Cost-benefit and cost-effectiveness analysis in health care economics

Health Care Economics

In economics, cost-benefit analysis assists in evaluating the costs of an approach in terms of resources spent while cost-effective analysis evaluates the costs as achieving some sort of benefit which is not evaluated in monetary terms. Moreover, cost-benefit study examines several aspects including net-present value, present value of benefit, and present value of costs; in line with this, if a project indicates that the monetary outcome is greater than initial costs, the project will be initiated (Amartya, 2000). On the other hand, cost-effective analysis requires a value judgment; since an individual is required to determine how much value is provided by the spent capital.

The other difference is that cost-benefit analysis assigns monetary value to any benefit; the analysis evaluates the benefits in terms of how effective that benefit is; however, it is difficult to quantify the monetary amount. As an example, the health sector uses cost-effective analysis to evaluate how a particular action can lengthen life; on the contrary, cost-benefit analysis measures the particular health initiative in terms of cost.

The other major difference between these two analyses is the factors that make up the study. As an example, during purchase of a car, cost-benefit analysis assists in assessing all costs associated with a car, including selling price, maintenance and the amount of miles per gallon the car gets; the outcome of a cost-benefit study thus shows a car which cost less to own over a period of time. On the other and, cost-effective evaluates not only car's price, but also other value added features like the comfort of the seats, the look of the car, whether it has a GPS installed and any other luxury features.

Question 2

Cost effective and cost utility analyses when used in health settings, they often result in different results. In this regard, the cost effective analysis looks at economic decision making to weigh up the costs and effects of a particular economic action (Black, 1990). For example, a physician may look at various ways of treating a particular disease but is likely to compare the costs and see how much of the disease can be treated with the given money. Therefore, cost effectiveness analysis is used in choosing the treatment method to use often leading to unprecedented outcomes.

On the other hand, cost utility analysis involves looking at whether an action should be undertaken by comparing the cost of the action to increase in utility (Neumann & Weinstein, 2010). For example, in health economics, cost utility analysis is used to decide whether someone should be treated. On the same note, the cost of treating someone with a rare cancer may be £400,000; and if this brings about an increased life expectancy of 1 year, then it is assumed the cost utility of the treatment is £400,000 per year. As a concern, there exists a strong overlap between cost effectiveness and cost utility analysis, cost utility analysis is usually referred to as a specific case relating to health care and life expectancy.

Question 4

The concept of direct exchange between the buyer and the seller is not present in the health care market. A basic characteristic of health care systems in all developed countries is that the majority of payments for medical services flow through third parties. A third party is an entity, usually an insurance company or government agency, which pays for medical services but does not receive or provide health care services. In general, third-party financing is due to two major reasons, the first being that individuals want insurance against the large and uncertain cost of illness, and governments want to assure access to health care for its citizens. In addition, if the concept of direct relationship between the doctors and patients existed, then individuals would pay providers directly for health services at prices set by those providers.

Healthcare is funded by either taxes or premium; individuals pay for the premiums to insurance companies and the taxes to the federal government which in turn pay for health care services. Aid in the employers often pay for a large share of insurance premiums and taxes, the amounts paid by employers are passed on to individuals and households through lower wages for the employees, higher prices to consumers for the employers' goods or services, or lower returns to investors on capital (Getzen, 1997). Besides, people with the highest incomes pay proportionately more than people with the lowest incomes, regardless of their use of medical services. On the other hand, insurance funded mainly by premiums is the most regressive because people with lowest incomes pay a higher proportion of their total income than people with high incomes.

Health care reimbursement is a vital issue in health care; it is the standard method of payment to health care providers. However, it varies among the insurance companies and government agents and the continued trade-off between organizations' efficiency and bottom-line profit vs. The freedom of patients and providers is likely to determine the reimbursement amount

Question 5

The best option is fee-for-service with no consumer copayment since it is the same as coinsurance thus, the patients will have no out-of-pocket payments. Thus, consumers will demand higher medical care as though it were a free good because they face zero prices. This will ultimately result in high-cost and lowest low-benefit medicine.

For option a; Fee-for-service plan with 40% consumer copayment, there will be a moderate incentive for the production of high-cost, low-benefit medicine. Consumers most likely are sensitive to price, but physicians prefer additional spending on medical care. For Prepaid health plan with 40% consumer copayment, there will be little incentive for the production of high-cost, low-benefit medicine since both consumers and providers are sensitive to costs.

The next, Fee-for-service plan with no consumer cost sharing will result into the creation of a significant incentive for the production of high-cost, low-benefit medicine and neither the consumers nor providers will bear any financial risk. Prepaid health plan with no consumer cost sharing creates a modest incentive for the production of high-cost, low-benefit medicine. While Fixed-salary plan with 40% consumer cost sharing results in little incentive for the production of high-cost, low-benefit medicine.