Health Economics Mastering Public Health PDF

4D Health Economics 4D.1 Health economics 489 4D.2 Assessing performance 501 4D.3 Financial resource allocation...

4D Health Economics 4D.1 Health economics 489 4D.2 Assessing performance 501 4D.3 Financial resource allocation 502 4D.4 Healthcare systems and incentives 505 4D.5 Economic appraisal 508 4D.6 Marginal analysis 520 4D.7 Decision analysis 520 4D.8 Economic evaluation and priority setting 522 References 523 Economics is based on the notion that we live in a world of scarcity where there are infinite demands but only finite resources (i.e. demand will always exceed supply). This chapter considers how these finite resources can best be allocated to address the public’s demand for health and for healthcare. It describes a range of techniques used by health economists, including economic evaluation, and the role of eco- nomics in policymaking and public health. 4D.1 Health economics Principles of health economics (including the notions of scarcity, supply and demand, marginal analysis, distinctions between need and demand, opportunity cost, discounting, time horizons, margins, efficiency, and equity). Economics is the social science of how goods and Scarcity services are produced, distributed, and consumed; Healthcare can be regarded as a production pro- it is traditionally divided into microeconomics cess that uses a number of inputs to produce and macroeconomics (see Table 4D.1). outputs. The inputs or factors of production are An axiom in healthcare is that demand exceeds divided into four categories (see Table 4D.2). supply. The amount of resources that could poten- It can be seen that none of these resources is infi- tially be spent on healthcare is infinite; therefore, nite. The term scarcity is used where more of a the resources that are actually available for health- resource is wanted than is available. Under these care will always be relatively scarce. As a result, circumstances, every choice that is made involves choices must be made over how to spend the a sacrifice, since the same resource cannot subse- healthcare budget. Health economics is the science quently be used for anything else. This sacrifice is of making these decisions (i.e. how best to employ called the opportunity cost and it represents the scarce resources that have alternative uses). The benefits that are forgone. Opportunity cost is a discipline is divided into positive and normative fundamental concept of health economics. economics (see Box 4D.1). MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 490 HEALTH ECONOMICS Table 4D.1 Types of economics Field of economics Unit of interest Topics covered Microeconomics Elements within the Individuals economy Households Firms Buyers Sellers Markets Macroeconomics Entire economy Unemployment Inflation Economic growth Monetary policy (interest rates, the money supply, etc.) Fiscal policy (public spending, tax, etc.) Box 4D.1 Positive and normative economics Type of health economics Topics covered Positive How markets work How interventions affect outcomes Normative What should be produced What resources to use How to distribute goods Table 4D.2 Factors of production Inputs Description Land Physical resources of the planet, including mineral deposits Capital Resources created by humans to aid production, such as tools, machinery, and factories Labour Human resources, in the sense of people as workers Enterprise Human resource of organising the other three factors to produce goods and services Opportunity cost life years saved, QALYs gained, etc.) that could have been achieved had the money been spent on The opportunity cost is the benefit forgone by the next best alternative intervention or health- not using resources for their next best alter- care programme. native use. In economics, a calculation of the opportunity cost is often used to value benefits of Opportunity cost can be calculated directly by a service. For example, the opportunity cost may means of CEA or cost–utility analysis (CUA) be quantified as the health benefits (in terms of (see Chapter 1C.14). MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS HEALTH ECONOMICS 491 Need and demand affected not only by healthcare but also by many other factors. Indeed, healthcare may not always Economists draw a distinction between need and lead to an improvement in health. demand (see Table 4D.3). Where need is not iden- tified, it is not expressed, and it is therefore not a The demand for healthcare may be quantified in demand. Moreover, the healthcare demanded does terms of: not represent all healthcare needs. See Figure 4D.1. Bed occupancy Consultation rates Demand in healthcare Waiting lists As in Section 4C, where a distinction was made between the need for health and the need for healthcare, the demand for health should be dis- Rising demand tinguished from the demand for healthcare. The In developed countries, the demand for healthcare demand for healthcare is a derived demand. In is rising for several reasons, including: other words, although healthcare may be unpleas- ant in its own right, it is still demanded because of Demographics (ageing population) its potential to improve health. Health, however, is Innovation (technology) Table 4D.3 Distinction between need and demand Need Demand Definition A capacity to benefit from healthcare A request for healthcare The amount of a good or service that consumers are willing and able to purchase at a given price Description The three types of need are Must be expressed by people by one of the Expressed need following: Felt need Attending the place where the service is offered Normative need Waiting for the service (see Section 4C.1 for details) Paying for the service Screening programme Need New technology for antibiotic resistance Supply Demand Homeopathy Figure 4D.1 Need, supply, and demand. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 492 HEALTH ECONOMICS Lifestyle (harmful factors such as smoking and Substitutes and complements excessive alcohol use) The demand for one good may be related to the Information (educated consumers) demand for another. Substitutes and complements are Rising standards of living (quality-of-life related goods, where a change in price of one good expectations) affects the demand for the other. See Table 4D.5. Demand curve Determinants of demand Normally, when the price of a good falls, consumers According to economic theory, demand is deter- are willing to buy more of it. As a result, the demand mined by four factors, namely price, income, pref- curve slopes downwards (i.e. a reduction in price leads erences, and alternatives (see Table 4D.4). to more of the good being supplied). See Figure 4D.2. Table 4D.4 Four factors that determine demand according to economic theory Factor Description 1. Price of health/healthcare When user fees are introduced to healthcare systems (e.g. a charge to see a doctor or a prescription charge), then demand falls. This is known as price elasticity of demand. In England, certain people, such as children and pregnant women, are exempt from prescription charges in order to ensure that their demand for health is not affected by the price of healthcare. 2. Individuals’ income Studies have shown that the introduction of user fees reduces demand disproportionately in people on lower incomes (i.e. their demand is more income elastic compared to people with higher incomes). 