1

Special Topics in Cost-Effectiveness Special Topics in Cost-Effectiveness Analysis:Analysis:

Indirect Costs, DiscountingIndirect Costs, Discounting

Gerald F. Kominski, Ph.D.Gerald F. Kominski, Ph.D.Professor, Professor,

UCLA Department of Health ServicesUCLA Department of Health Services

2

Direct CostsDirect Costs

Health Care CostsHealth Care Costs- Hospital costsHospital costs- Other institutional costs, including nursing home, rehabilitation, Other institutional costs, including nursing home, rehabilitation,

etc.etc.- Ambulatory costs, including physicians, home health services, Ambulatory costs, including physicians, home health services,

etc.etc.- PharmaceuticalsPharmaceuticals

Non-Health Care CostsNon-Health Care Costs- Costs borne by patients and their families, including travel Costs borne by patients and their families, including travel

costs, time lost from work, etc.costs, time lost from work, etc.- Costs borne by society, such as criminal justice system costsCosts borne by society, such as criminal justice system costs

Direct CostsDirect Costs

Caregiving CostsCaregiving Costs- Both unpaid voluntary care as well as purchased Both unpaid voluntary care as well as purchased

servicesservices

Patient Time Costs (in Treatment)Patient Time Costs (in Treatment)- Opportunity cost of receiving careOpportunity cost of receiving care- Equal to foregone income or value of time in next Equal to foregone income or value of time in next

best activitybest activity- Recuperation time and recovery time are captured Recuperation time and recovery time are captured

in the quality of life measurein the quality of life measure

3

Indirect CostsIndirect Costs

Productivity costs related:Productivity costs related:

MorbidityMorbidity, including lost ability to work and lost , including lost ability to work and lost functionality to engage in leisure activityfunctionality to engage in leisure activity

MortalityMortality, i.e., the loss of economic productivity , i.e., the loss of economic productivity due to premature deathdue to premature death- Medical costs of mortality should be captured in the Medical costs of mortality should be captured in the

measurement of direct health care costsmeasurement of direct health care costs

4

Morbidity CostsMorbidity Costs

Productivity losses due to recovery and recuperation, as Productivity losses due to recovery and recuperation, as well as reduced functionality, could be: well as reduced functionality, could be: - Monetized and included in the numeratorMonetized and included in the numerator- Captured in the HRQOL (QALY) measureCaptured in the HRQOL (QALY) measure

CEA assumes that these effects are captured in QALYsCEA assumes that these effects are captured in QALYs- Conceptually, they are a measure of the “effectiveness” Conceptually, they are a measure of the “effectiveness”

of treatment or interventionof treatment or intervention If it is important to monetize morbidity effects, then conduct If it is important to monetize morbidity effects, then conduct

a CBA, not a CEAa CBA, not a CEA If the CEA uses intermediate outputs instead of QALYs If the CEA uses intermediate outputs instead of QALYs

(and is thus not a reference case analysis), then (and is thus not a reference case analysis), then productivity costs should be included in numeratorproductivity costs should be included in numerator

5

Friction CostsFriction Costs

Although productivity losses should not be Although productivity losses should not be included in the numerator, costs borne by included in the numerator, costs borne by others, including employers and other others, including employers and other employees, must be included in the numerator employees, must be included in the numerator if they are not trivialif they are not trivial

Friction costs => transaction costs associated Friction costs => transaction costs associated with replacing a disabled or absent workerwith replacing a disabled or absent worker- Recruiting and training costsRecruiting and training costs- Any differences between real productivity and Any differences between real productivity and

wageswages

6

7

Identifying and Measuring CostsIdentifying and Measuring Costs

Identify resources usedIdentify resources used- Requires a careful specification of all relevant Requires a careful specification of all relevant

resources used in the intervention or treatment resources used in the intervention or treatment being assessedbeing assessed

Measure resources usedMeasure resources used- Requires data collection or abstraction tools, Requires data collection or abstraction tools,

developed to collection the information identified in developed to collection the information identified in the previous stepthe previous step

- In some cases, may be available from In some cases, may be available from administrative dataadministrative data

Place a monetary value on resources usedPlace a monetary value on resources used

8

Micro versus Gross CostingMicro versus Gross Costing

Gross costingGross costing- Uses readily available sources of data about either the cost of Uses readily available sources of data about either the cost of

production, or more commonly, the price paid for servicesproduction, or more commonly, the price paid for services- Requires collection of aggregate utilization data, which is then Requires collection of aggregate utilization data, which is then

priced using standard reimbursement or payment ratespriced using standard reimbursement or payment rates• Data are easier to collect, but refined analyses of changes in Data are easier to collect, but refined analyses of changes in

resource use aren’t possibleresource use aren’t possible

Micro costingMicro costing- Requires collection of detailed utilization data, usually with Requires collection of detailed utilization data, usually with

instruments developed specifically for an individual studyinstruments developed specifically for an individual study- Usually requires collection of detailed cost or pricing dataUsually requires collection of detailed cost or pricing data

