This Mind your Business article looks at health economics.

Mind your Business - 11 October 2004

Health Economics

The News

Health is one of the major issues on the government's agenda. It is likely to be central in the policy debates in the forthcoming general election. The issue, at its heart, is quite simple. The demands on the health service are great but the resources available are limited. The classic economic problem - unlimited wants and scarce resources! Every week, doctors have to make difficult decisions about treatment in their hospitals. The decisions are not only based on clinical need but also on the value for money that the hospital has to provide to its 'customers'. In addition it has to think of how to allocate competing resources. If a hospital manager, for example, is working out a budget, they may have to think about how to allocate a limited sum of money amongst competing uses. Does the hospital devote resources to preventative medicines and education or to treatment? Does it spend money on kidney dialysis or hip replacement operations? Such decisions are always difficult. Recent cases may serve to highlight the problems facing hospitals in allocating scarce resources. The Welsh Assembly announced at the end of September 2004, that the cost of prescriptions in Welsh pharmacies was to fall from £6.40, the rate in the rest of the UK, to £5.00. In addition, the Assembly announced that it intended to move towards free prescriptions within three years. However, there has been growing concern amongst some in Wales at the rise in the number of patients on the waiting list for treatment. The tables below highlight the problem faced by Welsh hospitals. The Conservative opposition in the Welsh Assembly claim that despite a 40% increase in funding since 1999, waiting lists have risen by 85%. Out-patients waiting lists in Wales, 1999-2003   1999 2000 2001 2002 2003 Total 134,364 160,844 177,647 212,740 216,370 Waiting more than: 3 months 53,424 73,745 85,547 115,480 117,413 6 months 21,828 37,991 45,757 68,834 70,120 1 year 4,947 10,360 14,603 27,501 24,606 18 months -- 1,988 5,758 12,505 8,361 In-patients and day cases waiting lists in Wales, 1999-2003   1999 2000 2001 2002 2003 Total 65,315 79,873 65,582 70,640 74,641 Waiting more than: 3 months -- 46,688 36,405 41,313 42,292 6 months -- 29,668 22,315 26,159 27,541 1 year 7,303 11,352 9,037 10,135 11,831 18 months 2,197 4,273 4,045 4,085 5,238 Source: Welsh Assembly - Waiting lists and waiting times There are those who would argue that the money is being channelled into the wrong area and that the £32 million it has been reported that the prescription policy will cost ought to be put into reducing waiting lists. Those who argue this point to cases where patients diagnosed with cancers have to wait to see specialists far longer than their equivalents in England. Such potentially serious diseases can be life threatening if not treated early. Decision-making in hospitals constrained by staff accountability for their actions and decisions. © Photolibrary Group Another case that highlights the problems centres on a baby born after only 26 weeks. For 11 months, Charlotte Wyatt has received intensive care and has never left hospital. She has severe lung and heart problems and has been already resuscitated twice by doctors. However, the doctors now say that there is no clinical benefit to offering further resuscitation to Charlotte should she stop breathing again. Charlotte's parents fought to try to overturn the doctors' judgements and wanted everything possible to be done to help Charlotte stay alive. The case went to the High Court, where a judge ruled that Charlotte should not be resuscitated if she stops breathing. Apart from the ethical issues surrounding this case, there is an economic one also which, however distasteful it sounds, doctors have to consider. The National Institute for Clinical Excellence (NICE) estimated that the cost of intensive care unit (ICU) treatment was £1,232 per bed per day as an average in UK hospitals. That, they estimate, is six times the cost per bed per day of an individual on a general ward, and the cost per bed in a high dependency unit three times more expensive than on a general ward. (Source: NICE Appraisal Consultation Document, point 2.5). In simple terms, therefore, we might estimate the cost of Charlotte being in the ICU of a hospital at nearly £450,000 (12 months at £1,232 per day). Image: The high degree of technology and care needed in ICU means that it is expensive to provide. Copyright: Adam Ciesielski, stock.xchng. Two questions then need to be asked: Could that £450,000 be better used on another patient or a number of patients? Is £450,000 a worthwhile figure to put on one individual's life? Both questions are clearly extremely difficult to answer. Hospitals, therefore, are being seen not only as places where people are treated for a range of problems, they are also business units in their own right. In addition, they are subject to a whole range of economic pressures and because they consume a relatively large amount of national income - around 17% of government spending totalling some £76.5 billion per year - there is enormous political and economic pressure to get value for money from the resources allocated.

