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Valuation issues
Jan Sørensen, Health EconomistJan Sørensen, Health EconomistCAST – Centre for Applied Health Services Research and CAST – Centre for Applied Health Services Research and
Technology AssessmentTechnology Assessment
University of Southern DenmarkUniversity of Southern Denmark
Cost-benefit analysis of future energy plans
Assess and compare the cost and benefits of different Assess and compare the cost and benefits of different alternatives from a social perspectivealternatives from a social perspective
CBA is based on well-established economic theory (welfare CBA is based on well-established economic theory (welfare economics), which might serves as reference case when in economics), which might serves as reference case when in doubtdoubt
Many reference booksMany reference books International guidelinesInternational guidelines Ministry of Finance, Guidelines 1999Ministry of Finance, Guidelines 1999
Many examples on applications within different other public Many examples on applications within different other public sectors including the environmental area eg. Møller et al, sectors including the environmental area eg. Møller et al, 20002000
Important decisions
Social perspectiveSocial perspective Include all relevant effects and resource use (cost)Include all relevant effects and resource use (cost) Valued from a social perspectiveValued from a social perspective
Long time horizonLong time horizon Include long term consequences of the specified energy scenarios for one year e.g. Include long term consequences of the specified energy scenarios for one year e.g.
2010, 2020, 2050)2010, 2020, 2050) Analytical (scenario) horizon assumed to be one year Analytical (scenario) horizon assumed to be one year Consider the long term consequences of this year’s energy productionConsider the long term consequences of this year’s energy production
Aim to express both the benefits and cost in monetary units (however, Aim to express both the benefits and cost in monetary units (however, should also present intermediate results – eg. new cases of disease, life should also present intermediate results – eg. new cases of disease, life years lost, additional use of health services)years lost, additional use of health services)
Provide a transparent, comprehensive and reliable analysisProvide a transparent, comprehensive and reliable analysis
In the following: Restricted focus on the cost and benefits relating to the In the following: Restricted focus on the cost and benefits relating to the health effects of pollution associated with changes in energy productionhealth effects of pollution associated with changes in energy production
Additional incidence of diseases – new cases by sex and age
Impact on health status: death, time with illness, QALY
Additional use of resource: Hospitals, primary care, medicine, social service, voluntary services, time
Value of avoided death, time with illness, QALY
Productive time
ConsumptionUnit cost per resource
Net present value of the benefits
Net present value of the resource use (costs)
*
~
*
~
Which value ?
Economic theory: Economic theory: The opportunity cost i.e. the utility of the second best application of the The opportunity cost i.e. the utility of the second best application of the
resourcesresources Valued from the perspective of society – usually as the aggregation of the Valued from the perspective of society – usually as the aggregation of the
values of each individual in the societyvalues of each individual in the society Marginal (inkremental) analysis i.e. the cost and benefit of the last Marginal (inkremental) analysis i.e. the cost and benefit of the last
unit/differenceunit/difference
Difficult to make operational outside a perfect market situationDifficult to make operational outside a perfect market situation
Therefore often approximated as the long term average cost, i.e. variable cost Therefore often approximated as the long term average cost, i.e. variable cost with reasonable contribution to the fixed costwith reasonable contribution to the fixed cost
Example
A 55 year old man who becomes ill with a stroke and survive A 55 year old man who becomes ill with a stroke and survive the immediate periodthe immediate period
Additional resource useAdditional resource use Hospital care in the immediate period (e.g. first 1 month)Hospital care in the immediate period (e.g. first 1 month) Rehabilitation period (additional training)Rehabilitation period (additional training) Maintenance period (home improvement, ongoing support, GP and nursing Maintenance period (home improvement, ongoing support, GP and nursing
service, medication, meals on wheels etc.) in own homeservice, medication, meals on wheels etc.) in own home Admission to nursing home until rest of life timeAdmission to nursing home until rest of life time
NPV of the additional resource use each year in the NPV of the additional resource use each year in the remaining life time (x euro per case with a specific age and remaining life time (x euro per case with a specific age and sex group)sex group)
Method - Register study
Identify population with new disease and suitable controlsIdentify population with new disease and suitable controls Assess the expected life time with the diseaseAssess the expected life time with the disease Assess additional resource use (attributable cost= difference Assess additional resource use (attributable cost= difference
between diseased and controls) in each year between diseased and controls) in each year e.g. hospital, primary care and medicinee.g. hospital, primary care and medicine e.g. valuation through DRG-system, fees paid by primary care funding body, e.g. valuation through DRG-system, fees paid by primary care funding body,
and pharmacy sales pricesand pharmacy sales prices
NPV (Unit cost) per new case = NPV (Unit cost) per new case = ΣΣtt qt * pt(q) * qt * pt(q) * δδtt
Time cost of seeking treatmentPatient and relatives
Alternative costAlternative cost Value of missed employment: missed income (net of tax)Value of missed employment: missed income (net of tax) Leisure time: missed leisure time Leisure time: missed leisure time
Valuation of benefit - 1
Avoided death/life years lost/lost time without illnessAvoided death/life years lost/lost time without illness Different valuation methodsDifferent valuation methods
Contingent valuationContingent valuation Discrete choiceDiscrete choice
Valuation of benefit - 2
Production lossProduction loss Human capital method: lost time => retirement ageHuman capital method: lost time => retirement age Friction cost method: lost time => replaced at labour marked (6 mths)Friction cost method: lost time => replaced at labour marked (6 mths)
Valuation: gross salary before taxValuation: gross salary before tax
Note risk of double counting!Note risk of double counting!
Valuation of benefit - 3
Future consumption (hospital and other resources)Future consumption (hospital and other resources) People living longer have more consumption eg. food, housing, holidaysPeople living longer have more consumption eg. food, housing, holidays Represent a use of social resourcesRepresent a use of social resources Arise in the gained life timeArise in the gained life time
Deliverables
Tables of aggregated NPV net benefit (cost) of new illnesses Tables of aggregated NPV net benefit (cost) of new illnesses (defined by the WP3 group) by age and sex groups (as (defined by the WP3 group) by age and sex groups (as defined by the detailed CEEH model) under different sets of defined by the detailed CEEH model) under different sets of assumptions regarding discount ratesassumptions regarding discount rates
Documentation of details in deriving such figuresDocumentation of details in deriving such figures
ActivitiesActivities Register studyRegister study Survey of population values (health, life years /QALY gain)Survey of population values (health, life years /QALY gain) Perhaps survey of population values of environmental consequencesPerhaps survey of population values of environmental consequences
Examples of earlier unit costs
Frohn et al, PP-presentation, May 2007