# Presentation: 533407

## Cost-Benefit, Cost-Effectiveness Analysis, and An Application to Home Care

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**Cost-Benefit, Cost-Effectiveness Analysis, and An Application to Home Care**

**William Weissert**
**Professor and Chair**
**Department of Health Management and Policy, School of Public Health**
**University of Michigan**
**Ann Arbor**

**Notes:**
Cost-Benefit, Cost-Effectiveness Analysis, and an Application to Home Care, a presentation by William Weissert of the Department of Health Management and Policy, School of Public Health, University of Michigan, Ann Arbor. Presented at the AHRQ-NGA meeting, State Long Term Care Systems: Reducing Cost, Quality and Access, held in Indianapolis, IN May 6-8, 2002.

## Outline

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**Outline**

**Key concepts and examples**
**Types of cost-analysis**
**An application of cost-benefit analysis to home care budgeting**
**Take away points on Cost Effectiveness Analysis (CEA)**

**Notes:**
There are two parts to this presentation, first cost effectiveness and then a section on the application of cost effectiveness principles to home care.  The principal mission is to talk about cost benefit, cost analysis. 

## Cost-Benefit Ratio

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**Cost-Benefit Ratio**

**$Cost****Intervention****   -   $Cost****Comparison**
**$Benefits****Intervention****   -   $Benefits****Comparison**

**Notes:**
Intervention – what do we want to compare it to?  We first start with an intervention and we a comparison group to see what the costs and benefits associated are with the new intervention. Then we divide benefits by their costs to get the cost benefit. 

## Compared to What?

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**Compared to What?**

**What’s the intervention?**
**Expanded home care benefits**
**What’s the comparison group?**
**Usual care**
**What they’re already getting:  *****not nothing***
**What’s the *****marginal***** cost?**
**How much *****additional *****spending is made**
**What’s the *****marginal***** benefit?**
**What are the *****additional *****benefits**
**Over what they would have been without the intervention?**

**Notes:**
What is intervention?  It is whatever you are doing now in home care.  We are doing a lot of home care now.  Expanding home care really means expanding at the margin – often giving more home care to people who are already getting it while you also serve some people who were getting nothing. In the Channeling Program which started back in the early 1980s, it appears that sixty seven percent of the people were already getting some care. It is easier to get something out of the first try than later.  How much extra spending and extra benefit will we see compared to what we are currently getting?

## -

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**-**

**+**

**+**

**COST**

**EFFECTIVENESS**

**ADOPT**

**CEA**

**CEA**

**REJECT**

- ADOPT?

- REJECT?

- ADOPT?

- REJECT?

- Source: Cliff Goodman, Lewin Assoc.

**Notes:**
This graphic was done by Cliff Goodman at Lewin. In most cases you will get something more expensive, and even if effective, probably not cost effective.  It’s more likely that it will  not be effective. Usually change shows on the diagonal where they are a little more effective and a little more expensive. So is it worth implementing a new intervention?

## Whose Costs, Who’s Benefits

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**Whose Costs, Who’s Benefits**

**Patient**
**Family**
**Provider**
**Medicaid**
**Medicare or other payer**
**Society at large**

**Notes:**
Judgements about effectiveness depends on who you represent – patients, family members, providers, budget managers -- all of the stakeholders including society at large.  Medicaid Directors will look at it from the perspective of their budget.  Benefits to patients may be costs to the state.  It takes many studies to see whose conclusion belongs to whom.

## Types of Economic Analysis

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**Types of Economic Analysis**

**Cost - Minimization:  $ vs. $  (same outcome)**
**Cost - Effectiveness:  $/ Outcome units**
**Cost - Utility:  $/Quality units**
**Cost - Benefit:  $/$  or ($-$)**

**Notes:**
Types of economic analysis  - what is cost effective? The first thing is something that appears to be cheaper, it saves money for the same (not more) outcome. This is really is cost minimization. Cost effectiveness is defined as the cost for a new outcome such as saving lives or keeping people out of nursing homes. If you also want to look at increased satisfaction, how do you put a value on that?

