NZ ranks 18th in new ridiculous healthcare ranking

Last month, the New Zealand Herald reported:

New Zealand's healthcare system is ranked 18th place out of 24 countries - lagging behind a number of countries including Japan, Germany and even Australia.

UK healthcare recruiter Medical ID has ranked 24 OECD countries on their healthcare systems.

The ranking was based on the amount of GDP spent on healthcare, the number of doctors and nurses, how many hospital beds they have and the average life expectancy.

New Zealand was ranked 18th with a score of 60/100 and spending 9 per cent of its GDP on healthcare. It has 12,821 hospital beds and 62,843 doctors and nurses and the average life expectancy is 81.45.

It shared its 18th placed ranking with the UK which, despite having the 13th highest spending on healthcare, was brought down by being placed 22nd for the number of doctors and beds per capita.

This shouldn't even be news. Why? Because the ranking method is ridiculous, for a couple of reasons.

First, it is based on a mashup of both inputs (healthcare spending, doctors/nurses, and hospital beds) and outputs (life expectancy). This is basically double-counting, since inputs get turned into outputs. But also it double counts some inputs, since spending on doctors/nurses and hospital beds depends on the number of doctors/nurses and hospital beds.

When you want to know if a health system is good or not, it matters most to you what the output of the system is - does it keep people healthier, for longer? It doesn't matter so much how the health system achieves those outcomes. That is, it doesn't matter how much the health system spends, or what inputs it uses, if all you care about is whether it keeps people healthier. In that case, why not simply look at life expectancy, or even better healthy life expectancy, to work out which health system is better?

Alternatively, you might be interested in how much health outcome you get per unit of inputs (which might be per doctor/nurse hour, per dollar of spending, per hospital bed, etc.), or the amount of health inputs per unit of health outcome (for example, the cost per year of additional life expectancy). In the latter, you would be measuring the cost-effectiveness of the health system. In both cases, more output (using the same amount of inputs) is good, but more inputs (to get the same amount of output) is bad.

In contrast, in this ranking system, if two countries have the same number of doctors/nurses and hospital beds, and the same life expectancy, but one spends more than the other, the country that spends more is ranked higher. WTF? If Country A is spending more but only achieving the same outcome (the same life expectancy) as Country B, then Country A has got a worse health system. It is wasting healthcare resources, relative to Country B.

Second, and related to the previous point, higher health spending is not necessarily better. If that were true, a country could improve its ranking by simply contacting Big Pharma, and offering to pay them double for medicines.

So, it should be easy to see that this is a ranking system that is complete rubbish. I guess that's what happens when it is produced by "UK healthcare recruiter Medical ID", which has a vested interest in having a ranking system where the number of doctors and nurses, and healthcare spending, are indicators of a better healthcare system. In fact, they could instead be indicators that the healthcare system is simply wasteful.

Cost-benefit analysis and cost-effectiveness analysis are different

In yesterday's New Zealand Herald, Jamie McKay wrote about an interview with Environment Minister David Parker. This bit caught my eye (emphasis mine):

DP: Huh! The industry has been consulted for over a decade here! In terms of cost-benefit you don't actually do an analysis on whether you should have clean rivers, that's a value judgement, and the vast majority of New Zealanders think we should have rivers clean enough to swim in. What you use cost-benefit analysis for is to look at what is the most cost effective way of getting there.

No, that's NOT what you use cost-benefit analysis for. At least, it is not helpful to conflate cost-benefit analysis with cost-effectiveness analysis in this way.

Cost-effectiveness analysis evaluates the cost per unit of benefits for some option, where the benefits need not be measured in dollars (e.g. a reduction in nutrients in a stream). Cost-effectiveness analysis is useful when there is more than one way of obtaining benefits, because it tells you that whichever option achieves a unit of benefits at the lowest total cost is the more cost-effective approach.

Cost-benefit analysis is related, but different. It compares the costs of some activity with its benefits, where both the costs and benefits are measured in dollars (so that they are comparable). The outcome of a cost-benefit analysis is technically a measure of cost-effectiveness - it is a measure of the ratio of benefits to costs (in other words, it measures the value of benefits for each dollar of cost, which is the inverse of cost-effectiveness). If this ratio is greater than one, then the benefits of the activity are greater than the costs. If this ratio is less than one, then the benefits are less than the costs. Simple. Cost-benefit analysis is useful if you want to determine whether or not to undertake some action, or to choose between mutually exclusive alternatives.

