Health Economics (Burden of Disease)

Introduction

Health economics is the application of economic theory and economic methods to phenomena and problems associated with health (Culyer 2005). A comprehensive taxonomizing framework that systematically includes the various topics of health economics was developed by Alan Williams from the University of York. The ‘`Williams’ Schematic of Health Economics '' (Culyer and Newhouse 2000) conceptualizes this definition (health economics, concepts). Topics of health economics include – among others – the meaning and measurement of health status, the production of health and health services, the demand for health and health services, cost‐effectiveness analysis, economic evaluation, health insurance, health care financing, equity problems, the organization of health care markets, methods of remuneration of physicians, performance management of health care organizations, and economics of comparative health systems (Culyer 2005; Jones 2006).

This synopsis of the field of health economics is divided into two main parts. The first part covers research topics of health economics which are summarized under the heading health care system design. This part includes topics such as methods of health care financing , problems of health insurance markets, regulatory mechanisms, and systems of provider remuneration. The second part of the synopsis covers topics that are related to the economic evaluation of health care technologies and interventions . These topics include costs of illness, and cost‐effectiveness and cost-utility analyses, as well as the question whether the value of human life (value, human life) can be reflected by these concepts. The bridge between the two parts is built by a summary of the burden of disease concept of the World Health Organization (WHO). This generic and mainly epidemiological approach should not be seen as an integral part of health economics, although there are clear implications for health economic topics such as health care financing and cost of illness.

Health Care System Design

Economic theory – more specifically neoclassical microeconomic theory – generally assumes that a competitive process of adjusting demand and supply of goods and services will lead to an optimal allocation of scarce resources. This process should be left alone by policy makers and public interventions. If it is not, economic incentives for the modification of supply and demand will be disturbed and market forces will not be able to reach the allocative optimum.

However, health care systems around the world are heavily regulated – which is even the case for rather libertarian countries such as the US. The reasons for this rather extensive regulation are a number of severe market failures in health care markets. Health economics provides some important tools to analyze the origin of market failures and to develop solutions to deal with them. In this section, the most important market failures on the demand side as well as on the supply side of health care markets are summarized. Moreover, policy tools that have been designed to address them are discussed.

According to microeconomic theory , demand is the mechanism which drives a competitive economy (Rice 2002; Folland et al. 2007). Demand is the key: the amount of goods and services that is produced and consumed is determined by the preferences of consumers. In the long run, supply adjusts to demand. However, demand theory is based on a number of important assumptions. Specifically, the following assumptions need to be fulfilled (Rice 2002) (consumer choice):

• Individuals are the best judges of their own welfare.

• Consumers have sufficient information to make good choices.

• Consumers need to know the results of their decisions.

• Individuals are rational.

Most of the time, these assumptions are not fulfilled in health care markets. Individual consumers usually lack the medical education needed to execute informed choices on treatment options. The outcome of medical interventions (or non‐interventions) is not always clear for consumers of health care services. The rationality of consumers is disturbed by the often very personal consequences of consumption decisions. If the demand for health care services were unregulated and were left to the competitive process only, severe market failures would occur. The economic and medical results of these market failures – most importantly unequal access to health care services – are generally not acceptable to societal preferences. As a consequence, designers of health care systems usually restrict individual choice – e. g. by requiring mandatory coverage of health insurance.

In most microeconomic applications, supply plays a subsidiary role to demand. It is generally assumed that supply adjusts if consumers' preferences change. Again, supply theory is based on a number of crucial assumptions, most importantly that supply and demand are determined independently. Once more, this essential assumption is not fulfilled in most health care markets. Supply and demand of health care services are closely interlinked, which is clearly contradictory to the traditional microeconomic model . Health economics closely studies the question of whether health care providers – particularly physicians – act as perfect agents for their patients or whether physicians are able to induce demand for their services among patients (Rice 2002). Health economists generally agree that physicians – the suppliers – are able to induce demand for their services, at least to some degree. As a consequence, designers of health care systems have come up with a variety of policy measures to reduce incentives to induce demand.