3. Tastes and preferences Different people place different values on different lifestyle factors. People also place different values on the benefits of healthcare: some people are more likely to seek healthcare for particular symptoms than others. For example, a person may choose to trade off the unhealthy effects of a takeaway meal against the convenience of not having to cook. 4. Price and availability of Substitutes for healthcare may include other types of healthcare (e.g. complements and substitutes complementary medicine). Some people who use these services may choose not to use conventional healthcare. Other people (e.g. people who place a particularly high priority on health) may use both types of healthcare. Table 4D.5 Substitutes and complements Definition Example Substitutes Products where an increase in the price of Two different brands of the same vaccine one of good causes an increase in demand for the other good Complements Products where an increase in the price of Needles and syringes one good causes a decrease in demand for the other good MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS HEALTH ECONOMICS 493 All things being equal,* a change in price leads to a D movement along the curve, whereas a change in certain other factors leads to a shift of the curve (i.e. the curve itself moves). See Table 4D.6. Price elasticity of demand The price elasticity of demand is a measure of how Price sensitive the demand for a particular good is to changes in price. It is calculated using the follow- ing formula: Price elasticity of demand ( PED ) D Percentage change in quantity demanded = Percentage change in price Quantity By convention, PED is then transformed into the absolute value (i.e. the + or − sign is removed) prior Figure 4D.2 Demand curve. to interpretation. Note that the absolute value is written using two vertical lines (e.g. |−0.5| = 0.5). Table 4D.7 shows the meaning of different absolute values of the price elasticity of demand. Table 4D.6 Phenomena affecting the demand curve Phenomenon Resulting effect Change seen on the demand curve Fall in price More product is demanded. Movement rightwards along the demand curve Rise in price Less product is demanded. Movement leftwards along the demand curve Falls in income Purchasers not willing to pay as Leftward shift of the demand curve much. Increased population Purchasers willing to pay more. Rightward shift of the demand curve Increased income Changes in taste (e.g. as a result of advertising) Table 4D.7 Price elasticity of demand Absolute value of PED Definition Characteristic |PED| > 1 Price elastic Large response in demand to changes in price. |PED| = 1 Unit elasticity Response in demand is proportionate to changes in price. |PED| < 1 Price inelastic Small response in demand to changes in price. |PED| = 0 Perfectly inelastic No response in demand to changes price. * Note that economists often use the Latin term ceteris paribus for ‘all things being equal’ or ‘all other things being held constant’. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 494 HEALTH ECONOMICS Table 4D.8 Price elasticity of income Value of IED Definition Characteristic IED > 1 Luxury goods Disproportionately large amounts of the good are demanded as incomes rise. IED > 0 Normal goods The amount of the goods demanded changes in line with income (as would be expected from demand curve). IED < 0 Inferior goods Larger amounts of the good are demanded as incomes fall. Income elasticity of demand S The income elasticity of demand is a measure of how sensitive the demand for a particular good is to changes in income. It is calculated using the fol- lowing formula: Price Income elasticity of demand (IED) Percentage change in quantity demanded Percentage change in income Table 4D.8 shows the meaning of different absolute S values of the price elasticity of income. Supply Quantity Supply is the amount of a good or service that pro- Figure 4D.3 Supply curve. ducers are willing and able to sell at a given price. It is determined by: product and therefore the supply curve (S) slopes The price of the good upwards. See Figure 4D.3. The cost of producing the good (e.g. raw mate- A change in price, ceteris paribus, results in move- rials, labour) ment along the demand curve. A change in any Prices of related goods other factor, ceteris paribus, results in a shift of the demand curve (e.g. an increase in labour supply The number of other suppliers leads to a rightwards shift) (Table 4D.9). The supply of healthcare is the care that is made available; it is the capacity of services to meet need. Markets Healthcare supply may be quantified in terms of: A market is a location (physical or virtual) where Staffing (e.g. whole-time-equivalent consul- consumers and suppliers trade goods or services. tants, nurses) Beds Market equilibrium Equipment The price of a good reaches equilibrium at the intersection of the supply curve and the demand Budget curve. If the price is set higher than this point, then producers will want to produce more of the good. Supply curve However, when the price is set higher, there will If a product sells at a low price, then producers will be fewer consumers willing to pay for the good be disinclined to make large amounts of it. If the thereby returning the price back to the equilibrium price rises, then producers will make more of the point. See Figure 4D.4. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS HEALTH ECONOMICS 495 Table 4D.9 Phenomena affecting the supply curve Phenomenon Resulting effect Change seen on the supply curve Rise in price More product is supplied. Movement rightwards along the supply curve Fall in price Less product is supplied. Movement leftwards along the supply curve More land Producers find it easier to produce Rightward shift of the supply curve More labour the product. New technology available Price of inputs falls Less land Producers find it more difficult to Leftward shift of the supply curve Less labour produce the product. Price of inputs rises Another fundamental principle of economics is Demand Supply that demand will equal supply in a perfect curve market. While neither health nor healthcare is a curve perfect market, certain aspects of the concepts of supply and demand do remain applicable. In the real world, there are no perfectly competi- tive markets; however, there are several approxi- mations, including the market for horse betting. Price A perfect market would have a range of character- Equilibrium istics, including atomicity, homogeneity, and free price entry (see Box 4D.2). In a perfect market, the producers are price-takers Equilibrium quantity (i.e. the market sets the price). Under such circum- stances, producers produce goods at the lowest possible cost in the long run, and they earn only normal profits. If producers do not operate in a price-taking way and, instead, if they have the Quantity ability to influence the price of a good or the total quantity of the good that is produced, then the Figure 4D.4 Supply and demand curves. market is said to have failed. Note: Perfectly competitive markets A normal profit is the same profit that could be It is a principle of economics that in a perfect mar- achieved in the best alternative business. This ket, the supply and demand of a good are deter- type of profit contrasts with an economic profit, mined independently (i.e. producers determine which is revenue additional to the normal profit. the supply of a good and purchasers determine The long run is defined as the timeframe in its demand). The price of a good rises or falls until which firms can enter or exit the market and in the amount supplied equals the amount demanded which they can change their capital (e.g. build (i.e. equilibrium is reached). an extra operating theatre). MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 496 HEALTH ECONOMICS Box 4D.2 Characteristics of a free market Feature Description Atomicity Many buyers and many sellers. Homogeneity Identical products. Free entry Sellers are free to join and leave the market. Equal access Production technology is available equally to all sellers. Perfect All buyers and all sellers know the products and prices of all sellers. information No externalities An externality is a benefit or disbenefit to someone other than the purchaser (e.g. an externality of an immunisation programme is herd immunity). Causes of market failure Supplier-induced demand in healthcare Supplier-induced demand occurs when agents act A market may fail if any of the conditions listed in in their own interests, recommending more health- Box 4D.2 are not met. The principal causes of mar- care