Valuation issues

1
Valuation issues

• Jan Sørensen, Health Economist
• CAST Centre for Applied Health Services
  Research and Technology Assessment
• University of Southern Denmark

2
Cost-benefit analysis of future energy plans

• Assess and compare the cost and benefits of
  different alternatives from a social perspective
• CBA is based on well-established economic theory
  (welfare economics), which might serves as
  reference case when in doubt
• Many reference books
• International guidelines
• Ministry of Finance, Guidelines 1999
• Many examples on applications within different
  other public sectors including the environmental
  area eg. Møller et al, 2000

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Important decisions

• Social perspective
• Include all relevant effects and resource use
  (cost)
• Valued from a social perspective
• Long time horizon
• Include long term consequences of the specified
  energy scenarios for one year e.g. 2010, 2020,
  2050)
• Analytical (scenario) horizon assumed to be one
  year
• Consider the long term consequences of this
  years energy production
• Aim to express both the benefits and cost in
  monetary units (however, should also present
  intermediate results eg. new cases of disease,
  life years lost, additional use of health
  services)
• Provide a transparent, comprehensive and reliable
  analysis
• In the following Restricted focus on the cost
  and benefits relating to the health effects of
  pollution associated with changes in energy
  production

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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
Unit cost per resource
Consumption


Net present value of the benefits
Net present value of the resource use (costs)
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Which value ?

• Economic theory
• The opportunity cost i.e. the utility of the
  second best application of the resources
• Valued from the perspective of society usually
  as the aggregation of the values of each
  individual in the society
• Marginal (inkremental) analysis i.e. the cost and
  benefit of the last unit/difference
• Difficult to make operational outside a perfect
  market situation
• Therefore often approximated as the long term
  average cost, i.e. variable cost with reasonable
  contribution to the fixed cost

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Example

• A 55 year old man who becomes ill with a stroke
  and survive the immediate period
• Additional resource use
• Hospital care in the immediate period (e.g. first
  1 month)
• Rehabilitation period (additional training)
• Maintenance period (home improvement, ongoing
  support, GP and nursing service, medication,
  meals on wheels etc.) in own home
• Admission to nursing home until rest of life time
• NPV of the additional resource use each year in
  the remaining life time (x euro per case with a
  specific age and sex group)

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Method - Register study

• Identify population with new disease and suitable
  controls
• Assess the expected life time with the disease
• Assess additional resource use (attributable
  cost difference between diseased and controls)
  in each year
• e.g. hospital, primary care and medicine
• e.g. valuation through DRG-system, fees paid by
  primary care funding body, and pharmacy sales
  prices
• NPV (Unit cost) per new case St qt pt(q) dt

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Time cost of seeking treatmentPatient and
relatives

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

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Valuation of benefit - 1

• Avoided death/life years lost/lost time without
  illness
• Different valuation methods
• Contingent valuation
• Discrete choice

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Valuation of benefit - 2

• Production loss
• Human capital method lost time gt retirement age
• Friction cost method lost time gt replaced at
  labour marked (6 mths)
• Valuation gross salary before tax
• Note risk of double counting!

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Valuation of benefit - 3

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

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Deliverables

• Tables of aggregated NPV net benefit (cost) of
  new illnesses (defined by the WP3 group) by age
  and sex groups (as defined by the detailed CEEH
  model) under different sets of assumptions
  regarding discount rates
• Documentation of details in deriving such figures
• Activities
• Register study
• Survey of population values (health, life years
  /QALY gain)
• Perhaps survey of population values of
  environmental consequences

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Examples of earlier unit costs
Frohn et al, PP-presentation, May 2007