Table 1 summarizes the dimensions of health care system design (health systems). Policy makers around the world heavily regulate health care financing, demand, and supply as a consequence of market failures in health care markets which are not socially acceptable. The role of health economics in this process is twofold. It analyzes market failures themselves and develops possible instruments for solutions – e. g. justifying universality of access as a consequence of non-rational consumers. Moreover, health economics also analyzes problems that occur due to the introduction of solutions to the original problems – e. g. non-optimal consumption of medical services because of universal coverage. In the remainder of this section, the dimensions of health care system design and the role of health economics are discussed in more detail (regulatory mechanisms).

Table 1 Dimensions of health care system design

The first dimension of health care system design is health care financing (health financing). With the exception of the US, Organisation for Economic Co-operation and Development (OECD) countries strive for universality of access to health care services. Universality of access can be justified for allocative as well as for distributive reasons. On the one hand, consumers may be willing to buy health insurance but they are unable to buy it if premiums are risk-rated – which will lead to distributive consequences that are socially unacceptable in all OECD‐countries outside the US. On the other hand, adverse selection may also result in non-optimal market outcomes. Adverse selection can occur if health insurers set their premiums in relation to the average health risk of a population and consumers have different probabilities of illness. In that case, consumers with low probabilities may refrain from taking out health insurance. They may even consume health care services without paying for them – e. g. if these services are paid for by welfare or social assistance (free-rider behavior). At the same time, consumers with high probabilities of illness will most probably seize the opportunity to take out health insurance eagerly. If this is the case, insurers need to cover clients who incur higher health care expenditures than expected and therefore insurers need to raise premiums, which in turn further decreases incentives for low-risk individuals to take out health insurance. Universality of access is achieved by tax‐financing of health care in countries such as the United Kingdom, Canada, or Scandinavian countries. In these countries, residents are eligible to consume health care services that are financed out of general tax revenue. Another possibility to achieve universality of access is mandatory universal coverage by social health insurance. In countries such as the Netherlands, Switzerland, and – for part of the population – Germany, consumers are obliged to take out social health insurance. Premium rate restrictions apply to make sure that individuals with high health risks are able to afford health insurance premiums. The US stands out because consumers in the US are not required to take out health insurance.

Universality of access can be achieved in tax-financed health care systems as well as in health care financing systems that rely primarily on social health insurance premiums. However, there are other policy objectives that may determine the choice between tax‐financing and financing by health insurance premiums  – notably implications for the redistribution of income and implications for employment. Implications for the redistribution of income in social health insurance systems very much depend on the mode of premium calculation. In tax-financed national health systems, implications for the redistribution of income depend on the design of the tax system (Wagstaff and van Doorslaer 2000).

If health care financing systems contain a direct link between health care expenditures and labor costs, rising health care expenditures lead directly to rising labor costs. Moreover, if there is a direct link, rising health care expenditures increasingly drive a wedge between labor costs of the employer and net wages of the employee. As a consequence, microeconomic labor market theory generally assumes that incentives for the employee to work diminish. What is more, incentives for the employer to substitute capital for labor – or to substitute cheaper labor abroad for domestic labor – increase. Therefore, all other things being equal, employment goes down. The growth of health insurance premiums may consequently result in a drain on employment in employment-based health insurance schemes, such as in group-based private health insurance in the US or social health insurance in Germany (labor market).

With the notable exception of the US, OECD countries do not rely on private health insurance as a predominant mode of health care financing (health insurance markets). Private health insurance serves three distinct functions. The first is as an alternative to other social health insurance or public arrangements. The second function is to supplement basic health insurance or tax-financed health care, providing coverage for services not covered by the public arrangement or to cover the financial risks of co-payments and coinsurance. A third function of private insurance is to provide what can be termed complementary or double-cover coverage, in which consumers purchase additional private health insurance even though they have to participate in existing public schemes (Colombo and Tapay 2004).

