Applying Economic Tools to a Health Care Setting
Health care is a controversial topic in the United States today. Some of these discussions involve the impact of the cost to the consumer, will the benefits out-weigh the costs, are the dollars being spent the most efficient use and what are the alternatives to manage health care costs. To assist in understanding all of these subject matters without alluding to a fix to the issues in this country, below is an overview of three methods of evaluating or using economic tools to apply to the health care industry and the usefulness to the individual.
Cost Benefit Analysis
Cost benefit analysis, (CBA) is an appraisal technique that tries to ...view middle of the document...
In figure 1 above (Bala, Mauskopf, & Wood, 1999), the two curves indicate how well-being increases with income at two different states of health (HD and H*). Beginning with a person having a disease with an income of Y0 and a well-being level of U*. Following this is to assure the lower income (Y1) in full health (H*) which the outcome is the same well-being level (U*) as income Y0 in health state HD. The difference between Y0 and Y1 is that individual’s maximum willingness to pay for the treatment. So, as you can see, willingness to pay is a measure of how much the individual values a particular improvement in health. This means that individuals choosing treatments only when their willingness to pay for the health improvement is greater than or equal to the price of the treatment (Bala, Mauskopf, & Wood, 1999).
A study by (Bala, Mauskopf, & Wood, 1999) using a CBA to determine whether the maximized benefits of an intervention exceed its costs for a new treatment of shingles which shortens the pain and rash from one month to one week. The costs include the marginal cost of production of the new drug, other types of costs including any additional personnel, equipment and facility costs associated with storing and administering the new drug, and finally cost savings because of reduced use of other drugs and costs associated to the reduction of pain. Benefits are applied to all of society as a whole, patients of the disease and an insurance option value and an altruistic value, benefits to friends and family (Bala, Mauskopf, & Wood, 1999).
In summary, a CBA can be developed which includes only the patient benefits with the new intervention. But, it would probably devalue the total benefits of a new treatment. So, to estimate the net benefits to patients, an estimate of the willingness to pay for the new treatment and figure an average willingness to pay per patient and subtract the average cost per patient. (Bala, Mauskopf, & Wood, 1999) noted an alternative way to present net patient benefits is to calculate total patient benefits for a well defined population by multiplying the average per-patient willingness to pay by the number of people in the population expected to have the disease in the period of interest and subtracting total costs expected for that population.
Cost Effective Analysis
Another economic tool which can be used to evaluate the cost of an intervention to its effectiveness as measured in natural health outcome such as “cases prevented” or “years of life saved” is the cost effective analysis (CEA) (CDC). The results are represented in a ratio of incremental costs to incremental output. The costs are in dollars, although outputs are the chosen health status measure, but they must be measured in the same units throughout all projects under comparison (Folland & Allen, 2004).
A CEA value is limited when the programs have different outcomes since it uses a specific outcome measure that...