wrong (e.g. $50,000) * Expected Health Foregone (e.g. 0.8 QALYs) * Population Affected (e.g. 1000 patients)

• @ $40 million

Summary

• Health Economics can contribute to a wide range of health policy issues

• The discipline of economics is concerned with choices when resources are limited (always)– It does this through consideration of opportunity cost

• Economic Evaluation is ONE way in which Health Economics can support health policy DECISION MAKING.

• It supports the evaluation of opportunity cost of different decision options, including delaying a decision to obtain more information

Questions?