than is necessary (i.e. more healthcare than a ket failure are listed in Box 4D.3 and include the perfect agent would recommend). For example, a production of externalities, public goods, and dentist might recommend a dental filling that was merit goods. not strictly necessary in order to earn the fee for performing the procedure. This phenomenon can be difficult to identify because Agency only price equilibrium points can be observed. For As will be seen in the section on markets in the example, if the costs of dentistry increased and the succeeding text, a key characteristic of a perfect demand for dental services decreased, then it is market is that each consumer has perfect knowl- difficult to say whether the demand decreased to edge about the goods on offer. One of the many the extent that would be expected in the absence of reasons why healthcare is an imperfect market supplier-induced demand. However, if the cost of is that consumers lack perfect knowledge about a dental consultation increased when more practi- the complexities of healthcare. Instead, they rely tioners entered the market, then the market would on agents such as doctors and dentists to inform be demonstrably abnormal, and supplier-induced them what services they need. For example, demand would have been detected. patients with angina only receive angioplasty if their cardiologist thinks that they will benefit Supplier-reduced demand from the procedure. In contexts where the supply of healthcare is par- Perfect agents (like perfect markets) do not exist, ticularly scarce, supplier-reduced demand may be because a perfect agent would have to strike a per- seen. Here, an agent may not recommend a par- fect balance between all of the following conflict- ticular healthcare intervention, whereas a perfect ing priorities: agent would have done so in the same circum- stances. To an observer, it would appear that it was Health status of an individual patient less demand for a service than was in fact the case. Preferences of an individual patient Rather than seeking to demonstrate and pun- Utility to society ish supplier-reduced demand, policymakers can Moreover, agents may sometimes be motivated by design contracts to eradicate the phenomenon other factors, such as their own self-interest. (e.g. by linking payment to quality indicators). MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS HEALTH ECONOMICS 497 Box 4D.3 Causes of market failure Cause of market failure Description Externality This is a side effect of the product that is not traded on the market (e.g. herd immunity as a side effect of immunisation is an externality). Externalities may be beneficial (termed positive externalities) or harmful (negative externalities). Public goods These goods are extreme examples of an externality, such as a health promotion poster campaign. Public goods are characterised by Non-rivalness (when one person reads a poster, other people do not suffer) Non-excludability (it is impossible to stop a person from reading the poster) Market A properly functioning market relies on many buyers and many sellers. Therefore, a control market may fail if there is a Monopoly (single producer) Oligopoly (few producers) Monopsony (single purchaser) Oligopsony (few purchasers) Imperfect Agency: patients do not normally have perfect knowledge of healthcare; therefore, information they rely on doctors and other clinicians as their agents (see later text). Uncertainty: patients are unable to predict their demand (e.g. when they will need trauma care). Moral hazard (in systems such as the NHS, there is no price to consumer at the time of use). Adverse selection (in systems such as the commercial health insurance market in the United States, people at low risk of illness tend to opt out of paying for health insurance). Merit goods Belief that certain goods, such as health services, are special in some way. Margins Where additional resources should be targeted Choices made by consumers often result in small Where reductions should be made if expendi- increases or decreases in the demand for one ture has to be cut product relative to another. These fluctuations are How resources can be reallocated to achieve an known as marginal changes, where the margin is overall gain in benefit with no overall change defined as the incremental variation in inputs in expenditure (see Box 4D.5) that is required to have a corresponding varia- tion on outputs. See Box 4D.4. Economies and The process of marginal analysis involves exam- ining the effect of small changes on the existing diseconomies of scale pattern of expenditure. Such analyses can help The average cost curve for the production of a good identify the following: tends to fall as more of the good is produced, but MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 498 HEALTH ECONOMICS Box 4D.4 Margins Concept Definition Marginal cost Cost of producing one extra unit of service. This cost will reflect any stepped costs that are encountered (such as having to open an additional operating theatre because the capacity of the existing theatres has been exceeded). Marginal benefit Benefit derived from one extra produced unit. Box 4D.5 Example: Targeting a screening programme A small-scale screening programme targeted at the high-risk groups may show a low cost per case detected. However, expansion of the programme will entail screening progressively lower risk groups or screening more frequently. The number of screens required to detect each additional positive case will rise, increasing the cost per case detected. Source: Reproduced from Cohen, D., BMJ, 309, 781, 1994. then reaches a nadir beyond which the cost tends to feature. These diseconomies may be caused by to rise. In other words, the curve is U-shaped (see the following: Figure 4D.5; Cost curve for the production of a Difficulties in managing an organisation that good.). This phenomenon occurs because as more is so large that it is unwieldy of a good is produced, the average cost falls due to Diseconomies of scope, where it becomes more efficient use of the inputs; however, a point increasingly costly to reach remote areas of the is reached where diseconomies of scale begin country Economies of scale Average cost Diseconomies of scale Amount produced Figure 4D.5 Cost curve for the production of a good. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS HEALTH ECONOMICS 499 Box 4D.6 Types of efficiency Type of efficiency Definition Technical efficiency Maximum output for given inputs (or minimal inputs needed for a given output). Economic efficiency Maximum output for a given expenditure (or minimal costs needed for a given output). Allocative efficiency Set the level of production such that marginal benefit is greater than the marginal cost (i.e. produce goods that consumers value more than their cost to produce). Efficiency Allocative efficiency See Section 4C.3 for a comparison of equity, equal- Allocative efficiency is the achievement of the best ity, and efficiency. possible combination of healthcare programmes Efficiency is a measure how much of a good is to maximise the health of society. The concept of being achieved from the available resources. It can allocative efficiency takes account not only the pro- be considered in three ways: technical efficiency, ductive efficiency with which healthcare resources economic efficiency, and allocative efficiency. are used to produce health outcomes (i.e. techni- These concepts are described in the succeeding cal and economic efficiency) but also the efficiency text and are defined in Box 4D.6. with which these outcomes are distributed among the community. Allocative efficiency is achieved when resources are allocated so as to maximise Technical efficiency the welfare of the community. Given that there will always be scarcity, a decision-making system Technical efficiency addresses the issue of using is required that determines how much is provided given resources to maximum advantage. An of different kinds of healthcare. There are