## Cost-Minimization Analysis

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**Cost-Minimization Analysis**

- (Hospvisits2*Hospcosts2)+(ERvisits2*ER$2)+(OPvisits2*OP$2)+(HCvisits2*HC$2)+(Trans2*Trans$2)+(Nhadmits2*NHdays2*NH$/day2)+(Infhrs2*Inf$2)+(DMEunits2*DME$2)+(Prescribe2*Prescribe$2)+(Disposunits2*Disposunits$2)+(Housingdays2*Housing$2)+(Meals2*Meals$2)+or(Copay2*Copay$2)
- +(NewTreat2*NewTreat$2)
- 		 			***minus***
- (Hospvisits1*Hospcosts1)+(ERvisits1*ER$1)+(OPvisits1*OP$1)+(HCvisits1*HC$1)+(Trans1*Trans$1)+(Nhadmits1*NHdays1*NH$1)+(Infhrs1*Inf$1)+(DMEunits1*DME$1)+(Prescribe1*Prescribe$1)+(Disposunits1*Dispos$1)+(Housingdays1*Housing$1)+(Meals1*Meals$1)+or-(Copay1*Copay$1)
***equals***
- Net cost difference (+ or -)

**Notes:**
Cost minimization analysis – what goes into the analysis?  The lower formula is the current program. The top formula is the intervention. The answer is anything that might be effected by an initiative, and it adds up to so many things.  A deal cut with a hospital might save you costs on hospital visits.  Home care has the potential to reduce emergency department visits, and you might cut a deal with the ER, or you might find that people don’t go until they are really sick and then they cost more.  Outpatient visits might be affected in number and/or cost.  You may reduce home care delivered by an agency, but new services that replace home care may increase your costs. Nursing home cost per day may be affected by negotiating rates for patients, or by outside care provided or not provided. Durable medical equipment and prescriptions may change how many days someone is in a home care setting, or your copayments may change as you negotiate deals. From the patient’s perspective, copayments add to costs yet from Medicaid’s view, it reduces costs. 

## Cost-Minimization Example	

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**Cost-Minimization Example**

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- 10

**Notes:**
Cost Minimization example. This is a spreadsheet with a few items that might be affected by home care.  Hospital, nursing home, and home care are compared before and after the expansion of  home care services.  These numbers may not be the exact numbers used by states to evaluate cost effectiveness, but they are representative. This set of assumptions leads to a 17 percent increase in costs.  After expanding home care, you serve 150 more people, reduce hospital use by 2percent, no reduction in daily cost and 2 percent reduction in length of stay. You reduce nursing home use by 25 percent and length of stay drops as well. Home length of stay increase and you would actually increase spending by 17 percent. You can play with this and see how much you have to reduce hospital or nursing costs to reach zero change in spending. 

## Cost-Effectiveness Analysis 

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**Cost-Effectiveness Analysis**

- [(Hospvisits2*Hospcosts2)+(ERvisits2*ER$2)+(OPvisits2*OP$2)+(HCvisits2*HC$2)+(Trans2*Trans$2)+(Nhadmits2*NHdays2*NH$2)+(Infhrs2*Inf$2)+(DMEunits2*DME$2)+(Prescribe2*Prescribe$2)+(Disposunits2*Dispos$2)+(Housingdays2*Housing$2)+(Meals2*Meals$2)+or-(Copay2*Copay$2)
- 	+(NewTreat2*NewTreat$2)]
***minus***** **
- [(Hospvisits1*Hospcosts1)+(ERvisits1*ER$1)+(OPvisits1*OP$1)+(HCvisits1*HC$1)+(Trans1*Trans$1)+(Nhadmits1*NHdays1*NH$1)+(Infhrs1*Inf$1)+(DMEunits1*DME$1)+(Prescribe1*Prescribe$1)+(Disposunits1*Dispos$1)+(Housingdays1*Housing$1)+(Meals1*Meals$1)+or-(Copay1*Copay$1)]
***divided by***
- [Units of a Single Outcome2 (such as %Satisfied *or *Days in Community) ***minus**** *Units of the same Single Outcome1]
***equals***
- Net cost per increased unit of Same Single Outcome (+ or -)

**Notes:**
Cost effectiveness utilizes the same equation as cost minimization. This is same equation  and add in new spending on home care and how many people benefited.  Cost analysis has to evaluate whether someone benefited from or was satisfied by the change.  You can divide the number of days a person stayed in the community and for how many days, but you can only look at one outcome at a time.

