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Cost-Effectiveness Analysis Life Years Analysis. Scott Matthews Courses: 12-706 / 19-702. Admin. HW 5 Due Wednesday Project 2 Coming soon. Due Monday Nov 24 (2 weeks). Specifics on Saving Lives. Cost-Utility Analysis Quantity and quality of lives important

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cost effectiveness analysis life years analysis

Cost-Effectiveness AnalysisLife Years Analysis

Scott Matthews

Courses: 12-706 / 19-702

admin
Admin
  • HW 5 Due Wednesday
  • Project 2 Coming soon.
    • Due Monday Nov 24 (2 weeks)
specifics on saving lives
Specifics on Saving Lives
  • Cost-Utility Analysis
    • Quantity and quality of lives important
  • Just like discounting, lives are not equal
    • Back to the developing/developed example
  • But also: YEARS are not equal
    • Young lives “more important” than old
    • Cutting short a year of life for us vs
    • Cutting short a year of life for 85-year-old
    • Often look at ‘life years’ rather than ‘lives’ saved.. These values also get discounted
cost effectiveness testing
Cost-Effectiveness Testing
  • Generally, use when:
    • Considering externality effects or damages
      • Could be environmental, safety, etc.
    • Benefits able to be reduced to one dimension
    • Alternatives give same result - e.g. ‘reduced x’
    • Benefit-Cost Analysis otherwise difficult/impossible
  • Instead of finding NB, find “cheapest”
    • Want greatest bang for the buck
  • Find cost “per unit benefit” (e.g. lives saved)
    • Allows us to NOT include ‘social costs’
the cea ratios
The CEA ratios
  • CE = C/E
    • Equals cost “per unit of effectiveness”
    • e.g. $ per lives saved, tons CO2 reduced
    • Want to minimize CE (cheapest is best)
  • EC = E/C
    • Effectiveness per unit cost
    • e.g. Lives saved per dollar
    • Want to maximize EC
  • No practical difference between 2 ratios
lessons learned
Lessons Learned
  • Ratios still tend to hide results
    • Do not take into account scale issues
    • CBA might have shown Option B to be better (more lives saved)
  • Tend to only consider budgetary costs
  • CEA used with constraints?
  • Minimize C s.t. E > E*
    • Min. effectiveness level (prev slide)
    • Find least costly way to achieve it
  • Minimize CE s.t. E > E*
    • Generally -> higher levels of C and E!
  • Can have similar rules to constrain cost
sample applications
Sample Applications
  • Cost-effectiveness of:
    • New drug/medical therapies* very popular
    • Pollution prevention
    • Safety regulations
definitions
Definitions
  • Overall cost-effectiveness is the ratio of the annualized cost to the quantity of effectiveness benefit.
  • Incremental cost-effectiveness is the difference in costs divided by the difference in effectiveness that results from comparing one option to another, or to a benchmark measure.
incremental ce
Incremental CE
  • To find incremental cost-effectiveness :
  • Sort alternatives by ‘increasing effectiveness’
  • TAC = total annualized cost of compliance
  • PE = effectiveness (e.g. benefit measure)
  • CE = (TACk – TACk-1) / ( PEk – PEk-1)
  • CE = incremental cost-effectiveness of Option k
  • Use zero values (if applicable) for base case
incremental ce example
Incremental CE Example
  • Inc CE here only relevant within control categories (metals v. oils v. org’s)
  • ** Negative CE means option has more removals at lower cost
  • Source: US EPA Office of Water EPA 821-R-98-018, “Cost Effectiveness Analysis of Effluent Limitations Guidelines and Standards for the Centralized Waste Treatment Industry”
definitions 2
Definitions (2)
  • Marginal cost-effectiveness refers to the change in costs and benefits from a one-unit expansion or contraction of service from a particular intervention (e.g. an extra pound of emissions, an extra fatality avoided).
why is cea so relevant for public policy analysis
Why is CEA so relevant for public policy analysis?
  • Limited resources!
  • Opportunity cost of public spending
    • i.e. if we spend $100 M with agency A, its $100 M we cannot spend elsewhere
  • There is no federal rule saying ‘each million dollars spent must save x lives’
gray areas
Gray Areas
  • How to measure cost-effectiveness when there is a single project cost but multiple effectiveness categories
    • E.g. fatalities and injuries, CO2 and SO2
  • Alternatives:
    • Keep same cost, divide by each benefit
      • Overstates costs for each
    • Keep same cost, divide by ‘sum of benefits’
    • Allocate cost, divide by each benefit separately
    • Weight the costs and/or benefits
    • Will see this more in next lecture
another cea example
Another CEA Example
  • Automated defribillators in community
    • http://www.early-defib.org/03_06_09.html
    • What would costs be?
    • What is effectiveness?
value of life analysis

Value of Life Analysis

Scott Matthews

Courses: 12-706 / 73-359 / 19-702

value of life
“Value of Life”
  • Economists don’t like to say they put a value on life
  • They say they “Study peoples’ willingness to pay to prevent premature mortality”
    • Translation: “how much is your life worth”?

