Suppose that you are asked to conduct a CEA of hip replacement surgery for patie
ID: 1120955 • Letter: S
Question
Suppose that you are asked to conduct a CEA of hip replacement surgery for patients with arthritis in their hip joints. Assume: Without surgery, the average patient's life-expectancy is 9 QALYs. With surgery, the average patient's life-expectancy is 14.8 QALYs. The cost of the surgery is $50,000. a) Calculate and show on a graph the ICER. In a study published in JAMA Internal Medicine (May 25, 2013) the cost of a hip replacement at different hospitals across the US ranged from about $11,000 to $125,000. Modify your graph from part a to incorporate this uncertainty, using these results as the lower- and upper-bound estimates (best case/ worst case) of cost. b) c) Suppose there is also uncertainty about quality-adjusted life expectancy: Without surgery, life expectancy might be as low as 6.5 QALYs or as high as 11.5 QALYs. Assume you're certain that with surgery, life expectancy is 14.8 QALYs. Calculate the upper and lower bounds (best case/ worst case) for the QALY gain from an immediate hip replacement.Explanation / Answer
(a) Price elasticity = 0.4
Insurance covers the 70 percent of the bill.
This means that price has decreased by 70%.
When price decreases, quantity demanded increases.
Price elasticity = % change in quantity demanded/% change in price
0.4 = % change in quantity demanded/70
% change in quantity demanded = 28
Thus, the quantity demanded of hip replacement will increase by 28 percent.
Price elasticity = 0.4
Insurance covers the 95 percent of the bill.
This means that price has decreased by 95%.
When price decreases, quantity demanded increases.
Price elasticity = % change in quantity demanded/% change in price
0.4 = % change in quantity demanded/95
% change in quantity demanded = 38
Thus, the quantity demanded of hip replacement will increase by 38 percent.
(b) (i) Price of hip surgery has increased from $50,000 per surgery to $80,000 per surgery.
So,
New price = $80,000 per surgery
Insurance covers 95% of price.
Amount covered by insurance = (95/100) * $80,000 = $76,000
Amount each insured person will pay = Price - Amount covered = $80,000 - $76,000 = $4,000
So, each insured patient will now pay $4,000 for a hip replacement surgery.
Price elasticity = 0.4
Original demand (Q) = 10,000 surgeries
Original price (P) = $50,000
New price (P1) = $4,000
Calculate percentage change in price -
% change in price = [(P1 - P)/P] * 100 = [(4,000 - 50,000)/50,000] * 100 = -92%
Negative sign indicates that price has decreased. However, negative sign can be ignored.
So, percentage change in price equals 92 percent.
Price and quantity has inverse relationship. As price has decreased, quantity demanded will increase.
So, the quantity demanded of hip replacement surgery will increase.
Calculate % change in quantity demanded -
Price elasticity = % change in quantity demanded/% change in price
0.4 = % change in quantity demanded/92
% change in quantity demanded = 36.8
% increase in quantity demanded = 36.8
original demand = 10,000 surgeries
Increase in demand = 10,000 * (36.8/100) = 3,680
So, the quantity demanded will increase by 3,680 surgeries.
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