Assessment of Approaches to Evaluating Telemedicine. 5. Cost and Other Economic Impacts


Health care technologies can have a wide range of microeconomic and macroeconomic effects or impacts. At the microeconomic level, the cost of a technology may be determined by formal cost accounting, or by such proxies as prices, charges, and payment levels. Other microeconomic impacts are measured in terms of comparisons of resource requirements and the outcomes or benefits of a technology for particular applications through such analyses as cost-minimization analysis, cost-effectiveness analysis, cost-utility analysis, or cost-benefit analyses. Macroeconomic impacts include the impact of technology on national health care costs and the effect of technology on resource allocation among different health programs or among health care and other sectors of the economy.

Some of the commonly recognized types of economic impact of telemedicine applications are costs associated with: patient time and productivity; transportation; capital (equipment, space, etc.), maintenance, and communications; utilization of health care services; and staffing levels and productivity of health professionals. As is the case for other types of technology, introduction of telemedicine can prompt various cost tradeoffs. For example, changes in utilization of health care services may appear in different forms. By lowering barriers to access, telemedicine may increase near-term utilization of services and related health care costs. However, costs of earlier care for patients who otherwise may have delayed care in the absence of telemedicine may be offset by savings from reducing or obviating the need for downstream medical costs for treating what would have been progressively worse conditions. More well-designed longer-term studies of these cost tradeoffs are needed to demonstrate the health and economic value of telemedicine. Even so, as described below, the shorter-term costs may be overestimated because of the start-up costs associated with establishing a telemedicine program, particularly if these are determined based on per-patient costs where patient utilization is low for start-up programs.

Assessing the economic attributes of teleconsultations and other telemedicine applications raises some special challenges. Among these are the following.

  • Low utilization in start-up or pilot telemedicine programs yields high levels of cost-per-patient or cost-per-consultation that may be misleading compared to steady-state utilization levels.
  • Cost structures change with rapidly evolving technologies.
  • Cost accounting may be complex for a telemedicine system that is shared by different services, departments, or institutions.
  • The establishment of a telemedicine program may lead to expanded or unanticipated application (Ohinmaa et al. 1999; Sisk and Sanders 1998).

Changing cost structures can be dramatic, with the potential to alter evaluation results. Staff of one of our site visit programs informed us that the price of an interactive video system was $45,000 in 1998; the price of this same system was approximately $17,000 just one year later. The changing cost structure of telemedicine and low utilization in start-up programs can complicate analyses of cost tradeoffs presented by telemedicine.

The main types of cost analysis used in technology assessment include the following.

  • Cost of Illness Analysis: economic impact of illness/condition, including treatment costs.
  • Cost Minimization Analysis: least costly among alternatives that produce equivalent outcomes.
  • Cost Effectiveness Analysis (CEA): costs in monetary units, outcomes in quantitative non-monetary units, e.g., reduced mortality, morbidity; life-years saved; ratio is calculated.
  • Cost Consequence Analysis: form of CEA, but without aggregating or weighting across costs or outcomes; ratio is not calculated.
  • Cost Utility Analysis: form of CEA, with outcomes in terms of utility or quality of life, e.g., quality-adjusted life-years (QALYs); ratio is calculated.
  • Cost Benefit Analysis: costs and outcomes in monetary units, both of which are quantified in common monetary units; ratio or difference is calculated.

Cost-of-illness studies are used to quantify the magnitude of a health care problem, providing some context for the importance or potential of a new technology to have a meaningful effect on this problem. Cost-effectiveness analyses in telemedicine are still scarce (Ohinmaa et al. 1999). Although the term "cost-effectiveness" is used frequently in the literature, very few studies collect data on both costs and effectiveness. Instead, many studies assume that a telemedicine program and usual care are equally effective, and simply determine which alternative is less costly, i.e., a cost-minimization analysis. Cost-consequence analyses are increasingly used in other forms of technology evaluation when there are multiple relevant economic perspectives for a technological intervention, so that presenting the array of costs and outcomes in a disaggregated format allows particular stakeholders to use those that accrue to them. By accounting for patient utilities or preferences rather than more specific natural health care units as in cost-effectiveness analysis, cost-utility analysis enables comparisons across different types of health problems. There are few if any cost-utility analyses or cost-benefit analyses reported in the literature (Ohinmaa et al. 1999).

The approaches to accounting for costs and outcomes or benefits in cost analyses of telemedicine applications can vary in a number of important respects, including the following.

  • perspective (e.g., society, payer, provider, patient);
  • direct costs (medical and non-medical);
  • indirect costs (e.g., loss of productivity);
  • actual costs vs. charges or prices;
  • time horizon (short-term or long-term);
  • marginal costs vs. average costs;
  • discounting;
  • correction for inflation; and
  • sensitivity analysis.

