Recommendations for 

Conducting Cost 

Effectiveness:

Elements of the Reference 

Case

Ciaran S. Phibbs, Ph.D.

September 5, 2012
Health Economics Resource Center

PHS Recommendations

 MR Gold, JE Siegel, LB Russell, MC 

Weinstein (1996) Cost-Effectiveness in 

Health and Medicine Oxford University 

Press. Especially Appendix A (pp 

304:311)

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PHS Recommendations, JAMA 

Summary

 Russell LB, et al. The Role of Costeffectiveness Analysis in Health and Medicine. 

JAMA. 1996:276:1172-1177.

 Weinstein MC, et Al. Recommendations of 

the Panel on Cost-Effectiveness in Health and 

Medicine. JAMA. 1996;276:1253-1258.

 Siegel JE, et al. Recommendations for 

Reporting Cost-effectiveness Analysis. 

JAMA. 1996;276:1339-1341.

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Poll

 Have you ever conducted a costeffectiveness analysis?

 Answers

 No

 One study

 More than one study

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Why Do We Need

Cost-Effectiveness Analysis?

 Health care interventions affect many 

different outcomes, in different ways

 Need a common metric to allow 

comparisons across diverse diseases, 

conditions, and patient populations (e.g., 

compare the value of interventions for 

PTSD and coronary artery disease)

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What is Cost-Effectiveness 

Analysis?

 Tool for making decisions, a common 

metric to compare diverse interventions

 Need to find both the costs of the 

intervention and assign values to outcomes 

 Outcomes must be measured on a single 

scale; the standard is Quality Adjusted Life 

Years (QALYs)

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Dominance Principles

 Only available tool if outcomes are not 

measured in QALYs 

 An intervention is favored if it is more 

effective and costs less

 Extended dominance can be used when 3 

or more treatments are being compared

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Application of Dominance

Change in Effectiveness

Change

in

Cost

Standard care 

preferred

+

-

- +

Intervention 

preferred

?

?

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Example of Strong Dominance 

(better outcomes and lower costs)

 Neonatal surfactant replacement therapy, 50% 

reduction on RDS mortality

 Reduced mortality increases costs

 But, surfactant reduced treatment intensity and 

LOS of those who would have survived 

anyway

 Net result, lower mortality and lower costs

 This is RARE!!!!!!

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CostEXP - CostCONTROL

_____________________

QALYEXP -QALYCONTROL

Incremental Cost-Effectiveness 

Ratio

 Calculated when one intervention is more 

effective and more costly
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Application of Critical

Cost-Effectiveness Ratio

Change in Effectiveness

Change

in

Cost

Intervention 

preferred

Standard care + preferred

-

- +

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What is the “Reference Case”

 A standard set of methods and 

assumptions to serves as a point of 

comparison across studies

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Why Do We Need a Reference 

Case?

 There are many different assumptions, 

methods, and perspectives that can affect the 

outcomes of a cost-effectiveness analysis. 

 Without standardization, it would not always 

be possible to compare the results across 

studies.

 Standardization greatly increases the policy 

value of C-E analysis.

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PHS Recommendations: 

Summary

 Adopt perspective of society

 Measure all costs

– direct cost of intervention

– all health care expenditures

– patient incurred cost 

 Express outcomes as Quality-Adjusted 

Life Years (QALY)

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PHS Recommendations: 

Summary (continued)

 All health effects in the denominator of 

the C/E ratio

 The numerator of the C/E ratio captures 

all changes in resource consumption 

associated with the intervention

 Discount costs and outcomes at 3% 

annual rate

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PHS Recommendations: 

Summary (continued)

 Model when effects of intervention not 

fully realized during the study period

 Conduct sensitivity analysis

 Test statistical significance of costeffectiveness findings 

 Standards for reporting of C/E analyses.

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Societal Perspective

 Adopt perspective of society

 Payer perspective may yield very 

different results; benefits or costs may 

occur to others, including:

– Patient

– Other payers

– Other individuals (e.g., family members)

– Employers

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Budget Impact Analysis

 For VA studies, may also consider doing 

a Budget Impact Analysis, in addition to 

a CEA

 Provides VA managers with information 

about the time line of the costs and 

benefits; important for budget planning.