• Costs may lack external validityCosts may lack external validity

9

Measuring CostsMeasuring Costs

PharmaceuticalsPharmaceuticals- acquisition costsacquisition costs- costs of administering, monitoring, compliancecosts of administering, monitoring, compliance

HospitalsHospitals- time and motion studies may be necessary to obtain time and motion studies may be necessary to obtain

accurate measure of resources used in treatmentaccurate measure of resources used in treatment- costs are often estimated from charges using the costs are often estimated from charges using the

ratio of costs-to-charges (RCC)ratio of costs-to-charges (RCC)- public payment rates, such as Medicare DRG rates, public payment rates, such as Medicare DRG rates,

can be used if we assume that marginal revenue for can be used if we assume that marginal revenue for public payers (roughly) equals marginal costspublic payers (roughly) equals marginal costs

10

Measuring CostsMeasuring Costs

PhysiciansPhysicians- Cost data are virtually impossible to obtainCost data are virtually impossible to obtain- Payment data, such as Medicare payment rates Payment data, such as Medicare payment rates

based on the Resource-Based Relative Value based on the Resource-Based Relative Value Scale, may be used assuming that marginal Scale, may be used assuming that marginal revenue roughly equals marginal costrevenue roughly equals marginal cost

- Private payment data is commercially availablePrivate payment data is commercially available• MEDSTATMEDSTAT

11

Measuring CostsMeasuring Costs

Personal/Family CostsPersonal/Family Costs- Often ignored, because in CEA/CUA, costs of lost productivity Often ignored, because in CEA/CUA, costs of lost productivity

or functional status are already included in outcome measure or functional status are already included in outcome measure (i.e., QALY)(i.e., QALY)

- Depending on the intervention, may be importantDepending on the intervention, may be important• Caregiver costs, including costs related to lost days of Caregiver costs, including costs related to lost days of

schoolschool• Travel costsTravel costs• Time in treatmentTime in treatment

Social CostsSocial Costs- Criminal justice systemCriminal justice system

• May be important for MH and SA interventionsMay be important for MH and SA interventions- Social servicesSocial services

12

Measuring CostsMeasuring Costs

Induced costs, i.e., costs of added years of lifeInduced costs, i.e., costs of added years of life- may have a large impact on programs with low CE may have a large impact on programs with low CE

ratiosratios- Panel on Cost-Effectiveness in Health and Medicine Panel on Cost-Effectiveness in Health and Medicine

suggests ignoring these costs, unless they are likely suggests ignoring these costs, unless they are likely to have a large impactto have a large impact

RecommendationsRecommendationsPanel on Cost-Effectiveness in Medicine and HealthPanel on Cost-Effectiveness in Medicine and Health

Costs of caregiving and other services related to the Costs of caregiving and other services related to the intervention should be included in the numeratorintervention should be included in the numerator

Time costs spent seeking care or undergoing an Time costs spent seeking care or undergoing an intervention should be included in the numeratorintervention should be included in the numerator

Morbidity costs and the costs of year of life lost should be Morbidity costs and the costs of year of life lost should be excludedexcluded from the numerator because they are captured from the numerator because they are captured in the denominatorin the denominator

Productivity costs borne Productivity costs borne by othersby others should be included in should be included in the numeratorthe numerator

13

Discounting Costs and BenefitsDiscounting Costs and Benefits

Both costs and benefits should be discounted to account for the effects of time, using the following formula:Both costs and benefits should be discounted to account for the effects of time, using the following formula:

where where t = time periodt = time period

i = discount ratei = discount rate

t

)1(costs = costs tt i

Discounting Costs vs. BenefitsDiscounting Costs vs. Benefits

discounting is justified because of:discounting is justified because of:

time preference rate of consumption => we will time preference rate of consumption => we will accept less of a good in order to use it today accept less of a good in order to use it today rather than next year, or we require rather than next year, or we require compensation for delaying use of a goodcompensation for delaying use of a good

opportunity costs => rate of return on capital in opportunity costs => rate of return on capital in private marketsprivate markets

Discounting Costs vs. Benefits (cont.)Discounting Costs vs. Benefits (cont.)

