Topic 4: Economic Evaluation exam questions
2021-2022 question:
(a) Briefly outline the rationale behind the use of economic evaluation to decide on the funding of
new treatments. In the context of Cost-Utility Analysis (CUA), explain how the ICER can be
calculated and how it is used in deciding whether a new treatment should be recommended for
funding in the NHS.
Economic evaluation is critical in deciding which new treatments should be funded, as healthcare
resources are scarce in public healthcare systems due to limited budgets. Since all new treatments
cannot be funded, policymakers must weigh the benefits and costs of alternative technologies to
ensure interventions are cost-effective. This optimal allocation of limited healthcare budgets
maximises the health gains of people, minimises costs of healthcare systems and improves the
overall health of economies. In the UK, the National Institute of Health and Care Excellence (NICE) is
responsible for evaluating the cost-effectiveness of treatments and deciding whether these will be
funded in the NHS. Adopting an NHS perspective, they aim to maximise health benefits of individuals
and reduce NHS costs. One limitation of analysing costs and benefits in this way is that they don’t
consider the impact of improved health on labour productivity or the welfare of immediate family.
Since their approach focuses mostly on the NHS, rather than the effects of individuals, NICE cannot
evaluate all benefits. They assume health is costless from an economic perspective, which can lead
to sub-optimal when deciding whether to fund the new drug.
One method of economic evaluation is Cost-Utility Analysis (CUA) which uses the Incremental Cost-
Effectiveness Ratio (ICER). This is when agencies want to compare a new treatment B with an
existing treatment A for the same condition, also known as the “best alternative” method. This
enables agencies such as NICE to consider the rate at which increasing expenses can obtain
additional benefits, (Weinstein, 2006). Evaluating incremental costs to incremental benefits
compared to the next most effective intervention, we obtain the ICER formula:
∆COST (Cost B−Cost A)
ICER=
∆ BENEFIT ( Benefit B−Benefit A)
Where the numerator represents the incremental cost and the denominator represents the
incremental benefit. Costs are in UK pound sterling and represent the direct and indirect costs of
new drugs on healthcare systems. Benefits are measured in a cost-effectiveness approach, by a
single common effect (life years) or a composite measure (QALY). The ICER therefore gives the cost
for each additional QALY gained when switching from the existing therapy to the new. When the
ICER calculated is lower, the treatment is more cost-effective because the cost of gaining one more
QALY is smaller.
To decide whether a new treatment is cost-effective and should be funded in the NHS, NICE uses an
ICER threshold of £20,000 per QALY gained, (BMJ, 2013). However, if the ratio exceeds this, the
therapy may not be funded and the pharmaceutical firm should negotiate a lower price, increase the
benefits of the drug or have a larger degree of innovation to distinguish this treatment from others.
Therefore, while the NICE threshold is not absolute and other factors are considered when funding
decisions are made, it is harder to approve drugs with higher ICERs. This is because they are more
expensive to fund in the NHS, meaning other interventions may receive less funding, resulting in
health losses for patients.
, However, a limitation of this economic evaluation method is that it is utilitarian. The objective of
NICE is to maximise the sum of QALY’s rather ensuring the equitable distribution of health gains.
Since individuals are not weighted according to needs or severity, there is an unequal distribution of
QALY’s, creating socio-economic inequalities. A more egalitarian approach is preferred so that
specific parts of the population are higher weighted, meaning the NHS objective of health being
equitable amongst the system is fulfilled. Additionally, these benefits and costs are only estimates
because to is difficult to measure these in monetary terms. This is especially because this is not
discounted, meaning this method does not consider future costs and benefits as no discount rate is
applied.
(b) Define the concept of Quality Adjusted Life Year (QALY). In the context of CUA, discuss whether
the methods used to measure preferences over health states are able to capture the multi-
dimensionality of health outcomes.