 May help speed adoption/implementation

 Will be covered in a later lecture

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Denominator vs. Numerator

 All health effects in the denominator, 

expressed in QALYs 

 The numerator of the C/E ratio captures 

all changes in resource consumption 

associated with the intervention

 There are gray areas, that could be placed 

in either

 Avoid double counting.

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Poll: Do these belong in the 

numerator of the ICER? Yes/no 

answers

 Health care costs associated with the 

intervention

 Length of stay

 Costs of patient time

 The value of lost productivity

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Components Belonging in the 

Numerator of the C/E Ratio

 Costs of health care services

 Costs of patient time ***

 Costs of care-giving (paid and unpaid)

 Other costs (e.g. travel time)

 Costs measured in constant dollars

 Use wage rates to value time costs

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Components Belonging in the 

Numerator of the C/E Ratio (cont)

 Non-health care costs

– E.g., education, criminal justice, 

environment

 Costs imposed on others

– E.g., employers, rest of society

 Do NOT include lost productivity; would 

result in double counting

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Components Belonging in the 

Numerator of the C/E Ratio (cont)

 Health care costs that result from living longer

– Include costs for intervention-related diseases within 

original expected life span, and for added years of life

– Include costs of treating adverse events

– Exclude unrelated health care costs and non-health 

care costs within original expect life span

– Exclude non-health care costs for added years of life

– No recommendation for unrelated health care costs for 

added years of life 

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Components Belonging in the 

Denominator of the C/E Ratio

 Measure health effectiveness in QALYs

 QALYS should be preference based

 Weights based on community preferences

 Use a generic health-state classification, 

as opposed to disease-specific

 Use age- and sex-specific HRQL to value 

gains and loses

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Modeling May Be Necessary

 Most clinical trials don’t cover full time 

horizon of the potential effects

 It is allowable to use modeling and/or 

data from other sources to complete the 

analysis

 Use of expert judgment should be 

avoided, if possible

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Discounting

 Real discount rate of 3%

 All costs should be adjusted for inflation

 Both costs and health outcomes should be 

discounted

 Conduct sensitivity analysis of the 

discount rate.

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Sensitivity Analysis

 Conduct sensitivity analysis

 1-way sensitivity analysis for key 

assumptions

 1-way sensitivity analysis under-state 

overall uncertainty; should also conduct 

multivariate sensitivity analysis

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Bootstrap Determination of CostEffectiveness Confidence Region

 Sample n observations with replacement

 Find incremental cost-effectiveness ratio

 Repeat 1,000 times

 Find percentage of replicates that are not 

“cost-effective”

– this is the p-value

– p-value may vary by threshold

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Sensitivity Analysis: How Does 

Significance Vary by CE Threshold?

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Standards for Reporting Results

 Siegel JE, et al. Recommendations for 

Reporting Cost-effectiveness Analysis. 

JAMA. 1996;276:1339-1341. Checklist

 List of information that needs to be 

included to allow comparison across 

studies

 This is very important from a policy 

perspective

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Alternative Method

 Just to mention, alternative to reporting ICER, 

net benefit regression.

 Hoch JS, Briggs AH, Willan AR. Something 

old, something new, something barrowed, 

something blue: a framework for the marriage 

of health econometrics and cost-effectiveness 

analysis. Health Economics. 2002;11:415-

430.

 HERC Cyber-Seminar, Hoch 8/23/2006

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Other References

 Methods for the Economic Evaluation of Health Care 

Programmes (Paperback)

by Michael F. Drummond, Mark J. Sculpher, George W. 

Torrance, Bernie J. O’Brian, Greg L. Stoddart Oxford 2005

 Hayward RA, Kent DM, Vijan S, Hofer TP. Reporting 

clinical trial results to inform providers, payers, and 

consumers. Health Affairs 2005;24(6):1571-1581.

 Heitjan DF. Fieller’s Method and Net Health Benefits. Health 

Economics 2000;9:327-335.

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Other References

 ISPOR Task Force for CEA in clinical trials, see:

 Ramsey, Scott, et al. Good Research Practices for CostEffectiveness Analysis Alongside Clinical Trials: The 

ISPOR RCT-CEA Task Force Report. Value in Health 

2005;8 (5), 521-533. Also available on the ISPOR web 

page, http://www.ispor.org/workpaper/clinical_trial.asp

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Next HERC Cyber Course

September 26, 2012

Estimating the Cost of Intervention

Todd Wagner, Ph.D. 

Health Economics Resource Center 35