Tax-financed systems, such as those in the United Kingdom, Canada, and Scandinavian countries, are non‐competitive single payer systems. The term single payer system means that in any given region, only one payer organization – such as primary care trusts in the UK – is purchasing care on behalf of patients. In the 1990s, the UK government strived to introduce internal markets (health systems reforms). The competitive nature of the market was supposed to provide the necessary incentives for health care providers to improve efficiency and responsiveness of the system. Internal markets were replaced by primary care trusts which emphasize cooperation rather than competition (Oliver 2005). Social health insurance systems may also be non‐competitive systems – as is the case in France. However, as a result of a number of health insurance reforms in the 1990s (health systems reforms), several countries, such as Germany, the Netherlands, and Switzerland, introduced competitive multi-payer systems based on a regulative framework of regulated competition (competition, health care). A key element of regulated competition is an effective method of risk adjustment in order to neutralize incentives for risk selection by competing health insurers (van de Ven et al. 2003). Consumer choice (consumer choice) is another key element in increasing competitive pressure for health insurers. Consumer choice is less pronounced in the competitive multi-payer private health insurance market of group contracts for the non-elderly in the US. In most cases, employers purchase a number of options for employees and the employees' choice is limited to these options (Dowd and Feldman 2006).

As noted above, microeconomic theory strongly emphasizes demand as a driving force of competitive markets. This logic is also inherent in most theoretical models of health economics. However, in order to avoid market failures, demand for health insurance and health care services by individual consumers is heavily regulated in most OECD‐countries. From an economic point of view, however, universal access to health insurance leads to over‐consumption. The rationale behind this argument is quite straightforward: because the marginal price of health care services is lower than marginal utility – the price is zero if there is full coverage without user charges – consumption of health care increases. This effect is called ex-post moral hazard and is generally considered to result in a welfare loss to society. Ex-ante moral hazard refers to the effect that being insured has on behavior – notably, less effort for preventive activities. This theoretical argument has been confirmed empirically. In a unique natural experiment (RAND health insurance experiment), it has been shown that demand for health care services increases as coverage by health insurance goes up (Newhouse and Insurance Experiment Group 1993). Health economists usually suggest introducing user charges at least for health care services that are elastic in price – specifically non-urgent, elective health care services. As a consequence, patients will refrain from using health care services that provide a low marginal utility (Cutler and Zeckhauser 2000). However, the share of non-urgent elective health care services as a share of total health care expenditure is rather small (health care costs). Moreover, due to severe information asymmetries, user charges may also deter consumers from using health care services that provide high marginal utility. The RAND health insurance experiment has also shown that consumers reduce consumption across all health care services if user charges are introduced, they do not differentiate between services which were considered to be highly or rarely effective (Lohr et al. 1986).

The problems of adverse selection and moral hazard are also important for the definition of the basket of health care services that are provided by health insurance. If the basket of health care services is not standardized – as is the case in most private health insurance schemes in the US and elsewhere – low risk individuals may find it attractive to choose a basket of health care services which provides only very basic coverage. At the same time, high-risk individuals will most probably choose maximum coverage – which results in adverse selection. If regulation mandates an extensive standardized basket for health care services in order to fight adverse selection, problems of over‐consumption (moral hazard) will develop. As noted before, user charges will only solve this problem if consumers are able to identify health care services with low marginal utility – which is rather doubtful. Regulation usually attempts to solve this dilemma between adverse selection and moral hazard by the centralized assessment of marginal benefits of health care services. In fact, the economic evaluation of health care interventions , which is performed by the National Institute of Clinical Excellence in England and by other institutions in other countries, seeks to substitute the individual assessment of marginal costs and marginal utility with a collective assessment of marginal costs and marginal utility.

As noted before, traditional microeconomic theory does not put much emphasis on the supply of goods and services. Supply is supposed to adjust to changing preferences of consumers. However, it can also be argued that demand is not determined independently of supply. The suppliers of health care services – primarily physicians and hospitals – do not act as perfect agents of their principal – the patient. As a consequence, health economics is concerned with the regulation of supply of health care services as well – more so than traditional microeconomic theory is concerned with producers. Health economics aims primarily to develop remuneration systems with the goal of making it advantageous for the physician to behave in a way that is in the patient's and the payer's best interest (regulatory mechanisms). Traditionally, research was focused on fee-for-services payment systems  – which contain incentives for over‐utilization of health care services – and on capitation payment systems, which developed primarily in managed care organizations and contain incentives for under‐utilization of health care services. Recently, research has been focused on “pay-for‐performance” schemes. In these schemes, the remuneration of physicians and hospitals is linked to defined quality performance thresholds (Rice 2006).