## Cost-Effectiveness Example	

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**Cost-Effectiveness Example**

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- 12

**Notes:**
Cost effectiveness example - this example counts persons who maintained ADL functioning for an entire year. Costs rose 17 percent, but improved quality of life for 10 people.

## Measuring Utiles

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**Measuring Utiles**

**Utiles are usually measured in QALYs**
**QALYs are Quality Adjusted Life Years**
** ****(1 year of life at full health minus adjusted for reduced quality)**
**e.g., if one year of full health equals 1 QALY**
**and having one ADL dependency reduces the value of life by 20%**
**then prevention of loss of independence in one ADL=.2QALY**
**%reduction is arbitrary, or preference based**
**I used, 5ADL dependency=0 Quality of Life (0 QUALYs)**
**May understate value of 5ADL dependent life**
**- and thus overstates value of preventing a single ADL decline**

**Notes:**
If you have multiple outcomes, you may have multiple improvements, but must figure out a way to put a value on each of those outcomes. This model converts the outcome to a quality adjusted life year.  One year of life at full health minus adjusted for reduced quality.  One ADL (arbitrary) dependency reduces the value by 20 percent.  This may be hard for someone without any ADL impairment whose real quality of life may not be 100 percent or to someone with impairments in all ADLs who feels their quality of life is more than zero. If you place a low value on each ADL, it is harder to show an increase in value through an intervention.

## Cost-Benefit Analysis 

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**Cost-Benefit Analysis**

- [(Hospvisits2*Hospcosts2)+(ERvisits2*ER$2)+(OPvisits2*OP$2)+(NHadmits2*NHdays2*NH$2)+(Trans2*Trans$2)+(Infhrs2*Inf$2)+(DMEunits2*DME$2)+(Prescribe2*Prescribe$2)+(Disposunits2*Dispos$2)+(Housingdays2*Housing$2)+(Meals2*Meals$2)+or-(Copay2*Copay$2) +(NewTreat2*NewTreat$2)
***minus***
- (Hospvisits1*Hospcosts1)+(ERvisits1*ER$1)+(OPvisits1*OP$1)+(NHadmits1*NHdays1*NH$1)+(Trans2*Trans$1)+(Infhrs1*Inf$1)+(DMEunits1*DME$1)+(Prescribe1*Prescribe$1)+(Disposunits1*Dispos$1)+(Housingdays1*Housing$1)+(Meals1*Meals$1)+or-(Copay1*Copay$1)]
-  ***divided by***
- [(Units of outcomeA2*$value per unit of outcomeA2)+(Units of outcomeB2*$value of outcomeB2)+ (Units of outcomeN2*$value per unit of outcomeN2)* *
***minus***
- (Units of outcomeA1*$value per unit of outcomeA1)+(Units of outcomeB1*$value of outcomeB1)+ (Units of outcomeN1*$value per unit of outcomeN1)]
- Outcomes are converted first to QALYs, Quality Adjusted Life Years (1 year of life at full health minus discount for reduced quality), then to $, e.g., if one year of full health is worth $200,000, and having one ADL dependency reduces the value of life by 20%, then prevention of loss of independence in one ADL=$40,000

**Notes:**
Cost benefit analysis uses the same equation with different outcomes.   First, you convert outcomes to quality life years.  If we assigned one year of life at $200,000, then each ADL is worth $40,000.  Dropping the value of each ADL and each quality adjusted life year changes the percentage of the outcome.  

