INDIRECT COSTS IN THE HEALTH ECONOMICS

EVALUATION LITERATURE:
A SURVEY ARTICLE

Philip Jacobs 1,2 and Konrad Fassbender1

Working Paper 97-4

1 Department of Public Health Sciences, Faculty of Medicine, University of Alberta, Edmonton,

Canada
2 Institute of Pharmaco-Economics, Edmonton, Canada
 TABLE OF CONTENTS

LIST OF TABLES................................................................................................................... iii

ABSTRACT ........................................................................................................................... 1
Objectives ................................................................................................................... 1
Methods...................................................................................................................... 1
Results......................................................................................................................... 1
Conclusions ................................................................................................................. 1
INTRODUCTION.................................................................................................................. 2
METHOD............................................................................................................................... 2
Literature search and article selection strategy............................................................... 2
Abstracting the articles................................................................................................. 3
Tabulating results ......................................................................................................... 4
Assessing the articles.................................................................................................... 4
RESULTS............................................................................................................................... 5
Articles selected........................................................................................................... 5
Analytical technique and data context ........................................................................... 6
Outcome measure of study........................................................................................... 6
Subject experiencing costs ........................................................................................... 6
State of activity whose time was measured.................................................................... 6
Analytical horizon......................................................................................................... 7
The alternative activity.................................................................................................. 7
Opportunity cost of care .............................................................................................. 7
ASSESSMENT OF THE METHOD USED ........................................................................... 8
Assessment of the health care activity........................................................................... 8
Assessment of the activity which is foregone ................................................................. 8
The value of foregone activity....................................................................................... 8
Consistency between cost and outcome measures......................................................... 9
Magnitude of indirect costs........................................................................................... 9
DISCUSSION AND CONCLUSION ................................................................................... 10

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REFERENCES ....................................................................................................................... 12

Institute of Pharmaco-Economics Working Paper 97-4 iii

 LIST OF TABLES

TABLE 1:............................................................................................................................... 16
Economic variables, measures, and assessment criteria

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ABSTRACT

Objectives

In this paper we develop a framework to analyse indirect cost estimates in economic evaluation
studies. We apply this framework in a literature review of economic evaluation studies.

Methods
We searched all English language literature from 1994 to 1996. Following the application of a search
algorithm, we abstracted 25 articles to determine methods used to identify the relevant time to which
indirect costs apply, the activities associated with indirect costs, and the costs themselves. These
methods were then assessed.

Results
Indirect costs significantly influence efficiency ratios. Authors have followed a number of different
methods in all categories.

Conclusion
Because of the significance of indirect costs, a greater degree of standardization needs to be
achieved in the literature.

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INTRODUCTION
Indirect costs are the costs of those resources for which no payment is made, but for which there is
an opportunity cost or foregone benefit. Guidelines for economic evaluation studies in health care
recommend the inclusion of indirect costs in any such study [6-8] though few studies incorporate them
[18]. With cutbacks in health spending, and the growing emphasis on non-institutional care, the potential
impact of indirect costs on measures of economic efficiency is increasing. Although there are several sets
of guidelines recommending the inclusion of indirect costs [6-8,10,13], and there are several theoretical
guides relating to their measurement [30,32], there is no place where the economic analyst can turn to
find a survey of the methodologies which are currently in practice to measure them; nor is there any
assessment of current practice. The purpose of this paper is to determine the “state of the art” in terms
of economic evaluation studies which include indirect costs, and to provide an assessment of these
studies. The rationale for this paper is that analysts who are considering including indirect costs in their
economic evaluations can find, in one place, a summary and critique of what has been done in this area.

In the following section of this paper we present our method for searching the literature and selecting
the appropriate studies; we then present the results of our search. This is followed by an assessment of
these results.

METHOD

Literature search and article selection strategy

An electronic search strategy was initially developed to identify articles from the Medline (Jan/94-
Dec/96) and HealthSTAR (Jan/94-Nov/96) databases. A specific strategy was developed to overcome
inherent limitations in the MeSH keywords. Several iterative textword searches resulted in an overall
strategy that balanced recall and precision. The cost effectiveness literature may for example include the
phrases “cost-/effectiveness,” “costs and effectiveness,” and “costs and efficacy.” Similarly, we slected
keyword combinations associated with indirect costs in order to identify articles which attempted to
include indirect costs in the analysis. Cost effectiveness and cost utility articles were then combined with
those containing references to indirect costs.

