Download Pareto-optimality

Economic evaluation of health
programmes
Department of Epidemiology, Biostatistics
and Occupational Health
Class no. 13: Cost-benefit analysis – Part 2
Oct 20, 2008
Plan of class
Discussion - assignment no 3
Finish material from lecture no 12
Methods for valuing benefits in CBA – old
and new (2)
Pareto-optimality;
Kaldor-Hicks
 Pareto-optimality: No trade can be made such
that someone is better off and no-one is
worse off
• One person owning everything can be Paretooptimal!
 Kaldor-Hicks: If winners gain enough that they
could compensate losers if they wanted to,
welfare has been increased.
Early method for evaluating
benefits: Human capital
• All or part of benefit of programme measured in
terms of economic productivity
• Discredited because from a welfare economics
point of view, this is too narrow a question.
Winners might value the health benefit much more
than its productivity gain.
• Ex: cosmetic surgery.
Method no. 2: Revealed
preference
Value of a life implied in:
 Wage differentials for riskier jobs
 Price increment for safety features
Modern: Contingent valuation
• Contingency of a market for a health program
existing.
• How much is it valued – how much are people
prepared to pay for it?
Willingness to pay for what?
 Degrees of uncertainty in what one pays for:
 Certain need, certain health outcome of Tx
• Tx that will solve a problem you have
– Ex post perspective
 Certain need, uncertain health outcome
• Tx that may solve a problem you have
 Uncertain need/future use,uncertain outcome
• Tx that may solve a problem you may develop
– Ex ante perspective
Restricted vs global
willingness-to-pay
Restricted WTP:
 Question concerns health state only
Global WTP
 Question also encompasses future health
cost savings
 Question also encompasses production gains
and income effects
Willingness to accept
Possible new program that benefits
an individual
Possibility of a program that
benefits the individual being taken
away
WTP: Maximum amount person is
willing to pay for program to be
provided
WTA: Minimum amount person will
accept to feel adequately
compensated for loss of program
Compensating variation : Amount
person would need to give to be at
same level of utility with the new
program as before
Equivalent variation: Amount person
would need to receive to be at same
level of utilit following loss of program
as before
Note: Much more common to seek to obtain
WTP than WTA values
Exercise
Design corresponding WTP questions with
regards to a program providing expensive
chemotherapy drug
 Do not address issue of how to elicit the
actual WTPs, only the constructs you are
trying to estimate
Discuss advantages and disadvantages of
estimating global WTP
Methods for eliciting WTP
values
Open-ended question
 Maybe unbiased, but imprecise
Closed-ended:
 Bidding games – search algorithm
• Starting point bias?
 Take it or leave it
• Need larger sample
Exercise
How would you elicit restricted WTP using
these 3 methods for the ex ante scenario
(uncertain need)
Discrete choice experiments
(1)
A health outcome usually has different
attributes
 E.g., related to efficacy, adverse health
events, cost
What would be the attributes of an evening
spent with friends – engaging in various
possible activities- e.g., going out to
dinner, seeing a movie, inviting them over
for dinner, etc.?
Discrete choice experiments
(2)
Attributes can have different levels
 Cardinal, ordinal or categorical
How might you categorize levels
associated with:
 Attribute of cost?
 Attribute of fun?
Steps in a DCE (1)
Identify attributes (or characteristics)
 Lit reviews, focus groups
Assign levels
Draw up scenarios
 If needed use experimental design methods
to reduce number of scenarios efficiently
Steps in a DCE (2)
Elicit preferences by asking respondents
to choose among pairs of scenarios
 Various elicitation formats
Use econometric methods to analyse data:
ΔUi = β1i(ΔX1i)+ β2i(ΔX2i) + β3(ΔX3i) +…+
βni(ΔXni) +εi
Example
How would we construct a simple DCE to
evaluate trade-offs among travel time and
wait time for an appointment with a
specialist?
Concluding comments (1)
True CBA more than tallying of direct
costs – involves assigning dollar value to
intangible costs and benefits
CBA appeals to many economists
because of grounding in welfare theory
Concluding comments (2)
WTP and DCEs are now dominant
methods for assigning $ value to intangible
benefits
However, there are problems:
 Technical: answers may be inconsistent
 Ethical/philosophical: Welfarism means
current wealth/income allocation accepted;
WTP values related to respondents’ incomes