## Value of Life

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**Value of Life**

- Usually estimated by either human capital approach (lifetime earnings) but produces discrimination problems,  or  preferably willingness to pay (also called contingent valuation) – as revealed by extra pay for extra risky jobs, or population cost of life-saving products like air bags divided by lives saved in the population

**Notes:**
Value of life.  What would someone do to pay for saving a life?  How do you value a life? Take the airbags example.  This is a revealed preference – people show what they would pay for airbags to save a life.  This gives you the value of a life or year of life.  Another method is to evaluate risky jobs and determine the extra wages paid in risky jobs to determine value of life.  What are lifetime earnings?  Compute what the earnings would have been to determine the award. But young children and seniors have no value under this system, which people find unacceptable.

## Cost-Benefit Example	

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**Cost-Benefit Example**

- 17

- Weissert

**Notes:**
Cost benefit example.  If you want to focus on one area, you better invest in getting better numbers to start with. Here, 10 patients maintained the same ADL functioning and 10 did not.  We evaluated a day of life without loss of ADL as worth $10 and subtract each day from the cost of the program.  The effect lasts 6 months. For the 180 days that people kept their satisfaction, each was worth $5 a day.  This reduces the cost of program from 17 percent down to 5 percent, which is more palatable to the legislature.  The real advantage of this process is sensitivity analysis - to see what the legislature will pay for.

## Discounting

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**Discounting**

- If costs and benefits flow over a different time, then discounting should be applied
- Often ignored on the assumption that most benefits are short term
- Not a bad assumption in long-term care
- Worse assumption for early prevention
- Requires applying a discount rate for each year of delay between costs and outcomes,
- e.g. value of outcomes to come in 5 years might be discounted at 3%/year*5years
- Or, if some costs or benefits are short term, and others long, apply discounting to both long term values

**Notes:**
This process can be made harder than it is. Most people would prefer cash to an IOU, because an IOU has the possibility of never being paid.  If you spend money now and get benefits in the future, due to inflation and interest, future benefits are not worth as much as benefits in the hand, so discount them.  

## An Application of Cost-Benefit Analysis to Home Care Budgeting

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**An Application of Cost-Benefit Analysis to Home Care Budgeting**

**Notes:**
An application of cost-benefit analysis to home care budgeting.

## Problems with Home Care

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**Problems with Home Care**

**Not cost-minimizing**
**Utilization and cost results poor**
**Minimally reduced hospital use**
**Some nursing home reduction**
**But not enough to offset new costs**
**Net costs 15-20% higher**
**Not cost-effective**
**Few outcome benefits, very high cost per benefit**
** ****No physical or mental benefits**
**ADL, IADL, activities, other measures**
** ****No increase in longevity**
** ****Contentment higher (though transient) in:**
**some patients**
**some family care-givers**

- Weissert

- 20

**Notes:**
Home care is not as cost effective as it is touted to be.  Using the FDA standard, home care tends to show an increase in costs.  It does sometimes substitute for nursing home care, but is often more expensive. There is room for improving home care. With randomized trials, it is seen to be poorly managed and makes few differences.

## Underlying Cause:  Imperfect Agency

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**Underlying Cause:  Imperfect Agency**

**Perfect agent requires:**
**Clear goals from principal**
**Good information**
**Tools, procedures, resources, training, feedback**
**Appropriate incentives**
**Rewards, constraints, sanctions**

**Notes:**
How you run a bureaucracy – why is it so badly managed and how do we fix it?  We want the case manager to be given every possible manner to succeed rather than fail.  Use business philosophy – if you go to a doctor and get lousy care, there are a few reasons. You may not have clear set of goals, the provider may not have good information to make decisions.  There is a long history of assessment instruments that have a poor performance record and are seriously flawed in determining who would do well in nursing versus home care. These instruments are often wrong as much as 4 times out of 5.   They don’t do good job of care planning, making goals for individuals and achieving them. They don’t do well with training, little standardization, poor care standards, and little feedback. Finally, they  don’t give many incentives.  If the situation fails to make people better, the residence gets the perverse reward of keeping the person.  Also providers receive special deals from drug companies to prescribe certain drugs. There are no incentives for case managers to make them more responsible for outcomes they do or don’t produce

