Cost Analysis Page 3    HHS    CDC
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 IntroductionJump to page 1.
 Cost of the Intervention or ProgramJump to page 2.
Cost of Illness
The Cost of Illness (COI) is defined as the value of the resources that are expended or foregone as a result of a health problem. The COI includes health sector costs, the value of lost productivity by the patient (indirect cost), and the cost of pain and suffering (intangible costs).
Why Should We Calculate the COI?
The objective of health policy decisionmakers is to improve the health status of society. Public health research and surveillance data (e.g., epidemiological studies) help determine the nation's current health profile and problems. They also identify the effectiveness of available technologies in eliminating these problems.
To make informed choices concerning which health problems to address and what interventions to use to alleviate them, we need to know the economic burden imposed by the various health problems. The COI provides a monetary estimate for the economic burden of diseases.
The majority of COI studies estimate the medical expenses and dollars of employment compensation that are foregone as a result of illnesses or premature death. This information provides us with estimated magnitudes of economic flows associated with government programs. With this knowledge we are able to assess the economic impacts of various health problems.
COI studies allow us to determine the amount of money that we spend on an illness and to compare it with what we spend on the interventions that decrease or eliminate the problems. This determination helps us answer the question "Is the intervention worth it?". By combining this data with information from the previous chapter (Cost of the Intervention or ProgramOpen this in a new window), we can estimate
  • how much the intervention costs,
  • how much the illness costs before (or without) the intervention, and
  • how much the illness costs after (or with) the intervention.
Other reasons for estimating COI are similar to those discussed in the IntroductionOpen this in a new window and Cost of the Intervention or ProgramOpen this in a new window chapters of this cost analysis tutorial.
Determining COI
We can follow the same systematic steps below to determine the COI as we did in estimating the cost of an intervention
  1. Frame the cost analysis.
  2. Develop a cost inventory.
  3. Measure resource use.
  4. Calculate cost analysis results.
Framing the Cost Analysis
The first step in framing a study involves defining the problem and adopting a research strategy. Each component of framing a study is discussed in detail in the previous chapter; the same considerations are relevant for framing a COI study.
Specifically for COI analysis, we have to choose a time frame, taking into account the characteristic duration of the illness in question. Some acute illnesses (e.g., the common cold) have a short duration. Other illnesses (e.g., HIV or tuberculosis) have durations that often extend over long periods.
Developing a Cost Inventory
The perspective we choose dictates what costs to include. In the COI studies, we use the direct, indirect, and intangible classification schemes described in the Classification SystemsOpen this in a new window section in the previous chapter.
Direct Costs
Direct costs of illness are expenditures for medical goods and services (e.g., medications, doctor visits, and hospitalization). Often direct costs are further classified as direct medical and direct nonmedical costs, depending on whether or not the resources have been expended directly in production of a treatment.
For instance, direct medical costs of end-state renal disease (ESRD) include the cost of treating ESRD and its co-morbidities (e.g., hypertension, electrolyte imbalance, anemia, dialysis complications, and side effects).
The direct nonmedical costs of ESRD include costs for such items as transportation to clinics and home modifications for in-house dialysis machines.
If the perspective of our study is societal, dividing costs into those borne by the health sector and those borne by the household is useful. The general categories of costs in each division are reflected in the table below.
Health sector costs Family costs
Hospitalization Out-of-pocket payments (user fees) for hospitals and drugs
Medication Medication
Emergency (ambulance) transportation and care Transportation of the patient and family
Outpatient and primary clinic Costs for taking care of dependents
  Modifications in home as a result of illness
User fees are out-of-pocket expenses for patients that certain public health systems require for their service. Double counting these user fees is an easy mistake to make. These fees must be accounted for either in the family cost category or in the health sector category, but not in both.
Indirect Costs
Indirect costs or productivity losses are the labor earnings that are forgone as a result of an adverse health outcome. The decreased productivity can be a result of illness, death, side effects, or time spent receiving treatment. Indirect costs include lost earnings and productivity of both patients and the family members who take care of them. For some diseases with premature death, the indirect cost is the loss in potential wages and benefits. Indirect costs associated with premature death might be very high.
Economists consider health to be a human capital investment. According to this approach, the value of health is measured in terms of its contribution to production activity and national income. By following the methods developed in the human capital approach, we can measure indirect costs by using data from the labor markets. Earnings lost because of time spent while ill or receiving medical treatments are used to estimate the value of time lost. Examples of indirect illness costs include
  • the value of time spent when unable to work as productively because of an illness or side effect,
  • earnings lost while traveling to health-care facilities, and
  • productivity losses associated with caregiver time.
