Download principles, effectiveness, economics and implementation issues

Economic evaluation of health
programmes
Department of Epidemiology, Biostatistics
and Occupational Health
Class no. 4: Measuring costs - Part 1
Sept 15, 2008
Plan of class
 Finish review of Mark et al; review Weisbrod et
al. using checklist from chapter 3.
 Average, marginal, fixed, variable, total costs
 Calculating unit costs without overhead costs to
allocate between different clinical activity centres
 Calculating unit costs when overhead or joint
costs need to be allocated
Checklist summary (1)
 Does the question correspond to the economic
evaluation of a health program?
 Was a comprehensive description of the
alternatives given?
 Was the effectiveness of the program or
intervention or treatment well established?
 Were all important and relevant costs and
consequences for each alternative identified?
 Were costs and consequences measured
accurately in appropriate physical units?
Checklist summary (2)
 Were costs and consequences valued credibly?
 Were costs and consequences adjusted for
differential timing?
 Was an incremental analysis of costs and
consequences of alternatives performed?
 Was allowance made for uncertainty in the
estimates of costs and consequences?
 Did the presentation of study results include all
issues of concern to users?
Question
How does the viewpoint of the analysis
influence the conclusion in Weisbrod et
al.’s analysis? Does the E treatment
produce a net benefit from the point of
view of the health and social care system?
Total, average, marginal, fixed
and variable costs
HYPOTHETICAL TOTAL, AVERAGE, AND MARGINAL
COSTS OF AN ORTHOPAEDIC SURGEON SPECIALIZED
IN HIP REPLACEMENTS
Surgeries per
week
Total cost
(dollars)
Marginal cost
(dollars)
Average cost
(dollars)
0
0
--
--
1
7000
7000
7000
2
9000
2000
4500
3
11000
2000
3666.67
4
13000
2000
3250
5
16000
3000
3200
6
20000
4000
3333.33
TOTAL, AVERAGE AND MARGINAL
COSTS - GRAPHICALLY
$
TOTAL COST
AVERAGE COST
20000
8000
6
Surgeries
MARGINAL COST
4000
6
Surgeries
6
Surgeries
FIXED AND VARIABLE
COSTS
• Another important way of classifying costs is between
fixed and variable. Fixed costs are those that are incurred
in a fixed way (do not change) whatever the level of
production. All other costs, which vary with the level of
production, are called variable costs.
Thus we have the relation:
TC = TFC + TVC
(total costs = total fixed costs + total variable costs)
What goes into the marginal cost,
for a hospital, of an additional X-ray?
How does it compare to the average
cost of an X-ray?
How about the variable cost of an Xray?
HYPOTHETICAL FIXED COSTS OF AN ORTHOPAEDIC
SURGEON SPECIALIZED IN HIP REPLACEMENTS
Surgeries per
week
Total fixed cost
(dollars)
Marginal fixed
cost (dollars)
Average fixed
cost (dollars)
0
0
--
--
1
5000
5000
5000
2
5000
0
2500
3
5000
0
1666.67
4
5000
0
1250
5
5000
0
1000
6
5000
0
833.33
TOTAL, AVERAGE AND MARGINAL
FIXED COSTS - GRAPHICALLY
TOTAL FIXED
COST
$
AVERAGE FIXED
COST
5000
5000
1
6
Surgeries
MARGINAL
FIXED COST
5000
6
Surgeries
6
Surgeries
Total fixed costs do not change once production has begun. Average
fixed costs will keep declining, but without ever reaching 0. Marginal
fixed cost starts at 5000 with the first unit, then goes to 0. All this follows
from the definition of fixed costs.
REVISITING TOTAL, AVERAGE AND
MARGINAL COSTS
TOTAL COST
$
AVERAGE COST
20000
7000
6
Surgeries
MARGINAL COST
4000
6
Surgeries
6
Surgeries
The total cost function can never be decreasing. If the
marginal cost curve intersects the one for average cost, at
that point average cost reaches a minimum and then begins
to rise. Can you see why?
LONG-RUN VERSUS SHORTRUN COSTS
The cost to a hospital or other organization of changing its
output level is very much dependent on the time horizon for
the change. Given enough time, a hospital can change many
of its inputs so as to be able to more efficiently produce the
greater quantity. For example, robotic equipment can be
purchased to automate a surgical procedure.
The long run is a period of time long enough for all the
hospital’s commitments to come to an end.
The short run is a shorter period of time than the long run,
such that some, but not all, of its commitments will have
come to an end.
In the long run, virtually all fixed costs become variable.
LONG-RUN VERSUS SHORT-RUN
AVERAGE COST CURVES
Short-run AC curves
Long-run AC curve
In the short run, the producer is “stuck” with one production method or another,
each associated with one of the short-run AC curves. But in the long run,
depending on the desired level of output, the producer can choose the production
method leading to the lowest AC.
Cost = q x p
Price of one pill = $25
Price of three pills = 3 x $25 = $75
To cost resources we need to :
(a) count numbers or frequencies; then
(b) multiply them by a unit cost
Note: ignore minor costs or
costs that won’t change the
answer
Some costs far into the future, because of
discounting…
Costs that are small compared to the
others and perhaps difficult to measure
 Ex: Legal costs for certain populations of
people with severe mental illness
In theory, what should the unit
cost represent?
Short-run or long-run opportunity cost of
using the resource?
Usual practice: estimate average cost, as
an approximation to the long-run marginal
cost
 Exception: when comparing two programs
that have the same overhead costs
Need for caution in using
average costs
The case of Info-Santé
So how do we find a unit cost?
Easy if we live in England…
Unit Costs of Health and Social Care
2007
Personal Social Services Research Unit
(PSSRU), University of Kent at Canterbury
http://www.pssru.ac.uk/pdf/uc/uc2007/uc2
007.pdf
But what if we live in Canada?
No current, comprehensive set of unit
costs
Would vary significantly by province
Price, when it exists, is usually a good
approximation
 In U.S., hospital prices can be very
misleading
In the Québec health care system, what
services have a price?
Why market price may not be
good
Under what conditions does market price
reflect the cost of production?
Volunteer time
Common practice: ignore it, or report it
separately as time
If valued:
 Wage rate of someone who could be hired to
do the job
 Average wage rate for age and sex
Which seems best to you?
No joint costs to allocate (1)
Uncommon in health care: an organization
that produces only one output
Nursing home with one
level of care
No joint costs to allocate (2)
Divide total cost by number of units
produced
Ex: Total cost in 2006-2007: $5,000,000
(including estimate of opportunity cost of
land and building)
Number of bed-days: 40,000
Cost per bed-day: $125
Allocating joint costs: the problem
Cost of Hospital’s
central administration:
$2M
?
35,000 beddays
?
150,000
Outpatient visits
No simple solution!
Allocation method depends on objective –
no « true » or absolutely « correct » way to
do it
For us: look for reasonable method
Consider Tables 4.2 to 4.8