Cost benefit analysis

II
Lecturer Zahraa
Abdul Ghani

Advantages and Disadvantages of the Human Capital Method

Measuring indirect benefits using the HC approach has several advantages:
 It is fairly straightforward and easy to measure.
 Income estimates can be obtained or estimated from publicly available
sources.
 Days lost from illness can be readily obtained from the patient or another
secondary source.
The HC approach also has several disadvantages:
 The primary concern with using the HC approach is that it may be biased
against specific groups of people, namely unemployed individuals.
 It assumes that if a person is not working, he or she has little or no
economic benefit.
 Children and unemployed elderly individuals are two groups with which
bias can occur.
 The HC assumption that the value of health benefits equals the
economic productivity they permit may also be biased. The
earnings for some individuals may not equal the value of their
output.
For example, there is a large difference between the daily wage
rates of a professional football player compared with that of an
elementary school teacher.
 Some contend that because the underlying goal of using CBA is
to measure the effect of an intervention on society, the HC
approach is meant to measure the loss of productivity to society.
 Thus, wage rates should be based on those of the average
population, not the specific patients included in a study.
 Although using general wage rates would not represent actual
productivity losses or benefits to a specific group of patients, it
would decrease some of the limitations of inequity already
mentioned.

 The HC method also does not incorporate values for pain and
suffering if these values do not impact productivity. There may
be certain disease states or conditions (e.g., menopause, hair
loss) that may not impact productivity but do have an impact
on a person's health-related quality of life.

 For example:
 Many women experience problems with menopause, including
moodiness, hot flashes, and irregular cycles.
 Although this condition may have a significant impact on
quality of life, most women do not miss many days of work
because of complications from menopause.
 Thus, the HC method would not be sensitive enough to capture
the benefits of a pharmacist-provided menopause clinic.
 But although biases exist with this method, it is the most
commonly used method to measure indirect benefits.
2.Willingness to Pay Method
 The WTP method can value both the indirect and intangible aspects of
a disease or condition.
 The WTP method determines how much people are willing to pay to
reduce the chance of an adversAZe health outcome.
The WTP method is grounded in welfare economic theory, and it
incorporates patient preferences and intangible benefits such as quality of
life differences WTP values can be collected through face-to-face
interviews, mail, telephone, or via the Internet.
Respondents are then asked to value the health care intervention
in a dollar amount.
Measuring WTP should include two general elements, a
hypothetical scenario and a bidding vehicle.

A.Hypothetical Scenario
 The hypothetical scenario should include a description of
the health care program or intervention (e.g., medication
therapy, management program, or new drug therapy).
 The aim of the scenario is to provide the respondent with
an accurate description of the service that he or she is
being asked to value. In addition, the scenario should
detail the amount of time the person should expect to
spend, as well as the benefit (e.g., percent improvement in
the condition) of the intervention.
 An example of a hypothetical scenario for the asthma
clinic might read:
Asthma Clinic Scenario
Patients with asthma have improved their condition by learning more about their
disease and by taking their medications as directed. Pharmacists can help people with
asthma understand their condition and the medications used to treat it. In addition, they
can:
1-Help you learn how to use a peak flow meter and an inhaler.
2-Help you better manage the medications used to treat asthma.
3-Help you recognize and handle situations when asthma attacks occur.
4-Monitor your asthma by keeping a record on file and following up with
you-on a regular basis to assess your progress.
5-Contact your doctor and report any changes in your health.

An initial visit with your pharmacist would include an educational program on

managing your disease state. This type of service is available by appointment only and
would last approximately 1 hour. Assume that the program would result in a 50%
improvement in your asthma

B.Bidding Vehicles
After the program or intervention has been adequately described, respondents are then asked
to "bid," or place a value on the program or intervention. Bids can be obtained through a
variety of formats, such as open-ended questions, closed-ended questions, a bidding game, or a
payment card. Below is a brief description of each of the methods.
Open-Ended Questions Open-ended questions simply ask respondents how much— they
would be willing to pay for the program or intervention. This question would immediately
follow the hypothetical scenario. Here is an example:
What is the maximum amount that you would be willing to pay for a 1-hour consultation with
a pharmacist? --------------------------------------------.
The respondent would then write in their maximum WTP amount.
This method is used the least because it results in WTP values that vary widely. Many people
do not know how to value health care programs because they do not normally pay the full
amount out of pocket. The other methods provide respondents with more guidance in
determining their maximum WTP.
Closed-Ended Questions Closed-ended questions are also called "take-
it-or-leave-it" questions. Respondents are asked whether or not they
will pay a specified dollar amount for the program or intervention.
Here is an example: Would you be willing to pay $60 for a 1-hour
consultation with a pharmacist? _________________ .Yes or No

This method more closely resembles the marketplace. When

consumers shop for products, they must decide based on the price of the
product whether to "take-it-or-leave-it."
One drawback to this method is that only one question is asked, so
only one WTP value can be elicited from a respondent. Thus, a very
large sample would be required to determine the overall WTP value.

