WTP

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Willingess to pay (WTP) perspectives

February 14, 2008 in Economics - General, Experimental | Permalink

Many health economists wonder how much individuals would be willing to pay for a treatment. Since most medical care is paid by third parties (i.e. private insurance companies or the government) we can not use revealed preference econometrics which has been used in other areas of economics. Instead, many economists ask individuals directly these valuation questions. Yet simply asking the question is not enough. Do you ask the person how much they should pay for a treatment for an illness they do not yet have? Or should we only ask patients who have the disease how much they would be willing to pay for their own treatment? In healthcare systems that are run by the government, one may also want to know how much a person would pay for treatment for other people’s diseases.

In order to understand, what perspective should be taken, a paper by Dolan et al. (Health Economics 2003) uses a simple chart to illustrate six different perspectives:

  Ex-ante Ex-post
Personal 0<pp<1; po=0 What value do you attach to treatment being available should you need it? pp=1; po=0 What value do you attach to your own treatment?
Social pp=0; 0<po<1; What value do you attach to treatment being available to others should they need it? pp=0; po=1 What value do you attach to the treatment of others?
Social inclusive personal 0<pp<1; 0<po<1; What value do you attach to treatment being available to a group of people amongst whom you might find yourself pp=1; po=1 What value do you attach to the treatment of yourself and others?
         

The term pp gives of the probability of one’s own need for treatment, and po is the probability that others in society will need treatment.

Why is it important for researchers to keep track of all these different perspectives when measuring willingness to pay (WTP)? Dolan notes that empirically, “real patients often give higher valuations than hypothetical patients.” Yet this need not be the case. If patients, ex-post, have adapted to the disease to a significant degree, than hypothetical patients may have higher valuations that real patients.

Whenever a researcher is investigating WTP measures, they must very cautious as to the perspective under which the question is asked.

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Welfarists vs. Extra-welfarists

February 13, 2008 in Economics - General, Experimental | Permalink

Health economists, policy makers, physicians and public health officials all want to maximize the well-being of society. These groups evaluate different medical treatments or public health interventions and then determine if the benefit is worth the cost.

In an opinion piece by Dorte Gyrd-Hansen in Pharmacoeconomics (2005), two schools of thought are examined. Those who are ‘welfarists’ believe that “the output of healthcare should be judge according to the extent to which it contributes to overall welfare (i.e. the [weighted] sum of individual utilities….’extra-welfarists’ do not define the output of healthcare in terms of preferences for health vis-a-vis other goods, but according to its contribution to health itself, i.e. they wish to maximize health as against overall welfare.”

What does this mean in reality?

“From a welfarist theoretic framework, treating a person who copes well with her disease and thus generates a high level of personal utility despite a poor health state will not be as efficient as treating a person who copes poorly. Extra-welfarists would aim at constructing an outcome measure that would produce equal values for the two strategies thus overriding individual preferences.”

Let’s use a chart to compare these two philosophies:

  Welfarist Extra-Welfarist
Focus Output of medical care should be judged against all other goods Output of medical care should be judged against all other types of treatment
Function to maximize u(x,h(m)); s.t.: x+pm=I h(m); s.t. [h(m)-h(0)]/p>C
Individual heterogeniety Different individuals value the same health state differently Assume that everyone values health states similarly
Analysis Cost-benefit analysis (CBA) Cost-effectiveness analysis (CEA)
Advantage Theoretically superior Easier to implement in practice
     

From the chart we see that welfarists try to maximize [the sum of] individual utilities subject to a budget constraint. Extra-welfarist, try to maximize health which is done by choosing all medical procedures which are more cost-effective than a certain threshold. This threshold, C, is must be chosen by policymakers. Welfarists wisely see that some individuals value health more than others in comparison to other goods. The extra-welfarist assumes all individuals with the same disease are homogeneous. This may seem naive, but in practice, it is very difficult to find each individuals willingness to pay for an increased level of health.

Extra-welfarists often try to elicit willingness-to-pay (WTP) measures for an additional QALY (i.e. quality-adjusted life year). If one applies a single WTP for each QALY, this “will entail overriding individual preferences such as diminishing marginal utility of health and potential differences in the value of increment health across population groups.” If we could rank health on a scale from 0 to 100 where 0 is equivalent to death and 100 is perfect health, economists would argue that under diminishing marginal utility of health that and individual would value an increase in health from 50 to 60 more than they would an increase from 90 to 100.

So is using the extra-welfarist QALY acceptable? While the welfarist camp offers no practical, easily estimable alternative, the do bring out some short comings of using QALYs (e.g., diminishing marginal utility of health, individual heterogeneity in terms of valuation of health against other good). Thus, I think the QALY method is helpful to analyze the benefit of a particular medical treatment, but the cost per QALY should not be the only factor taken into account when analyzing whether or not to adopt a new medical procedure.

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