Theory

There are a number of core concepts to investigate in relation to health:

• The supply and demand for healthcare
• Valuing a life
• Hospitals as cost centres
• Estimating value for money in the health service

The supply and demand for health care:

Health care comes in several forms. It could be based on preventative medicine - providing people with education to enable them to make healthy life choices - but such a strategy is long term in its effects and could be questionable in how effective it is. (The nation is still eating too much of the wrong foods, smoking and drinking too much and not getting enough exercise despite the repeated warnings!)

The National Health Service (NHS) is structured through a system that starts with PCTs - Primary Care Trusts. These are the first contact that people tend to have with the NHS. General Practitioners (GPs) will see a patient in the first instance. The GP may be able to treat that person without further problem but in some cases will need to refer the patient for more specialist treatment - so called secondary health care. This is likely to be at a hospital where the patient will need to see a specialist. That specialist may then recommend a course of treatment depending on the nature of the problem the patient has.

The Structure of Health Care in the UK

Source: About the NHS (http://www.nhs.uk/england/aboutTheNHS/default.cmsx). Crown Copyright, reproduced under licence.

Where and to whom the GP refers the patient is the crucial point in this section. In most economic markets, the demand and supply of goods and services are independent of each other. Suppliers may take patterns of demand into account but they cannot directly control demand and vice versa.

However, in health care the supplier of the service is also the one generating the demand. For example, I go to my doctor with a pain in my abdomen. The GP examines me and decides that I have kidney stones. Upon referral to the hospital, a specialist in renal care examines me and decides that the stones need to be removed by keyhole laser surgery. In another scenario, my pain could be diagnosed by the GP as being due to an ulcer - a different doctor and different treatment regime would be required as a result.

The point here is that the demand for the service (the doctor concerned, the treatment, the necessity of an operation, etc.) is determined by the very people who are also supplying the service. If a doctor tells me I need an endoscpy to check out my problem who am I to argue? As a patient, I am not in a position to be able to make informed choices because there is a considerable degree of imperfection in the information available to me.

The same situation exists in the case of medicines and drugs. The doctor may prescribe a particular course of drugs. As the patient, I do not know if there are other drugs available that would do the job just as well (or better), neither do I know if the drugs being prescribed are just given because they are the most effective treatment, or whether the GP/doctor is a shareholder in the company who makes them, or whether they are under pressure to get rid of stocks of drugs or to prescribe the cheapest available to save the NHS money!

Image: Who determines the demand for drugs? The doctors or the patient? Copyright: Carin Araujo, stock.xchng.

The idea therefore of bringing market forces into the health service is heavily restricted by this unusual situation.

Valuing a life:

This is a really difficult and tricky issue. We can look at the problem from a marginal cost perspective. Ask yourself this question - how much would you say a human life is worth. Or put it another way, how much extra, per year, would you be prepared to pay in taxes to save one additional human life? £10, £10,000, £1,000,000? The answer is almost impossible to answer, in part because it is so subjective (a normative proposition) and in part because most of us do not have £1,000,000 or anything like that to make the question feasible.

However, the NHS and doctors do have to find some way of making such a decision. One way would be to put an estimate on the contribution the individual might make to society - estimated in its crudest sense by their future earning capacity.

Take the example of a patient who is 45. In theory that person has another 20 years of work left in them before the normal retirement age. The average wage in the UK for all people is around £25,000 per annum. That means that this individual is worth £500,000 to society. If the treatment therefore costs less than £500,000 it could be argued it is worth treating this individual.