Burden of Disease

The term burden of disease generally describes the total, cumulative consequences of a defined disease or a range of harmful diseases and their respective disabilities on a community. This approach combines measurement of mortality and morbidity with non-fatal outcomes, such as quality of life aspects. The gap between an ideal situation, where everyone lives free of disease and disability, and the cumulated current health status is defined as the burden of disease.

In the 1990s, the WHO, in co‐operation with Harvard University and the Worldbank, developed a methodological concept to quantify the global burden of disease based on statistical measurement of the disability‐adjusted life year (DALY) . The DALY aggregates the time lost because of premature mortality and the time spent in a limited health state (Homedes 1996). Consequently, the DALYs for a defined disease or health condition are calculated as the sum of the years lost due to specific premature mortality and the years lost due to disability for incident cases of the health condition. Further time discounting and non-uniform age weights give less weight to years lived at a younger age.

The cumulated disease‐specific DALYs aggregated according to the country‐specific prevalence of the diseases and disabilities considered reflect the burden of disease of a specific society or a country. The Global Burden of Disease concept of the WHO compares a large number of low-, middle-, and high-income countries with regard to their country‐specific burden of disease, and offers mortality figures, which refer to the number of people who die and the causes of death. Thus a comprehensive and consistent set of estimates of mortality and morbidity is given, expressed by the single indicator DALY and differentiating by age, sex, and region.

Economic Analyses of Defined Health Care Technologies and Interventions

This field of health economics is characterized by the intention to describe or investigate economic aspects of defined health conditions or the use of defined health care technologies. Health care technology in this case stands for all diagnostic, therapeutic, rehabilitative, or palliative procedures that influence the health of an individual. With relevant influence from medical sciences, the concepts can be subdivided into: (1) mainly descriptive studies with epidemiological elements and the intention to describe real-life health care settings, and (2) study designs derived from the methodological concepts of clinical studies, which focus on clearly defined medical interventions in often highly selected patient groups, typically not only giving an average measure for the costs and the medical outcome of patients but further aggregating the results to a more abstract ratio of the costs per a predefined outcome such as life-year gained. Examples of the first group of study designs are cost of illness studies, decision analytic health policy models, and budget impact analyses. Classic economic evaluation studies such as cost‐effectiveness or cost-utility studies are examples of the second group (Gold et al. 1996; Drummond et al. 1997).

Inclusion of costs distinguishes health economic analyses of defined health technologies from epidemiological or clinical studies. Costs refer not only the costs of the intervention but also the costs of all direct or indirect consequences of the use of the technology. There are some general aspects of the costing process (the measurement of costs) such as the perspective, approaches, sources of data, and the types of costs, which will be described before the different study designs are mentioned (Canadian Coordinating Office for Health Technology Assessment (CCOHTA) 1996; Canadian Agency for Drugs and Technologies in Health (CADTH) 2006).

Time Horizon and Modeling

For many diseases, the medical and economic consequences of a more successful therapy compared to a less successful alternative are relevant for a long period of time, often a patient's lifetime. In many cases, e. g. screening tests or other measures for primary or secondary prevention, the medical and economic benefits often occur a long time after the intervention. For economic evaluation studies, therefore, a time period that covers all relevant consequences of the intervention should be considered (Gold et al. 1996). This so-called time horizon for comparing health economic analyses is often longer than the limited follow-up period of clinical or epidemiological studies. This has two consequences: (1) it has to be acknowledged that the standards of evidence-based medicine cannot be used for economic evaluation studies in the same strict manner as is common with clinical trials; (2) the time exceeding the follow-up period of randomized clinical trials or epidemiological studies can often only be estimated by modeling. Widespread modeling techniques such as medical decision tree analysis, Markov models, or discrete event simulation are seen as standard methods for estimating the medical and economic consequences of many health technologies in the patient's lifetime, but it has to be assured that the studies are conducted and described transparently and with high methodological standards (Philips et al. 2004).