Cost-benefit analysis for a single option (e.g. for cleaning up a stream) doesn't tell you what is cost-effective, because that is not its purpose. You need to be comparing multiple options to evaluate cost-effectiveness. In the case of clean streams, there probably are several options for clean-up to choose from. Of course, if you conducted multiple cost-benefit analyses for the different options, then you could argue that the option with the highest ratio of benefits to costs is most cost-effective. But cost-benefit analysis would likely be overkill for this purpose.

Cost-effectiveness analysis is easier to conduct than cost-benefit analysis, because for cost-effectiveness analysis you don't need to measure the value of the benefits (in dollars), which can be difficult as it requires non-market valuations of the benefits. Cost-benefit analysis will only be necessary if you have multiple benefits and you want to know the combined benefit (since converting everything to dollar values is a handy way to combine benefits in a single measure). But that is probably not the case for streams, where you can measure the benefits in terms of something like reduced nutrient loads, and converting the benefits to dollar terms would only add an additional source of error to the analysis.

Cost-effectiveness analysis is much more flexible than cost-benefit analysis if, as Parker implies, you've already made the decision to have clean rivers. If cleaning up streams is your sole goal (e.g. based on a measure of a single nutrient load or an index of several nutrient loads), then cost-effectiveness analysis is most likely what you would use to determine the most cost-effective way of getting there, NOT cost-benefit analysis.

Why Pharmac might be better not to fund next-generation drugs

As reported by the New Zealand Herald earlier this week, the government is to investigate a new fund to give New Zealanders access to costly new-generation medicines:

The Cancer Society has called for an early-access scheme, and Labour's previous health spokeswoman Annette King repeatedly called for one, saying that when in Government Labour would look at what funding was needed.

New Health Minister David Clark told the Herald the Government wanted to explore how such a scheme could operate.

The United States and Britain have versions of early-access schemes to let certain patients access ground-breaking drugs.

There is a real problem with funding of these schemes for very expensive treatments. While these treatments may be effective and have highly positive outcomes for the patients that receive them, focusing on the patients who will receive the treatment ignores the opportunity costs (this is a point I have made before about Pharmac funding, here and here). The appropriate way to decide on which treatments are funded is by considering their cost-effectiveness, not by considering which treatments generate the most negative media attention for the government.

A focus on cost-effectiveness ensures that scarce healthcare resources are being used where they will generate the greatest benefit for society. A treatment is cost-effective if it increases a person's health at a lower cost than alternative treatments. Since not all treatments provide the same health benefits (and many have negative side effects, etc.), we need some way of consistently measuring the health gains from a treatment, and measuring the cost per unit of health gain. To do this, we could use Quality-Adjusted Life Years (QALYs - a measure that combines length of life and quality of life) as our measure of health gain, [*] and cost-per-QALY-gained as a measure of which treatments are most cost-effective. A treatment that provides the same increase in QALYs for lower cost, or more QALYs for the same cost, should be preferred for funding.

That might sound unfair (especially to patients who miss out on funding, or their family or friends), but the alternative is even more unfair. If we ignore cost-effectiveness and simply fund any treatment that generates negative media attention (within the same fixed budget), then the healthcare budget will generate a lower total improvement in health. Funding expensive and less-cost-effective treatments has serious costs in terms of decreases in overall health and wellbeing of the population.

Even if the government increases funding for Pharmac, that increased funding should not necessarily go to these next-generation treatments, as there may be other currently-unfunded treatments that are most cost-effective and those should be funded first. Indeed, funds for next-generation treatments are not necessarily a good thing, as the Herald article notes:

The Cancer Drugs Fund in the UK has been overspending despite budget increases, resulting in a number of treatments being taken off its list.

An analysis in the leading cancer journal Annals of Oncology found the medicine funded through the British scheme was not worth the money, as only 18 of the 47 treatments prolonged the patient's life.

One of the paper's authors, Professor Richard Sullivan of King's College London, said the fund had been a "massive health error", and the populism that drives public policy has no place in health.

