An Investigation into the Impact of Irreversibility on HIV/AIDS Prioritization in the

Context of the Global Economic Crisis:A Case Study of Malawi

Priorities 2010 Conference24th April 2010, Boston.

Paul Revill, Steve ThomasCentre for Global Health, Trinity College Dublin.

Overview

1. Scope of research2. The financing picture for HIV/AIDS programmes in

the context of the Global Economic Crisis3. Conventional tools for prioritization and the

problem of irreversibility 4. The prioritization of HIV/AIDS programs given

shortfalls in funding5. Further considerations6. Conclusion

Notes:• What this research does:

– It introduces a problem in current approaches to prioritization particularly significant in the prevailing economic environment

– It begins to examine how this problem can be characterized and overcome, and whether approaches can be developed for pragmatic policy-making.

• What this research doesn’t do:– It does not offer an empirical solution to the issues highlighted

in the paper– It doesn’t prescribe to HIV/AIDS policy-makers which

programmes should be prioritized

Perhaps the greatest value is in identifying areas in which future research will add value.

The Financing Picture for HIV/AIDS Programmes in the Global Economic Crisis

• Global investments in HIV/AIDS have increased from have increased from $7.9bn in 2005 to $13.7bn in 2008.

• Future patterns of the epidemic and treatment needs are predictable, but future funding in highly unpredictable – particularly due to the global economic crisis (Ahmed, 2009)

• The Crisis puts HIV/AIDS programmes in LDCs at risk through possible reductions in

1) Domestic sourced revenues

2) ODA

History Says....

Source: Roodman (2008)

The Conventional Tools for Programme Prioritization

• The conventional set of tools for the prioritization of programs given limited resources is cost-effectiveness analysis.

• The decision to fund an alternative (j) is then based on expected costs (Cj), expected outcomes (Qj) and the budget threshold (λ). The cost-effectiveness of j can be expressed in terms of net benefit:

• For an intervention offering positive health gains at a cost it’s estimated cost-effectiveness rises and falls in the threshold λ.

jjj CQNB

The Conventional Tools for Programme Prioritization (2)

• CEA offers a robust set of tools that are used internationally for healthcare prioritization

• However, it relies upon some fairly strong implicit assumptions:– The decision has to be made ‘today’ – there is no option to

defer– The DM can costlessly switch between technologies– There are no sunk costs or irreversibilities

• These assumptions may not represent a problem in stable environments. However, in situations of high future uncertainty and irreversibility in decision-making they can lead to highly misleading results.

The Problem of Irreversibility

• If an investment decision is subject to some form of irreversibility this limits the scope and possibly value of future choices.

• In the presence of irreversibility and uncertainty, decision-makers have reason to value the flexibility

• The technical toolkit best suited to incorporate irreversibility into investment decision-making is real options valuation (ROV)

• There are 2 broad types of options that that can be equated with the kinds of options found in financial markets– The “call option” value: wait and see before committing to an

ex-ante decision– The “put” or “abandonment option” value: relates to

disinvestment decisions over existing interventions

Responding to Interruptions in Funding

• How, then, can policy-makers respond to a reduction in financial resources1) Aim to deliver the same services at reduced costs – seek

technical efficiency gains;2) Identify those interventions that are highly CE and highly

irreversible (the “untouchables”) – ensure the are provided;3) Identify those interventions that have low CE and/or are highly

reversible – the contenders for cost-savings.• Given evidence of similar CE, examining differential levels of

irreversibility across programmes offers a feasible short-cut to a more complex decision problem.

The Irreversibility of HIV/AIDS Programmes in Malawi

• The following causes of irreversibility were identified– Sunk costs - HR costs– Health consequences - Stakeholder reactions – Institution and systems effects

• Working with national HIV/AIDS policy-makers priorities were then examined based on CE and Irreversibility:– Some potential tech. efficiency savings

– Highly reversible activities were identified: e.g. mainstreaming, information campaigns.

– Other programmes if cut today would be more difficult/costly to restart in future: notably PMTCT, and treatment.

The Irreversibility of HIV/AIDS Programmes in Malawi (2)

• CEA merits a predominant role in the prioritization of programs

• In times of high future uncertainty standard CE are not sufficient– It’s also necessary to consider that value of future choices based

on the irreversibility of today’s decisions• Programs vary widely in CE and their degree of irreversibility

– Reductions of treatment programs would be very irreversible, so are particularly vulnerable to interruptions in funding

• Undertaking this work showed that policy-makers found the approaches intuitive, they agreed with the criteria, and that it offered an improvement on existing ad hoc prioritization.

Further Challenges

• Methods do not currently exist to incorporate ROV into the valuation of healthcare programmes within a fixed budget constrain – The next challenge is to develop appropriate methods and

estimate empirically how ROV alters the ENBs of HIV/AIDS programmes

• Consideration of irreversibility also has implications for political economy issues, such as the debate on additionality (van der Gaag et al, 200x; Murray et al, 2010).– We will proceed to examine the implications of irreversibility

for appropriate funding modalities

Thank You!