Perspective

The perspective of an economic analysis of a health care technology describes the point of view which is taken for the costing and, if relevant, for the outcome measurement. The choice of the perspective is a basic decision to be made for every analysis and can crucially affect the result of the calculation. It especially influences determination of the costs. From a societal perspective, all costs and benefits are taken into account, including productivity loss due to a health state, treatment, or diagnostic procedure. From the narrower perspective of a health insurance or sickness fund (often called the payer's perspective), only their own expenses, expressed as reimbursement rates in different sectors of the health care system, are relevant. From the perspective of an institution like a hospital, only the costs to the institution itself that are incurred during the inpatient stay are considered. The most important perspectives are the societal, the payer's, and the institutional perspective. According to most recommendations for economic evaluations in health care, a societal perspective should be considered at least in addition to other perspectives that have been chosen (Gold et al. 1996; Drummond et al. 1997; Canadian Agency for Drugs and Technologies in Health (CADTH) 2006).

Costing Process

In general, all costs related to the use of a technology should be identified and considered to be relevant. These costs are the monetary equivalent of resources such as goods or professionals' time. The resources are measured in quantifiable physical units e. g. inpatient days or GP contacts, as detailed as necessary for the analysis, and should be differentiated in categories that are appropriate to the decision makers. The measured resources are valued in a second step to express them in monetary units (Canadian Coordinating Office for Health Technology Assessment (CCOHTA) 1996; Gold et al. 1996). For valuing, mainly standard reimbursement or pricing catalogs are used. It has to be kept in mind that these charges are not necessarily identical to the costs according to the economic theory, which requires that the opportunity costs and the benefits that could have been derived from funding the next best alternative should be estimated. With rare exceptions in health economic analyses, the opportunity costs of health care resources can only be approximated using charges, assuming also that charges are the result of a societal process like the price of any other good in a functioning economy.

In health economic analyses, it is not usually possible to base the complete calculation on primary data collected individually from the study population included. Usually, the primary data of randomized controlled trials or epidemiological analyses are combined with a number of different additional data sources such as administrative data from sickness funds, routine data sets from official statistics, reimbursement catalogs, or predefined package definitions e. g. from DRG catalogs or treatment guidelines. Also, in contrast to clinical studies in health economic analyses, data can be collected by a top-down approach, using routinely collected large data sets e. g. of sickness funds or health care organizations as the basis of the analysis, as well as the described bottom-up approach. Following the framework of evidence-based medicine, these retrospective analyses of routine data that are quite commonly performed in the US are considered a lower grade of scientific evidence compared with randomized controlled studies. However, to gain knowledge about real-life routine care, they offer clear advantages by avoiding strict patient selection and an artificial study‐determined treatment setting.

Direct Costs

Direct medical costs are defined as the costs related to the provision of the health care intervention itself, including all side effects and all future consequences on health care diagnosis and treatment in different health care settings (e. g. inpatient hospital treatment, ambulatory care, drugs, rehabilitation). In some diseases, direct non-medical costs, e. g. for transportation or child care during a medical intervention of the parent, can also be incurred.

Indirect Costs

The so-called indirect costs incorporate the loss of productivity suffered by the national economy. Indirect costs can be due to decreased efficiency or total absence from work through illness – either for a limited number of days of absence or due to early retirement – or premature death.

There are two ways of calculating indirect costs: (1) the human capital approach and (2) the friction cost approach. Both approaches are based on the assumption that the lost productivity can be valued by the achievable gross income of the employed population, giving the labor a defined value (labor market). Using the human capital approach, the entire period of absence from work due to illness is considered and valued by the achievable gross income. The human capital approach is based on economic theory and gives a maximum possible productivity loss (Sculpher 2001). The friction cost method more accurately estimates the actual loss of productivity in western industrialized countries. This method takes two main aspects of criticism against the human capital approach into consideration. First, some part of a short-term work absence, e. g. due to an influenza infection, is compensated for either by colleagues or by the employee when back at work. Second, in societies with a significant percentage of unemployed people, a large percentage of positions will be taken by a previously unemployed individual after a certain time, called the friction period (Koopmanschap et al. 1995). Using the friction cost method, only the shorter friction period is valued by the average achievable gross income.

