🏥 How to put a price on health
Health economics answers sensitive questions around allocating finite resources to a priceless good.
As the saying goes, “You can’t put a price on health”. But unfortunately, there is a price on health in our consumerism world that we cannot avoid. From the price of your health insurance to the amount of money the government is ready to spend on healthcare interventions before saying “It is not worth it”, Health Economics quantifies the value of life for the parties involved, from patients to policymakers. Simply put, healthcare resources are finite, resulting in difficult decisions for governments to make on how to allocate these resources to achieve the greatest benefit for the population as a whole.
Incremental Cost-Effectiveness Ratio (ICER)
A tool used by governments to make a decision on healthcare interventions is the incremental cost-effectiveness ratio (ICER). ICER is calculated by dividing the incremental cost of the intervention by the incremental benefit it provides. The incremental cost is relatively easy to calculate, as it is the difference in the cost of the new intervention and the standard intervention. It also includes the differences in the costs of potential follow-up treatments that may be required in the future, depending on the timescale being studied.
The benefit of a healthcare intervention is often expressed as quality-adjusted life years (QALYs). QALYs are a measure of the quality and quantity of life gained from a healthcare intervention. It takes into account not only the length of life gained but also the quality of that life. A year of life free from disability or disease would be assigned a higher value than a year of life lived with a chronic illness or disability. 1 QALY equates to one year in perfect health while 0 QALY equates to death. 0.5 QALYs may mean half a year in perfect health, one year in “half-perfect” health or any other combination. Calculating a QALY requires two inputs - The utility value associated with a given state of health and the years lived in that state. The measure of utility is derived from clinical trials and qualitative studies that measure how people feel in these specific states of health. Hence, QALYs can be subjective, albeit they are backed by clinical studies to strengthen the evidence for a QALY of a given health state.
The incremental health benefit is the gain/loss in the QALYs between the two interventions. It also takes into account the potential changes in health states in the future and the associated QALYs for them, depending on the timescale being studied. Therefore, ICER is expressed as the cost per QALY gained (i.e. $/QALY).
The Use of ICER in Healthcare Systems
ICER is used by healthcare systems to decide whether a healthcare intervention is cost-effective, or in layman's terms “worth it”. If the ICER is below a certain threshold, the intervention is considered cost-effective, making it more likely to be implemented. On the contrary, if it is above the threshold, it is considered to not be cost-effective, reducing the chances for it to be implemented.
The NHS is one of the few countries to have explicitly stated ICER thresholds. Specifically, anything below £20,000/QALY is accepted and anything above £30,000/QALY is rejected. Interventions with an ICER in between these two values would be further discussed before making a final decision. These thresholds are also one of the lowest values for a first-world country, showing the financial strain that the NHS has been in. A higher threshold would mean the healthcare system is willing to spend more money for a certain amount of benefit.
It should also be noted that compared to private healthcare systems, public healthcare systems, like the UK’s NHS, typically have much lower ICER thresholds as healthcare is free for its citizens. Hence, with a fixed budget, using the money for an intervention that is not cost-effective means that the budget is reduced for a potentially more cost-effective intervention, even if it is for a completely different health issue. Hence, fewer people would be able to benefit and potentially more people may not receive life-saving treatment. On the other hand, private healthcare systems like the US have much higher ICER thresholds as they are more driven by profits and can pass the costs onto patients and/or their insurance. That being said, private healthcare systems tend to have more than one option for a given health issue to cater to the differing budget constraints between patients.
Criticisms and Limitations of ICER
The biggest criticism of ICER is that it literally puts a price on health and life. To many, healthcare is a fundamental human right, and it should be analyzed more in-depth. Alternatively, there should not even be a budget for healthcare and everyone should be provided with the necessary treatment. Realistically, this is impossible and while ICER may not be without its flaws, its crudeness of putting a literal price on health is what also makes it a strong, decisive tool in making decisions.
Another, more valid, criticism (or limitation) of ICER is that QALYs may not always paint an accurate picture. For instance, a stroke patient today has a much higher chance of living an otherwise healthy life compared to 20 years ago. However, the difference in QALYs for a stroke patient versus a healthy person may be larger on paper than it is in reality. It is indeed hard to put a number as to how healthy a person is with a certain condition, considering the nearly infinite combinations of conditions and their severity, combined with the inherent differences between individuals. These factors may make it near impossible to get an accurate value for QALY. Regardless, there is no perfect solution to put a value on health but research has been relatively in-depth to put a value in terms of QALYs, such as numerous clinical and qualitative studies to get an as accurate QALY value for a given health state as possible. Thus, we cannot discount the importance of QALYs for ICER calculations.
Another limitation of ICER is that it can vary significantly according to the timescale that is being studied, which can vary from a few days to decades. An example is the use of immunotherapy to treat cancer. Immunotherapy can be expensive in the short-term but may provide better long-term benefits than the standard treatments (e.g. chemotherapy) in terms of increased survival rates and improved quality of life. The short-term ICER for immunotherapy may be high, but the long-term ICER may be more favourable because of the potential for long-term benefits. Therefore, the timescale chosen can be very important and it is important that healthcare systems place more emphasis on long-term ICER. Unfortunately, this is often not the case as budgets for healthcare systems are typically allocated on a yearly basis. Therefore, the decision-makers may feel that the long-term benefits may not be justifiable for the short-term increased costs, especially if the budget has to come at the expense of other treatments. That being said, healthcare systems should make a shift to focus significantly more on treatments with better long-term ICERs as this would increase the overall health of the society. It would also decrease costs in the long term as treatments with better ICERs would reduce the number of people who need follow-up treatments in the future.
All in all, ICER remains an important tool for healthcare systems to make resource allocation decisions. It provides a way to compare different healthcare interventions based on their cost and effectiveness, and it can help healthcare systems to control costs while still providing high-quality care to maximize the benefit for society.
Hi, I'm Mayank Goel, a Master of Public Health (MPH) student at Imperial College London and a Bioengineering Graduate from Nanyang Technological University. | LinkedIn
Great article! Thanks for explaining so clearly the economics behind healthcare I as a layman would have otherwise not known about. Very basically speaking, I don’t want to be reduced to an average for decisions on whether my condition will have access to sufficient options for treatment — I wonder if this awareness is motivating enough for people to work harder in protecting their health.
Another interesting thread of thought here, is that how we could assign ICER scores to non-healthcare things - maybe more broadly addressing the social determinants of healthcare, like we discussed in our prior articles: https://heacare.substack.com/p/honeybee-healthcare