Other models look at the individual's willingness to pay to buy an extra year's worth of life or how much someone would be willing to pay to reduce the risk of death. There are inherent problems with all of these models but the essential basis of each of them is the fundamental concept of a 'trade off'.

One economist, Orley Ashenfelter, calculated the value of a human life based on an analysis of the effect of a rise in speed limits on US roads. The rise in the speed limit meant that drivers drove slightly faster. This 'led to' a rise in deaths on the roads by 35%. Ashenfelter then compared this to the data from areas where speed limits had not been changed. People in such areas drove slower.

The trade off occurs between the number of hours saved as a result of faster travel against the lives lost as a result. Ashenfelter found that the saving in time was about 45 million hours whereas the increase in the number of deaths was 360. Dividing the two gives an average of 125,000 hours per life. Multiply this figure by the US avarage wage and he ended up with the figure of £980,000.

One problem with such calculations is that it might assume that everyone's life is of equal value. Treatment given to a 98 year old may be valued differently compared to a 25 year old. The question then arises, where do you draw the line? When does someone beceome too old to treat? Already there have been cases where doctors have refused to treat patients who have smoked and drank heavily despite repeated warnings because they feel they have brought the problems onto themselves and that the use of public money to treat such people is misdirected.

Image: What price human life? Does age, behaviour and personal habit make a difference? Copyright: John Pring, stock.xchng.

Hospitals as cost centres:

Cost centres are important concepts in business. A cost centre is a point in a business organisation where costs can be specifically attributed. For example, in a hospital, the X-ray department will incur various costs in carrying out its work. How much this cost is, over a period, can be calculated fairly accurately. Cost centres are important in that knowledge of them can help a business in analysing and controlling costs within the business. If, for example, the X-ray department's costs rose dramatically from one year to the next as a proportion of the costs of the hospital concerned, investigations can be undertaken to discover whether this was due to increased use or whether there was some element of the unit that was inefficient in some way.

Image: A machine such as this may do work for a number of departments in a hospital. How do you account for the cost of it? Copyright: Adam Ciesielski, stock.xchng.

Some cost centres are easy to idenitfy, others are not. For example, in a hospital, the work of the catering department is spread across all the different departments of the hospital. In such cases, the costs of catering may have to be allocated to each department based on an evaluation of the proportion of use that department makes of catering.

Estimating value for money in the health service:

Value for money essentially looks at what you get in return for every unit of currency spent. For most purchases in life, we are able to make an informed estimate as to the value of something to us as individuals when purchasing. With health care, the benefits are not so clear.

Part of the reason for this is that the outcomes of health treatment are not always what we might imagine. Some illnesses and treatments can lead to the patient being able to live a completely 'normal' life; other treatments may result in us being better than we were before but not able to live completely 'normal' lives. The definition of the term 'normal' is the tricky part. A woman who has had to have a breast removed following diagnosis of breast cancer may be able to carry out all the normal functions of living but mentally might be scarred by what has happened and by the surgery. The feeling that they are not a 'complete woman' is not unusual amongst such patients.

One method that has been designed to try to come to terms with this is a unit of measurement of the outcome of treatment called quality adjusted life years (QALYs). The concept was developed by health economics researchers at the University of York in the UK. A QALY gives a measure of the extra quality of life and the number of years of extra life resulting from a treatment.

To create a scale (the measure of health state) that covers the range of outcomes of a treatment (or intervention as it is called), researchers went from 1, the best possible state of health where all normal functions were at the disposal of the patient, to 0, the worst possible health state. Between these two scales (and it may seem rather bizarre) was 'death' - in other words, an intervention could be carried out that results in the death of the patient.

What could be worse than death? This is very much a normative issue but it may be possible to imagine a state of health that exists where a patient suffers intolerable physical and mental pain. Doctors, for example in the case of Charolte Wyatt, maintained that Charlotte was in a state where 'her quality of life was both terrible and permanent' and that 'she had no feelings other than continuing pain'.