Intangible Costs
The intangible cost components of illness are usually substantial, and in many cases, might dominate the policy agenda. Examples include
  • disfigurement (e.g., breast cancer with surgery),
  • functional limitations (e.g., paralysis from polio),
  • pain (e.g., rheumatoid arthritis or bone metastasis), or
  • fear (e.g., HIV, rabies, or bovine spongiform encephalopathy [BSE]).
One approach to estimating the intangible costs is through willingness-to-pay (WTP) studies. However, WTP is a complex method requiring specialized expertise in designing and implementing surveys.
Because of 1) complexities involved with implementing WTP studies and 2) unresolved theoretical controversies in measuring intangible costs, the majority of economic evaluations include only their qualitative discussion.
Estimating Resource Use and Calculating Results
Because of data and methodological limitations, the majority of COI studies in the literature estimate only a part of the full economic costs of illness represented by direct, indirect, and intangible costs. A simplified approach is documented below.
COI = Number of episodes x ( Direct cost per episode + Indirect cost per episode )
where
Direct cost per episode = Direct outpatient costs + Direct inpatient costs + Direct homecare costs
Indirect cost per episode = Value of production x ( Production lost because of illness + Production lost because of caregiving )
We can generate multiple summary measures to analyze costs.
  • Total cost: resources expended for all patients with the illness.
  • Average costs: cost per case of illness.
  • Annual cost: The COI per year.
Case Study: Hepatitis A Outbreak — Denver, Colorado, 1992
Context
Outbreak: During November–December 1992, 44 cases of hepatitis A associated with a catering facility were reported to the Colorado Department of Public Health and Environment. The 44 cases included
  • 10 employees from the catering company, and
  • 34 persons who attended parties catered by the company.
Approximately 5,000 persons were considered potentially exposed to hepatitis A by attending functions at which the food was prepared by the 10 infected food handlers.
Intervention: The Colorado Department of Public Health and Environment and the Tri-County Health Department notified party attendees of their potential exposure by contacting party hosts and conducting a news conference. Approximately 16,000 people received immune globulin prophylaxis.
Objective: To estimate the cost of the disease-control program and the COI.
Source of This Study
Dalton, CB, Haddix, Anne, et al., The Cost of a Food-Borne Outbreak of Hepatitis A in Denver, Colorado. Arch Intern Med 1996:156:1013–16
Methods
Study population: Food handlers at catering facilities and residents of the metropolitan Denver area who had used the services of the catering facility.
Study design: Retrospective program cost and COI analysis.
Study perspective: Societal.
Calculating Costs
Societal Costs
The total cost to society estimated in this study comprises multiple different costs.
Disease-Control Costs
The components of disease-control costs were estimated from 1990 data on actual payments for services classified by diagnosis related group codes obtained from Blue Cross/Blue Shield. These costs are summarized below.
Health Department Costs
Health department costs, which are estimated on the basis of diary and payroll records, are considered to consist solely of personnel costs. Information is collected from each agency for each employee involved in work related to the outbreak during December 1992 and January 1993.
Total personnel costs were calculated to include the hourly wage, benefits, and insurance and workers compensation premium of each employee.
Costs of Testing Suspected Hepatitis A Cases
The metropolitan Denver hospitals and commercial laboratories furnished counts of the hepatitis A serologic tests for total immunoglobulin and IgM (anti-hepatitis A virus) performed during November 1992–January 1993.
The excess number of tests performed in January 1993, compared with the average during November–December 1992, was attributed to the outbreak.
The cost of evaluating a suspected case, $81.28, was based on an average payment of $30.28 for the serologic test and a physician fee of $51.
Costs of Immune Globulin Administration
Administrative costs were determined for
  • HMOs: The cost of the injection, based on average payment data from 13 hospitals, was an estimated $34.
  • Health Departments: Four local health departments were contacted to estimate
    • globulin cost: $2, and
    • personnel time cost: $16.
Business Costs
Business costs are estimated to include only the cost of the food discarded by the catering company. The catering company's decreased profit was not included as a cost to society; it was assumed that other catering companies would have acquired the lost business.
COI
COI is considered to consist of the two components below.
  • Medical costs: Direct medical charges are used as a proxy for cost.
  • Productivity losses: For patients and their relatives, productivity losses are estimated by multiplying the cost of 1 day of lost productivity by the mean number of days lost from performing productive work as a result of the illness.
