Introduction to Economic Evaluation Page 1    HHS    CDC

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What Is an Economic Evaluation?
In the United States, the public health infrastructure is a network of local, state, and federal agencies entrusted with the task of implementing curative and preventive health programs and interventions, including emergency and response strategies, to improve and secure population health.
Therefore a certain amount of resources (e.g., financial) are allocated to local, state, and federal agencies.
Public health programs and interventions can be thought of as a production process that transforms inputs (resources) into outputs (changes in health outcomes), as illustrated in this diagram:
Public health programs transform resources into changes in health outcomes.
Decisionmakers responsible for allocating resources and implementing public health programs and interventions need to understand the relationship between resources used and health outcomes achieved by the program or intervention. One analytical tool available to decisionmakers is economic evaluation.
In an economic evaluation, analytic techniques are applied to identify, measure, value, and compare the costs and consequences of two or more alternative programs or interventions.
In the health field, economic evaluations are used to analyze how efficiently resources have been allocated and how resources should be allocated to ultimately maximize welfare.
When applied to public health programs, economic evaluation is concerned with the
  • amount of resources used by a program or intervention, and
  • corresponding level of health-related outcomes.
Economic evaluation is therefore an effort to
  • analyze inputs (resources) and outputs (changes in health outcomes) simultaneously, and
  • help decisionmakers assess whether a certain level of output is worth the amount of resources expended to produce it (given that resources are scarce and can be used for alternative purposes).
Why Should Economic Evaluations Be Conducted?
Economic evaluations provide us with criteria for deciding between alternative strategies that have different costs or consequences.
The diagram below illustrates how a comparison of costs and consequences of two alternative programs provides a basis for a decision.
Economic evaluation provides a basis for decision making by comparing costs and consequences of alternative programs.
Decisionmakers need to know the inputs or costs that the programs will need as well as the outputs or benefits that the programs will produce to make informed decisions.
When an economic evaluation is used in the public health sector to ensure that limited resources are allocated as efficiently as possible, decisionmakers need to ensure that the benefits are worth the costs.
In an economic evaluation, the principles from multiple disciplines (e.g., biology, epidemiology, decision sciences, and economics) are used. By combining these disciplines, the researchers can conduct an economic evaluation to produce comprehensive results that are scientifically sound.
Interventions and Programs Must Be Feasible
When determining feasibility you should consider the following factors.
Biologic Feasibility
Biologic evidence refers to the research that occurs during ideal circumstances in a clinical setting. Such basic science research helps determine the efficacy of an intervention but is useless to a decisionmaker without a method of production and distribution.
The resources needed to execute a program must be technologically feasible and readily available.
For example, if a vaccine is available for a disease, you should determine the most efficient way to deliver that vaccine.
Correctly assessing the available technology in terms of efficacy, cost, and evidence of use can be valuable in helping a decisionmaker allocate resources.
Epidemiologic Effectiveness
Epidemiologic evidence informs decisionmakers regarding the effectiveness of an intervention or program on society. Effectiveness data is valuable to decisionmakers because of the manner in which it is obtained. It is obtained from a practical, as opposed to a hypothetical, setting that is applicable to the real world.
For example, how effective is the vaccine in preventing disease? How does the effectiveness of the vaccine differ across populations?
Political and Social Feasibility
Feasibility in the political and social arenas as well as other areas outside the scientific disciplines must be considered with the efficacy and effectiveness of an intervention.
All health policies involve political repercussions and social consequences. Determining whether the impact of those side effects is substantial enough to warrant implementation of the program is a decision that must be left to the policymaker.
For example, is society's best interest served by administering vaccine to populations at risk but who are more likely to experience side effects?
Crucial Questions
Along with the biological, technical, and social/political feasibility of an intervention or program, the decisionmaker might ask the following questions:
Is the Program Affordable?
How much does the program or intervention cost and is this cost acceptable within limited resources?
Which Costs and Outcomes Are Attributable to the Program?
The program is cost effective if the health outcomes outweigh the costs. The program could result in a net benefit if benefits exceed costs.
How Does the Program Compare with Other Programs?
When costs and outcomes of the program are weighed against those of other programs, does this program make better use of scarce resources?
An economic evaluation can assist a decisionmaker in answering these questions.
A Benefits Versus Costs Example
Consider a vaccination program implemented by an employer to vaccinate employees — healthy working adults — against influenza. An economic study documents that
  • the total cost of vaccinating one person is $16.69, and
  • benefits gained by each person vaccinated total $30.35.
If the employer has sufficient health-care funds to fund the program, should the employer do it?
Because the benefits outweigh the costs, the employer might consider investing in the program if it compares favorably to other programs.
What Forms of Economic Evaluation Can We Use?
These four forms of economic evaluation are used predominately in public health:
  • Cost Analysis
    Cost analysis deals with costs alone, sometimes subtracting the cost-of-illness.Cost analysis (CA) is a form of economic evaluation that involves the systematic collection, categorization, and analysis of the net costs of a program.