Another example might be the state of the young man, Tony Bland who, in 1989, suffered severe brain damage after being crushed at the Hillsborough Stadium disaster. He existed in a permanent vegetative state, a condition where the patient loses cognitive functioning - the ability to process information, be aware of the environment and what is happening to them and around them - but is still able to breath and survive through artificial nutrition and hydration. Mr Bland survived in this state for 3 years before the High Court agreed that his life support should be switched off. The relatives of Mr Bland were reportedly 'relieved' at the judgement. Clearly in such tragic situations, some might view the quality of life as being worse than being dead.

The researchers drew up the grades within this scale based on responses from patients about their preferences for different states of health. The grades within the scale, therefore, allow the user to be able calculate the number of QALYs gained from a treatment. If treatment of a condition of a 50 year old patient restores the person to full health and that person's life expectancy is 76, then the treatment will have resulted in 26 QALYs. If the treatment restores the person to a reasonable state of health but with some disabilities, such as some limitations to walking, breathing, sight, hearing or other problems rated on the scale as 0.75, then the number of QALYs would be 0.75 x 26 = 19.5 QALYs.

Having got some indication of an outcome, the cost of providing that outcome can be identified and as a result some measure of the value for money provided by healthcare treatment can be identified. For example:

• The average cost of a primary hip replacement is £4,160.
• The average cost of a heart transplant is £16,500.
• The average cost of treating a patient with an open lower limb fracture or dislocation is £2,521 per fracture.

Let us assume that the following outcomes are possible after treating a 40 year old patient:

Treatment	Cost per patient	Measure of health state	Additional life expectancy	QALY	Cost per QALY
Hip Replacement	£4160	0.95	15	14.25	£291.92
Heart Transplant	£16,500	0.83	10	8.3	£1,987.95
Fracture	£2,521	1.00	35	35	£72.03

Predictably the fracture comes out as providing the best value for money because of the amount of years of 'good health' it provides after treatment. We can also deduce from this that the opportunity cost of treating one person with a heart transplant is 6.8 people that could have been given a hip replacement and achieving the same cost per QALY - in other words the cost per outcome.

This system therefore provides the health professionals with some form of measure of the outcome of treatment, its associated cost, comparisons between hospitals and departments and thus the basis for decision making.

Data / Facts / Figures

• Details of the costs of providing a range of treatments on the NHS (http://www.dh.gov.uk/assetRoot/04/07/01/16/04070116.xls)

Related Web sites for Research

• An outline of the cost effectiveness of transplants - from the NHS (http://www.uktransplant.org.uk/ukt/newsroom/fact_sheets
  /cost_effectiveness_of_transplantation.jsp)
• The economic benefits of speed cameras - view from the Cleveland Safety Camera partnership (http://www.clevelandsafetycameras.co.uk/index2.html)
• Article on the approaches to valuing human life by Richard P. Morin (http://www.brown.edu/Administration/George_Street_Journal/value.html)
• A more detailed analysis estimating the value of a human life by J.K. Vrijling and P.H.A.J.M. van Gelder(http://www.waterbouw.tudelft.nl/public/gelder/paper58.pdf)
• Summary of Ashenfelter's work - from the Daily Princetonian (http://www.dailyprincetonian.com/archives/2002/10/09/news/5646.shtml)
• BBC news article on Charlotte Wyatt's case - note this is an on going case and is likely to change (http://news.bbc.co.uk/1/hi/health/3706770.stm)
• A spreadsheet showing the NHS Reference Costs for different treatments (FCE stands for 'Finished Consultant Episodes') (http://www.dh.gov.uk/assetRoot/04/07/01/16/04070116.xls)
• US question and answer site on transplant surgery (http://www.transweb.org/subindex/azindex/azindexa.html)
• Department of Health (http://www.dh.gov.uk/Home/fs/en)
• Guide to foundation hospitals - from the Department of Health (http://www.dh.gov.uk/PolicyAndGuidance/OrganisationPolicy/
  SecondaryCare/NHSFoundationTrust/fs/en)