    Productivity Loss Detail
    Productivity losses for 43 persons who developed hepatitis A were based on data from patients with acute hepatitis A enrolled in the Sentinel Counties Cost Study (CDC, Hepatitis Branch, unpublished data, 1995).
    The Sentinel Counties Cost Study assessed the mean amount of time lost from performing routine productive duties by patients and their relatives because of hepatitis A. This assessment was made based on 50 population-based reports of hepatitis A in the county of Denver in 1991.
    • The median duration of absence from work was 12.5 days (range: 6–25 days) for hospitalized cases and 7 days (range: 1–23 days) for outpatient cases.
    • The cost of a day of lost productivity was calculated on the basis of average national earnings and the imputed value of household work, adjusted by age and sex. Its value was an estimated $94; this value included data for nonemployed persons and was based on a 40-hour, 5-day working week.
    • The cost of travel and productivity losses for persons receiving immune globulin and serologic testing and the cost of caretakers' time was excluded from this analysis.
Data Collected
Data was collected for the following items:
  • health department, HMO, hospital, and catering company records,
  • salaries and benefits of personnel at county departments of health and personnel time devoted to work related to the outbreak,
  • number of serologic tests and immune globulin injections performed in 13 hospitals and two commercial laboratories,
  • data from1990 on actual payments for services from Blue Cross/Blue Shield HMOs, and
  • cost and revenue data from the catering company.
Results: COI Estimates
Cost category Quantity Unit cost ($) Subtotal ($) Total ($)
Disease-Control costs  
Health department personnel time
 2,777 38/hour* 105,699  
Serologic tests and physician fees
 1,639 81.28 133,218  
Immune globulin injections
  
Health department clinics
 3,794 6.7 25,431  
HMOs/hospitals
 12,499 34.00 424,966  
Total: Disease control
   689,314 689,314
Business losses  
Discarded food
   45,000 45,000
Illness costs for cases  
Direct medical
  
Outpatient
 41   31,092  
Hospitalized
 2   14,972  
Total: Direct medical
   46,064 46,064
Productivity losses
  
Outpatient
 41 x 7** 94/day 26,978  
Hospitalized
 2 x 12.5** 94/day 2,350  
Total: Productivity losses
   29,328 29,328
Total cost to society     809,706
*Mean personnel cost per hour (salary, benefits, workers compensation, and medical insurance)
**Person-days
Conclusion
The medical costs and productivity losses composed only approximately 9% of the total cost of the outbreak. The high cost of foodborne outbreaks is an important factor that should be considered in economic evaluation studies of vaccination programs for food handlers.
Advantages and Shortcomings of the COI Approach
The apparent ease of estimation of direct and indirect costs of illness accounts for the widespread use of the COI approach. However, the following factors make the estimation complex and highlight limitations of certain uses of COI estimates.
  • No uniform COI template exists.
  • Data are usually insufficient and inexact.
  • Using CCRs (described in Using Cost-To-Charge Ratios [CCRs]Open this in a new window) to adjust the charges for medical services provides only approximate estimates of true economic costs for direct expenses.
  • Making an accurate estimate of productivity losses is difficult. Wages and benefits are used to estimate the forgone earnings for working patients and household members.
  • Making an accurate estimate of the cost of nonmarket goods and services is more difficult than doing so for productivity losses.
  • COI estimates are often used as a measure of the monetized benefits of public health programs. The total of the costs that are avoided represents the value of program benefits. However, COI estimates do not provide correct measures of the social value of program benefits.
    Persons incur losses in their welfare when they pay for medical expenses by cutting their consumption and forgoing the utility that this consumption provides. In contrast, these direct expenditures stimulate economic activity and produce welfare in health care and other sectors of the economy. Therefore, the direct costs of illness do not represent the social costs accurately.
  • COI estimates are often used as measures of disease severity. However, COI estimates provide a measure of the economic consequences of an illness, not of disease severity. The direct costs of an illness reflect the types of medical interventions currently available, whereas indirect costs measure the affected population's education level, skill level, income, sick-leave benefits, and insurance coverage.
Despite these shortcomings, the COI approach provides useful information regarding economic flows associated with an adverse health outcome and is a useful economic tool to guide resource allocation decisions.
Test Your Understanding
Please answer the questions before you look at the "Our Answers" section.
  1. Suppose you are conducting from a societal perspective a COI analysis to estimate the economic burden of influenza in the United States. You are provided with the information below from a representative sample.
    • Average direct cost of treating each case is $86 (range: $21–$140).