## Observed Versus Predicted:Mean Rate of Hospitalization for Selected Subgroups

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_***Observed Versus Predicted:***_**Mean Rate of Hospitalization for Selected Subgroups**

_***Characteristic***__***	***__***Predicted  ***__***	***__***Actual***__***	***__***Ratio***_
**Male****	****0.0178****	****0.0178****	****1.00**
**Age over 80****	****0.0134****	****0.0133****	****1.01**
**Human help toileting****	****0.0155****	****0.0156****	****0.99**
**Human help transfer****	****0.0161****	****0.0160****	****1.01**
**Human help eating****	****0.0142****	****0.0135****	****1.05**
**Human help w/mobil  ****	****0.0161****	****0.0161****	****1.00**
**Mental/Alz. dx****	****0.0128****	****0.0128****	****1.00**
**Respiratory dx****	****0.0207****	****0.0207****	****1.00**
**Nonhyperten. circ.dx****	****0.0172****	****0.0172****	****1.00**

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- 32

**Notes:**
Estimating risk and risk predictions.  We start by taking a population with an adverse outcome, and compare them with those who are different. Using 5 years of data, we used regression analysis to examine what factors predicted hospitalization and what were the actual reasons for hospitalization.  We found the ratio of predictions to reality were very high for this subgroup.

## Resource allocation is randomFigure 1. Per Capita Spending by Decile of Hospitalization Risk in ALTCS ’92-97

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**Resource allocation is random****Figure 1. Per Capita Spending by Decile of Hospitalization Risk in ALTCS ’92-97**

## Figure 2. Per Capita Spending by Decile of Nursing Home Admission Risk in ALTCS ’92-97

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**Figure 2. Per Capita Spending by Decile of Nursing Home Admission Risk in ALTCS ’92-97**

**Notes:**
We find the same result for nursing home admissions.  The risk level of the patient has little to do with how much care that patient receives.

## Figure 3. Per Capita Spending by Decile of Risk of Death in ALTCS ’92-97

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**Figure 3. Per Capita Spending by Decile of Risk of Death** **in ALTCS ’92-97**

**Notes:**
The risk of death is not related to the care received.  It may be related to capitation. It shows that case managers may simply be doing the same care plan for each patient rather than tailoring care to need which could be due to lack of training or experience.

## Figure 4. Per Capita Spending by Decile of  Functional Decline Risk in ALTCS ’92-97

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**Figure 4. Per Capita Spending by Decile of  ****Functional Decline Risk** **in ALTCS ’92-97**

**Notes:**
This shows similar findings.

## Reform Agenda:  Improve Agency

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**Reform Agenda:  Improve Agency**

**Clarify goals**
**Focus on patient specific outcome goals**
**Improve information**
**Provide risk assessment tools**
**Reduce false positives in selection**
**Replace single, categorical eligibility with multistage process**
**Create demand for dose-response data**
**Create incentives for efficiency, effectiveness**
**Impose budget constraint binding on every patient**
**Focus care planning on marginal benefit for marginal cost**

**Notes:**
We suggest you do a risk profile for every patient.  Then expect from your care manager an evaluation of individual risk and a care plan designed around those risks.  A potential problem is the lack of information about how much day care mitigates some effects or how much it takes to balance out other effects.  If you expect case managers to write plans based on risk, you can look at process and evaluate performance based on specific outcome goals related to risk, and compare populations one to another. 