We need to be careful that our healthcare decision-making is made on the basis of what will generate the greatest gains in health for the budgeted amount, rather than making populist decisions that will make us worse off.

Read more:

• Pharmac vs. Keytruda - The sequel
• Keytruda, and why Pharmac looks for the best value treatments 

[*] An alternative is to measure health using the number of Disability-Adjusted Life Years (DALYs) averted. DALYs are a measure of health lost due to illness or injury, which can be used in place of QALYs (you can read more about QALYs and DALYs here).

Pharmac vs. Keytruda - The sequel

Back in 2015 I wrote a post about Pharmac's decision not to fund the drug Keytruda for melanoma patients. Keytruda is back in the news this week:

A 44-year-old father of four given six to nine months to live when he was diagnosed with lung cancer has seen his tumour halve in size thanks to a new treatment he describes as a "miracle drug".

Patients and advocates are calling on Keytruda to be publicly funded for lung cancer, the country's biggest form of cancer death which claims five lives a day, because many patients could not afford the tens of thousands of dollars required to pay for it...

Pharmac director of operations Sarah Fitt said they had received funding applications for Keytruda, also known as pembrolizumab, for the first and second-line treatment of advanced non-small cell lung cancer and would continue to review evidence.

Clinical advisers would now review extra information requested to decided (sic) on funding for it as a first-line treatment.

I'll simply reiterate some of the points that I made in that 2015 post (and note that this issue is quite timely given that my ECON110 class covered the health economics topic just this week).

It is worth starting by noting that Pharmac has a fixed budget to pay for pharmaceuticals. If it agrees to pay for Keytruda for lung cancer, at a cost of tens of thousands of dollars per patient, then that is tens of thousands of dollars that cannot be spent on pharmaceuticals for other patients. There is an opportunity cost to funding this treatment.

Now, that problem could be mitigated by the government increasing Pharmac funding by enough to pay for the Keytruda costs. But if Pharmac receives additional funding, is Keytruda the best use of that funding? Are there other treatments that could be funded instead? Even with extra resources, Pharmac's budget would still be limited, so how should we decide whether Keytruda is the best use of that additional funding?

Fortunately, there is a solution to these tricky questions: work out which treatments are most cost-effective and fund those first. Health economists use cost-effectiveness analysis to measure the cost of providing a given amount of health gains. If the health gains are measured in a common unit called a Quality-Adjusted Life Years (QALYs) then we call it cost-utility analysis (you can read more about QALYs here, as well as DALYs - an alternative measure). QALYs are essentially a measure of health that combines length of life and quality of life.

Using the gain in QALYs from each treatment as our measure of health benefits, a high-benefit treatment is one that provides more QALYs than a low-benefit treatment, and we can compare them in terms of the cost-per-QALY. The superior treatment is the one that has the lowest cost-per-QALY.

You might disagree that cost-effectiveness is a suitable way to allocate scarce health funding resources. I refer you to the Australian ethicist Toby Ord, who makes an outstanding moral argument in favour of allocating global health resources on the basis of cost-effectiveness (I recommend this excellent essay).

Finally, here's what I wrote about funding Keytruda in 2015 (for melanoma, but the same points apply in terms of Pharmac funding the drug for lung cancer):

Of course, it would be good for the melanoma patients who would receive Keytruda free or heavily subsidised. But, in the context of a limited funding pool for Pharmac, forcing the funding of Keytruda might mean that savings need to be made elsewhere [*], including treatments that provide a lower cost-per-QALY. So at the level of the New Zealand population, some QALYs would be gained from funding Keytruda, but even more QALYs would be lost because of the other treatments that would no longer be able to be funded.

Unfortunately, New Zealand doesn't have an equivalent of the UK's National Centre for Health and Care Excellence (NICE), which calculates cost-effectiveness of potential treatment options for the National Health Service and ranks them against an objective standard cost-per-QALY (of £30,000) to work out which options should or should not be funded. That makes so many of Pharmac's decisions subject to political interference, which really could end up costing us in terms of overall health and wellbeing.

The advantages of creating a market for live kidney donations

In the ECON100 tutorials, one of my favourite questions covers the welfare effects of creating a market for live kidney donations. And it's topical too - there was a front page story on the issue on the New Zealand Herald on 8 April (though it is no longer available online?).

