Monetisation and Social Return on Investment (SROI)
Sarah is the trainer for our two-day SROI training course and here introduces an article she co-authored with other SROI experts.
You might think it impossible to put a pound sign on a person’s life. But policymakers, project funders and other decision makers may need to weigh up different options that may affect human health and wellbeing, as well as having other environmental and economic impacts. If health is not quantified and valued, it is effectively left off the balance sheet and may not be considered in strategic decisions.
Social Return on Investment (SROI) is one way valuing the impact of an organisation or policy, which requires the explicit consideration and valuation of all of the impacts – including human health and wellbeing if relevant.
But there are lots of different options for valuing health. One way, borrowing from the field of health economics are QALYs (or Quality Adjusted Life Years). QALYs are a way of considering both the length and quality of human life in one measure. QALYs themselves do not give a monetary value to outcomes but there are various approaches to putting a monetary value on a QALY.
In this article, we describe such approaches. There is no one right or wrong way to put a value on life, but we make recommendations for when you might want to use one method or another. This article will be of particular use to SROI practitioners, but understanding the valuation of QALYs is important for many other cost-benefit methodologies.
Read the article below authored by Oliver Kempton, Sarah Arnold, Samrawit Mariam and Alison Freeman… or see it here.
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In some ways this diversity of approaches is a good thing; the difference in scope and purpose of SROIs means that sometimes different approaches are called for. However, these different approaches to monetisation can lead to otherwise similar SROIs showing very different SROI ratios. For some people, this lack of consistency in approach is one of the main drawbacks of SROI.
“as SROI becomes more widespread, monetisation will improve and there will be scope for pooling good financial proxies”.
This article aims to contribute to this improvement by outlining how Quality Adjusted Life Years (QALYs) can be a useful tool in monetising outcomes.
QALYs are a measure of a person’s heath. They are defined by NICE (the National Institute for Health and Care Excellence) as:
“a measure of the state of health of a person or group in which the benefits, in terms of length of life, are adjusted to reflect the quality of life. One QALY is equal to 1 year of life in perfect health”.
The relative success of medical interventions can be measured in QALYs. For example, if a medical intervention leads to an individual ‘gaining’ a QALY, this could mean a number of things. It might mean that the individual is expected to live one year longer, and that one year of life will be lived in perfect health. More realistically, they may live two years longer, and those two years will be lived at 50% health. Or their life expectancy may not change at all, but for the final five years of their life they gain 20% health per year.
We believe that QALYs are useful because they allow a whole range of different outcomes to be compared on a like-for-like basis, using the same unit of health. For example, QALY measures have been established for areas such as:
- Physical health: A 2013 study used a QALY approach to estimate the cost of ill health attributable to environmental noise, specifically looking at the costs of hypertension-related acute myocardial infarction, stroke and dementia due to environmental noise levels.
- Mental health: The Centre for Mental Health has examined the impact of mental health problems in terms of QALYs. They used data from the Health Survey for England 1996, Department of Health (1998), and the Measurement and Valuation of Health (MVH) survey. They report that the average loss of health status is estimated at 0.098 of a QALY for each individual with a moderate mental health problem, and 0.352 of a QALY for those with a severe mental health problem.
- Environmental impact: A toolkit called CAPTOR (Schmitt et al., 2015) produced for the West Yorkshire context in the UK, a low emission zone, gives users the ability to calculate the QALY gain by reducing Particulate Matter 2.5 (PM2.5) and Nitrous Oxide (NO2/NOx) concentrations. The QALY value per person per tonne of PM2.5 reduced is 0.000044 and reflects general mortality risk, pregnancy complications and lung diseases. At a population level the health value can quickly add up.
- Fear of crime: A paper examining estimating the economic and social cost of fear of crime used QALYS to estimate the health loss from episodes of fearfulness of crime. The mean annual health loss per person was 0.00065 QALYs.
QALYs do not in themselves give a monetary value to outcomes. However, if outcomes such as the ones above are expressed in QALYs, they can then be converted into a monetary figure fairly easily, and on a consistent basis. All that is required is a monetary value per QALY. There are several approaches to placing a monetary value on a QALY, and we discuss some of these below.
Approach 1: NICE QALY threshold 1: £20,000 – £30,000
NICE use a cost-effectiveness threshold of £20,000 – £30,000 for one QALY. Crudely, a medical intervention is judged to be good value for money if it costs less than £20,000 – £30,000 for every QALY it creates for the patient. It means that, in theory, the NHS would be prepared to pay up to £30,000 for each QALY created or saved for a patient by a medical intervention.
