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Computer Graphics	Health Services - How Should We Decide How Much to Spend By definition medical expenditure is equal to the price times the quantity of the services provided. Price is identically equal to the provider's net income. The identity may therefore be restated as "expenditure is equal to the provider income per service times services received per patient". This highlights two decisions which must be taken. First, what income should providers receive? And, secondly, how many services should patients receive? The decisions are not unrelated. As provider's incomes rise the cost to the remainder of the population increases and the ideal level of health and health services will fall. The issue of appropriate provider incomes is complex, unresolved and beyond the scope of this chapter. It is worth noting, however, that governments have been concerned with reducing unit medical prices and, by implication medical incomes. Governments, at least, have recognised the trade-off between real medical incomes and service availability. In principle, the second decision concerning the number of services should be made by the application of the economic rule that all services should expand to the point where the additional (marginal) benefit is equal to the marginal cost. Application of this principle is, however, difficult and for this reason a variety of other approaches to prioritisation and resource allocation have been proposed such as "goals and targets". To the extent that their methods deviate from the economic prescription it follows, as a matter of logic, that they will result in less health for any given cost. For example, suppose that the unit of benefit was the life year and that the application of the alternative methodology resulted in the adoption of two interventions where the marginal costs of obtaining a life year were $2,000 and $10,000 respectively. Scaling down the second intervention would lead to the loss of one life year; but the reallocation of the $10,000 to the first intervention would gain five life years. According to economic principles all else equal this reallocation should continue until it was no longer possible to obtain life years more cheaply from the first intervention. Alternative approaches to resource allocation typically do not employ this logic and often fail to consider costs and benefits at the margin or even fail to consider costs at all. Economists have developed three basic techniques to assist with the implementation of the general rule. The defining characteristic of the first, Cost Benefit Analysis (CBA), is that benefits must be measured in dollars. Because of the difficulty in converting the value of human life into dollars, economists have attempted to side step this issue through the use of Cost Effective Analysis (CEA). This allows the comparison of any interventions where there is a single and common unit of benefit. This, of course, is a serious disadvantage as it is often necessary to compare quite different outcomes and interventions which affect both the quantity and quality of life. Consequently, Cost Utility Analysis (CUA) was developed in which the unit of benefit, the quality adjusted life year (QALY), combines both of these dimensions of outcome. However CUA represents an explicit recognition of the importance of the quality of life and the inevitability of judging its relative importance when health outcome is compared with cost. A common characteristic of all of these techniques is that they are applicable at the "micro" level; that is, they are designed to determine whether particular small scale interventions are or are not desirable. To assist with the global allocation of resources the results of individual evaluations must be combined in some broad framework. The most direct approach is the one adopted in the famous (or infamous) Oregon experiment. Simplifying somewhat, all of the possible services which could be offered to the Oregon Medicaid population were ranked according to their cost per QALY. Services with the lowest ratio were to be selected progressively until the Medicaid budget was exhausted. The underlying value judgement in Oregon was that as the budget contracted it was desirable to eliminate less cost effective services rather than to restrict population eligibility to participate in the scheme. The chief difficulty with this approach is the magnitude of the evaluation task. The Oregon experiment was based upon research that was arguably inadequate. Costings were rough, quality of life values were doubtful and cost to QALY ratios were obtained for very broad intervention categories which did not distinguish marginal from intra-marginal services. Despite this, the Oregon experiment remains an impressive model for one approach to global prioritisation within the health sector. Despite measurement error, each of the steps required for correct decision making was subject to explicit investigation and the overall analytical framework had the potential to maximise health from a given budget. An alternative framework has been suggested and trialed by Segal and Richardson in which more comprehensive evaluations are conducted within a disease category but, initially, only for those interventions where there is a serious possibility of expansion or contraction. Global efficiency is envisaged as being achieved iteratively by the progressive elimination of the least cost effective and the progressive expansion of the most cost effective services. While these techniques may make an important contribution to achieving efficiency in the health sector - maximising health per unit of cost - they fall short of determining the appropriate level of overall expenditure in two important respects. First, the techniques purport to place a value or relative value on health benefits. They do not assist with the measurement of benefits in natural units; that is, they require information about the impact of health services upon the quantity and quality of life. This must be obtained from the medical literature and, as indicated above, the majority of health services have not been clinically evaluated or evaluated in a way that is a suitable basis for economic evaluation. Secondly, CEA and CUA and both of the broader frameworks discussed above only rank projects. They cannot unambiguously indicate whether or not a service should be provided. In the short run this is all that is required. There is overwhelming evidence of allocative inefficiency in the health sector and, as in the Segal-Richardson framework, the greatest health gains may be obtained initially by reallocating resources to where the greatest health benefits can be obtained.  Eventually, however, a comparison must be made between benefits inside and outside the health sector. This implies a common unit of measurement with which to make the comparison and, as most benefits outside the health sector cannot sensibly be measured in QALY's this implies that the value of QALY's life years and lives must be measured in dollars. If this could be satisfactorily achieved then cost benefit analysis could be used for the economic evaluation of all health projects and, in principle the frameworks discussed above could determine, not simply the appropriate ranking of projects, but whether or not benefits exceeded costs. The iterative application of CBA could eventually determine the appropriate level of health expenditures; that is, the level where marginal expenditures were just producing the same value within the health sector as they could produce elsewhere.