The premise for the market approach is fairly basic. At the moment in most countries (including the U.S. and New Zealand) there is no market for kidneys, and kidney donors are not directly compensated for their kidney. Effectively this means that, in the market for kidneys, the price is fixed at zero, as in the diagram below. At this price, the quantity of kidneys demanded (QD) is greater than the quantity of kidneys supplied (QS). So, there is a shortage of kidneys - not every patient who has a need for a kidney transplant is able to receive one. The waiting list for a kidney transplant is about 450 in New Zealand, and about 93,000 in the U.S.

If live kidney donors (or deceased donors' estates) were compensated for giving up their kidneys, this would remove the effective price control from this market. The market price for a kidney would rise from zero to P1 (in the diagram above). The quantity of kidneys supplied would increase from QS to Q1 (as at least some people who wouldn't have given up kidneys for nothing would choose to do so in return for compensation), while the quantity of kidneys demanded would fall slightly from QD to Q1 (the slight decline here is because demand for kidneys is very inelastic - there are few substitutes for a kidney [*]). There would no longer be a shortage of kidneys.

The welfare impacts are likely to be large. Without the market for kidneys, the consumer surplus (a measure the amount by which transplant recipients benefit from kidneys) is the area ABCO (plus the triangle above AB which extends above the top of the diagram), which is also the measure of total welfare because there is no producer surplus. If the market was allowed to operate (no pun intended!), consumer surplus would be ABEP1 (plus the area above AB), and producer surplus (a measure of the amount that donors benefit from the market) would be P1ECO. Total welfare would now be ABECO (plus the area above AB) - an increase of BEC.

There are other ways of demonstrating the gains from compensating kidney donors. A recent paper in the American Journal of Transplantation by Philip Held (Stanford), Frank McCormick (Bank of America - retired), Akinlolu Ojo (University of Michigan Health Systems), and John Roberts (University of California San Francisco Transplant Service) evaluates the costs and benefits of government compensation of kidney donors. The paper is very readable, and I encourage you to read it (it is ungated). It's also notable for having twelve supplements of additional material to the paper, supporting the analysis and conducting sensitivity testing. The abstract provides the best summary of the results:

From 5000 to 10 000 kidney patients die prematurely in the United States each year, and about 100 000 more suffer the debilitating effects of dialysis, because of a shortage of transplant kidneys. To reduce this shortage, many advocate having the government compensate kidney donors. This paper presents a comprehensive cost-benefit analysis of such a change. It considers not only the substantial savings to society because kidney recipients would no longer need expensive dialysis treatments—$1.45 million per kidney recipient—but also estimates the monetary value of the longer and healthier lives that kidney recipients enjoy—about $1.3 million per recipient. These numbers dwarf the proposed $45 000-per-kidney compensation that might be needed to end the kidney shortage and eliminate the kidney transplant waiting list. From the viewpoint of society, the net benefit from saving thousands of lives each year and reducing the suffering of 100 000 more receiving dialysis would be about $46 billion per year, with the benefits exceeding the costs by a factor of 3. In addition, it would save taxpayers about $12 billion each year.

There's a lot that my ECON110 students can gain from reading this paper, as it makes extensive use of techniques we develop in a much simpler way in that paper. Among other things, Held et al. demonstrate that kidney transplantation is more cost-effective than kidney dialysis ($49,000 vs. $186,000 per Quality-Adjusted Life Year gained) for end-stage renal disease.

The overall conclusion though is again, that compensation for live donors of kidneys makes economic sense. Held et al. have a final comment for those who still hold a dissenting view:

Finally, we encourage those who oppose compensating kidney donors to place a monetary value on their concerns and to show how they outweigh the very large net benefits demonstrated by this analysis. If they do, they may discover—as we did in Supplement 6—that many of the arguments usually made against compensation of kidney donors turn out instead to be arguments in favor.

[HT: Marginal Revolution for the Held et al. paper]

*****

[*] Although, it could be argued that the demand for kidneys would actually increase, because a kidney transplant can be expected to last only 10-15 years, after which the transplant recipient would require another kidney transplant.