    Net costs are often calculated by subtracting the cost-of-illness (COI) from the cost of program implementation. Other cost analyses might not incorporate COI and therefore assess only program costs.
    CA can stand alone but is often nested within other economic evaluations to identify and describe all costs accrued and saved throughout the life of a program or intervention.
    CA excludes outcome measures because they are either
    • unavailable, or
    • equally effective between the chosen alternatives.
    For example, CA could be used to determine the costs of a health education and condom distribution program. (See this example in the Cost Analysis tutorialOpen this example in a new window. for more information.)
  • Cost-Effectiveness Analysis
    Cost-effectiveness analysis compares costs between programs having common health effects.Cost-effectiveness analysis (CEA) is used to compare the costs of alternative intervention strategies that produce a common health effect.
    Such effect measures are often expressed in physical or natural health units and can include final outcomes (e.g., life years gained or number of cases prevented) as well as intermediate outcomes (e.g., mean reduction in diastolic blood pressure or reduced cases of child maltreatment).
    CEA derives a ratio of cost per unit of health outcome as a summary measure.
    For example, CEA could be used to compare a newly developed vaccine treatment with an existing one in terms of cost per case of smallpox prevented in the target population.
  • Cost-Utility Analysis
    Cost-utility analysis is a form of cost-effectiveness analysis with outcomes adjusted for the timing and duration of health outcomes.Cost-utility analysis (CUA) is a unique form of economic evaluation that combines life years saved with the quality of life during those years.
    CUA is a form of cost-effectiveness analysis that attempts to capture timing and duration of disease and disability by comparing the utility associated with different health outcomes.
    Utility represents a person's preference (or utility) for a preferred outcome (or health state). CUA typically measures outcomes in quality-adjusted life years (QALYs) and disability-adjusted life years (DALYs).
    CUA is measured by the cost-utility ratio and can be expressed as the dollar value per QALY or DALY saved.
    For example, CUA could be used to compare the cost per QALY from an anthrax vaccination program with the cost per QALY from no vaccination.
  • Cost-Benefit Analysis
    Cost-benefit analysis derives a net benefit from benefits less costs.Cost-benefit analysis (CBA) is a form of economic evaluation that standardizes both costs and benefits in dollars and provides a list of all costs and benefits accrued during a period.
    Incongruent cost and benefit timelines are adjusted, and summary measures for a CBA are typically presented as a single value (i.e., net present value [NPV]).
    For example, CBA could be used to compare the net benefits of a smallpox vaccination program targeting population subgroups at risk with the net benefits of a program targeting the entire population.
How Do We Determine Which Form of Evaluation To Use?
The decision is made on the basis of
  1. the alternatives to be compared and whether outcomes are to be examined, and
  2. the decision-making level.
By the Alternatives To Be Compared and Whether Outcomes Are To Be Examined
CBA, CUA, and CEA compare at least two alternatives and evaluate the costs and consequences of each. In contrast, CA examines only the net costs relevant to either a single intervention or in a comparison of >=2 programs.
The economic evaluation tools table below illustrates the association of these four types of economic evaluation.
Economic Evaluation Tools
  Examining both costs and outcomes?
No Yes
Comparing >=2
No CA Descriptive analysis
By the Decision-Making Level
The decision-making tiers diagram below depicts the relationship between CBA, CUA, and CEA as they relate to the informational needs of the decisionmaker.
Decision-Making Tiers
At the highest level, the U.S. Congress uses CBA to make decisions. On a lower level, the CDC Director uses CUA, whereas a director of a health clinic uses CEA.
At the Highest Level
At the highest level of decision making, the U.S. Congress decides how to allocate scarce resources towards programs with disparate outcomes.
To compare outcomes of diverse programs (e.g., defense and health), converting outcomes into a common unit (e.g., dollars) is necessary.
At the Next Level
At the next level of decision making, the CDC director decides which scarce resources must be allocated for programs that have similar outcomes, because they affect the population's health.
However, health outcomes might differ if one program could increase survival expectancy, whereas another program might not affect survival but might improve a person's overall quality of life.
For comparative purposes, outcomes should be converted to a common health unit (e.g., QALY).
At the Micro Level
At the micro level of decision making, the director of a health clinic decides how to allocate scarce resources between two programs that have the same outcome measure but that achieve the outcome at different costs.
To determine the cost effectiveness of one program when comparing it to the other, the outcomes must be converted into a common natural health unit, (e.g., number of cases prevented).
Although this model illustrates the scheme of decision making to simplify the process and to explain the typical uses of economic evaluation, it is not meant to confine each form of economic evaluation to a specific level.
For example, CEA can be used by Congress to assess the effectiveness of current policy concerning inpatient length of stay for Medicare beneficiaries (cost per life year saved).
Similarly, a public health clinic director might use CBA to determine whether to construct a new facility or buy new equipment for an existing facility.
What Next?
Please click this link:
Framing an Economic EvaluationOpen this in a new window.
The Framing tutorial, which describes the first step in an economic evaluation, will appear in a new browser window.
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