GHME 2013 Conference Session: New directions in cost-effectiveness analysis Date: June 17 2013 Presenter: Lorenzo Sabatelli Institute: GLOB MOD

1. GLOB MOD
A Model Using Household-Income and
Household-Consumption Data to Estimate the Cost
and the Effectiveness of Subsidies
Lorenzo Sabatelli
GLOB MOD
Dean T. Jamison
University of Washington

2. GLOB MOD
Consumer Choice, Health Risk, and Policy
Global Health-Risk Factors
Childhood underweight
Household air pollution from solid fuel
High blood pressure
Suboptimal breastfeeding
Tobacco smoking and second hand smoking
Ambient particulate matter pollution
Diet low in fruits
Iron deficiency
High fasting plasma glucose
High body-mass index
Diet high in sodium
Alcohol use
Unimproved sanitation
High total cholesterol
Diet low in nuts and seeds
Vitamin A deficiency
Diet low in vegetables
Diet low in grains
Zinc deficiency
Unimproved water source
People do not choose to become ill, choose to be happy
Individuals and Households make choices on the purchase
of goods and services
They try to optimize the use of available resources to
maximize the satisfaction of their perceived needs
(Maximization of Utility)
Some choices may be optimal, but not for health
 Governments can use financial instruments, such as
subsidies, to influence consumer choices
Subsidies decrease the out-of-pocket price of certain goods
to the consumer, increasing demand

3. GLOB MOD
Data on
Household
Budget
Allocation
Data on Household
Income and Consumption
Data on
Utility and
Income
Cost and Effectiveness of Subsidizing the Installation of
Household-Based Sanitations in Rural India
Case-Study
MODEL
Cost and Effectiveness of Subsidizing the Purchase
of Health-Relevant Goods
Overview
Do not reproduce without the express written consent of the authors

4. GLOB MOD
Parameter Intuitive Definition
Income Elasticity of Demand
The percent change in the demand for a class
of goods (e.g. food, clothes, housing) due to a
1% increase in income, when prices remain
constant.
Uncompensated Own-Price Elasticity of Demand
The percent change in the demand for a class
of goods (e.g. food, clothes, housing) due to a
1% increase in the average price, when income
and the price of other goods remain constant.
Budget Share
The proportion of a consumer budget used to
purchase goods of the class of interest.
Quantities of Interest

5. GLOB MOD
Elasticity of the Marginal Utility of Income

6. GLOB MOD
The Model Recipe
BUDGET
SHARE
OF GOOD
X
INCOME ELASTICITY OF
DEMAND OF GOOD X
ELASTICITY
OF THE
MARGINAL
UTILITY OF
INCOME
Price Elasticity of
Household-Based Sanitations in Rural India
UNCOMPENSATED OWN
PRICE ELASTICITY OF DEMAND
OF GOOD X
Do not reproduce without the express written consent
of the authors

7. GLOB MOD
 Utility increases with income, with decreasing margins (convexity)
 Consumers allocate their own budget to the purchase of goods and services in a way that
maximizes utility
 Demand adjusts to changes in prices and in income in a very short (negligible) time
 Preference Independence: the utility associated with the consumptions of one class of goods
does not depend on the consumption of goods of a different class (no interaction)
These assumptions are the basis of the so called Florida Preference Independence Model
Model Assumptions

8. GLOB MOD
Uncompensated Own-Price Elasticity vs. Income Elasticity
Model
Assumptions
Demand
Equation
Relationship between
price-elasticity and
income-elasticity
To protect the confidentiality of unpublished results this slide is different from the original used in the GHME 2013 conference
Price Elasticity = function (Income Elasticity; Budget Share; Elasticity of the Marginal Utility)

9. GLOB MOD
Background
 60% - 70% of households without latrines
 Absence of improved sanitations is a major
public-health risk factor
Data Sources
 District Level Household and Facility Survey
(DLHS) provides health care and utilization
indicators at the district level
 Asian Development Bank statistics and
policy documents
APPLICATION
Subsidizing the Installation of Sanitations in Rural India

10. GLOB MOD
What is Income, by the way?
Permanent-income was estimated on a log-
scale with a random-effects probit model using
household asset ownership as a (probabilistic)
proxy for household income
Calculation of Income, Income Elasticity and Other Parameters
Calculating the income elasticity with a Mixed-Effect First Difference Regression using
DLHS-2 and DLHS-3 data
Parameter Value
Annual cost of one basic
improved-sanitation facility
5.5-11 US$
Current sanitation coverage ~32%
Total number of households 140 millions
Additional parameters
To protect the confidentiality of unpublished results this slide is slightly different from the original used in the GHME 2013 conference

11. GLOB MOD
Results
Additional Number of Households
with Sanitations
Annual Cost to the Policy Maker
Please note: These results are preliminary. Do not reproduce without the express written consent of the authors

12. GLOB MOD
 Within the framework of the Florida Preference Independence Model, a relationship exists
between the uncompensated own price elasticity of demand and the income elasticity of demand
for a given class of market goods.
 When used to study the impact of subsidizing sanitations in rural India, the model provides
probabilistic estimates of the achievable increase in coverage and of the potential cost to the
government, as a function of the subsidized fraction of the price
 The proposed approach may provide a fast and inexpensive method for broad brush assessments
that could help design policies and set public-health priorities.
 Future developments are likely to involve: technical improvements of the model here presented;
expansion to other financial instruments; and developing user-friendly software tools for simulating
the impact of financial instruments in health policy.
Conclusions and Future Developments