Risha Gidwani, DrPH 

Spring 2014

Decision Analysis: an 

Overview
What will you learn?

 Why to use decision analysis 

 Different types of decision analysis 

 Jargon  definitions 

 The difference between cost-effective and 

cost-saving 

2 
Why engage in decision analysis?

 Have to choose between funding different 

interventions 

– limited resources

 There is generally no clear “right” answer of the 

best intervention to fund

 Logical, transparent, quantitative way to weigh 

the pros and cons of each intervention

– Make an informed decision

3 
Weighing the pros and cons of a 

decision 

 Not all “pros” and “cons” are equal: 

– Consequences of pro/con

– Probability of pro/con

 Variation in probability

4 
Pros and cons

 Option A: 

– 80% probability of cure

– 2% probability of serious adverse event

 Option B: 

– 90% probability of cure

– 5% probability of serious adverse event

 Option C: 

– 98% probability of cure

– 1% probability of treatment-related death

– 1% probability of minor adverse event

5 
Opportunity costs

 Choosing one option means forgoing another

– Due to funding

– Due to resources

 Example: 

– Tuberculosis directly-observed therapy versus 

Promatora-based breast-feeding campaign

– Cap-and-trade versus carbon tax

6 
Variation 

 In medicine/healthcare, we have a lot of 

variation!

– Variation: 

 application of intervention (if it is non- pharmacological)

 adherence to intervention

 response to intervention

– Sampling error (uncertainty)

7 
Recap, Why to use Decision 

Analysis 

 Allocation of limited resources 

 Each intervention has pros and cons

 Each intervention is different:

– Condition/population

– Cost

– Health outcome

 And we are know there is uncertainty around 

much of our estimates of pros, cons, costs and 

health outcomes

8 
Advantages of Decision Analysis

 Evaluates each intervention using the 

same measure(s) 

 Compare results using the same metric:

– Costs 

– Cost per Life Year Saved

– Cost per Quality-Adjusted Life Year

9 
Decision Analysis can be 

applied to...

 Drugs 

 Procedures 

 Health programs

 Screening 

 Vaccines 

 Reimbursement decisions

 Etc.

10 
Types of decision analysis
Types of decision analysis

 Cost-effectiveness analysis

 Cost-benefit analysis

 Budget impact analysis

12 
Cost-Effectiveness Analysis 

(CEA) 

Costs : Health effects 

Health effects can be anything:

- Life-Years Saved

 - Cases of Cancer Avoided

 - Etc

 

13 
CEA and ICERs

 Cost-Effectiveness Analyses compare the 

impact of 2 or more interventions 

 Result is an Incremental CostEffectiveness Ratio (ICER)

ICER = CostB – CostA 

Health EffectB – Health EffectA 

14 
 A particular form of cost-effectiveness 

analysis 

 Health Effect is a Quality-Adjusted Life Year (QALY)

QALY is derived from Utility

Cost-Utility Analysis

15 

Cost-Utility Analysis

Cost-Effectiveness 

Analysis
CEA versus CUA

Method Cost-Effectiveness 

Analysis 

Cost-Utility 

Analysis 

Outcome Δ Cost / Δ Health Effect Δ Cost / Δ QALY

16 

Both compare 2 or more interventions
QALYs and Utilities

 QALY = # of years of life * Utility of life 

 Example: 

– Utility = 0.8

–# of years of life lived = 5

–QALY = 0.8 *5 = 0.40

17 
Utilities 

 Preference for health

– Not just a measure of health!

 Combine: 

– Health state a person is in

– Valuation of health state

 Conventionally range from 0-1 

 0 = death

 1.0 = perfect health

 More info in Dr. Sinnott’s upcoming HERC lecture

18 
Utility Calculations

19 

) ) ) )

Jane’s 

health

(0-1)

0.8

0.2

0.4

0.9

---

Jane’s

valuation

(sum to 1)

0.15

0.40

0.40

0.05

1.0

0.12

0.08

0.16

0.045

0.405

Joe’s 

Health

(0-1)

0.8

0.2

0.4

0.9

---

Joe’s

valuation

(sum to 1)

0.50

0.10

0.25

0.15

1.0

0.40

0.03

0.12

0.045

0.595

Variable

ADL

Exercise

Mental 

Clarity

Emotional 

well-being

Total
Utility  QALY

 Jane’s utility is 0.405 

– Jane lives for 10 years – 0.405 * 10 = 4.05 QALYs

– Jane lives for 12 years – 0.405 * 12 = 4.86 QALYs

 Joe’s utility is 0.595

– Joe lives for 10 years – 0.595 * 10 = 5.95 QALYs

– Joe lives for 5 years – 0.595 * 5 = 2.975 QALYs

20 
Advantages of Utilities/QALYs

 Incorporate morbidity and mortality into 

a single measure 

 Allows for comparison across disparate 

strategies 

– Newborn screening versus prostate cancer treatment

– Early childhood education versus community health centers

21 
ICERs in a Cost-Utility Analysis

 ICER = CostB – CostA 

 QALYB – QALYA 

 If ICER < $50,000/QALY, is generally 

considered cost-effective 

–More on this later

22 
ICERs in a CUA, Example

 ICER = CostB – CostA 

 QALYB – QALYA 

ICER = $150,000 - $40,000 = $110,000 = $11,000

 35 – 25 10 Cost-Effective

23 

Program A Program B

Intervention Mobile text messaging for 

medication adherence

Diabetes care coordinator

Cost $40,000 $150,000 

QALYs 25 35 
Cost saving

 Cost-effective ≠ cost-saving!! 