Bidding Game The bidding game resembles an auction in that several bids are
offered to reach a person's maximum WTP. Before soliciting a second response,
the bids are adjusted based on the first response. This iteration could go on a
number of times, but it is suggested that three times is optimal. Here is an
example:
Would you be willing to pay $60 for a 1-hour consultation with a pharmacist?
__________________ If yes, ask: "Would you be willing to pay $80?"
__________________ If no, ask: "Would you be willing to pay $40?"
This method is useful to try to arrive at a person's maximum WTP value. It is time
consuming and is best conducted via a face-to-face interview or over the Internet.
In addition, the WTP values can be biased depending on how high (or low) the
first bid is. This is called "starting point bias".
Payment Card
`
This method is very easy to use and it provides respondents
with a range of values to choose from. The advantages of the
method can also result in disadvantages:
Providing respondents with a range of values can bias their
WTP values. The range provided can "suggest" the value of the
intervention and can influence what respondents say.
Also, "range bias" can influence the WTP amount.
For example, if the range of values was from $0 to $75
versus $0 to $150, the respondents' WTP amount can vary
depending on which range or starting point was provided.

Advantages and Disadvantages of the Willingness-to-Pay Method

The main advantage of the WTP approach is that it is a method to place a

dollar value on intangible benefits.
However, there are several disadvantages to the WTP methodology. It is
difficult for people to place a dollar value on a health benefit or an increase in
health-related quality of life or satisfaction.

Because a "hypothetical" or artificial scenario is presented, it is possible that

respondents might give a "hypothetical response" or that the respondent!" may
not understand the value of the market (e.g., pharmaceutical care program"
being presented).
Calculating Results of Costs and Benefits
After all costs and benefits have been identified and
quantified, the results of the analysis must be presented in ways
that help decision makers understand the value of the program
or intervention.
CBA can be presented in the following three formats:
net benefit calculations,
benefit-to-cost ratios, and
internal rates of return (IRR).
When evaluating interventions, it is important to consider the
time horizon for the project. If retrospective data are collected
for more than 1 year or if the project inputs or outcomes are
estimated for more than 1 year into the future, it is important to
adjust or discount these costs one point in time.

Net Benefit (or Net Cost) Calculations.

The net benefit (or net cost) calculation simply presents the
difference between the total costs and benefits.
Net benefit = total benefits — total costs;
Net cost = total costs — total benefits.
Interventions would be considered to be cost beneficial if:
Net Benefit > 0 or Net Cost < 0

Benefit-to-Cost (or Cost-to-Benefit) Ratio Calculations.

CBA results can also be calculated by summing up the total
benefits and dividing by the total costs. The ratio may be expressed
as a benefit-to-cost ratio or a cost to-benefit ratio. Depending on
how the ratio is calculated, interventions are cost beneficial if:
Benefit-to-cost > 1 or Cost-to-benefit < 1
Example Using Different Calculation Techniques.
Suppose a decision maker had to choose between two proposals for implementation. Also
assume that the projects are for 1 year, so discounting is not needed.
Proposal A: Cost = $1000; Benefit = $2000
Proposal B: Cost = $5000; Benefit = $7500

Table 7.4 shows the net and ratio calculations for both proposals. Although four
calculations are shown in the table, the benefit-to-cost ratio (when compared with the cost-
to-benefit ratio) and the net benefit calculation (when compared with the net cost
calculation) are used most often because the higher the result, the more cost beneficial an
option becomes.
Using the criteria outlined above for cost-beneficial programs, it is apparent that both
programs are cost beneficial using both the net and ratio methods of calculations. However,
when comparing net calculations, proposal B is more cost beneficial than proposal A (net
benefit = $2500 versus $1000), but proposal A is more cost beneficial than proposal B
(benefit-to-cost ratio = 2.0 versus 1.5) when using ratio calculations.
In this example, in which both proposals are cost beneficial, the decision maker may
consider other issues, such as the amount of money available for investment. Whereas A
would require $1000 input costs, proposal B would require $5000.
Another consideration may involve the return on investment. Proposal A, with a 2:1
benefit-to-cost ratio, has a higher return than proposal B (i.e., 1.5:1 benefit-to-cost ratio).
‫ يعود دوالرين‬Proposal A ‫اي ان الدوالر الواحد المصروف على‬
‫ يعود دوالر ونصف‬Proposal B ‫وان الدوالر الواحد المصروف على‬
A third consideration is the actual net benefit amount. Proposal B has a higher net benefit
than proposal A ($2500 versus $1000).
Using cost-benefit analysis to allocate resources to different services
Worked example 7.1 shows how WTP can be used in a CBA to generate net
benefit. However, in that example we were trying to decide between two ways of
treating the same illness. We could also have used a common outcome such as the
presence of anemia, and the resulting economic evaluation would have been a
CEA (see 5, worked examples).
It is more difficult to compare two healthcare interventions that do not have
comparable outcome measures.
CEA cannot be used in this situation, and we have to use an outcome measure
that can be used across different diseases, such as WTP. CBA can be used to
generate net benefit in different disease areas, and so diseases with different
clinical outcomes can be compared.
This means that CBA can be used to allocate resources to different services.
Worked example 7.2 illustrates how this can be carried out.
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