An Introduction to Health Economics

Health Economics is a discipline that concerns itself with examining both the costs and benefits of a healthcare intervention or programme - the outcomes and the measurement of them are very important, not just the evaluation of the costs involved. Of additional importance are matters concerning equity and access to care.

For a basic introduction to health economics please visit the Office of Health Economics Website for an introductory course they have put together for school pupils - it is quite interactive, and gives a good flavour of what the subject area is all about  http://www.oheschools.org/ohech1pg1.html

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Some key terminology and concepts:

Basic Economic Evaluation
The standard form of economic analysis or evaluation normally involves the comparison of two or more health care interventions or treatment programmes in terms of both their costs and their consequences.   There are four main types of economic evaluation which all compare the costs of the interventions with their outcomes.  The table and example below provides an illustration of the types of analysis via a scenario of two treatments: X and Y with the following attributes (outcomes):

Attribute	Treatment X	Treatment Y
Cost (£)	£25,000	£15,000
Effectiveness (survival in years)	1.5 years	1.0 year
QoL weight (utility)	0.8	0.6
QALYS	1.2	0.6
Benefit (£)	£120,000	£105,000

Cost Minimisation Analysis (CMA)
This form of analysis is indicated only when the outcomes are shown to be identical, in this case, no matter how they are measured, they are shown to be different and therefore they must be valued.

If the outcomes are shown to be identical for both treatments then it is only necessary to measure the costs and to select the least cost treatment – here it would be treatment Y.

Cost Effectiveness Analysis (CEA)
This type of analysis is used to compare treatments where the outcomes are measured in the same units but have been achieved to differing degrees. – it is the most commonly used type of analysis. The aim is to compare the additional (or incremental) costs with the additional (or incremental) benefits of the two options to see which is the most cost effective option.

• Incremental cost of X compared to Y is £25,000 - £15,000 = £10,000
• Incremental improvement in survival for X compared to Y is 1.5 – 1.0 – 0.5 yrs
• Cost effectiveness ratio for X is £10,000/0.5 = £20,000/year of life saved
• Treatment X is cost effective

Cost  Benefit Analysis (CBA)
Is used to compare treatments where the outcomes are both measured in monetary units and have been achieved to differing degrees. It is seen as a specialised form of CEA and once again the incremental costs are compared to the incremental benefits, however in this case both the costs and benefits are measured in monetary units.

• Incremental benefit of X compared to Y is £120,000 - £105,000 = £15,000
• Incremental cost of X compared to Y is £25,000 - £15,000 = £10,000
• Incremental cost benefit of X is £15,000 - £10,000 = £5,000
• Incremental cost benefit of X > 0; therefore it is cost-beneficial

Cost Utility Analysis (CUA)
This is the final and most complex form of economic evaluation. It is carried out where the outcomes are achieved to differing extents and where they are measured in different units making them difficult to compare – often between groups of individuals in different clinical categories. In order to provide a common denominator to permit measurement of outcomes across a range of different clinical groups with varying outcomes a common outcome has been devised that measures quality adjusted life years or QALYsQALYs following X = 1.5 x 0.8 = 1.2 QALYs

• QALYs following Y = 1.0 x 0.6 = 0.6 QALYs
• Incremental increase in QALYs following X = 1.2 – 0.6 = 0.6 QALYs
• Incremental cost of X compared to Y is £25,000 - £15,000 = £10,000
• Incremental cost utility ratio for X = £10,000/0.6 = £16,666/QALY
• Treatment X is cost effective

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A number of economic evaluations have been carried out by staff at ISD during the past few years; various links to related pages and reports may be found on the Health Economics at ISD page.