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 In addition to excluding articles published before 1994, monographs and foreign studies were
excluded. Cost-benefit articles were excluded from the search strategy, however some articles
incorporated more than one type of analysis. Eleven articles known to the authors but missed
electronically were added to this set of references.

The article titles and abstracts were reviewed to ensure that the studies were economic evaluation
articles, examining at least two alternative interventions. Those articles that were retrieved were examined
to ensure that they contained both formal evaluations and indirect cost measures, rather than just
referring to indirect costs without incorporating them into the study. Those which met these criteria were
retained.

Abstracting the articles

We abstracted each of the articles which were selected using the following descriptive categories.
We first identified the country of study and the type of intervention (prevention, diagnosis, treatment, long
term care, and palliative care). We then abstracted each article’s analytical components using the
following categories: analytical technique (cost effectiveness analysis, economic impact or cost benefit,
and cost minimization); data context (randomized clinical trial, observational data base, or modeling),
and outcome measures (eg. lives saved, life years saved, quality adjusted life years).

With regard to the actual indirect cost measures, we abstracted each article as follows (see Table 1
for an overview of our analytic framework.) We determined whose indirect costs were being measured
- the patient or a caregiver. We determined which state or activity the investigators were costing; among
the choices were: illness episodes (including adverse events) beginning with the time of treatment;
premature mortality; travel time; waiting time; time for treatment; and patient recovery time. We then
determined how the potential time spent in each state or activity was measured, based on the beginning
and final end points for each study (the analytic horizon). Next, we identified the data source that was
used to measure the time spent in the activity or state ; the investigators either resorted to existing
literature, made assumptions based on personal judgment, or conducted direct observations.

Since the indirect cost is the opportunity cost of the activity which was related to the intervention, it
was necessary to identify that activity which the investigators chose as the alternative to the health care

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activity. Investigators had the following choices: labor (denoted L in Table 1), housework or non-market
labor (denoted UnL), leisure (Le), unemployment (U), retirement (R), and total time (without
distinguishing how that time was composed). Finally, we identified the cost measures which were linked
to these alternative activities, and the data sources of these measures.

Tabulating results

The type of study, methodology and results for each article were tabulated.

Assessing the articles

Following the tabulation of our results, we developed an assessment of the methods. The criterion
which we used was that the measure should capture the opportunity cost of activities foregone as a result
of the intervention. This requires (1) that the analyst (a) identify the activities which comprise, or the
states which result from, the intervention, and (b) measure all of the time which is spent by the patient /
caregiver on the health care activity; (2) that the activities which were thereby displaced during that time
frame be appropriately hypothesized; and (3) that the value of these foregone activities be estimated
according to economic criteria.

With regard to the selection of the activities which were related to the intervention, we assessed
whether or not the measure was comprehensive, in that it incorporated all the activities which were
associated with each health care intervention. With regard to the measurement of time spent in each
activity, we assessed whether the end points which were selected fully covered the period of the
intervention and its effects. We also evaluated the source of data; we assume that “evidence based,”
direct observations are superior to indirect sources of information. Furthermore, observations made
during the period being observed are superior, because patients and caregivers can make errors in
recalling information.

With regard to the evaluation of the alternative activity, we assessed whether these measures that
were used identified those activities that were likely to be replaced. Since foregone activities are, by their
definition, unknowable [5], such a determination is necessarily based on speculation. However, there will
be instances where the activities which are identified as being “foregone” are at odds with what we

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know. For example, a study which omits any reference to an alternative activity which was displaced,
such as leisure or retirement is incomplete.

Finally, the value which is assigned to the foregone activity should be determined by economic
criteria. A number of authors have provided theoretical guidance relating to the appropriate measure of
the cost of foregone activities [30,32]. There are several competing measures for the value of foregone
labor. One is based on the human capital approach, and is the value of compensation (usually
approximated by a function of earnings, although full compensation, including benefits, seems more
appropriate) [30]. Another measure, calculated by the friction method, is the value of displaced
production; this measure is less than the wage, because it assumes that some of the displaced production
is made up [19,20].