Keytruda, and why Pharmac looks for the best value treatments

I was privileged to attend a presentation by Professor Sir Michael Marmot on Tuesday. It was on inequality and health (which I'm not going to talk about in this post), and one of the points he made struck me - Sir Michael suggested that he doesn't make the economic case for reducing health inequality, he makes the moral case.

The reason that comment struck me is that economists are often unfairly characterised as not having regard for the moral case, particularly in the context of the allocation of health care spending. However, I'm not convinced that the moral case and the economic case for how health care spending is allocated are necessarily different. Toby Ord makes an outstanding moral argument in favour of allocating global health resources on the basis of cost-effectiveness (I recommend this excellent essay). Ill spend the rest of the post demonstrating why, using the example of Pharmac funding (or rather non-funding) of the new cancer drug Keytruda, that is currently big news in New Zealand (see here and here and here).

First, it is worth noting that Pharmac essentially has a fixed budget, which has increased from about $635 million in 2008 to $795 million in 2015. Pharmac uses that money to provide treatments at free or subsidised cost to New Zealanders. However, Pharmac can't provide an unlimited amount of treatments because its funding is limited. So, naturally it looks for the best value treatments.

What are the best value treatments? In the simplest terms, the best value treatments are the treatments that provide the most health benefits per dollar spent. A low-cost treatment that provides a large increase in health for patients is considered to be superior to a high-cost treatment that provides a small improvement in health.

Low-cost-high-benefit vs. high-cost-low-benefit is an easy comparison to make. But what about low-cost-low-benefit vs. high-cost-high-benefit? That is a little trickier. Economists use cost-effectiveness analysis to measure the cost of providing a given amount of health gains. If the health gains are measured in a common unit called a Quality-Adjusted Life Years (QALYs) then we call it cost-utility analysis (you can read more about QALYs here, as well as DALYs - an alternative measure). QALYs are essentially a measure of health that combines length of life and quality of life.

Using the gain in QALYs from each treatment as our measure of health benefits, a high-benefit treatment is one that provides more QALYs than a low-benefit treatment, and we can compare them in terms of the cost-per-QALY. The superior treatment is the one that has the lowest cost-per-QALY.

Following this model in the context of a limited pool of funds to pay for health care, then the treatments that are funded with higher priority then are the ones that have the lowest cost-per-QALY. This is essentially the model that the Pharmac follows, as do other countries such as the UK. The National Institute for Health and Care Excellence (NICE) sets a funding threshold of £30,000 per QALY - treatments that cost less than £30,000 per QALY are more likely to be funded, and those that cost more are less likely. In New Zealand, the effective cost-per-QALY for Pharmac-funded treatment was $35,714 for the last financial year.

Now consider Keytruda, a new 'wonder drug' for treating melanoma. The downside is that Keytruda is extremely expensive - $300,000 per patient for a two-year course of treatment. Of course the cost-per-QALY isn't calculated as simply as dividing that cost by two because patients may gain many years of healthy life as a result of treatment, but Pharmac rated Keytruda as "low priority", in part because of the high cost.

Andrew Little has suggested that Labour would override Pharmac's decision not to fund Keytruda if elected, and John Key has also wavered in the face of public demand for the drug. Would that be a good thing? Of course, it would be good for the melanoma patients who would receive Keytruda free or heavily subsidised. But, in the context of a limited funding pool for Pharmac, forcing the funding of Keytruda might mean that savings need to be made elsewhere [*], including treatments that provide a lower cost-per-QALY. So at the level of the New Zealand population, some QALYs would be gained from funding Keytruda, but even more QALYs would be lost because of the other treatments that would no longer be able to be funded.

And so, I hope you can see why the economic case and the moral case for the allocation of health care spending need not necessarily be different. By allocating scare health care resources using an economic case, we ensure the greatest health for all New Zealanders.

[*] Fortunately, neither political party is suggesting that funding for Keytruda would come out of Pharmac's existing limited budget. However, that doesn't mitigate the issue of overriding Pharmac's decision-making. Even if Pharmac's budget is increased to cover the cost of providing Keytruda to all eligible patients, there may be other treatments that have lower cost-per-QALY than Keytruda that are currently not funded but could have been within a larger Pharmac budget.