The human capital approach is considered to be the simpler and more frequently used approach and is therefore recommended by a number of guidelines for economic evaluation studies, although it is also recommended that the friction cost approach in an additional scenario or at least a sensitivity analysis should also be calculated (Gold et al. 1996).

Cost of Illness Studies

The term ‘cost of illness’ has to be seen as separate from the burden of disease concept of the WHO. While the burden of disease concept is a generic approach, estimating the burden of all relevant diseases of a large number of populations, cost of illness studies are defined as analyses of the total costs due to one specific disease or health condition in one defined population.

In cost of illness studies, the total economic impact of a disease or health condition on society is estimated by identification, measurement, and valuation of all direct and indirect costs. This form of study does not focus on a particular intervention and does not address any questions regarding treatment efficacy or efficiency. Cost of illness studies usually adopt a societal perspective, measuring the financial burden incurred in different sectors of society such as the state or government, health insurers, and individuals.

The costs of illness can be estimated by taking into account the costs associated with all patients with a defined health state in a specific limited time period (prevalence method) or by calculating the long-time costs associated with those patients whose illness is newly diagnosed during a specific limited time period (incidence method).

Costs of illness calculations create information about the amount of resources spent on the treatment of a disease. This information can be helpful in generating hypotheses for health economic evaluation studies that compare different intervention strategies. Furthermore, the results can be used to set priorities for research activities regarding diseases with a larger potential of cost savings if more cost‐effective alternatives would be preferred. In situations where there are limited resources for health care, this information could be misunderstood as a signal to cut down resources primarily in the treatment of the most expensive diseases. A rational decision for more cost‐effective alternatives should be prefered which not only considers the costs but also includes factors related to the medical benefit and therefore has the opportunity to produce more value for money in health care.

Economic Evaluation of Health Technologies

Economic evaluation studies are a systematic method of comparing two or more health technologies that can be used alternatively, by measuring the costs and the consequences (outcomes) of each alternative. As the outcome comparator, disease‐specific measures such as time to relapse or events avoided, or generic measures such as life-years gained or utilities, can be chosen.

One key element of economic evaluations comparing alternative health care programs is the economic concept of “incremental change ” which means that only the additional costs of an alternative are compared to the additional outcome gain. Consequently, in contrast to cost of illness studies, it is not necessary to calculate the full range of all possible costs and outcomes but only the difference (increment) between one program and an alternative.

The central result of a health economic evaluation study is the incremental cost-outcome ratio, expressing the additional costs per additional standardized outcome measure. Common examples are the costs per life-year gained or the costs per event avoided.

The results of economic evaluation studies are commonly demonstrated graphically in so-called cost‐effectiveness planes showing the incremental costs on the y-axis and the incremental outcome gain on the x-axis (Black 1990; Drummond et al. 1997). The four quadrants of a cost‐effectiveness plane illustrate the four possible relations of costs and outcome when comparing two alternative strategies e. g. a new technology and a standard treatment:

• 1. The new technology shows higher costs and a worse outcome (north-west quadrant)

• 2. The new technology shows lower costs and a better outcome (south-east quadrant)

• 3. The new technology shows lower costs and a worse outcome (south-west quadrant)

• 4. The new technology shows higher costs and a better outcome (north-east quadrant)

Figure 1

Cost‐effectiveness plane (adapted from Drummond et al. 1997)

If the incremental cost‐effectiveness is located in the north-west or the south-east quadrant, the dicision for identification of the less costly and more effective treatment is clear. One treatment shows a better outcome for lower costs and is dominant over the other. The decision for or against a new technology is more difficult if their incremental cost‐effectiveness is located in the north-east quadrant. This is often the case for innovations because they tend to have an additional medical benefit connected with higher costs. In this case, the crucial question is: what is the relation of the additional costs and the additional outcome? In other words, is a new technology adequate value for money? Figure 1 shows a schematic cost‐effectiveness plane. The use of the new technology B is responsible for higher additional costs and lower additional outcome compared with standard treatment than the new technology A. Technology A is more cost‐effective than technology B. However, both new technologies are located in the north-east quadrant. Standard treatment is less effective but also less costly. The decision to use an implicit or explicit threshold depends on ability and the preferences of society. So far, no official threshold has been established by decision makers, but an implicit threshold of 50,000 EUR, 50,000 USD, or 30,000 BPS per life-year gained or per quality‐adjusted life-year gained, derived from reimbursement decisions, is discussed in the literature (Rawlins and Culyer 2004).