## Effectiveness, Risk, Value(ERV) Budget Model

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**Effectiveness, Risk, Value****(ERV) Budget Model**

**Clarifies goals**
**Emphasizes patient-specific outcomes**
**Accommodates broad range of outcomes**
**Improves information**
**Provides better risk assessment methods**
**Employs two-stage needs assessment**
**Implies care plan evaluation criteria**
**Creates incentives for marginal benefit- marginal cost trade-offs**
**Sets binding constraint on care plan costs**
**Shifts funds from low risk to high risk patients**
**Rewards improved effectiveness**

**Notes:**
For example, we would want to capture improved participant and caregiver life satisfaction, satisfaction with care, and other measures of caregiver benefits; reduction of participants’ unmet need, increased use of preventive services, and improvements in other condition-specific outcomes and care plan goals for specific patients or subgroups, such as: hygiene, appetite, nutrition, weight, depression, medication compliance, sleep patterns, pain control, skin condition, living environment (e.g., removal of hazards; installation of smoke detectors; emergency plan put in place; telephone assured to be accessible and usable; home repairs made), maintenance of dental health, social interaction and relationship with informal caregivers and others; and improvements in end-of-life specific measures of optimal care; fulfillment of patient self-determination, the extent to which care choices are consumer driven, assurance that policies and practice are consistent with the goal of provision of community based service options even to clients who qualify for institutional care,  improved activity levels, reduction in isolation, and avoidance of adverse effects on mobility or physical or mental function or mortality, and avoidance of nursing home and hospital use.

## ERV Example for One Risk

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**ERV Example for One Risk**

**If...**
**Hospital risk for a given patient = 25%, and,**
**Cost of hospitalization would be = $10,000, and**
**Effectiveness of home care in mitigating hospital risk = 20%,**
**Then, monthly ERV= ****$500 **
**(500=.20*.25*10,000)**
***Note incentives:***
*** ******Higher effectiveness=more money***
***Spending reallocated to highest risk-benefit potential***
***Process, outcome evaluation criteria implied***

**Notes:**
For example, take one patient with a 25percent risk of hospitalization. Then the cost of hospitalization equals $10,000, the effectiveness of home care in mitigating risk equals 20 percent and then the monthly ERV equals $500.  Incentives show higher effectiveness of money spent. This method is used now with no systematic method used to predict effect, and using new methods will be more effective, but not perfect. Risk profiles come from studies done at think tanks and research institutions on what are the predictors of outcomes.  The limitations come from the data collectors. We don’t want the case manager to do the risk assessment, but to plug the numbers in and get a result to use to design individualized care plans based on a standard.  

## Some Case Examples

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**Some Case Examples**

**Notes:**
These are some case examples showing the effect of changing some variables. These were given to the case managers in Arizona who tested the process. The data tells you where this patient ranked among the 50,000 patients in Arizona for each of the risk factors.  The low risk first patient got the same amount as all the other patients, but I suggest you could spend $149 a month on her for the same outcome.  On the other hand, the other patient is very high risk in many areas, and I would have spent 20 times as much on this patient based on the data and criteria given to the case managers.  In the end, the case managers reduced spending 15 percent by applying the criteria without regard to global savings, but by concentrating on careful assessment of individual needs.  This is the start to developing careful protocols that improve the efficiency based on supportable data.

## Take-Away Points About Cost- Effectiveness Analysis

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**Take-Away Points About Cost- Effectiveness Analysis**

**Central purpose of CEA:**
**Compare relative value of *****marginal***** costs of new policy to *****marginal***** value of health benefits produced**
**Specify all current costs and new costs**
**For a single outcome, subtract old costs from new, and**
**Subtract old benefit levels from new**
**Divide net cost by number of clients benefiting**
**For multiple outcomes, convert all outcomes to QALYs**
**QALYs must be valued to produce value of benefits**
**CEA doesn’t render decisions, only input**
**Just trying it will improve your decision process**
**Makes you clear about what you’re likely to get and costs**
**May help you think about what’s feasible and what’s not**

**Notes:**
We need to stop giving people things that aren’t effective as long as we are denying others things that could be effective.  We need to give more support and monitoring help to the workers in the trenches and get them the tools that are available.   We are making subjective assessments without basis about very important issues, and I want to make they system more systematic and base care judgements on the basis of systematic data.  We won’t be able to make those assessments unless we invest in the research to use as the basis of these decisions. We are so complacent about home care that we don’t collect much data and don’t have the data to evaluate services.