three intervention is technically efficient if the same (or decision-making options: the free market, the com- greater) outcome could not be produced with less mand system, and the mixed system (Box 4D.7). of one type of input. For example, consider the treatment of osteoporosis using alendronate: if a 10 mg daily dose is as effective as a 20 mg dose, Equity then the lower dose is more technically efficient. Section 4C.3 compares equity and efficiency. In economics, equity is the concept of fair- Economic efficiency ness. Equity may be vertical or horizontal Economic efficiency refers to the maximisation of (see Chapter 1C.10). An example of where equi- outcomes for a given cost, or the minimisation of table principles align with efficiency is provided costs for a given outcome. Consider, for example, a in Box 4D.8. policy of changing from maternal age screening to biochemical screening for Down’s syndrome. If the sum of the costs of the new biochemical screening Discounting programme is less than (or the same as) the cost Discounting is a method used in economics to of the maternal age programme, and outcomes are deal with the phenomenon of positive time equal (or better), then the biochemical programme preference, which is the human nature of prefer- is economically efficient in relation to the maternal ring benefits to be realised now and for costs to age programme. be borne at a later date. Positive time preference MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 500 HEALTH ECONOMICS Box 4D.7 Decision making options Decision-making option Description Free market Healthcare resources are allocated according to consumers’ purchasing behaviour. Command system Planning is used to allocate healthcare according to some pre-determined criterion, such as ‘need.’ Mixed system Combines elements of the free market with elements of the command model. Box 4D.8 Example: Equity versus efficiency in cervical screening The NHS policy on cervical cancer screening has been primarily based on maximising coverage through the use of financial incentives on GPs. However, high-risk women have tended to have lower participa- tion rates, particularly in socio-economically disadvantaged groups. Researchers have calculated that the screening programme could have achieved the same cost-effectiveness in terms of cancers avoided with less extensive but more equitable coverage. Source: Reproduced from Sassi, F. et al., BMJ, 323, 762, 2001. occurs because the future is uncertain; therefore, where it is logical to want benefits earlier and costs later. However, many public health interventions, such 1 Discount factor = as stop-smoking campaigns, are costly today n(1 + r ) but will not realise their benefits of a reduction in lung cancer deaths until many years into the and r = discount rate; n = years. future. Positive time preference can be adjusted for in calculations of costs and benefits using a Because of the large impact of discounting on pub- discounting rate whose magnitude reflects the lic health interventions, sensitivity analyses should strength of the time preference. Discount rates always include a range of discount rates for both vary widely but are typically between 0% and 6%. costs and benefits (see Section 4D.5). Note that the discount rate for benefits is particu- larly controversial and that the discount rate used Special features of healthcare in a calculation need not be the same for costs and Economics is a core discipline within public benefits. health. However, economists regard healthcare Using the discount rate, the present cost is calcu- as a special case for several reasons, including lated by adjusting the cost in a future year by the imperfect markets and agency. Other rea- discount factor. sons, such as immediacy, uncertainty, and necessity, will be explored later in this chapter. Present cost = (Cost in year n) × (Discount factor ) See Box 4D.9. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS ASSESSING PERFORMANCE 501 Box 4D.9 Distinguishing features of healthcare Distinguishing feature of healthcare Description Supply and demand Demand and supply are not truly independent in healthcare. Imperfect markets All healthcare systems (but especially those that are publicly funded) are imperfect markets. Immediacy Life and death decisions often need to be made with very short timescales. Agency The nature of healthcare that people need, especially when they are critically ill, is largely specified by healthcare providers. Uncertainty Illness is often unpredictable. Necessity Healthcare is an unavoidable commodity. 4D.2 Assessing performance the benefits it generates per unit of expenditure. See also Chapter 1C.9. This process is known as economic analysis The performance of an allocation system may (see Section 4D.5). be assessed in terms of its efficiency (includ- The WHO advises that when assessing the perfor- ing its Pareto efficiency) and its equity (see mance of a healthcare system, a range of dimen- Section 4C.3). In contrast, the performance of a sions should be assessed, including efficiency, healthcare system may be assessed in terms of resource use, and feedback (see Box 4D.10). Box 4D.10 Dimensions for assessing a healthcare system (WHO) Aspect of a healthcare system Description Social goals Measuring the contribution of the health system to socially desirable goals Resource use Measuring the resources used to achieve health outcomes Efficiency Estimating the efficiency with which the resources are used to achieve health outcomes Review Evaluating how the system influences health outcomes and efficiency Feedback Designing and implementing policies to improve outcomes and efficiency, and monitoring their effect MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 502 HEALTH ECONOMICS 4D.3 Financial resource allocation Financial resource allocation involves transfer- Health made allocations to PCTs based primarily ring funds from purchasers to providers in order to on a national weighted capitation formula together meet healthcare objectives. The allocation process with a number of additional factors (see Figure can be used to promote: 4D.6 and Table 4D.10). Equity In 2013, the commissioning system changed. Instead of PCTs commissioning services, ser- Changes in activity vices began being commissioned by CCGs, the Efficiency NHS Commissioning Board, Public Health England, and local authorities. Accordingly, the Expenditure by a health service may broadly be resource allocation has changed significantly divided into recurrent and capital spending (see Figure 4D.7). (see Box 4D.11). SCOT + NT + WA The UK government NHS funding allocates central funding to Northern Ireland, Scotland, and Wales for services that are the ENG In England, the vast majority of funding for responsibility of their devolved legislatures the NHS comes from general taxation and national including healthcare. Such funds are allocated insurance contributions, with the remainder com- according to the Barnett formula and represent ing from patient charges (e.g. prescription charges about 80% of public spending in these coun- and dental charges). Recurrent revenue allocations tries. The Barnett formula has been in use since to PCTs cover hospital and community health ser- the late 1970s although it in fact has no statutory vices, prescribing, primary medical services, and basis. The parliament or assembly in each country HIV/AIDS. See Figure 4D.6. decides how to spend its block of funds, including The method for allocating NHS funding in England what proportion to spend on healthcare and other changed in 2013. Before then, the Department of services. Box 4D.11 Types of expenditure Type of expenditure Definition Examples Capital Expenditure results in acquiring or enhancing an Buildings, equipment asset (i.e. property that has value and could be sold to meet commitments or debts) Recurrent Expenditure that does not result in acquiring or Staff, drugs, consumables enhancing an asset Providers Department Weighted Primary Contractor Deliver (GPs, Population of Health capitation care trusts agreements service hospitals) Figure 4D.6 The allocation of funds prior to 2013. (From Department of Health, NHS Allocations, Department of Health, London, UK, 2006, Available online at: www.dh.gov.uk.) MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS FINANCIAL RESOURCE ALLOCATION 503 Table 4D.10 Funding of PCTs prior to 2013 Allocation factor Description Weighted capitation Formula for allocating resources to PCTs based on: Size and age distribution of the population Additional need Unavoidable geographical variations in the cost of providing services (the so-called market forces factor) Recurrent baseline The previous year’s actual allocation, plus any adjustments made in-year. Distance from target The difference between the weighted capitation and the recurrent baseline. Pace of change policy This determined the level of extra resources allocated to PCTs that were below their weighted capitation target. The pace of change policy was decided by ministers for each allocation funding round. Patients and public (general taxation) New organisation Parliament Funding Service provision Department of Health Holds contracts directly Public Health England NHS England Direct commissioning of specialised services, e.g. Public health Clinical specialised mental departments based in commissioning health services local authorities groups Community GPs Secondary care health services Patients and public receive services Figure 4D.7 ENG Funding of healthcare since April 2013. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 504 HEALTH ECONOMICS NRAC* Health Boards for Deliver Scottish Government Services according Population formula services to National Policy and Local Priorities— includes all services, e.g. hospital, community, primary care, etc. Figure 4D.8 The allocation of funds within Scotland. *NRAC, National Resource Allocation Committee. SCOT In contrast to England, there is no pur- funds away from relatively overfunded areas chaser/provider system in Scotland. The Scottish (such as North Wales) to relatively underfunded Government allocates funds to health boards, areas (such as Southeast Wales). This approach which provide healthcare services within their was adopted for political reasons and has slowed area. Where necessary, funding flows between dif- the pace of change. LHBs are, in turn, expected ferent health boards in order to pay for specialist to allocate their resources to reflect local needs tertiary care. The Scottish Government allocates rather than based on demand. funds within Scotland on the basis of the National NI In Northern Ireland, the Health and Social Resource Allocation Committee (NRAC) formula Care Board allocates funds for health and per- (see Figure 4D.8). sonal social services between five commissioning WA The Welsh Assembly decided to move groups, covering nine programmes of care. These toward allocating resources to LHBs accord- allocations are based on the weighted capitation ing to a new needs-based system informed by formulae described in Box 4D.12. the Welsh Index of Multiple Deprivation (see Chapter 1C.8). However, the transition to this Rationing new system involved allocating additional funds to underfunded areas rather than by moving See Section 4C.2. Box 4D.12 Funding allocation methods Weighted PCTs receive their share of resources calculated according to: capitation Size and age distribution of the population Additional need Unavoidable geographical variations in the cost of providing services (called the market forces factor) Recurrent This is the previous year’s actual allocation, plus any adjustments made in-year baseline Distance from This is the difference between the weighted capitation and the recurrent baseline target Pace of change This determines the level of extra resources that are allocated to PCTs that are policy below their weighted capitation target. The pace of change policy is decided by ministers for each allocation funding round MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS HEALTHCARE SYSTEMS AND INCENTIVES 505 4D.4 Healthcare systems and incentives Systems of health and social care and the role of incentives to achieve desired endpoints. Various methods are used around the globe to assistance from the state either through welfare fund health and social care ranging from private benefits or through social services funding. Some health insurance to public funding. There are also people who require social care are given direct numerous ways in which these health systems pay payments that provide them with the freedom to providers of health services. Each of these systems budget and purchase their own care rather than has different methods for incentivising providers. having it arranged by the local authority. Health system funding Integrated care The principal methods of healthcare funding are In response to problems of fragmentation in care, private insurance, social insurance, and public efforts have been made in many areas to improve funding (see Table 4D.11). the integration of care, including the so-called hor- izontal integration between medical treatment Payment of providers and social care. Such integration requires health and social care organisations to work together to See also Chapter 5F.2. deliver flexible services that are tailored to allow The main methods of paying healthcare providers people to live independent lives. are by salary, fee-for service, or capitation (see Table 4D.12). See Chapter 5B for more details of inte- grated care. Financial incentives Financial incentives may be used to encourage or Monitoring performance discourage certain behaviours by providers (e.g. the provision of particular services) and patients See Chapter 5E for systems of monitoring per- (e.g. the uptake of particular services). formance of health and social care providers. UK As part of the UK government’s public ENG The Care Quality Commission provides inde- service modernisation agenda, explicit finan- pendent assessments of the quality and performance cial incentives were introduced with the aim of of health and social care commissioners and provid- improving the efficiency and quality of the NHS in ers on behalf of the government and the public. England (see Table 4D.13). WA The Care and Social Services Inspectorate for Wales is the body that regulates, inspects, and enforces health and social care regulations. Social care Although technically part of the Welsh Government, Social care covers a wide range of services that it operates as independent body. The inspectorate support people with ADL and particularly focuses regulates care homes and children’s homes, as well on the groups shown in Table 4D.14. as domiciliary and day care services, nursing agen- Around 70% of the social care budget for England cies, fostering and adoption agencies, boarding, and is spent on adult community care services, espe- special schools. The regulations and standards for cially for older people, people with physical or social care are set by the Welsh Government. learning disabilities, and people with mental ill- The performance of healthcare providers in ness. Many of these people pay for their own Wales, both NHS and private, is monitored by the social care, with the remainder receiving financial Healthcare Inspectorate Wales. This is another arm MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 506 HEALTH ECONOMICS Table 4D.11 Healthcare funding systems Method Description Advantages Disadvantages Private health Individuals purchase May incentivise Adverse selection: people insurance insurance by paying monthly insurers to who know they are at low premiums. Private insurance compete on the risk of ill health will not may be provided by or basis of cost, want pay premiums that through a person’s employer. quality, and are priced for people at customer services. higher risk. As a result, May incentivise fewer low-risk people enter providers to the risk pool, so a risk of compete on the the risk pool increases and