Pharmacoeconomics & Health Outcomes

Decision Analysis Part 1

Leon E. Cosler, R.Ph., Ph.D.

Associate Professor of Pharmacoeconomics
Albany College of Pharmacy
Road Map: Decision Analysis

1. Describe the steps involved

2. Construct a decision tree analysis

3. Use and interpret the results

Where’s he getting this?

• Text chapter 8
Decision Analysis

• A quantitative approach to decision making

• Uses a diagram for choices and outcomes
• Quantifies uncertain events
• Imposes logical thinking
• Method used “inside” CEA, CUA, etc.
• Emphasis on ‘expected values’
Decision Analysis: History

• WW II military applications
• allocation of scarce resources

• 1970’s + in medical / health literature

• 1987: >200 published medical studies

• 1995: 81 articles for Rx products

• 2008: 21,840 PubMed hits in the last 5 years

“Expected” Values
• In probability theory the expected value of a
random variable is the sum of the probability of each
possible outcome of the experiment multiplied by its
payoff ("value").
• It represents the average amount one "expects" as the
outcome of the random trial when identical odds are
repeated many times.
• The expected value itself may be unlikely or even
impossible (ex. Dice)
• These strategies are used in gambling, attempts at
medical therapies, or other problem solving situations.
Expected Value of rolling 1 die:
Expected Value:

Chances or Chances or
"Expected
Face Value probability (as probability (as
Values"
ratio) decimal)

1 x 1/6 0.167 = 0.167

2 x 1/6 0.167 = 0.333
3 x 1/6 0.167 = 0.500
4 x 1/6 0.167 = 0.667
5 x 1/6 0.167 = 0.833
6 x 1/6 0.167 = 1.000

Expected Value (Σ): 3.500

Expected Value of rolling 2 dice:

Expected Value:

Chances or Chances or
Sum of 2 "Expected
probability probability Possible Combinations of 2 dice:
dice: Values"
(as ratio) (as decimal)

2 x 1 / 36 0.028 = 0.056 1+1

3 x 2 / 36 0.056 = 0.167 1+2 2+1
4 x 3 / 36 0.083 = 0.333 1+3 3+1 2+2
5 x 4 / 36 0.111 = 0.556 1+4 4+1 2+3 3+2
6 x 5 / 36 0.139 = 0.833 1+5 5+1 2+4 4+2 3+3
7 x 6 / 36 0.167 = 1.167 1+6 6+1 2+5 5+2 3+4 4+3
8 x 5 / 36 0.139 = 1.111 2+6 6+2 3+5 5+3 4+4
9 x 4 / 36 0.111 = 1.000 3+6 6+3 4+5 5+4
10 x 3 / 36 0.083 = 0.833 4+6 6+4 5+5
11 x 2 / 36 0.056 = 0.611 6+5 5+6
12 x 1 / 36 0.028 = 0.333 6+6

Expected Value (Σ): 7.000

Expected Values
Expected Values
Value ("Payoff") Probability Value ("Payoff") Probability
$ 0.01 X 0.0385 ( 1 / 26) = $ 0.0004 $ 0.01 X 0.0400 ( 1 / 25) = $ 0.0004
$ 1.00 X 0.0385 = $ 0.0385 $ 1.00 X 0.0400 = $ 0.0400
$ 5.00 X 0.0385 = $ 0.1923 $ 5.00 X 0.0400 = $ 0.2000
$ 10.00 X 0.0385 = $ 0.3846 $ 10.00 X 0.0400 = $ 0.4000
$ 25.00 X 0.0385 = $ 0.9615 $ 25.00 X 0.0400 = $ 1.0000
$ 50.00 X 0.0385 = $ 1.9231 $ 50.00 X 0.0400 = $ 2.0000
$ 75.00 X 0.0385 = $ 2.8846 $ 75.00 X 0.0400 = $ 3.0000
$ 100.00 X 0.0385 = $ 3.8462 $ 100.00 X 0.0400 = $ 4.0000
$ 200.00 X 0.0385 = $ 7.6923 $ 200.00 X 0.0400 = $ 8.0000
$ 300.00 X 0.0385 = $ 11.5385 $ 300.00 X 0.0400 = $ 12.0000
$ 400.00 X 0.0385 = $ 15.3846 $ 400.00 X 0.0400 = $ 16.0000
$ 500.00 X 0.0385 = $ 19.2308 $ 500.00 X 0.0400 = $ 20.0000
$ 750.00 X 0.0385 = $ 28.8462 $ 750.00 X 0.0400 = $ 30.0000
$ 1,000.00 X 0.0385 = $ 38.4615 $ 1,000.00 X 0.0400 = $ 40.0000
$ 5,000.00 X 0.0385 = $ 192.3077 $ 5,000.00 X 0.0400 = $ 200.0000
$ 10,000.00 X 0.0385 = $ 384.6154 $ 10,000.00 X 0.0400 = $ 400.0000
$ 25,000.00 X 0.0385 = $ 961.5385 $ 25,000.00 X 0.0400 = $ 1,000.0000
$ 50,000.00 X 0.0385 = $ 1,923.0769 $ 50,000.00 X 0.0400 = $ 2,000.0000
$ 75,000.00 X 0.0385 = $ 2,884.6154 $ 75,000.00 X 0.0400 = $ 3,000.0000
$ 100,000.00 X 0.0385 = $ 3,846.1538 $ 100,000.00 X 0.0400 = $ 4,000.0000
$ 200,000.00 X 0.0385 = $ 7,692.3077 $ 200,000.00 X 0.0400 = $ 8,000.0000
$ 300,000.00 X 0.0385 = $ 11,538.4615 $ 300,000.00 X 0.0400 = $ 12,000.0000
$ 400,000.00 X 0.0385 = $ 15,384.6154 $ 400,000.00 X 0.0400 = $ 16,000.0000
$ 500,000.00 X 0.0385 = $ 19,230.7692 $ 500,000.00 X 0.0000 = $ -
$ 750,000.00 X 0.0385 = $ 28,846.1538 $ 750,000.00 X 0.0400 = $ 30,000.0000
$ 1,000,000.00 X 0.0385 = $ 38,461.5385 $ 1,000,000.00 X 0.0400 = $ 40,000.0000

