Pharmacoeconomics & Health Outcomes

Cost Benefit Analysis

Leon E. Cosler, R.Ph., Ph.D.

Associate Professor of Pharmacoeconomics
Albany College of Pharmacy
Road Map:
• Cost-Benefit Analysis
• Discuss history and applications of CBA
• Describe projects amenable to CBA
• Discuss the methods for reporting results
• Describe the interpretation of results

• Where’s he getting this?

• Text Chapter 4 Cost – Benefit Analysis
Cost - Benefit Analysis (CBA)

• All costs against the $$$ value of all benefits

- All outcomes valued in $$$
- Can compare vastly different projects
- techniques developed in 19th century

Design Numerator Denominator Comments

Cost- Minimization Cost ($$$) N/A Outcomes identical

Cost-Benefit Cost ($$$) Benefits ($$$) Value any outcome in $$$
Cost-Effectiveness Cost ($$$) Outcome Units When outcomes not equal
Cost-Utility Cost ($$$) QALY Convert units into QALYs
Cost - Benefit Analysis (CBA)

• History in health care

- CBA used starting in 1960s
- most popular topics
• communicable diseases
• immunizations / vaccination programs
- several more recent medical technologies
• transplants
• total hip arthroplasty
• CABG
Cost - Benefit Analysis (CBA)

• Advantages
1. Compare $$$ costs vs. $$$ benefits
2. Assess one program or compare multiple
3. Compare very different types of projects
- disparate outcomes
• Disadvantages
1. All benefits need a $$$ value
• including lives saved
• researchers argue how to do this
Cost - Benefit Analysis (CBA)

1. Clearly identify the Intervention

2. Identify and value all costs / resources
- Dependent on perspective
3. Identify and value all benefits
4. Derive Net Benefits
• Net (present) benefits
• NB = total benefits – total costs
• B/C ratio = total benefits
total costs
How to present findings from CBA:

• A. Report the “net benefit”

• Desirable: “Bene $$$” > “Cost $$$”
• If you have several to pick, rank ‘em based
on size

• B. Compute RATIOS: Benefits

Costs
- B/C > 1 : 1 are desirable
• If you have several to pick, rank ‘em by ratio
Cost - Benefit Analysis (CBA)
Identifying Costs

• Direct Medical
• Direct Non-medical
- include program set-up costs
• Similar to the other methods
• “Get ‘em all!”
• Measure resource units & “price them out”
• MD visits,
• ER visits,
• Inpatient days
Identifying Benefits

1. “Direct” benefits:
- medical & non-medical resources saved
- a “benefit” can be a “cost” “avoided”
- ex: immunizations
- Perspective dependent

2. “Indirect” benefits:
- “gained” productivity time x average wages
- consider the Pt and caregivers
- sometimes court awards have been used
Cost - Benefit Analysis (CBA)

3. Intangible benefits
- pain and suffering
- only through WTP (scenario provided)
- strategies to estimate the value
• open-ended
• close-ended
• bidding
• payment cards
- disadvantages: hypothetical case and bias
Calculating results

• Discounting & Net Present Values

- usually over 1 year in duration
- common discount rate is ~5%
- can make a case for rates 4% <-> 20%
- sensitivity analyses should be conducted

• Internal Rate of Return (IRR)

- NPV costs = NPV of benefits
- compare to a threshold rate (market rate)
How to present findings from CBA:

Option Benefit Cost Net B/C Ratio

Benefit

Program A $20,000 $10,000 $10,000 2.0 : 1

Program B $3 million $2 million $1 million 1.5 : 1

• Generally report the net benefit

• the magnitude is usually most important
• Discuss which choice is preferred…
Cost - Benefit Analysis (CBA)
Discounted Costs ($ in millions) No Vaccination Net Cost (Savings) of
Vaccination Vaccination vs No
Vaccination

Medical costs
Varicella disease costs 90 10 (80)
Vaccine and administration 0 88 88
Total Medical Costs 90 98 8

Work-loss costs (savings) 439 48 (391)

Total medical and work-loss

Varicella-related costs (savings) 529 146 (383)

Lieu TA, Cochi SL, Black SB, Halloran ME, Shinefield HR, Holmes SJ, Wharton M, Washington AE. Cost-effectiveness of a routine varicella vaccination
program for US children. JAMA; 1994 Feb 2;271(5):375-81.
Prepare for our next exam!

• This manuscript will

accompany Exam #2.
- on colored paper
• You may read it
ahead of time!
• You many NOT bring
it to the exam.
New Exercise is now available!

Enjoy SPRING BREAK !!