A Quality Adjusted Life Year (QALY) is a concept based on (Klarman et al., 1968). QALYs are a health
outcome that weighs a year of life by the quality of an individual’s health status, where 1 represents
1 year in perfect health and 0 represents death. A QALY is calculated by:
QALY =1 life year × health state utility assigned ¿ that year
Total QALYs in a healthcare system are:
T
f t qt
TOTAL QALYs=∑
t=1 (1+r )t
Where f t is the probability that the individual is still alive at age t (mortality). q t is the utility value
assigned to that year of the individual’s life and r is the discount rate as QALY’s aggregate future
benefits. This discount rate is 3.5% per year for costs and health effects, (NICE, 2020), indicating
individuals place a lower value on future benefits. An advantage is that they are a single measure of
cardinal utility, meaning they can be compared across different treatments on the same scale.
However, QALYs weigh a life against money because the decision to fund a new treatment depends
on the number of QALYs gained, making this unethical.
One method capturing the multi-dimensionality of health is the EQ-5D by (Dolan, 1997) used in CUA.
Using a representative survey of 3,000 UK individuals and the time trade off method (TTO), he
obtains 42 of health states and extrapolates the rest. The TTO method uses the choice dimension,
where individuals choose between remaining in ill health (H 1 ) for T years or being restored to full
¿
health ( H ) for a shorter life span, t. The EQ-5D describes health in 3 levels of severity – non(1),
some(2) and extreme problems(5) for 5 dimensions – mobility, self-care, usual activities,
pain/discomfort and anxiety/depression. This generates 243 (3¿¿ 5) ¿ health states, defined by a 5-
number code ranging from 11111 (no problems in any dimensions) to 33333 (extreme problems in
all health dimensions). This is used to calculate QALYs, which range from 0 (death) to 1 (full health).
(Dolan, 1997) find the health state 33332 (no mobility, unable to wash/dress self, no usual activities,
extreme pain/discomfort, moderately anxious/depressed) means that living 1 year in this health
state is equivalent to losing half a year in good health (QALY= –0.429). However, this method
excludes decisions under certainty by ignoring the dimension of medical treatments. Since
treatments accurately quantify benefits of prolonging life, disregarding this dimension inaccurately
represents health states and underestimates a healthcare intervention’s true effect. Additionally,
this study failed the RESET test (omitted variables/incorrect functional form) and suffered from
2021-2022 question:
(a) Briefly outline the rationale behind the use of economic evaluation to decide on the funding of
new treatments. In the context of Cost-Utility Analysis (CUA), explain how the ICER can be
calculated and how it is used in deciding whether a new treatment should be recommended for
funding in the NHS.
Economic evaluation is critical in deciding which new treatments should be funded, as healthcare
resources are scarce in public healthcare systems due to limited budgets. Since all new treatments
cannot be funded, policymakers must weigh the benefits and costs of alternative technologies to
ensure interventions are cost-effective. This optimal allocation of limited healthcare budgets
maximises the health gains of people, minimises costs of healthcare systems and improves the
overall health of economies. In the UK, the National Institute of Health and Care Excellence (NICE) is
responsible for evaluating the cost-effectiveness of treatments and deciding whether these will be
funded in the NHS. Adopting an NHS perspective, they aim to maximise health benefits of individuals
and reduce NHS costs. One limitation of analysing costs and benefits in this way is that they don’t
consider the impact of improved health on labour productivity or the welfare of immediate family.
Since their approach focuses mostly on the NHS, rather than the effects of individuals, NICE cannot
evaluate all benefits. They assume health is costless from an economic perspective, which can lead
to sub-optimal when deciding whether to fund the new drug.
One method of economic evaluation is Cost-Utility Analysis (CUA) which uses the Incremental Cost-
Effectiveness Ratio (ICER). This is when agencies want to compare a new treatment B with an
existing treatment A for the same condition, also known as the “best alternative” method. This
enables agencies such as NICE to consider the rate at which increasing expenses can obtain
additional benefits, (Weinstein, 2006). Evaluating incremental costs to incremental benefits
compared to the next most effective intervention, we obtain the ICER formula:
∆COST (Cost B−Cost A)
ICER=
∆ BENEFIT ( Benefit B−Benefit A)
Where the numerator represents the incremental cost and the denominator represents the
incremental benefit. Costs are in UK pound sterling and represent the direct and indirect costs of
new drugs on healthcare systems. Benefits are measured in a cost-effectiveness approach, by a
single common effect (life years) or a composite measure (QALY). The ICER therefore gives the cost
for each additional QALY gained when switching from the existing therapy to the new. When the
ICER calculated is lower, the treatment is more cost-effective because the cost of gaining one more
QALY is smaller.