    • Average indirect cost for treating each case is $190 (range: $ 44–$560).
    • The sample yields an incidence rate of 7.5%. However, other studies indicate that incidence rates are in the range of 4%–12%.
    What might be some of the direct cost components of influenza in the United States?
  2. What might be some of the indirect costs for influenza in the United States?
  3. Will the results of a COI study that is based on estimating direct and indirect cost components reflect the full economic burden of influenza in the United States?
    If not, what is the omitted component?
  4. Assuming that the population of the United States is 280 million, calculate the COI for influenza by using the following formula:
    COI = Number of cases x ( Average direct cost per case + Average indirect cost per case )
    where
    Number of cases = Population x Disease Incidence rate
  5. How would you account for the uncertainty in the data?
  6. Which parameters would you vary in a sensitivity analysis?
  7. As we discussed in the previous chapter, conducting cost analysis inevitably involves uncertainties regarding some parameters. The sensitivity analyses reveal the impact of these uncertainties by calculating the changes in analysis results when one or multiple study parameters are varied.
    Recalculate the COI by using the minimum and maximum values for direct cost per case.
  8. Recalculate the COI using the maximum values for infection prevalence and direct and indirect costs per case.
Our Answers
  1. Suppose you are conducting from a societal perspective a COI analysis to estimate the economic burden of influenza in the United States. You are provided with the information below from a representative sample.
    • Average direct cost of treating each case is $86 (range: $21–$140).
    • Average indirect cost for treating each case is $190 (range: $ 44–$560).
    • The sample yields an incidence rate of 7.5%. However, other studies indicate that incidence rates are in the range of 4%–12%.
    What might be some of the direct cost components of influenza in the United States?
    Direct costs include
    • physician services costs,
    • diagnostic/laboratory testing costs,
    • vaccination costs,
    • physician services costs in emergency departments,
    • prescription drug costs,
    • over-the-counter drug costs, and
    • costs for treating complications.
  2. What might be some of the indirect costs for influenza in the United States?
    Indirect costs include
    • value of productivity losses from morbidity,
    • value of productivity losses from premature mortality, and
    • value of caregivers' productivity losses.
  3. Will the results of a COI study that is based on estimating direct and indirect cost components reflect the full economic burden of influenza in the United States?
    If not, what is the omitted component?
    No. The results of a COI study based on estimating only direct and indirect costs will not reflect the full economic burden of influenza in the United States.
    The intangible costs are an integral part of the COI estimates, although they are difficult to quantify and often are discussed qualitatively in COI analyses.
  4. Assuming that the population of the United States is 280 million, calculate the COI for influenza by using the following formula:
    COI = Number of cases x ( Average direct cost per case + Average indirect cost per case )
    where
    Number of cases = Population x Disease Incidence rate
    Number of cases = Population x Disease Incidence rate
    = 280,000,000 x 0.075
    = 21,000,000
    COI = Number of cases x ( Average direct cost per case + Average indirect cost per case )
    = 21,000,000 x ( $86 + $190 )
    = $5,796,000,000
  5. How would you account for the uncertainty in the data?
    The uncertainty in the available data can be factored into the analysis by conducting a sensitivity analysis.
  6. Which parameters would you vary in a sensitivity analysis?
    A sensitivity analysis should be conducted around direct costs, indirect costs, and the incidence rate. All three parameters can be varied in a sensitivity analysis, one-way or multiway.
  7. As we discussed in the previous chapter, conducting cost analysis inevitably involves uncertainties regarding some parameters. The sensitivity analyses reveal the impact of these uncertainties by calculating the changes in analysis results when one or multiple study parameters are varied.
    Recalculate the COI by using the minimum and maximum values for direct cost per case.
    In a one-way sensitivity analysis, direct costs per case could be increased to $140 and decreased to $21.
    COI = 21,000,000 x ( $140 + $190 )
    = $6,930,000,000
    COI = 21,000,000 x ( $21 + $190 )
    = $4,431,000,000
  8. Recalculate the COI using the maximum values for infection prevalence and direct and indirect costs per case.
    This multiway sensitivity analysis below explores the impact that a higher incidence rate as well as higher direct and indirect costs per case would have on cost analysis results.
    Number of cases = 280,000,000 x 0.12
    = 33,600,000
    COI = 33,600,000 x ( $140 + $560 )
    = $23,520,000,000
 Adjusting CostsJump to page 4.
 AppendicesJump to page Appendices.
 Glossary — Cost AnalysisJump to page Glossary.
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