The perspective of a cost analysis refers to the standpoint from which costs and benefits (or other outcomes or impacts) are realized, e.g., clinician, patient, hospital, payer, or society at large. Our respondents identified economic perspective as a critical evaluation issue. Many respondents stressed the importance of the impact of telemedicine to costs experienced by patients, although these costs often are not adequately evaluated compared to costs to institutions or payers. Economic perspective must be made explicit in teleconsultation evaluations. (Perspective is discussed in greater detail below.)

Evaluations should identify direct costs and indirect costs of telemedicine applications. Direct costs including direct medical care costs for clinicians and other staff, capital equipment, facilities costs, communications, maintenance, etc. Direct non-medical costs include care provided by family members and transportation to and from the site of care. Indirect costs usually include the cost of time lost from work and decreased productivity for patients.

Instead of accounting for actual costs (of physician services and other health care services), many analyses use readily available health care charges or payments. However, charges (as well as actual payments) tend to reflect provider cost shifting and other factors that decrease their validity for representing the true costs of providing care. In the telemedicine literature, the types of costs analyzed and the methods for accounting for these vary widely, making study-to-study comparisons of costs or cost-effectiveness impractical (Ohinmaa et al. 1999).

Interpretation of cost analyses must consider that the time horizon of a study is likely to affect the findings regarding the relative magnitude of the costs and outcomes of a health care intervention. Costs and outcomes usually do not accrue in steady streams over time. Comparisons of costs and outcomes after one year may yield much different findings than comparisons made after 5, 10, or 25 years. Of course, studies with longer time horizons typically require more data collection and may be more costly. (Time horizon is discussed in greater detail below.)

Evaluations should make clear whether average costs or marginal costs are being used in the analysis. Whereas average cost analysis considers the total costs and outcomes of a telemedicine program (e.g., total program costs per patient consultation or per diagnosis), marginal cost analysis considers the additional costs and outcomes for the next service (e.g., costs per additional consultation or per next diagnosis), which may provide more information about how to use resources efficiently. For example, marginal cost analysis may reveal how per-consultation costs change with increased utilization.

Cost analyses should account for the effect of the passage of time on the value of costs and outcomes. Costs and outcomes that occur in the future usually have less present value than costs and outcomes realized today. Thus, costs and outcomes should be discounted relative to their present value (e.g., at a rate of five percent per year). Analysis should also correct for the effects of inflation (which is different from discounting), such as when costs or cost-effectiveness for one year are compared to another year.

In any evaluation, there is some uncertainty associated with the estimates of certain costs, outcomes, and other variables used. Therefore, sensitivity analysis should be performed to determine if plausible variations in the estimates of these variables affect the results of the analysis. For example, for teleconsultations, sensitivity analysis can be used to determine how anticipated improvements in technical specifications of video conferencing systems might improve physician acceptance, what level of utilization would be required to meet certain levels of cost-effectiveness (i.e., a "break-even" analysis), or how feasible decreases in communications technology costs would affect marginal cost of consultations.

One form of cost-effectiveness analysis that can be performed across a given time horizon, whether prospectively or retrospectively, is a net present value (NPV) analysis. This type of analysis calculates the long-term return of an investment in a program by subtracting the total costs from the total returns of the investment. If the NPV is positive, future cash flows will exceed current investment and therefore the investment should be made; if NPV is negative, the investment should not be made. NPV analysis accounts for time horizon, the cost of capital (or discount rate), and economic perspective, since the costs and returns of a program accrue differently to different stakeholders, as described above (Rendina 2000).

Given the different ways in which costs and outcomes may be determined, all studies should make clear their methodology with respect to economic perspective, accounting for direct and indirect costs, and the other aspects noted above.

At issue in cost evaluation for telemedicine is determining which of the various types of cost analysis are most appropriate for the telemedicine program or application being evaluated. Few of our study respondents had specific preferences among types of cost analysis; however, their comments as a whole offer some insight into approaches to cost evaluation of telemedicine.

Of all the areas of telemedicine evaluation, respondents provided the most commentary on cost evaluation. Even so, in part because of the difficulty of carrying out cost evaluations in telemedicine, the respondents generally considered cost and related economic attributes to be lesser priorities in conducting evaluations of telemedicine. 1 Consistent with the literature, respondents generally observed that cost evaluations have been inadequate. Several respondents did acknowledge the particular importance for telemedicine evaluation of perspective of analysis (especially accounting for patient perspectives) and specification of appropriate time horizons, e.g., capturing utilization and cost data at more mature stages rather than just during project start-up, and lasting long enough to capture downstream effects of early interventions.

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