Priority AreaActual

Expenditures US$

(2005/06)

Actual Expenditures

US$(2006/07)

Actual Expenditures

US$(2007/08)

1. Prevention and Behaviour Change- mass media campaigns, HCT, PMTCT, awareness campaigns

0.98(4%)

8.5(16%)

14.41(17%)

2. Treatment, Care and Support- operation of ART sites, training, provision of therapeutic food and HBC

8.53(33%)

22.77(43%)

35.72(41%)

3. Impact Mitigation- cash and other transfers, awareness campaigns, labour-saving technology

1.3(5%)

4.01(7%)

11.5(13%)

4. Mainstreaming and Decentralization- set-up and training of workplace orgs, meeting and dissemination activities

10.05(39%)

11.33(21%)

13.43(16%)

5. Research, Monitoring and Evaluation-

0.77(3%)

1.3(2%)

3.42(4%)

6. Central Administration Activities- resource mobilization and utilization, policy and partnership developments

4.78(19%)

6.91(12%)

11.29(13%)

SOURCE

Total Amount Committed

Timeframe Agreements

FY2 FY FYTotal

Amount

(m US$) 2009/2010 2010/2011 2011/2012 (m US$)

Pooled Financing Partners (MoU 2007 to 2011)            

Ministry of Finance   MOU to 2011 2.00 2.00 2.00 6.00

Global Fund           -

Round 1 178.61 2003 - 2008 - - - -

RCC Round 1 375.00 2012 - 2014 51.46 54.30 64.31 170.07

OVC Round 5 17.71 2006 - 2010 3.40 3.40 3.40 10.21

Round 7 36.03 2008 - 2013 3.81 4.18 3.04 11.03

World Bank   2007 - 2012 10.00 10.00 10.00 30.00

DFID £8.4 m  2007 - 2011 6.01 6.01   12.03

Kingdom of Norway  7.50 MOU to 2011 2.50 2.50 - 5.00

(Non-Pooled)

           Earmarked funds

US Government (including CDC)     38.00 38.00 38.00 114.00

UNICEF     9.47 9.47 9.47 28.41

European Development Fund 12.00 € 2010 - 2013 1.88 1.88 1.88 5.63

UNFPA     3.30 3.30 3.30 9.90

WHO 2.80 2.80 2.80 8.40

UNDP     0.57 0.57 0.57 1.71

UNAIDS     0.50 0.50 0.50 1.50

TOTALS     135.70 138.91 139.27 413.89

-I = -490

L1 = 100

S1 = 0 ….

L2 = 100 ….

t = 0 t = 1 t = 2 t > 2

0.5

0.5

The Value of Future FlexibilityThe Call Option Value: Following the “Bad News” Principle

• If the decision has to be made today (t=0) the investment is undertaken with a positive NPVt=0 of 10.

• If there is the possibility of delay the investment would not take place in the negative variant due to a NPVt=1|S of -490, but will in the positive variant with a NPVt=1|L of 510

• The value of the project evaluated today, inclusive of the option, then becomes

• This exceeds the “now or never” decision by 231.8-10 = 221.8, which is the “call option” value of delay.

Fixed cost of investment (I) = -490Probability of large funding stream (q) = 0.5Probability of small funding stream (1-q) = 0.5Discount rate (r) = 0.1

8.2310*5.0510*5.01.1

1OVNPV

COB = 0

L1 = 50

S1 = -50 SC = 100

L2 = 50 ….

t = 0 t = 1 t = 2 t > 2

0.5

0.5

The Value of Future Flexibility (2)The Put Option Value: Following the “Good News” Principle

Current operating net benefit (COB) of 0Scrap value (SV) of abandonment of 100Probability of large funding stream (q) = 0.5Probability of small funding stream (1-q) = 0.5Discount rate (r) = 0.1

• If the decision is delayed and the positive variant occurs, the investment valued at t=1 is 50/0.1 = 500. This exceeds the scrap value so the interventions is continued

• If the decision is delayed and negative variant occurs the intervention will be withdrawn with a value in t=1 of -50 +100/1.1 = 40.91

• To guide the first period decision we need to know the EPVt=0 of a “now or never” decision and the net present value inclusive of the option to delay (EPVOV)

• The “now or never” decision would simply be obtain the scrap value of 100/1.1 = 90• If deferral is possible the project value is

• The difference 245.87 – 90 = 155.87 is the put option value of deferral

87.24591.40*5.0500*5.01.1

1OVEPV

The Prioritization of Programs Given Interruptions in Funding 2

• We found that policymakers easily understood the concepts around CE and the value of future flexibility; they agreed with them as a criteria; and they could put them into practice.

• Potential areas for technical efficiency gains included:– task-shifting; reductions in admin costs across the board; a

reassessment of a “2% ORT” Directive

• The low or questionable CE, highly reversible interventions included:– mainstreaming activities, some funding to CBOs, awareness

campaigns, some research

• The programs regarded as highly CE and/or highly irreversible (regarded as “the untouchables”) were:– targeted cash transfers, PMTCT, treatment/ART, surveillance surveys