To decide whether a new treatment is cost-effective and should be funded in the NHS, NICE uses an
ICER threshold of £20,000 per QALY gained, (BMJ, 2013). However, if the ratio exceeds this, the
therapy may not be funded and the pharmaceutical firm should negotiate a lower price, increase the
benefits of the drug or have a larger degree of innovation to distinguish this treatment from others.
Therefore, while the NICE threshold is not absolute and other factors are considered when funding
decisions are made, it is harder to approve drugs with higher ICERs. This is because they are more
expensive to fund in the NHS, meaning other interventions may receive less funding, resulting in
health losses for patients.
, However, a limitation of this economic evaluation method is that it is utilitarian. The objective of
NICE is to maximise the sum of QALY’s rather ensuring the equitable distribution of health gains.
Since individuals are not weighted according to needs or severity, there is an unequal distribution of
QALY’s, creating socio-economic inequalities. A more egalitarian approach is preferred so that
specific parts of the population are higher weighted, meaning the NHS objective of health being
equitable amongst the system is fulfilled. Additionally, these benefits and costs are only estimates
because to is difficult to measure these in monetary terms. This is especially because this is not
discounted, meaning this method does not consider future costs and benefits as no discount rate is
applied.
(b) Define the concept of Quality Adjusted Life Year (QALY). In the context of CUA, discuss whether
the methods used to measure preferences over health states are able to capture the multi-
dimensionality of health outcomes.
A Quality Adjusted Life Year (QALY) is a concept based on (Klarman et al., 1968). QALYs are a health
outcome that weighs a year of life by the quality of an individual’s health status, where 1 represents
1 year in perfect health and 0 represents death. A QALY is calculated by:
QALY =1 life year × health state utility assigned ¿ that year
Total QALYs in a healthcare system are:
T
f t qt
TOTAL QALYs=∑
t=1 (1+r )t
Where f t is the probability that the individual is still alive at age t (mortality). q t is the utility value
assigned to that year of the individual’s life and r is the discount rate as QALY’s aggregate future
benefits. This discount rate is 3.5% per year for costs and health effects, (NICE, 2020), indicating
individuals place a lower value on future benefits. An advantage is that they are a single measure of
cardinal utility, meaning they can be compared across different treatments on the same scale.
However, QALYs weigh a life against money because the decision to fund a new treatment depends
on the number of QALYs gained, making this unethical.
One method capturing the multi-dimensionality of health is the EQ-5D by (Dolan, 1997) used in CUA.
Using a representative survey of 3,000 UK individuals and the time trade off method (TTO), he
obtains 42 of health states and extrapolates the rest. The TTO method uses the choice dimension,
where individuals choose between remaining in ill health (H 1 ) for T years or being restored to full
¿
health ( H ) for a shorter life span, t. The EQ-5D describes health in 3 levels of severity – non(1),
some(2) and extreme problems(5) for 5 dimensions – mobility, self-care, usual activities,
pain/discomfort and anxiety/depression. This generates 243 (3¿¿ 5) ¿ health states, defined by a 5-
number code ranging from 11111 (no problems in any dimensions) to 33333 (extreme problems in
all health dimensions). This is used to calculate QALYs, which range from 0 (death) to 1 (full health).
(Dolan, 1997) find the health state 33332 (no mobility, unable to wash/dress self, no usual activities,
extreme pain/discomfort, moderately anxious/depressed) means that living 1 year in this health
state is equivalent to losing half a year in good health (QALY= –0.429). However, this method
excludes decisions under certainty by ignoring the dimension of medical treatments. Since
treatments accurately quantify benefits of prolonging life, disregarding this dimension inaccurately
represents health states and underestimates a healthcare intervention’s true effect. Additionally,
this study failed the RESET test (omitted variables/incorrect functional form) and suffered from
