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Economic Evaluation of Health Programs: Measuring Costs

Learn about DRGs, discounting, valuing productivity losses, and using NIRRU for costing hospital stays in the context of economic evaluation. Understand the importance of discounting future costs and calculate present value. Explore conversion of upfront costs into annual costs with examples.

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Economic Evaluation of Health Programs: Measuring Costs

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  1. Economic evaluation of health programmes Department of Epidemiology, Biostatistics and Occupational Health Class no. 5: Measuring costs - Part 2 Sept 17, 2008

  2. Plan of class • Finish material from previous class • DRGs • Discounting • Valuing productivity losses

  3. There are 543 such codes in version 23 (FY 2005) of the DRG system (source: Wikipedia entry on DRGs, accessed Sep 16 08)

  4. Using DRG weights/NIRRUs to cost hospital stays • Use NIRRU – Niveau d’intensité relative des ressources utilisées • Equivalent to DRG weight • Multiplied by a cost per NIRRU (obtainable from MSSS), provides an indication of the expected (or average) cost of an admission. • Can be used to derive a cost per day for a given type of admission, more accurate way of costing an admission of a certain type if one knows length of stay

  5. Discounting • Reasons to prefer something now rather than later: • Short-term view of life • Future is uncertain • We’ll be richer later

  6. Two uses of discounting in economic evaluation • Express future costs (or benefits) in terms of current costs (or benefits) • Principle of comparing apples with apples • Convert the up-front cost of a building or equipment into an annual cost over their useful life

  7. Current GIC rates in Canada Source: http://www.fiscalagents.com/bestGICrates.shtml These interest rates are above rates of inflation in recent years (2 to 3%), reflecting the greater value of money now compared to money later

  8. What is the current value of a future stream of costs (or benefits)? • P = C1/(1+r) + C2/(1+r)2 + C3/(1+r)3 • Suppose C1=$1000, C2=$2000, C3=$9000. Calculate the present value of this stream of costs if r=0.05. Of course, if more than 3 years, extend the series similarly

  9. Source: John Broome, Ethics of climate change, June 2008 Scientific American

  10. What is wrong with the previous graph? How would you fix it?

  11. Converting the up-fron cost of a building or equipment into an annual cost • This type of cost often ignored as it does not appear in a hospital’s financial statements if the building is depreciated. • Find E such that: • K = E/(1+r) + E/(1+r)2+ … + E/(1+r)n • K = E x (1 – (1+r) –n)/r • K = E x (Annuity factor, n period, interest r)

  12. Exercise • If a superhospital has a projected upfront cost of $800 million and a useful life of 50 years, what annual sum can we convert the cost of the hospital to over its useful life? Assume an interest rate of 3%.

  13. Which interest (or discount) rate to use? • Competing theoretical arguments • In practice, show results without discounting, and also use 3% (US Public Health Service Panel on Cost-Effectiveness in Health and Medicine recommendation) and 5% (for comparability with other studies)

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