Valuation issues

Jan Sørensen, Health EconomistJan Sørensen, Health EconomistCAST – Centre for Applied Health Services Research and CAST – Centre for Applied Health Services Research and

Technology AssessmentTechnology Assessment

University of Southern DenmarkUniversity of Southern Denmark

Cost-benefit analysis of future energy plans

Assess and compare the cost and benefits of different Assess and compare the cost and benefits of different alternatives from a social perspectivealternatives from a social perspective

CBA is based on well-established economic theory (welfare CBA is based on well-established economic theory (welfare economics), which might serves as reference case when in economics), which might serves as reference case when in doubtdoubt

Many reference booksMany reference books International guidelinesInternational guidelines Ministry of Finance, Guidelines 1999Ministry of Finance, Guidelines 1999

Many examples on applications within different other public Many examples on applications within different other public sectors including the environmental area eg. Møller et al, sectors including the environmental area eg. Møller et al, 20002000

Important decisions

Social perspectiveSocial perspective Include all relevant effects and resource use (cost)Include all relevant effects and resource use (cost) Valued from a social perspectiveValued from a social perspective

Long time horizonLong time horizon Include long term consequences of the specified energy scenarios for one year e.g. Include long term consequences of the specified energy scenarios for one year e.g.

2010, 2020, 2050)2010, 2020, 2050) Analytical (scenario) horizon assumed to be one year Analytical (scenario) horizon assumed to be one year Consider the long term consequences of this year’s energy productionConsider the long term consequences of this year’s energy production

Aim to express both the benefits and cost in monetary units (however, Aim to express both the benefits and cost in monetary units (however, should also present intermediate results – eg. new cases of disease, life should also present intermediate results – eg. new cases of disease, life years lost, additional use of health services)years lost, additional use of health services)

Provide a transparent, comprehensive and reliable analysisProvide a transparent, comprehensive and reliable analysis

In the following: Restricted focus on the cost and benefits relating to the In the following: Restricted focus on the cost and benefits relating to the health effects of pollution associated with changes in energy productionhealth effects of pollution associated with changes in energy production

Additional incidence of diseases – new cases by sex and age

Impact on health status: death, time with illness, QALY

Additional use of resource: Hospitals, primary care, medicine, social service, voluntary services, time

Value of avoided death, time with illness, QALY

Productive time

ConsumptionUnit cost per resource

Net present value of the benefits

Net present value of the resource use (costs)

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Which value ?

Economic theory: Economic theory: The opportunity cost i.e. the utility of the second best application of the The opportunity cost i.e. the utility of the second best application of the

resourcesresources Valued from the perspective of society – usually as the aggregation of the Valued from the perspective of society – usually as the aggregation of the

values of each individual in the societyvalues of each individual in the society Marginal (inkremental) analysis i.e. the cost and benefit of the last Marginal (inkremental) analysis i.e. the cost and benefit of the last

unit/differenceunit/difference

Difficult to make operational outside a perfect market situationDifficult to make operational outside a perfect market situation

Therefore often approximated as the long term average cost, i.e. variable cost Therefore often approximated as the long term average cost, i.e. variable cost with reasonable contribution to the fixed costwith reasonable contribution to the fixed cost

Example

A 55 year old man who becomes ill with a stroke and survive A 55 year old man who becomes ill with a stroke and survive the immediate periodthe immediate period

Additional resource useAdditional resource use Hospital care in the immediate period (e.g. first 1 month)Hospital care in the immediate period (e.g. first 1 month) Rehabilitation period (additional training)Rehabilitation period (additional training) Maintenance period (home improvement, ongoing support, GP and nursing Maintenance period (home improvement, ongoing support, GP and nursing

service, medication, meals on wheels etc.) in own homeservice, medication, meals on wheels etc.) in own home Admission to nursing home until rest of life timeAdmission to nursing home until rest of life time

NPV of the additional resource use each year in the NPV of the additional resource use each year in the remaining life time (x euro per case with a specific age and remaining life time (x euro per case with a specific age and sex group)sex group)

Method - Register study

Identify population with new disease and suitable controlsIdentify population with new disease and suitable controls Assess the expected life time with the diseaseAssess the expected life time with the disease Assess additional resource use (attributable cost= difference Assess additional resource use (attributable cost= difference

between diseased and controls) in each year between diseased and controls) in each year e.g. hospital, primary care and medicinee.g. hospital, primary care and medicine e.g. valuation through DRG-system, fees paid by primary care funding body, e.g. valuation through DRG-system, fees paid by primary care funding body,

and pharmacy sales pricesand pharmacy sales prices

NPV (Unit cost) per new case = NPV (Unit cost) per new case = ΣΣtt qt * pt(q) * qt * pt(q) * δδtt

Time cost of seeking treatmentPatient and relatives

Alternative costAlternative cost Value of missed employment: missed income (net of tax)Value of missed employment: missed income (net of tax) Leisure time: missed leisure time Leisure time: missed leisure time

Valuation of benefit - 1

Avoided death/life years lost/lost time without illnessAvoided death/life years lost/lost time without illness Different valuation methodsDifferent valuation methods

Contingent valuationContingent valuation Discrete choiceDiscrete choice

Valuation of benefit - 2

Production lossProduction loss Human capital method: lost time => retirement ageHuman capital method: lost time => retirement age Friction cost method: lost time => replaced at labour marked (6 mths)Friction cost method: lost time => replaced at labour marked (6 mths)

Valuation: gross salary before taxValuation: gross salary before tax

Note risk of double counting!Note risk of double counting!

Valuation of benefit - 3

Future consumption (hospital and other resources)Future consumption (hospital and other resources) People living longer have more consumption eg. food, housing, holidaysPeople living longer have more consumption eg. food, housing, holidays Represent a use of social resourcesRepresent a use of social resources Arise in the gained life timeArise in the gained life time

Deliverables

Tables of aggregated NPV net benefit (cost) of new illnesses Tables of aggregated NPV net benefit (cost) of new illnesses (defined by the WP3 group) by age and sex groups (as (defined by the WP3 group) by age and sex groups (as defined by the detailed CEEH model) under different sets of defined by the detailed CEEH model) under different sets of assumptions regarding discount ratesassumptions regarding discount rates

Documentation of details in deriving such figuresDocumentation of details in deriving such figures

ActivitiesActivities Register studyRegister study Survey of population values (health, life years /QALY gain)Survey of population values (health, life years /QALY gain) Perhaps survey of population values of environmental consequencesPerhaps survey of population values of environmental consequences

Examples of earlier unit costs

Frohn et al, PP-presentation, May 2007