Value of Human Life

Discussions about the interpretation of the results of economic evaluation studies and the legitimization of a threshold value up to which a new health care technology should be reimbursed by public payers also opens up the dispute about the value of a human life (value, human life). Three main approaches should be considered. The human capital approach estimates the maximum expected future earnings of an individual based on the average achievable gross income. Heavy criticism was made of the use of this measure for valuing a human life and by doing so implying that the value of a human life is reduced to productivity from a national economic point of view. Furthermore, this approach discriminates major parts of the population who do not work for payment, such as children, housewives, the unemployed, old people, and people with chronic illnesses or disabilities. A second, so-called social decisions approach , uses decisions made in the public sector like reimbursement decisions or legal acts. The third approach is based on empirically created data on people's preferences. This can be done directly, by assessing the willingness to pay for a life year or a life-saving health care intervention, or indirectly, e. g. from surveys about the value placed by individuals on reduction of the risk of death due to a particular hazard. The third approach is currently regarded as the most appropriate as it reflects the individual preferences and uncertainty that is characteristic of such estimations.

Comparing the different approaches and also the results of different studies using the same approach, an extremely wide variation can be observed, from a few thousand € up to a few hundred thousand €. Currently, the methodological approaches are in an early stage of development and valid results will not be available for many years, if at all.

In the following chapters, the two main types of health economic evaluations, namely cost‐effectiveness analysis and cost-utility analysis, are described. The third study type is the cost-benefit analysis (sometimes also misused as a generic term for economic evaluation). In cost-benefit studies, not only the costs but also the outcome is expressed in monetary units using valuations of the patients' observed or stated preferences. The most common approach is to determine the willingness-to-pay, meaning that individuals are asked to define the amount of money they would be willing to pay to avoid a certain health state or illness. Cost-benefit studies are widespread outside the health care sector but, due to the ongoing methodological dispute regarding the measurement and quantification of the medical benefit of health care in monetary terms, they are currently less common and less important for decision makers in health care resource allocation than other studies.

Cost-Effectiveness Analysis

The most common type of economic evaluation is the cost‐effectiveness analysis. In this type of analysis, the outcome is expressed in adequate medical or epidemiological units e. g. life-years gained or number of events avoided, or specific measures like units of reduction of diastolic blood pressure (Gold et al. 1996; Drummond et al. 1997). The more specific the outcome measure is, the more difficult it is to use cost‐effectiveness analyses to compare treatments for different diseases or whole health care programs. The advantage of cost‐effectiveness studies is their ability to adopt the most relevant and clinically significant parameter and to compare treatment alternatives for a specific disease. The results are often more of a clinical nature. Therefore, they are often more easily accepted by the medical society than the more abstract results of cost-utility analyses. Cost‐effectiveness studies can give useful information concerning the decision between a limited number of treatment alternatives for a clearly defined health problem. This is often the case for diseases where a standard treatment is already available, and the value for money of a new treatment alternative should be estimated based on the results of the first clinical efficacy studies. However, for use in the process of decision making for non-disease or non‐indication specific allocation of health care resources, the results of cost‐effectiveness studies are less useful. It is not possible to compare the costs per life-year gained of a life-saving intervention like heart surgery with the costs per case detected in a screening program, or the costs per exacerbation avoided in an educational program with COPD-patients.

Cost-Utility Analysis

Cost-utility analyses can be seen as a special form of cost‐effectiveness analysis in which the outcome measures are the units of utility gained. In general, utilities are numbers assigned to entities presumed to be the objects of patients' preferences, and thus the entities can be quantified and ranked. Utilities offer a patient‐orientated generic measure which allows comparison of the effect of all possible interventions influencing the health state (Feeny et al. 1996).

