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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 l.jpg

Cost-Effectiveness AnalysisLife Years Analysis

Scott Matthews

Courses: 12-706 / 19-702


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Admin

  • HW 5 Due Wednesday

  • Project 2 Coming soon.

    • Due Monday Nov 24 (2 weeks)


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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



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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’


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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



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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


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Sample Applications

  • Cost-effectiveness of:

    • New drug/medical therapies* very popular

    • Pollution prevention

    • Safety regulations


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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.


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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


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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”


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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).


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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’


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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


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Another CEA Example

  • Automated defribillators in community

    • http://www.early-defib.org/03_06_09.html

    • What would costs be?

    • What is effectiveness?


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Value of Life Analysis

Scott Matthews

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


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“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

  • 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


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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

  • 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

  • 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

  • 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

  • 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

  • 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

  • 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)

  • 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

  • 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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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 l.jpg
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

  • 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

  • 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

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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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