Economic evaluation of health programmes

1. Economic evaluation of health programmes Department of Epidemiology, Biostatistics and Occupational Health Class no. 9: Cost-utility analysis – Part 2 Oct 1, 2008

2. Plan of class • More on using DRGs to cost hospital services in Québec • Discussion of topic for term project • Axioms of expected utility theory • Methods for eliciting values or utilities associated with health states

3. More on using DRGs in Québec to cost hospital days • Each hospitalisation has a NIRRU (Niveau d’Intentité Relative des Ressources Utilisées) which is a weight indicating the expected resource utilization for that DRG and level of gravity (for entire episode) • Usually, secondary diagnoses add to the level of gravity, which add to the NIRRU

4. Sample DRGs of various gravity levels and associated NIRRUS (Resource Intensity Weights) DMS: Average length of stay

5. Example calculation • Admissions for physical health conditions: Average provincial cost in 2005 – 06 for a NIRRU of 1: $ 4 113 • So an admission into APR-DRG 1 with severity 2 (Craniotomy age >17 w cc) could be attributed a cost of: 3.2688 x 4 113 = $13,445 • Does not include: physician fees; opportunity cost of land and buildings

6. Other notes • Only the AQESSS calculates a cost per NIRRU in this way, for its clients • The MSSS excludes costs of : (1) administration and « hôtellerie » (e.g., food); and (2) buildings, maintenance. These overhead costs account for about 25% of the total • Hence in practice this system is not easy to use! Rely on goodwill of AQESSS staff!

7. John von Neumann and Oscar Morgenstern 1944: Theory of games and economic behavior. This book included a theory of rational decision-making under uncertainty: a normative model (i.e. a model of how people should behave, if they are to act rationally) of behavior under uncertainty. Their approach involves assigning utility to lotteries (risky prospects). John von Neumann

8. Axioms of von Neumann- Morgenstern utility theory (1) Axiom 1: (a) Preferences exist and (b) are transitive. Pair of risky prospects y and y’: Win $1,000 Win $10,000 p=0.9 p=0.7 p=0.1 p=0.3 Lose $100 Lose $1000 Preferences exist: A person either prefers y to y’, or y’ to y, or is indifferent between y and y’. (Which would you prefer? Why?) They are transitive: If 3 risky prospects y, y’ and y’’, if y>y’ and y’>y’’, then y>y”

9. Axioms of von-Neumann Morgenstern utility theory (2) Axiom 2: Independence: Combining each of the 2 previous lotteries with an additional lottery r in the same way should not affect your choice between the 2 lotteries

10. Axiom of independence Win $1,000 p=0.9 p=0.6 p=0.1 Lose $100 3rd lottery r (p, x1, x2) p=0.4 Axiom: Choice between y and y’ unaffected by addition of the same 3rd lottery with same probability of obtaining that 3rd lottery (say, p=0.9, x1=$5000, x2= - $1,000). Win $10,000 p=0.7 p=0.6 p=0.3 Lose $100 3rd lottery r (p, x1, x2) p=0.4

11. Is independence axiom reasonable? The Allais paradox In each experiment, which gamble would you choose?

12. Is independence axiom reasonable? The Allais paradox As the alternative lottery with certain outcome promises more and more (from 0 to 1 million) we are more and more inclined to choose the certain outcome. This can be viewed as rational.

13. Expected value of a gamble Pair of risky prospects y and y’: Win $1,000 Win $10,000 p=0.9 p=0.7 p=0.1 p=0.3 Lose $100 Lose $1000 In this example, E(y) = 0.9 x 1,000 -0.1 x 100 = $890; E(y’) = 0.7 x 10,000 -0.3 x 1000 = $6,700.

14. Utility, value and preference • Utility (NM utility): In NM jargon, a cardinal measure of preference attached to a lottery/gamble/risky or uncertain prospect • Value: Value attached to a certain outcome • Preference: generic term relevant to both NM utility and value, in the senses above

15. Utility, utility and utility • 19th century economics: a cardinal measure of satisfaction derived from a good or bundle of goods • Modern economics: an ordinal measure of satisfaction derived from a good or bundle of goods (cardinality now thought both unrealistic and unnecessary) • Both different from NM utility defined on previous slide

16. Methods of measuring preferences

17. Rating scale • Rank health outcomes from most preferred to least preferred • Place outcomes on a scale: • Without numbers • On a line (visual analogue scale) • With numbers, e.g., 0 to 100 (rating scale) • If on a line, we get the ‘feeling thermometer’ • With categories, e.g., 0 to 10

18. Rating scales and risk preference • Rating scales ignore the uncertainty associated with the decision to undergo a treatment • In fact people are often risk averse, sometimes risk loving • Standard gamble, which uses Axiom 2 of expected utility theory, incorporates respondents’ attitude toward risk

19. Time trade-off State i for time t, then death Alternative 1 Healthy for time x < t, then death Alternative 2 Vary x until respondent is indifferent between the alternatives

20. Standard gamble Healthy p Alternative 1 1-p Dead State i Alternative 2 Above: Chronic health state preferred to death Below: Temporary health state Healthy p Alternative 1 1-p State j Alternative 2 State i