Approach 2: NICE QALY threshold 2: £18,317
To provide an empirical basis for the NICE QALY value estimates, academics looked at health spending and its effects on health outcomes across England to consider the opportunity cost of health spending. The allocation of funding to one intervention/treatment will improve the health of some people but will create an opportunity cost – funding will be displaced from elsewhere. If money is displaced, for example, from spending on improving mental health to cancer screening, cancer survival rates are likely to decrease but outcomes for those with clinical depression are likely to improve. Analysts examined programme health budgets across England to consider the effects of marginal changes in expenditure related to over 20 different diagnoses and conditions, and the subsequent impact or mortality and QALYs. The study found that the cost per QALY threshold £18,317 in 2008 prices – or £23,234 in current (2018) prices.
Approach 3: Stated preference – ‘willingness to pay’ for a QALY: various
As an alternative empirical approach to QALY valuation, the European Commission undertook a 3-year research project with organisations from across 10 European countries. The aim of this project was to develop robust methods for determining the monetary value of a QALY across various European member states. Two primary approaches were developed to estimate the monetary value of a QALY.
- The ‘chained approach’ involved administering a questionnaire in which respondents were asked to value avoidance of small, but certain, negative health states through answering questions which would ascertain their utility value for each health state. They were then asked how much they were willing to pay to avoid a certain duration/risk of that health state. Responses to these two components were combined to estimate willingness to pay (WTP) per QALY gained.
- The ‘direct approach’ sought to elicit values of a QALY in a more direct way by administering questionnaires which used graphical and textual descriptions to present different scenarios representing one-QALY gains and asking related WTP questions to respondents. Due to the broad and complex nature of the research, the study does not arrive at a specific value or narrow range of values for a QALY. Instead a number of different QALY values are provided depending on the country and the approach used. These are outlined in the report: European Value of a Quality Adjusted Life Year.
Approach 4: A meta-analysis of QALY values in Australia: $151,000
In Australia the Government recommends using a value which combines a number of techniques. In 2008 professor Peter Abelson published a meta-review (OBPR, 2014) of both Australian and non-Australian studies on the Value of a Statistical Life (VSL). Pulling together the most relevant empirical research for the Australian context he provided a VSL of AUD3.5million based on the mean age and a discount rate of 3%. This equated to a QALY value of AUD151,000 in 2007 and when adjusted for CPI is roughly $190,500 in 2018 money. This high value represents cost of illness to an individual (income and medical costs), willingness to pay through insurance rates and contingent valuation. The relatively high wages in Australia combined with WTP considerations mean this high value can often be one of the most sensitive numbers in an Australian SROI analysis.
We believe that QALYs can be a useful tool for people who are undertaking SROI. They are particularly useful when evaluators are able to measure changes in health with some degree of rigour, and when it is valuable to communicate in language that makes sense to commissioners as well as wider audiences.
There are several mechanisms for placing a monetary value on a QALY. Like other approaches to monetisation, there are different views as to the most appropriate value to use, and analysts should consider the purpose of their research and its audience when choosing the best approach, as well as considering other options in the sensitivity analysis. Sensitivity analysis is the process by which data and assumptions are tested, to see which have the greatest effect on the model or analysis.
Our belief is that, overall, QALYs strengthen SROI analyses, and can contribute to the increase in consistency and rigour of monetisation.
The authors of this article
The authors are all current or previous employees of NEF Consulting and the New Economics Foundation.
Oliver Kempton, Envoy Partnership, is a NEF Consulting associate.
Sarah Arnold is at the New Economics Foundation and delivers NEF Consulting’s 2-day SROI accredited training.
Samrawit Mariam was Senior Consultant at NEF Consulting when contributing to this article.
Alison Freeman, EY, was, until re-locating to Australia, Senior Consultant at NEF Consulting.
 REF: Harding, A-H, Frost, G. A., Tan, E. & Tsuchiya, A. (2013). The cost of hypertension-related ill-health attributable to environmental noise. Noise & Health. 67 (15): 437- 445. DOI: 10.4103/1463- 1741.121253.
 MVH Group (1995), The Measurement and Valuation of Health: Final Report on the Modelling of Valuation Tariffs, Centre for Health Economics, University of York.