∑ = $ 131,477.54 ∑ = $ 116,736.64
Important symbols:
A “choice” node:
what follows is result of a decision

A “chance” node:
what follows is uncertain &
requires probabilities

START
HERE
TIME
Decision Analysis Steps
1: Identify a decision which needs to be made

2: Diagram the decision & all plausible results

- diagram consequences over time
- include probabilities for each result
- calculate “expected values” for each decision
- identify the preferred alternative
MATH ...
Example 1

Patients with medical condition ‘X’ have two choices for initial treatment:
a.) surgery or b.) Rx therapy.
If, after 3 months of Rx therapy, there is no improvement; patients will
then get surgery.

Assumptions:
a. the surgery is 100% effective in all cases
b. the Rx treatment has no adverse effects; but is only 90% effective
c. the following cost data apply to each treatment

Treatment Effectiveness Direct Costs

Surgery 100% $100,000
Drug 90% $250 per month
Example 1

Goal:
• What is the ‘average’ or ‘expected’ treatment cost per patient
for patients treated with:

• a.) Rx therapy or b.) Surgery

Decision Analysis (“Cosler method”)
1 ?? % $ ???,??? $ ???

2 ?? % $ ???,??? $ ???

3 ?? % $ ???,??? $ ???
Decision Analysis (“Cosler method”)
1 10 % $ 100,750 $ 10075

Ineffective P=0.1 Surgery

RX P=1.0

Effective P=0.9
2 90 % $ 750 $ 675

Total: 100% 10,750

surgery P=1.0
3 100 % $ 100000 $ 10000

Total: 100,000
100%
Decision Analysis Worksheet #1
1

3
Example 1 Decision Analysis

?
Decision Analysis: Example 2

Consider whether or not to give Ab prophylaxis

after c-sect to reduce post-partum infection
(endometritis). A normal c-section results in a 3
day stay. If infection occurs, it results in an
additional 4 days in the hospital. There are no
other significant implications for using the
antibiotic (no allergic reactions, etc.)

- What is the expected cost per patient

for pts with Ab Tx and without Ab Tx?
Decision Analysis: Example 2
Utilization Data Cost Length of Stay

Antibiotic Prophylaxis: $ 300

Normal C-section $ 7,000 3 days
Endometritis $ 8,000 4 days

Probabilities:
Endometritis with no Ab: 25%
Endometritis with Ab: 8%

- What is the expected cost per patient

for pts with Ab Tx and without Ab Tx?
Example 2: Decision Analysis

prophylax

No prophylax
Decision Analysis

Prophylaxis

No
Prophylaxis
Decision Analysis

Infection will not occur 92% 7300

$ 6716
Prophylaxis P=0.02

P=0.08
Infection will occur 8% 15,300 1224

7942
P=0.75
Infection will not occur
75 % 7000 5250

P=0.25
No Infection will occur
Prophylaxis 25 % 15000 3750

9000
That’s all for today… !
Decision Analysis (“Cosler method”)
1 ?? % $ ???,??? $ ???

2 ?? % $ ???,??? $ ???

3 ?? % $ ???,??? $ ???