basis of quality premiums rise. Solutions and cost so that include community rating insurers choose to (i.e. setting the same fund their services. premiums for all persons living in a given territory) or compulsory insurance (where low-risk people subsidise higher-risk people). Providers may compete based on their perceived quality rather than actual quality. Generally leads to an inefficient system. Social insurance A social insurance fund is Generally lower Only provides insurance for created from the cost than private people who are employed contributions made by insurance. and another government employees, employers and The government is scheme is required for government. The fund is a strong partner people who are not used to pay for the and can influence covered. healthcare of employees costs. and their dependents. Public funding Funded mainly through Normally lower May result in less taxation. May be cost. competitive pressure if supplemented by some user Government can services are publicly charges (e.g. prescription influence costs. provided. charges). Providers may be public (e.g. NHS Trusts) or private (e.g. private hospitals providing NHS- funded care). MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS HEALTHCARE SYSTEMS AND INCENTIVES 507 Table 4D.12 Payment of providers and associated incentives Payment method Effect of incentive Salary Restricts the number of patients seen and the services provided Fee-for-service Increases the number of patients seen and the services provided Increases the use of more expensive services Capitation/block contract Increases number of patients on a patient list, especially healthy patients Reduces the number of patient contacts and the services provided Table 4D.13 Incentives to improve the quality and efficiency of healthcare Financial incentive system Description Quality and outcomes In England, general practices been offered incentives to improve the quality framework of their provision. The quality and outcomes framework (QOF) is a voluntary system of financial incentives aimed at improving quality within the General Medical Services (GMS) contract for GPs. Payment by results Providers are paid for providing intervention based on the national average cost of delivering that Healthcare Resource Group. Providers are therefore incentivised to increase provision and reduce costs below this fixed average payment. Note that the term Payment by Results is somewhat of a misnomer: a better term might be Payment by Activity. Delayed discharge The publication Delivering the NHS Plan requires local authorities to use some of their resources to reduce the number of people who remain in hospital after being deemed medically fit to be discharged. A failure on the part of the local authority to make appropriate alternative provision available to patients may result in hospitals charging social care departments for the cost keeping people in hospital unnecessarily. Readmissions NHS trusts are held accountable for the cost of unplanned readmissions occurring within 30 days of discharge. This incentive is aimed at ensuring that patients are not transferred prematurely and improving the quality of post-discharge care. Vaccinations A fee-for-service incentive is used to encourage providers to deliver certain items of service to patients. An example is the fee received by GP practices for administering vaccinations. Case mix Case-mix payments adjust payment according illness severity. For example, the UK health economy uses different HRGs as the units of charging for services (e.g. inguinal hernia repair with or without complication). HRGs are based on the average cost of a patient treated with that diagnosis; therefore, providers have an incentive to deliver care costing no more than the fixed payment of that HRG. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 508 HEALTH ECONOMICS Table 4D.14 Principal groups of people may require social care Group Examples of services provided Older people Residential care homes, nursing homes, home carers, meals-on-wheels, day centres, lunch clubs Disabilities Adaptations, carers, and other services for people with physical disabilities or learning disabilities Mental health Ranging from support for people with mild mental illness, up to exercising legal powers for compulsory admission to mental health hospitals Ex-offenders People leaving prison may need help with resettlement, especially if they have drug or alcohol problems Families Particularly where children have special needs such as a disability Child protection Including monitoring of children at risk of non-accidental injury Children in care Fostering, accommodation in children’s homes, and adoption of Welsh Government that operates as an inde- monitors private healthcare facilities and armed pendent body. The inspectorate monitors organi- forces healthcare in Wales. Other issues coming sations against published Standards for Health under the inspectorate’s remit include controlled Services in Wales. In addition to reviewing LHBs drugs, deprivation of liberty, and monitoring of the and NHS Trusts in Wales, the inspectorate also Mental Health Act. 4D.5 Economic appraisal Techniques of economic appraisal include CEA Option appraisal and modelling, CUA, option appraisal, and An option appraisal is the process of determining cost–benefit analysis (CBA), the measurement and comparing different options for meeting an of health benefits in terms of QALYs and related objective. An option appraisal generally involves measures. comparing two or more new options rather than comparing a new option against a current Economic evaluation service. Option appraisal normally includes an In healthcare, markets are highly imperfect; economic appraisal as well as an assessment of therefore, it is inefficient to use market forces factors such as affordability, achievability, and as the only incentives. Before other incentives impact. can be deployed, encourage the use of particu- Types of economic evaluation: lar interventions; we first need to know which interventions are most effective so we know The most commonly used types of economic eval- which interventions to incentivise. The process uation are: of economic evaluation (also called economic CBA appraisal) involves comparing the costs and con- CEA sequences of two or more alternative treatments. For example, an economic evaluation may be CUA used to compare the costs and benefits associated See Table 4D.15. Note that all of these methods with switching from one vaccination programme measure costs in terms of money but differ in the to another. way that they value outcomes. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS ECONOMIC APPRAISAL 509 Table 4D.15 Types of economic evaluation CBA CEA CUA Description Involves calculating Compares the cost of Measures outcomes in costs and benefits of an different interventions that aim terms of QALYs or DALYs intervention in monetary to achieve the same type of to enable comparisons terms and calculating outcome to be made across the difference between different disease areas the two Valuation of costs Monetary Monetary Monetary Valuation of Monetary Clinical (e.g. cases of QALYs or DALYs outcomes malaria averted, mmHg of (consequences) blood pressure reduced) Result Net benefit ICER ICER (i.e. outcomes minus costs) Advantages Can compare the value Useful for comparing different Can compare of different interventions interventions for the same interventions for different across different sectors disease or issue (i.e. for medical conditions; of the economy (i.e. not assessing economic and therefore allows some simply the health technical efficiency) assessment of allocative sector); therefore, efficiency examines allocative efficiency also Disadvantages Requires a monetary Cannot be used to compare Cannot be used to value to be placed on across different diseases areas compare with life and/or health, or conditions. For example, interventions from other, which is difficult interventions aimed at non-health, sectors of the increasing life years gained economy cannot be directly compared with interventions aimed at improving the quality of life Note: The terms CEA and CUA are often used interchangeably. Other types of economic evaluation are CMA Cost–consequence analysis (CCA) and CCA. In this type of analysis, the different con- Cost-minimisation analysis (CMA) sequences of each option are simply listed, rather than attempting to express the con- A type of CEA where the effect of each sequences using the same units. intervention on the consequences is the same (i.e. this analysis simply assesses CCA is therefore a disaggregated approach how the costs of two or more interventions because the costs and consequences are differ from each other). not combined into a single indicator such as the net benefit or the incremental cost- For example, treatment A and treatment B effectiveness ratio (ICER). both prevent 100 strokes per year. Using a CMA, the cheaper option would be In England and Wales, NICE allows CCA to be chosen. used for assessing public health interventions. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 510 HEALTH ECONOMICS Cost-effectiveness cost per QALY. The ICER indicates the cost-effec- tiveness of one intervention or treatment relative Figure 4D.9 illustrates how the results of a CEA to another; however, health must still be valued or a CUA may be plotted in one of four quadrants and so decisions will still need to be made about based on a comparison of a new intervention ver- the affordability of an intervention. For example, a sus an old intervention. threshold may be set, below which any new inter- In the top left and the bottom right quadrants of vention will generally be accepted. The NICE does the diagram, one of the interventions dominates not publish a fixed threshold; however, in general, and therefore the decision is obvious. However, treatments with an ICER below £20,000 to 30,000/ in the bottom-left and the top-right quadrants, QALY are likely to be accepted. This threshold can trade-offs are required. Often, when a new inter- be represented as a cost-effectiveness plane on vention is assessed, the results of an economic the cost-effectiveness diagram (see Figure 4D.10). evaluation place it in the top-right quadrant (i.e. it is more effective than the old treatment but also Note: NICE also considers other factors such as more expensive). In these circumstances, calculat- the opinions of professionals and patient groups. ing the ICER is helpful for assessing how the addi- tional cost compares with the additional benefit. Framing an economic evaluation Incremental cost-effectiveness When critically appraising an economic evalu- ratio ation, some of the key points to consider are the The ICER for a therapeutic intervention or treat- design, the target population, the perspective ment is the ratio of the change in costs to the incre- from which the evaluation was conducted, and the mental benefits. time horizon used (see Table 4D.16). Total cost of new intervention Costs − Total cost of old intervention ICER = The choice of which costs to include in an eco- Outcome of new intervention nomic evaluation primarily depends on − Outcome of old intervention The perspective (i.e. the viewpoint from which The outcome of a CUA is usually expressed in the costs and benefits are regarded) QALYs; therefore, the ICER is expressed as the The timeframe for the evaluation New intervention more costly New intervention Old treatment more effective but dominates more costly New intervention New intervention less effective more effective New intervention New treatment less costly but dominates less effective New intervention less costly Figure 4D.9 Possible outcomes of CEA/CUA. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS ECONOMIC APPRAISAL 511 New intervention more costly LY / QA 00 0,0 £3 New intervention New intervention less effective more effective Intervention likely to be accepted New intervention less costly Figure 4D.10 Cost-effectiveness plane. The costs of the alternative interventions are then 1. Measuring health calculated. Depending on the perspective adopted 2. Placing a value on different measures of health and the timeframe chosen, different costs may or health states (which may be monetary or or may not need to be included. Potential costs non-monetary) include Researchers may value a health state directly (e.g. by Costs to other government agencies (e.g. social asking somebody with HIV to value their current care department) health on a rating scale). Alternatively, the health state Costs from a loss of productivity could first be measured (e.g. using the EQ5D instru- Costs to the patient’s family ment) and then assigning a preassigned value obtained beforehand from surveys offered to wider samples. Out-of-pocket costs to the patient The type of health outcome measured depends on Future costs the type of economic evaluation being used: Costs may be classified as shown in Table 4D.17. CBA—monetary terms CEA—morbidity measure (e.g. peak expiratory Valuing resources flow) with no value assigned CUA—non-monetary terms (e.g. QALYs or The use of resources may be evaluated by using micro (bottom-up) or macro (top-down) DALYs) approaches. Values are typically derived either from an RCT (where the interventions represent Measuring health different arms of the trial) or using some form of There are various types of health measures that economic modelling (see succeeding text). The may be used for measuring health, including analysis should take account of opportunity Mortality (deaths averted or life years gained) costs, should take a long-run economic perspec- Morbidity (prevalence, incidence, or clinical mea- tive, and should be adjusted for discounting (see sures such as x-ray findings or blood test results) Table 4D.18). Disease-specific measures (profiles or indices, such as the results of a COPD questionnaire) Health outcomes Generic health measures (profiles or indi- There are two aspects to assessing health out- ces such as the Nottingham Health Profile, comes or benefits: WHOQOL, SF-36, EQ5D); see Box 4D.13 MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 512 HEALTH ECONOMICS Table 4D.16 Appraising an economic evaluation Aspect for consideration Details Objectives For example, adding to the evidence base or making a specific decision. Audience Who will be using the information? For example, the government, a managed care organisation, WHO, pharmaceutical companies, non-governmental organisations. Type of CBA, CEA, CUA, etc. evaluation Perspective Affects which costs and outcomes are included. Usually, one of the following perspective is adopted: Societal perspective (the broadest perspective, which considers all of the costs and benefits regardless of who pays for/receives them) Health service’s perspective Patient’s perspective Target Group of patients for whom the intervention is intended. population May also identify subgroups for separate analysis (i.e. subgroups for whom costs/benefits differ). Boundaries Many interventions have spill-over effects (i.e. other people are affected), which need to be considered. For example, a stop-smoking intervention offered to mothers may improved the health of children as well as the mother due to a reduction in passive smoking; HIV interventions may lead to reduced transmission as well as an improvement in the patient; dementia interventions may have a positive impact on carers. Boundaries on the types of health outcomes considered (e.g. physical, mental). Time horizon The time horizon should extend far enough into the future to capture all of the important outcomes and costs (e.g. lifetime horizon). The difficulty is that data tend to be only available for a limited period, beyond which the parameters will need to be modelled. The further into the future, the less accurate these models tend to be. The discount rate or rates applied, if any (see Section 4D.1). Defining the The definition should be clear—’who?’ ‘does what?’ ‘to whom?’ ‘where?’ and intervention ‘how often?’ Comparator(s) If resources were unlimited, the ideal scenario would be to compare all possible interventions; generally, however, this is not feasible. The most relevant comparison is usually the current practice, although this can sometimes be difficult to define. Note that the current practice may not be efficient; therefore, sometimes the best available alternative or a do-nothing option are used. Cost data (See main text) Outcome data (See main text) MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS ECONOMIC APPRAISAL 513 Table 4D.16 (Continued) Appraising an economic evaluation Aspect for consideration Details Design RCT (piggyback studies) where healthcare utilisation data are collected during an RCT and used to assess costs. However, this approach may only include the costs and benefits seen during the trial period. Moreover, the costs and benefits seen under trial conditions may not be generalisable. Modelling studies (where decision analytic models are populated with data from a wide variety of sources—see later text). Combination studies: Most economic evaluations use a combination of RCT and modelling Fox-Rushby and Cairns. Table 4D.17 Types of costs used in an economic evaluation Type of cost Description Direct Costs incurred exclusively for that output (e.g. disposable surgical equipment) Indirect Costs shared across several outputs (e.g. and autoclave that sterilises equipment for several operation) Overhead Costs shared across the entire organisation (e.g. communications department) Tangible Costs that can readily be measured in currency terms and with certainty Intangible Costs that are difficult to measure in currency terms (e.g. psychological costs associated with illness or treatment, such as pain and suffering) Fixed Costs that do not vary with the volume level of activity Variable Costs that vary in proportion to the quantity produced Table 4D.18 Types of cost used when valuing resources Type of cost Description Opportunity costs It is the opportunity cost that should always be considered when valuing resources (i.e. the forgone value of the next-best use of the resources). Long-run costs Costs should be assessed from the long-run perspective (i.e. where all inputs, including capital inputs such as buildings, can be altered freely). In the long run, the average cost is equal to the marginal cost. Discounted costs Costs should be adjusted for human time preference by means of discounting (see Section 4D.1). Marginal cost Cost of producing one extra unit of service, reflecting any stepped costs that are encountered. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 514 HEALTH ECONOMICS Box 4D.13 EuroQol eQ-5d The EuroQol eQ-5d is a standardised instrument for measuring the health outcomes used in an economic evaluation. It is based on five dimensions: 1. Mobility 2. Self-care 3. Usual activities 4. Pain/discomfort 5. Anxiety/discomfort Each dimension is scored out of 3 (there is also a version that scores out of 5) to give a final score (e.g. 2-1-1-1-2). Monetary valuation of health dence on the cost per QALY produced by the treatments that it appraises. Monetary valuation is used in CBA. It has a num- ber of advantages, including the following: QALY = Utility value in a health state Outcomes can be compared directly to costs × Years of life in that state to give a net benefit (easier than considering whether the cost per unit of outcome repre- The benefit of a health intervention is the gain in sents good value for money). QALYs that it produces. Normally, utility values Non-health outcomes can also be included range between 0 (= death) and 1 (= perfect health); (e.g. impact on family income). however, negative values (i.e. worse than death) Comparisons can be made with interventions may also potentially be used. used in other sectors of the economy (e.g. edu- For example, 2 years in perfect health followed by cation or transport). 3 years in a health state with utility value of 0.6 The principal approaches to valuing life in monetary would be 3.8 QALYs: terms are the human capital, revealed preference, (2 × 1) + (3 × 0.6) = 3.8 and stated preferences methods (see Table 4D.19). As we have seen, there are two principal approaches Non-monetary to calculating utility values: valuation of health 1. Providing scenarios of a disease state and valu- Because of the difficulties involved in placing a ing the disease state directly. monetary value on life and health, non-monetary 2. Using a health measure (e.g. EQ5D) to score a valuations are often preferred. Both QALYs and disease state. Each score will then be allocated DALYs are calculated using non-monetary meth- to a preassigned utility value that was deter- ods and may be used in CUA. mined using a general population sample. Note that different countries may have differ- ent value sets. Quality-adjusted life years The second of these methods is used more often Economists use utility as an expression of an than the first, because it is less time-consuming. individual’s preference for a particular health There are multiple ways of assigning utility values, status or health outcome. A commonly used including the use of rating scales, time trade-off, unit of utility is the QALY, which combines the standard gamble, and person trade-off (see Table quality and duration of life gained from an 4D.20). The value of a QALY therefore depends on the intervention as a single measure. In the United method used. Ideally, the method should be based on Kingdom, for example, the NICE collects evi- preferences and should have interval properties. MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS ECONOMIC APPRAISAL 515 Table 4D.19 Approaches to valuing life in monetary terms Approach Advantages Limitations Human The expected value of the Objective Identifying changes in capital individual’s productivity is productivity may not be easy. calculated (both market and The value of children, older household ‘non-market’ people, and unemployed productivity), and then adjusted people appears lower than for the individual’s life the value of working-age expectancy. May use wage as males. an indicator of productivity. Does not reflect how much society is willing to pay for treatment. Improvements in health are only valued for their improvement in productivity. Revealed Individuals’ preferences Based on actual Focused on immediate preference regarding the value of a health consumer choices accidental deaths as opposed (Hedonic risk or benefit gain are traded (indicates actual WTP to deaths due to chronic wage) against income (e.g. British for items such as exposures (e.g. asbestos) soldiers’ pay is greater than airbags, smoke Biased toward males of other comparable public sector alarms, etc.) working age. posts because soldiers face Provides insight into Ignores imperfect labour substantial risks during their an individual’s markets (i.e. no knowledge of service life). valuation of their risks, few job options). own life Limited generalisability: people who undertake risky jobs are unlikely to be representative of the general population. Stated Individuals are asked what they Measures the Stated preference may preferences would choose given different strength of not reflect reality. hypothetical situations. Different preference Requires large and costly methods may be used, Can be applied surveys. including: to any Issues with validity, Contingent valuation intervention reliability, and bias where an attempt is made (people may state to elicit a person’s different preferences from maximum WTP to avoid a those that they actually risk or to improve health hold). Discrete choice experiments where a person is asked to choose between different interventions based on cost MEDICAL SOCIOLOGY, SOCIAL POLICY, AND HEALTH ECONOMICS 516 HEALTH ECONOMICS Table 4D.20 Methods for calculating QALYs Method Description Problem Rating scales Subjects are asked to attribute values between 0 and 1 Doubtful interval properties to a series of health states. With visual ana