Non-market labor costs can be estimated by comparison to similar services which can be obtained in
the market according to the economic principle of labor-leisure tradeoff, although if the replacement
does not take place, then this may be an indication that the market value exceeds the actual value of time.
Leisure-time activities can be valued at the market wage rate [30], although if the individual chooses
leisure over work, the value of leisure may exceed that of work, even at the margin. The existence of
involuntary employment indicates that the market wage is above the individual’s valuation of time; it
provides an over-estimate of the value of time, but in the absence of market indications, we do not know
how much. Finally, if there is a labor market in which retirees can participate, then the wage in this
market can be used as the opportunity cost of time; however, as in the case of leisure, the value of time
can exceed this wage.

Two other evaluative criteria were used. First, indirect costs are often associated with some of the
broader health outcome measures, such as Quality Adjusted Life Years. In the context of cost-utility
analysis, this leads to the potential for double counting of costs and outcomes [10,17,33]. We identified
the cost-utility studies whose outcome measures do not exclude valuation of non-health consequences of
treatment (i.e. loss of leisure and/or loss of earnings). Secondly, we also determined the extent to which
inclusion of indirect costs affected the incremental ratio by estimating the percentage difference in the
summary efficiency measures for each study, which resulted from the use of full (direct and indirect)
costs, rather than direct costs only.

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Institute of Pharmaco-Economics Working Paper 97-4 x
RESULTS

Articles selected

In our initial search, we identified 163 articles; we reviewed the abstracts of all of these, and further
selected them in accordance with the following criteria: contains a formal evaluation with at least two
alternative interventions. Fifty-seven (57) articles met these criteria. We reviewed all 57 articles; of
these, twenty five included estimates of indirect costs; the remainder mentioned these costs in their
abstracts, but the study did not contain them.

Of the twenty five articles, 10 were from the U.S., 5 from Europe (other than the United Kingdom),
four from Canada, three from the U.K., two from Africa and one from Australia. Thirteen of the articles
were in the area of prevention, ten of treatment, and two of diagnosis.

Analytical technique and data context

Seventeen of the studies used the cost effectiveness (including cost utility) analysis technique, six used
economic impact analysis and cost benefit analysis, and two used cost minimization analysis. Of the
twenty five studies, 16 used modeling analysis [1-3,11,15,22-26,28,29,31,34,35,40], 6 were based on
observational data bases [4,9,20,27,38,39] and three used randomized clinical trial information
[14,16,38,39].

Outcome measure of study

The following outcome measures were used: cases prevented [26,34 ], life years saved [22-24],
quality adjusted life years [2,9], cases or symptoms avoided [24,35,40], time to return to work [27,39],
cases identified [1,15], disease - free time [28], lives saved [12], cases successfully treated [3], and
psychological scales [16,31].

Subject experiencing costs

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 Both patients and caregivers experience indirect costs due to treatment. In 19 studies, indirect costs
of patients were estimated [1,2,4,9,11,12,15,23-25,27,28,31,34-36,38-40]. In 9 studies investigators
analyzed the indirect costs of caregivers [3,9,14,16,22,26,29,34,36].

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State or activity whose time was measured

In 16 studies investigators identified the illness episode (including an adverse event) as the entity
whose cost was determined [1,2,4,9,11,14,16,23-25,27,31,34-36,38]. Two studies identified
premature mortality as the state whose cost was determined [31,34]. All other studies identified one or
more activities as the unit whose cost was determined; these activities were: travel [12], treatment
[1,3,11,15,22,25,27,29,40], downtime or recovery time [9,39]. The sources of data from which the
time spent in each state or activity was estimated were: published literature [2,22-26,31,34,35], direct
observation [1,4,9,14-16,27,36], and assumed values [1,3,11,12,26,35,40], with others not being
specified.

Analytical horizon

In terms of the final end point, seven studies used death as the end point [2,11,24,25,31,34,38], four
chose a fixed time of under one year [9,16,29,36], and four a fixed time of one year or more
[22,23,27,28,35]. A number of other end points were used, including return to work [4,39], the
detection of an illness [5], birth [12], and successful treatment [3]. In other studies, end points were not
clearly specified.

The alternative activity

If the patient or caregiver had not spent time being ill or receiving care, he/she would have engaged in
some other activity. Investigators assumed that the following activities were displaced with care / illness
related activities: labor [1-4,11,12,14-16,22-29,31,34-36,38-40], total time on all activities [9,36],
leisure [15], unemployment [3]. These sum up to over 25 because in some studies both caregivers and
patients had foregone activities.

