WEEK 5: Introduction to economic evaluation

Question 1

What is economic evaluation?

Answer 1

Economic evaluation involves the identification, measurement, valuation and comparison of the costs(inputs) and benefits(outcomes) of 2 or more alternatives

Question 2

Describe elements of economic evaluation.

Answer 2

1. Perspective: refers to the point of view under which an economic evaluation is being conducted.
2. Time frame: refers to the length of time for which the costs and consequences of a program are accrued
   One must allow for sufficient time to ensure that all relevant costs are captured, and consequences are realized as they can accrue differently over time.
3. Input costs: amount of money spent in the adoption of a program. They can be
   defined as

Question 3

State 4 types of input costs.

Answer 3

1. One-time direct costs- expenditures incurred in order to implement a program e.g. training, software licenses, hardware equipment
2. Ongoing direct costs- recurrent expenditures to operate the system after its implementation e.g. system updates, support staffing, commodities
3. Ongoing indirect costs- recurrent expenditures relating to the program that is allocated by the organization after implementation. e.g. security, cleaning services, changes in workload
4. Intangible costs – unquantified or difficult to measure e.g. donation, volunteerism

Question 4

State the 4 types of economic evaluation.

Answer 4

1. Cost minimization
2. Cost effective analysis
3. Cost benefit analysis
4. Cost utility analysis

Question 5

Describe Cost minimization.

Answer 5

-Used when product/outcome is the same, and what is compared is only the costs

-A strong assumption for this method is that all consequences of the alternative interventions are the same.

-Concerned with “which intervention has the lowest cost for equal result” e.g comparison between two antihypertensive medications manufactured by two different companies which one is less costly?

Question 6

Describe cost effective analysis.

Answer 6

This is the most common type of economic evaluation in healthcare:

Programs with the same health aims are compared and these health objectives are the primary outcomes of interest

• select the cost-effective intervention for a defined
  outcome.

Outcome measured: uni-directional natural units e.g lives saved, change in pain score,
body weight in kg etc.

Question 7

State is an aspect of Cost-effective analysis.

1. What does ICER stand for?
2. State the formula for ICER.

Answer 7

*Incremental Cost Effectiveness Ratio (ICER)

*ICER = Difference in costs/Difference in effects

*ICER = ∆C/∆E

ICER =
Cost2 -Cost1
Effect2 -Effect1

Question 8

State three approaches to determine if an ICER represents value for money in a given society:

Answer 8

– Thresholds: Highly cost-effective — ICER < GDP per capita or Willingness To Pay Threshold

– Benchmark interventions: Citation of the cost-effectiveness of a benchmark intervention that
has already been adopted

– League tables: Interventions ranked in league table according to ICERs

Question 9

Weight loss Interventions:

Calculate ICER
-diet program :2kg wt loss in 6 months, cost P300
-medication: 3kg wt loss in 6 months, cost P1500

Answer 9

=P1200 per additional kg lost
✅ Final Answer

The ICER of using medication instead of diet alone is P1200 per additional kilogram of weight loss.

📌 Interpretation (Application for Exams)

*This means medication costs P1200 for every extra kilogram of weight lost compared to diet.

*Policymakers decide whether the extra 1 kg lost is worth an extra P1200.

If the health system has a limited budget, diet may be more cost-effective.

Question 10

Describe COST UTILITY ANALYSIS

Answer 10

Cost Utility Analysis is an economic evaluation method that compares the costs of interventions relative to the utility (quality of health gained) — usually measured in QALYs (Quality Adjusted Life Years).

Question 11

State the formula for calculating QALY.

Answer 11

QALY=Years of Life × Utility

Question 12

What is ICUR and what does it stand for?

Answer 12

*ICUR stands for: Incremental Cost-Utility Ratio

*Definition: ICUR is an economic evaluation measure used in Cost-Utility Analysis (CUA).

It compares the extra cost of an intervention to the extra utility gained, usually measured in QALYs (Quality Adjusted Life Years).

Question 13

State the formula for ICUR.

Answer 13

ICUR= QALYs of Intervention B – QALYs of Intervention A /
Cost of Intervention B – Cost of Intervention A

Question 14

Standard of Care (Intervention A)
*Utility increases: 0.5 → 0.7
*Duration: 10 years
*Cost: P2500

New Intervention (Intervention B)
*Utility increases: 0.5 → 0.9
*Duration: 10 years
*Cost: P5000

1. Calculate QALYs for the interventions.
2. Calculate ICUR.

Answer 14

1. QALY=Utility × Years
   =0.7×10=7 QALYs
2. QALY for New Intervention (B):
   =0.9×10=9 QALYs
3. Calculate incremental cost
   Δ Cost 5000 − 2500 = P2500
4. CALCULATE THE ICUR
   Δ Incremental Cost / Δ Incremental QALY

P2500 / 2
= P1250 per QALY gained

📌 Interpretation (for exam application)
*The new intervention costs P1250 for each additional QALY, which is very low.

*If Botswana’s willingness-to-pay threshold is around P80,000 per QALY, the new intervention is highly cost-effective.

Question 15

Describe Cost Benefit Analysis.

Answer 15

Measures all outcomes in monetary terms:

As costs and benefits are both measured in the same units, they can be compared directly.

CBA formula.
Output of cost benefit analysis will show net benefit
-Sometimes represented as a ratio (benefit cost ratio (BCR))

Question 16

Describe the interpretation of BCR.

Answer 16

Decision rule:

If BCR > 1 → project is worthwhile

Choose the project with the higher BCR

Question 17

EXAMPLE
Financial analysis International Ltd is planning to undertake one project. It has two alternatives

*Alternative 1
Costs = $ 60 million Benefits = $ 100 million

*Alternative 2
Costs = $ 10 million Benefits = $ 21 million

Which Project should the company choose using the BCR decision rule?

Answer 17

Step 2: Calculate BCR for Each Project

*Benefits = $100 million
*Costs = $60 million
𝐵𝐶𝑅 = 100/ 60 =1.67

*Benefits = $21 million
*Costs = $10 million
𝐵𝐶𝑅 = 21/ 10 = 2.1

Step 3: Apply Decision Rule

Alternative 1 BCR = 1.67
Alternative 2 BCR = 2.1

Both are greater than 1, but Alternative 2 has the higher BCR.

✅ Final Answer
*The company should choose Alternative 2 because it has the higher Benefit–Cost Ratio (2.1), meaning it gives greater benefits per dollar spent.