This is lesson 4.2.2: Discounting. Discounting, or accounting for time, is another important aspect to a well thought out technology assessment. The impact of most medical technology stretches over time. And it's important to remember that the future is worth less than the present. In other words, $1 today is not necessarily worth $1 tomorrow, because the future value of the dollar is uncertain. We can however calculate the present value or net present value of future costs in (time T) using a discount rate (r). In other words, if we think about a time horizon, where today is time 0 and 5 years from now is t = 5, we can calculate what the future dollar value is in today's prices or dollars if we know or assume a discount rate of r. The actual calculation is the sum over time periods of 1 over 1+ r to the power of the number of years we're interested in, times the difference in costs between the two technologies we're assessing, in the period T. So you may ask, how much does it matter? Is there really that much of a difference between a dollar today and a dollar tomorrow? Well, that depends. It may matter for something like disease screenings and many preventive services where they are preventing costs that are potentially occurring many years down the road. It probably doesn't matter or there's no reason to take into account the difference between two days. Time implications are important if there are long time frames, and/or the intervention is only marginally cost effective. Another way to say that is that if the technology is just barely cost effective, it might make a difference if the impact is observed today or in the future. Suppose an intervention increases the health related quality of life by 0.2 units for 10 years. If we assume a quality value of $100,000, then depending on the discount rate, the discounted present value or net present value of a QALY can differ a lot. With no discount rate, the QALY is $200,000, with a 3% discount rate it's 175,000, with a 10% discount rate, the QALY is 135,000. That means that this technology is not necessarily cost effective with a long time horizon and a large discount rate. Because the discount rate that's used matters so much in the calculation, it's important to consider which discount rate to use. There are many possible discount rates. Like many other aspects of technology assessment, there is not one correct answer. The discount rate used should, however, capture the rate at which society is willing to trade off current for future consumption. This provides a sense of where to look to identify a discount rate. Market based discount rates, that are based on interest rates, are a common approach. The advantage of using market rates is that there's a theoretical justification. A market rate or interest rate maybe on bonds or stocks or even banking interest rates. The disadvantage of using these types of rates is, they don't necessarily reflect the type of transactions that are relevant for the healthcare consumer or patient. Overall, rates generally range between 3% to 5% in published studies, and these are reasonable and consistent across those studies. However, in testing your technology assessment and performing your own assessments, you may want to test a larger range of rates, anywhere between 0 and 7% to determine if the choice or assumption of the discount rate used impacts the results. Discounting dollars may seem intuitive, but it's also possible to discount QALYs. There is some controversy about this, however, how and if to discount QALYs. The question is whether a future year of life is worth less than a current one. The current practice is to use the same discount rate for costs as one uses for any health consequences such as QALYs. If cost and health benefit discount rates differ, there are implications for when and how to implement the intervention. If we assume that future health is worth more, you may want to delay the intervention. If on the other hand,the future health is worth less, you may want to overimplement today so that you can reap the benefits in the current period. Like everything else, there are a few other issues to consider when discounting. First, you want to ask should we use a constant discount rate? It is possible that the discount rate changes over time and you could account for that. However, it's usually better to use a constant discount rate than a variable discount rate if for no other reason than it's easier to explain. It's transparent and there's not necessarily a theoretical justification for changing the discount rate over time. Second, we want to make sure we keep the valuations and the discount separate. So all the discounting should be applied to cost and benefits after they are calculated. Again, this helps identify the impact of the discounting and allows for more transparent calculations. And finally, we may want to consider inflation. If we're combining expenditures from multiple years, the analysis should be conducted in real terms. Just as we're trying to use discounting to calculate everything in the present value, if we use expenditures from today and tomorrow, that don't apply a discount rate, you want to at least adjust for the fact that there's inflation over time, and calculate everything in current prices or future prices.