Opportunity cost of care

The cost of the foregone activity is the opportunity cost of care. Numerous measures were used.
When labor was used as the alternative activity, the following cost of labor measures were used: a wage
for the appropriate industry / occupation group [14,16,22], a single wage for all groups [1,11,29,36], a
single wage for those under 65 and a value of 0 for those over 65 [3,23,34], a single wage for those

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under 65 and no wage for those over 65 or unemployed [25,26,39], observed lost income or income
replacement [4,36], the average income (wages plus non-labor income such as interest and dividends)
for those under 65 [2], a fixed sum estimating the earnings loss [27], per capita gross national product
[35], a differential wage between those with and without the illness [35] and a minimum wage [40].

The one study which measured the cost of leisure time assumed that this cost was 25 per cent of the
average wage [15]. The one study which separately costed unemployment time assumed it to be the
same as all other income under 65 [3]. Post retirement income was either not specified (i.e., valued as
zero) or assumed to be equal to the average wage. One study measured the value of total time as
reported by the patient [9].

Data sources for the opportunity cost of care were from published statistics [1,2,11,14,15,24-
26,28,29,31,35,38-40], published literature [3,15,22,23,34] observation [4,27,36] and by assumption
[3,12].

ASSESSMENT OF THE METHODS USED

Assessment of the health care activity

Most studies defined an episode of treatment as the time spent being ill, after treatment began. These
studies also defined the end point as a specific time, an event such as return to work, or death as the final
end point. Other studies defined the treatment event end point by excluding recovery time; such episode
definitions are not comprehensive in that they exclude other measures such as travel time, waiting time,
and recovery time, all of which may be influenced by the intervention.

Assessment of the activity which is foregone

The activity that is alternative to health care is one that never occurred. An assessment in this case
would consist of identifying and evaluating missing activities. The measure of total time given up is the
most appropriate one to use, in that it is the most inclusive. However, most investigators selected labor
time as the alternative activity, thus omitting a number of activities, including non market labor, leisure
time, unemployment, and retirement time. All of these measures except retirement time were selected in

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two studies. In most cases, however, they were ignored. These activities are often replaced by health
care treatments, and so they should be included.

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The value of foregone activity

A wide variety of measures were used to value foregone labor; many were not appropriate. The
friction method was not used at all. A number of studies used the human capital approach, which
amounts to using a wage rate. Some studies adjusted these wages for age/occupation group, but others
used a single measure for everyone, which is less appropriate. Other measures which were used but
which are less defensible included ones based on the gross national product, total income, and the
minimum wage. Gross national product and total income include non-labor income, which is not lost
when the individual receives health care. Minimum wage is an underestimate, and it has no theoretical
basis.

No study included non-market labor or retirement time, although there is a justification for placing a
positive value on both. If investigators ignore these activities completely, the results of their studies will
underestimate the opportunity cost of those treatments which require more recovery time. Only one
study included a cost for leisure, being 25 per cent of work time. Valuing all time at market wages will
result in an overestimate in the context of involuntary unemployment.

Since costs will vary between persons, it is desirable when making generalizations to have a standard
cost for the value of time lost. Such a cost can be obtained from published statistics, which should
provide the most valid measure. In fact, even though a theoretical measure was seldom used, the authors
in most cases did consult published statistics for the value of time foregone.

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Consistency between cost and outcome measures

Several authors have observed that there is an overlap between “full cost” (including indirect patient
cost) and health related quality of life measures (which often include physical capabilities) . Several sets
of guidelines recommend the use of the most general cost effectiveness ratio, which is the difference in full
cost divided by the difference in quality adjusted life years. Of the three studies employing cost-utility
analysis [2,9,11], only one [11] has addressed the issue by noting that the outcome measure includes
leisure.

There are essentially three strategies which address this problem. The first is to utilize QALY
measures which explicitly exclude the valuation of non-health (i.e. productivity and leisure) activities and
to include all indirect costs in the numerator. The second strategy is to incorporate all valuations of time
in the QALY instrument, thereby excluding indirect costs in the numerator altogether [13]. The
fundamental problem with both of these strategies is the difficulty associated with having patients
consistently incorporate health, time, and out-of-pocket costs into a QALY instrument. This issue is
further complicated by the existence of transfers [eg. paid sick leave]. Therefore, patients’ perceptions
of indirect costs are a function of their circumstances. Since the two measures either over- or under-
estimate the efficiency ratio, a third strategy is prescribed. We recommend that for comparisons
involving indirect cost differences between alternative treatments, that efficiency ratios be reported with
and without indirect costs.