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wtp versus wta
WTP versus WTA
  • Economics implies that WTP should be equal to ‘willingness to accept’ loss
  • Turns out people want MUCH MORE in compensation for losing something
  • WTA is factor of 4-15 higher than WTP!
    • Also see discrepancy shrink with experience
    • WTP formats should be used in CVs
    • Only can compare amongst individuals
economic valuations of life
Economic valuations of life
  • Miller (n=29) $3 M in 1999 USD, surveyed
    • Wage risk premium method
    • WTP for safety measures
    • Behavioral decisions (e.g. seat belt use)
    • Foregone future earnings
    • Contingent valuation
  • Note that we are not finding value of a specific life, but instead of a statistical life

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daly qaly measures
DALY/QALY measures
  • Disability adjusted life years or quality-adjusted life years
  • These are measures used to normalize the quality-quantity tradeoff discussed last time.
    • E.g., product of life expectancy (in years) and the quality of life available in those years.

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risk analysis
Risk Analysis
  • Study of the interactions between decision making, judgment, and nature
  • Evidence : cost-effectiveness of risk reduction opportunities varied widely - orders of magnitude
  • Economic efficiency problems

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example mais scale
Example - MAIS scale
  • Abbreviated Injury Scale (AIS) is an anatomically based system that classifies individual injuries by body region on a six point ordinal scale of risk to life.  
  • AIS does not assess the combined effects of multiple injuries. 
  • The maximum AIS (MAIS) is the highest single AIS code for an occupant with multiple injuries. 

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sample qaly comparison
Sample QALY comparison
  • A: 4 years in a health state of 0.5
  • B: 2 years in a health state of 0.75
  • QALYs: A=2 QALY; B=1.5 QALY
  • So A would be preferred to B.

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cost effectiveness of life saving interventions
Cost-Effectiveness of Life-Saving Interventions
  • From “500 Life-saving Interventions and Their Cost-Effectiveness”, Risk Analysis, Vol. 15, No. 3, 1995.
  • ‘References’ (eg #1127) are all other studies
  • Model:
    • Estimate costs of intervention vs. a baseline
    • Discount all costs
    • Estimate lives and life-years saved
    • Discount life years saved
    • CE = CI-CB/EI-EB

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specific sample example
Specific (Sample) Example
  • From p.373 - Ref no. 1127
    • Intervention: Rear outboard lap/shoulder belts in all (100%) of cars
    • Baseline: 95.8% of cars already in compliance
    • Intervention: require all cars made after 9/1/90 to have belts
      • Thus costs only apply to remaining 4.2% (65,900) cars
    • Target population: occupants over age 4
    • Others would be in child safety seats
    • What would costs be?

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example cont
Example (cont)
  • 1986 Costs (from study): $6 cost per seat
    • Plus added fuel costs (due to increased weight) = total $791,000 over life of all cars produced
  • Effectiveness: expect 23 lives saved during 8.4 year lifetime of fleet of cars
    • But 95.8% already exist, thus only 0.966 lives saved
    • Or 0.115 lives per year (of use of car)
  • But these lives saved do not occur all in year 0 - they are spread out over 8.4 years.
  • Thus discount the effectiveness of lives saved per year into ‘year 0’ lives..

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cost per life saved
Cost per life saved
  • With a 5% discount rate, the ‘present value’ of 0.115 lives for 9 years = 0.817 (less than 0.966)
    • Discounted lives saved =
    • This is basically an annuity factor
  • So cost/life saved = $791,000/0.817
    • Or $967,700 per life (in “$1986/1986 lives”)
    • Using CPI: 145.8/109.6 -> $1,287,326 in $1993
  • But this tells us only the cost per life saved
  • We realistically care more about quality of life, which suggests using a quality index, e.g. life-years saved.

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slide31

Sample Life Expectancy Table

35-year old American expected to live 43.6 more years (newer data than our study)

Source: National Center for Health

Statistics, http://www.cdc.gov/nchs/fastats/lifexpec.htm

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cost per life year saved
Cost per life-year saved
  • Assume average age of fatality in car accident was 35 years
    • Life expectancy tables suggested a 35 year old person would on average live to age 77
    • Thus ‘42’ life years saved per fatality avoided
    • 1 life-year for 42 yrs @5%= 17.42 years (ann. factor)
  • $1993 cost/life-year = $1,287,326/17.42
    • With 2 sig. figures: ~$74,000 as in paper
    • Note $1,287,326 is already in cost/life units -> just need to further scale for life-years by 17.42

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example 2 incremental ce
Example 2 - Incremental CE
  • Intervention: center (middle) lap/shoulder belts
  • Baseline: outboard only - (done above)
  • Same target population, etc.
  • Cost: $96,771,000
  • Incremental cost : $96,771,000 - $791,000
  • Effectiveness: 3 lives/yr, 21.32 discounted
  • Incremental Effectiveness: 21.32 - 0.817= 20.51
  • Cost/life saved = $95.98 million/20.51 = $4.7 million ($1986) => $6.22 million in $1993
  • Cost/life-year = $6.22 million/17.42 = $360,000

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overall results in paper
Overall Results in Paper
  • Some had < $0 cost, some cost > $10B
    • Median $42k per life year saved
    • Some policies implemented, some only studied
  • Variation of 11 orders of magnitude!
  • Some maximums - $20 billion for benzene emissions control at tire factories
    • $100 billion for chloroform standards at paper mills

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comparisons
Comparisons

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agency comparisons
Agency Comparisons
  • $1993 Costs per life year saved for agencies:
  • FAA (Aviation): $23,000
  • CPSC (Consumer Products): $68,000
  • NHTSA (Highways): $78,000
  • OSHA (Worker Safety): $88,000
  • EPA (Environment): $7,600,000!
  • Are there underlying causes for range? Hint: are we comparing apples and oranges?

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