but is our time preference for wealth but is our time preference for wealth differentdifferent from our time preference for health?from our time preference for health?- some studies have shown that individuals are more some studies have shown that individuals are more

risk averse in choices involving years of life than in risk averse in choices involving years of life than in financial mattersfinancial matters

- one obvious reason is that wealth can be reacquired if one obvious reason is that wealth can be reacquired if lost, whereas health and years of life cannotlost, whereas health and years of life cannot

Olsen (1993) concludes that time preferences for Olsen (1993) concludes that time preferences for health are different, and research is needed to health are different, and research is needed to elicit the appropriate time preferences for healthelicit the appropriate time preferences for healthOlsen JA. On what basis should health be discounted? Olsen JA. On what basis should health be discounted? J Health Econ J Health Econ 1993;12:39-53.1993;12:39-53.

RecommendationsRecommendationsPanel on Cost-Effectiveness in Medicine and HealthPanel on Cost-Effectiveness in Medicine and Health

Costs and outcomes should be discounted using the same Costs and outcomes should be discounted using the same discount rate, to avoid the Keeler-Cretin paradox (Keeler discount rate, to avoid the Keeler-Cretin paradox (Keeler and Cretin, 1983)and Cretin, 1983)

Discount rate should reflect the Discount rate should reflect the shadow price of capitalshadow price of capital- Reflects the trade-off between present and future consumption Reflects the trade-off between present and future consumption

made by social decision makersmade by social decision makers- Social rate of time preference (SRTP)Social rate of time preference (SRTP)- SRTP has been pegged to the real rate of return on low-risk, long-SRTP has been pegged to the real rate of return on low-risk, long-

term government investments, roughly 3%term government investments, roughly 3% 3% is therefore the preferred discount rate3% is therefore the preferred discount rate

- Because so many studies have been conducted using 5%, studies Because so many studies have been conducted using 5%, studies should also include a 5% discount rateshould also include a 5% discount rate

- Sensitivity analyses should be conducted ranging from 0% to 7%Sensitivity analyses should be conducted ranging from 0% to 7%Keeler EB, Cretin S. Discounting of life-saving and other nonmonetary effects. Keeler EB, Cretin S. Discounting of life-saving and other nonmonetary effects. Management Management

Sci Sci 1983;29:300–306.1983;29:300–306.

Is There A Suitable Alternative to Using a Is There A Suitable Alternative to Using a Constant Discount Rate?Constant Discount Rate?

Discounting seems most problematic for Discounting seems most problematic for interventions where most of the costs are interventions where most of the costs are borne in the present, but most of the benefits borne in the present, but most of the benefits accrue in the (distant) futureaccrue in the (distant) future- Most health promotion/preventive measuresMost health promotion/preventive measures- Is prevention better than cure?Is prevention better than cure?- Underinvestment in health promotion/disease Underinvestment in health promotion/disease

prevention by health insurers, because benefits prevention by health insurers, because benefits accrue to someone other than the payer (market accrue to someone other than the payer (market failure due to externality)failure due to externality)

18

Is There A Suitable Alternative to Using a Is There A Suitable Alternative to Using a Constant Discount Rate?Constant Discount Rate?

Some empirical research suggests that Some empirical research suggests that individuals have high discount rates (i.e., high individuals have high discount rates (i.e., high time preference) for health benefits in the near time preference) for health benefits in the near future, but lower discount rates for health future, but lower discount rates for health benefits in the more distant futurebenefits in the more distant future

Similarly, older individuals may have higher Similarly, older individuals may have higher time preferences for health benefits than time preferences for health benefits than younger individuals, reflecting their shorter younger individuals, reflecting their shorter (relative) life expentencies(relative) life expentencies

19

Is There A Suitable Alternative to Using a Is There A Suitable Alternative to Using a Constant Discount Rate?Constant Discount Rate?

One alternative to a constant discount rate, One alternative to a constant discount rate, therefore, is a declining (hyperbolic) discount ratetherefore, is a declining (hyperbolic) discount rate- Substitute discount factor = 1 / (1 + r) Substitute discount factor = 1 / (1 + r) tt

with discount factor = 1 / (1 + r * a(t))with discount factor = 1 / (1 + r * a(t))

where a(t) = b / (b + t) and b > 0where a(t) = b / (b + t) and b > 0

Disadvantages:Disadvantages:- CE ratios can shift over time solely due to the passage CE ratios can shift over time solely due to the passage

of time => choices become time variantof time => choices become time variant• This may make sense from an individual perspective, This may make sense from an individual perspective,

but does it make sense from a societal perspective?but does it make sense from a societal perspective?- Incompatibility with vast majority of published studiesIncompatibility with vast majority of published studies

20