Magnitude of indirect costs

One measure of the importance of indirect costs is to estimate percentage differences in the efficiency
ratio with and without indirect costs in the numerator. This measure was calculated for all studies for
which sufficient information was available (excluding 5 studies [11,14,30,36,40].

A positive value of the percentage difference ratio means that the experimental treatment is
associated with higher indirect costs than the control. Excluding indirect costs in these cases results in an
underestimation of the true measure. Similarly, the efficiency measure is overestimated when
experimental treatments are associated with indirect cost savings. Of the twenty studies for which the

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magnitude could be estimated, 12 were positive and 6 were negative. A value of zero was observed in
two studies [15,26] implying equivalency of indirect costs in both the experimental and control arms.

The magnitude was only calculated for the base case (i.e. excluding sensitivity analyses but often
involving multiple comparisons and scenarios). The incremental efficiency measure varied from -2560%
to 144% taking into consideration all twenty studies. This variation was observed for all analytical
methods. This wide range supports the importance for the proper consideration, measurement and
inclusion of indirect costs in economic evaluations.

DISCUSSION AND CONCLUSION

Indirect costs of health care - the value of time for those activities which are foregone when
undergoing health care interventions - represent an important component of many health care
interventions. If one is to measure indirect costs which are associated with an intervention, the following
elements must be specified: the activities or states which span the intervention (along with the beginning
and final end points); the hypothesized activities which were foregone, including work, unpaid labor,
leisure, unemployment and retirement; and the value of these foregone activities. When one is using this
measure as a value of activities foregone by patients in a cost-effectiveness analysis, one must select an
appropriate place for these costs - either the numerator or denominator.

Our survey of cost effectiveness studies indicated that very few authors include indirect costs in their
studies; of those that do, very few measured these costs directly. The inclusion of indirect costs usually
had a substantial effect on the efficiency ratio. Our survey also indicated that a wide variety of methods
are used by investigators. Authors who did include indirect costs in their studies generally chose the
illness episode as the entity to be measured, substantial number of foregone activities were left out of
the studies. Most studies focused on labor foregone, to the exclusion of leisure, retirement time, and
unpaid labor.

There are several sets of guidelines which relate to cost effectiveness studies in health care; all
recommend the inclusion of indirect costs. Two of these guidelines [7,8] do not provide specific
recommendations as to which indirect costs to include or how to measure them. The recent set of

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guidelines from the US [13] provides considerable detail about the valuation of alternative activities and
the placement of patients’ indirect costs in the cost effectiveness ratio. However, even these guidelines do
not provide guidance to authors as to which activities or states to include, which timelines to use, and
which alternative activities to incorporate into their studies.

Based on our survey results, we recommend the following practices: (1) in general, the activities or
states which are measured should span the entire course of treatment which is under investigation; (2) all
foregone activities should be incorporated, not merely those which yield productivity losses. The
selection of foregone activities will be based on hypothesis. These would include unpaid labor,
unemployed time, retirement time, and leisure time. The valuation of time has been adequately addressed
in the US guidelines, at least in accordance with the current state of the art.

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Institute of Pharmaco-Economics Working Paper 97-4 xxii

 Table 1: Economic variables, measures, and assessment criteria

VARIABLE ALTERNATIVE CRITERIA FOR

MEASUREMENTS ASSESSMENT
Health care activity / • Episode of illness - time from • Covers entire time of
state and time beginning of treatment to a given end treatment and its effects
point • Evidence based
• Episode of care - time in total or for
any or all of the following
components: waiting, travel,
treatment and recovery
Activity foregone • Paid labor (L) • Identify all relevant
• Unpaid labor (UnL) activities which are likely
• Leisure (Le) to be foregone during
• Unemployment (U) the time span identified
• Retirement (labor and leisure ) (R)
Value of foregone • Wages or Labor compensation • Value reflects what is
activity (and associated (linked to L) potentially paid for in a
activity to which this • Cost of replacement activities (linked market, or else the value
value is linked) to UnL) of time which someone
• Value which consumer places on reveals in an
time used (linked to Le,U,R) experimental setting
• To ensure
generalizability of results,
costs should be standard
costs which represent
an average value rather
than actual value for
subjects who were in
study

Institute of Pharmaco-Economics Working Paper 97-4 xxiii