24 

Cost-Saving Cost-Effective 

Cost less, provides greater health Costs more, provides 

proportionally more health

Costs less, provides proportionally 

less health
Cost-Effective

 Cost-Effective: 

- Program B costs more than Program A, but 

Program B provides proportionally more health 

benefit than Program A

 Proportional? 

– ICER is < Willingness to Pay Threshold

25 
Willingness to Pay (WTP)

 U.S. – Often $50,000/QALY 

– Willing to pay up to $50,000 for one 

additional QALY

 Arbitrary, heavily criticized

– Not an empirically-derived threshold

26 
Thresholds for WTP

 Panel on Cost-Effectiveness in Health and 

Medicine does not endorse any WTP threshold

 NICE (U.K.) does not have an explicit 

threshold for reimbursement

- Recommended results are presented using WTP of ₤20,000 

and ₤30,000

27 
Cost-Benefit Analysis
Cost-Benefit Analysis

 Costs and Effects are expressed entirely in 

dollar terms

– Convert health effect  cost 

Incremental Benefit (cost) – Incremental Costs = Net social benefit

 If Net social benefit is positive, then program 

is worthwhile

29 
Assigning a dollar value to life

 Willingness to Pay (WTP)

– Examine revealed WTP or elicit WTP

– Framing effects, loss aversion, age-related effects, 

varying levels of disposable income

 Human Capital Approach 

– Use projected future earnings to value a life

– Assumes an individual’s value is entirely measured 

by formal employment.

 Children?

 Retired people?

 Pay differential between men and women, different races

30 
Cost-Benefit Analysis in 

Healthcare/Medicine 

Very rarely used: 

– Problems with assigning a dollar value to 

life

– Problems with evaluating quality of life

31 
Budget-Impact Analysis
Budget Impact Analysis

 Estimate the financial consequences of adopting a new 

intervention.

 Usually performed in addition to a cost-effectiveness 

analysis

– CEA: does the intervention provide good value? 

– BIA: can we afford it? 

33 
BIA, example

Drug A has an ICER of $28,000 per QALY compared 

with Drug B. It is cost-effective.

Drug B costs $70,000.

Therefore, Drug A costs $98,000. There are 10,000 

people eligible for Drug A, resulting in a total cost of 

$980 million dollars. 

34 
BIA tells us

 The true “unit” cost of the intervention 

 The number of people affected by the 

intervention 

 To give us an understanding of the total 

budget required to fund the intervention

35 
CEA versus BIA

36 

CEA BIA

Purpose Does this intervention 

provide high value?

Can we afford this 

intervention?

Outcome Cost and health outcomes Cost

Size of Population Not explicitly considered Explicitly Considered

More info in Dr. Sinnott’s upcoming BIA lecture
Approaches to Decision 

Analysis 
Methods for decision analysis

 Modeling 

 Measurement alongside a clinical trial

38 
Types and Methods 

for Decision Analysis

Measurement alongside 

a clinical trial

Modeling 

Cost-Effectiveness 

Analysis 

x x 

Cost-Benefit 

Analysis 

x x 

Budget Impact 

Analysis 

x 

39 
Measurement alongside a trial

“Piggyback” onto an existing RCT

 Collect extra information from patients 

enrolled in the trial

– Cost (based on utilization) 

– Utilities 

– (Efficacy and AEs are already being collected)

40 
Modeling 

 No real-world experiment exists

 Build a mathematical framework to understand 

the relationship between inputs and outputs

 Build model structure in software, populate it 

with inputs (from literature). Run model to 

derive outputs

 You decide on the boundaries of the analysis

Time frame, population, interventions of interest 

41 
Modeling versus Measurement

42 

Measurement Modeling

Treatments 

considered

• Only the ones in the RCT (which 

may include placebo)

• Any of interest – But they 

also come from RCTs

Advantage • Design case-report forms

• Individual-patient data 

(subgroup analysis)

• Utilities may be more accurate 

(treatment and health condition 

specific)

• Don’t need to wait for a 

trial to be funded to do 

your analysis

Disadvantage • Short time frame – will still have 

to project beyond the trial

• Will not provide all of your 

inputs

• Inputs need to come from 

similar studies on your 

• Utilities come from patient 

perspective, rather than 

community

population of interest
Cost-effectiveness 

Analysis for Resource 

Allocation 
How is CEA used for decision making?

 Ex-US: Used by NICE (U.K.), PBAC (Australia), 

CADTH (Canada) for regulatory/market access 

purposes

 US: Medicare has historically not used costeffectiveness to drive coverage decisions, ACA 

prohibits this

44 
U.S. Cost-Effectiveness Analysis

 Pharmaceutical companies – international 

markets 

 Academia 

 Veterans Health Administration

 NOT used by FDA or CMS 

45 
Summary 

 3 major types of decision analysis:

– Budget Impact Analysis

– Cost-Benefit Analysis

– Cost-Effectiveness Analysis 

 Cost-Utility Analysis

 QALYs, a measure of morbidity and mortality

 Operationalize your decision analysis:

– Measurement alongside a clinical trial, or

– Modeling

 Cost-effective ≠ cost-saving! 

46 
Resources: 

Decision Analysis and CEA

 Gold MR, Siegel JE, Russell LB, Weinstein MC, eds. CostEffectiveness in Health and Medicine. New York: Oxford 

University Press; 1996.

 Hunink M, Glasziou P, Siegel J, et al. Decision Making in 

Health and Medicine: Integrating Evidence and Values. 

Cambridge, UK: Cambridge Press; 2004.

 Muennig P. Designing and Conducting Cost-Effectiveness 

Analyses in Medicine and Health Care. San Francisco, CA: 

Jossey-Bass; 2002.

47 
risha.gidwani@va.gov 

Questions?