9.5.1 Direct/Indirect Costs and CEA/ICER/CBA


Warning: Attempt to read property "ID" on null in /home/990584.cloudwaysapps.com/hvcgdwcmdt/public_html/wp-content/plugins/sfwd-lms/themes/ld30/templates/topic.php on line 80

Describes the Basic Differences Between Direct and Indirect Costs and the Ways in Which they can be Estimated with CEA, ICER and CBA

Health economics is a field of study that involves the application of economic principles to healthcare systems and decision-making. In this field, costs play a significant role in determining the allocation of healthcare resources. There are two main types of costs: direct costs and indirect costs.

Direct costs:

Direct costs are costs that are directly related to the provision of healthcare services. Examples of direct costs include the cost of medical supplies, hospital charges, and physician fees. Direct costs are usually easy to measure and quantify.

Indirect costs:

Indirect costs, on the other hand, are costs that are not directly related to the provision of healthcare services but are still associated with the condition being treated. Indirect costs can include lost productivity, caregiver time, and travel expenses. Indirect costs are often difficult to measure and quantify, and their estimation may involve various assumptions and extrapolations.

For example, consider a patient with diabetes who requires regular monitoring and treatment. The direct costs of this patient’s care would include the cost of medications, doctor visits, and laboratory tests. The indirect costs would include the patient’s lost productivity due to time spent in medical appointments and any time is taken off work by family members to provide care.

Opportunity costs:

The value of the best alternative use of resources when a particular healthcare intervention is chosen. Examples include the economic value of lost wages for a patient receiving treatment instead of working, or the allocation of funds to one healthcare programme over another potentially beneficial programme.

Intangible costs:

Costs that are not easily quantifiable but impact patients’ and caregivers’ overall well-being and quality of life. Examples include pain and suffering from illness, anxiety and stress related to treatment, stigma associated with an illness and reduced quality of life due to chronic disease.

Ways in which they can be Estimated

To estimate these costs, healthcare economists use various methods, such as cost-effectiveness analysis and cost-benefit analysis. These methods aim to determine the most efficient use of resources and to compare the costs and benefits of different healthcare interventions.

Cost-effectiveness analysis (CEA):

Definition:

  • CEA is a method used to compare the relative costs and outcomes (effects) of different courses of action. It helps determine which intervention provides the best results for the given costs.

Key Features:

  • Measurement of Outcomes: Outcomes are measured in natural units, such as life years gained, cases prevented, or symptom-free days.
  • Incremental Cost-Effectiveness Ratio (ICER): The ICER is calculated to compare the additional cost of an intervention to its additional benefit.
    • The formula is: ICER = ΔCost / ΔEffectiveness = ICER
    • Where ΔCost is the difference in cost between two interventions, and ΔEffectiveness is the difference in their effectiveness.

Example:

  • Comparing two treatments for hypertension where Treatment A costs £500 and results in a reduction of blood pressure by 10 mmHg, while Treatment B costs £1000 and reduces blood pressure by 15 mmHg. CEA would help determine which treatment is more cost-effective based on the cost per mmHg reduction.

Advantages:

  • Useful when outcomes can be easily measured in health units.
  • Helps in decision-making when resources are limited.

Limitations:

  • Does not assign a monetary value to outcomes, which can make comparisons across different types of interventions difficult.

Interpretation of ICER values:

  • Lower ICER Value: A lower ICER value indicates that the additional cost per unit of effectiveness (e.g., per quality-adjusted life year (QALY) gained) is lower. This means the intervention is more cost-effective, as you are getting more benefit for less additional cost.
  • Higher ICER Value: A higher ICER value indicates that the additional cost per unit of effectiveness is higher. This means the intervention is less cost-effective, as you are getting less benefit for more additional cost.

Example:

  • Intervention A: Costs £1,000 and provides 10 QALYs.
  • Intervention B: Costs £1,500 and provides 12 QALYs.
  • ICER Calculation: ICER=£1,500−£1,00012−10=£5002=£250 per QALYICER = frac{£1,500 – £1,000}{12 – 10} = frac{£500}{2} = £250 text{ per QALY}ICER=12−10£1,500−£1,000​=2£500​=£250 per QALY

In this example, the ICER of £250 per QALY gained indicates the additional cost per QALY when choosing Intervention B over Intervention A.

Cost-benefit analysis (CBA):

Definition:

  • CBA is a method that evaluates the total costs and benefits of an intervention in monetary terms. It helps determine whether the benefits of an intervention outweigh its costs and by how much.

Key Features:

  • Monetary Valuation: Both costs and benefits are converted into monetary units.
  • Net Benefit: The difference between total benefits and total costs.
    • The formula is: Net Benefit = Total Benefits − Total Costs
  • Benefit-Cost Ratio (BCR): The ratio of total benefits to total costs. A BCR greater than 1 indicates that benefits exceed costs:
    • BCR = Total Benefits / Total Costs

Example:

  • Evaluating a vaccination programme by assigning monetary values to the benefits (e.g., reduced healthcare costs, increased productivity due to fewer sick days) and comparing these to the costs of the programme.

Advantages:

  • Allows for comparison across different types of interventions by using a common monetary metric.
  • Provides a clear indication of the economic value of an intervention.

Limitations:

  • Assigning monetary values to health outcomes and intangible benefits can be challenging and subjective.
  • May overlook important qualitative aspects of healthcare interventions.

References:

  1. Drummond, M. F., Sculpher, M. J., Claxton, K., Stoddart, G. L., & Torrance, G. W. (2015). Methods for the economic evaluation of health care programmes. Oxford university press.