The United States government has created an Office of Health Economic Evaluation

Question

The United States government has created an Office of Health Economic Evaluation and the President has appointed you as the Undersecretary of Health Economics. Congratulations! You have been well trained for this new position. There are three evaluations lying on your desk after you arrive from your Senate confirmation hearing:

A proposal to invest $10,000,000 in debit card payments for health care providers to eliminate delays in payments by CMS. It is expected that the system would save $8,000,000 per year in administrative costs;

A proposal for $5,000,000 a year to immunize children against whooping cough, expected to reduce the incidence of this illness by 1,000,000 per year;

and A comparison of two treatments for stage IV breast cancer. One costs $100,000 and extends life an average of 9 months. Another costs $75,000 and extends life by an average of 7 months.

Pick one of these three items and describe how you would analyze that proposal, including a description of what type of analysis discussed in your readings would be used for that proposal. What variables would you need to evaluate and what data would you need? State any assumptions you feel necessary to answer the question.

Explanation / Answer

Considering the first alternative, the anlaysis would be based on NPV method and from a scaleability perspective. The proposal requires initial investment of $ 10 million and this will result in annual savings of $ 8 million in administrative costs. To evaluate this project using NPV (Net Present Value), we would need following additional information

1. Interest rate (discounting rate)

2. Investment Schedule. How will $ 10 million be invested. whether it will be invested in the initial itself, or the investment will be spread across a time period.

3. When will the savings start from.

4. For how many years will the savings continue.

5. Whether the system will be scaleable or there will be limits to transactions.

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