By far the most widespread and prominent utility measure is the quality‐adjusted life year (QALY) . The QALY is a generic measure of utility that combines both the quality and the quantity of life generated by health care interventions. A year spent in perfect health is one QALY and a year spent in less than perfect health with a lower health‐related quality of life is worth less than one QALY. Death or the poorest imaginable state of health is defined as “0”. Aggregating the quality of life and the remaining lifetime, it has to be taken into account that the quality of life fluctuates over time. Quality of life must therefore be measured repeatedly over time (the course between the point measures has to be estimated) with generic instruments such as the EQ5D, the health utility index , or the SF-6D. Alternatively, the quality of life over the total health state path can also be estimated at one time using techniques such as standard gamble or time trade-off.

There is a certain amount of controversial debate about the theoretical foundation of the QALY, especially about its foundation in the welfare theory, as well as about the empirical robustness of the results and ethical implications of a possible use in resource allocation decisions.

League Table

One way of presenting the results of several cost‐effectiveness or cost-utility analyses for decision makers is a league table. League tables rank health technologies and interventions according to their relative cost-outcome ratio, starting with the lowest cost per QALY gained (or the gain in another generic outcome measure) and ending with the most unfavorable cost per QALY ratio. In theory, league tables could be used by decision makers to allocate resources within a limited budget e. g. by only reimbursing technologies with costs per QALY gained below a defined threshold. There are major arguments for not making decisions about resource allocation in health care solely on the basis of league tables (Gerard and Mooney 1993; Bleichrodt et al. 2004), but in general the results of health economic evaluations can provide helpful additional pieces of information for the process of decision making. Decisions about allocation of health care resources have to be the result of a societal consensus and should never be made on the basis of economic analyses alone.

Summary

Health economics is defined as the application of economic theory and economic methods to phenomena and problems associated with health and health services. Topics of health economics include – among others – the meaning and measurement of health status, the production of health and health services, the demand for health and health services, cost‐effectiveness analysis, economic evaluation, health insurance, health care financing, equity problems, the organization of health care markets, methods of remuneration of physicians, performance management of health care organizations, and economics of comparative health systems.

Health care systems cannot be regarded as a normally functioning market as this may lead to market failures such as inequity of access to health care services. As a consequence, competition in most health care systems is regulated in several directions. The main dimensions of health care system design are financing of health care and regulation of demand and supply. With regard to health care financing, three main principles, tax‐financing, social health insurance, and private health insurance, can be distinguished. Key elements in regulating competition are risk adjustment and consumer choice. To decrease the moral hazard effects leading to increased demand in health care, regulative elements such as user charges can be implemented. An unnecessarily increased supply of health care should be regulated by remuneration systems that modify the incentives for hospitals and physicians.

In a situation of scarce resources available for health care, not all imaginable interventions can be reimbursed by third–party payers. As patients and health care professionals are mostly unable to assess the additional benefit of single health care technologies, collective assessments of the additional costs and the additional medical benefits or utilities are performed. In economic evaluation studies, the cost consequences, as well as the clinical efficacy of alternative interventions, are compared based on cost-outcome ratios. In cost‐effectiveness analyses, the chosen comparators are the costs per adequate clinical or epidemiological parameter such as the costs per life-year gained or the costs per event avoided. Utilities, the outcome measure of cost-utility analyses, aggregate the life-time gained by a defined intervention together with the patient's quality of life to a generic measure, which allows comparison of interventions for different indications and in different health care sectors. Key elements of economic evaluation studies of health care interventions are the choice of the perspective, the use of modeling techniques, and the choice of different cost components to consider for the costing process. More generic approaches to describe costs with respect to the effectiveness of health care systems as a whole are cost of illness studies and the burden of disease concept of the WHO.

Cross-References

Burden of Disease

Competition, Health Care

Consumer Choice

Cost-Effectiveness

Health Care Costs

Health Economic Evaluation

Health Economics, Concepts

Health Financing

Health Insurance Markets

Health Systems

Health Systems Reforms

Labor Market

Modelling

Regulatory Mechanisms

Value, Human Life – Utilities