Pharmacoeconomics
Discounting
Dr Eman A. Hammad
Dr. Rimal Mousa
Assistant professor of Clinical pharmacy and Health Economics
Learning outcomes
• By the end of the lecture, you will be expected to:
• Understand discounting technique
• Understand the rationale for discounting in Health
economics
• Understand the time preference for income today
rather than income in the future
• Understand the way discounting adjusts for costs (and
benefits) occurring at different points in time.
Think what would you prefer
• To be given 100 JDs today or after 5 years?
• Hint (think of this in term opportunity cost associated with
deferred consumption; i.e. the value of what is foregone by not
having the $100 over the next five years (% of interest)
$100 five years from now is valued less than $100
today
Think what would you prefer
• If I ask you to borrow 1000 JDs today and assured you to pay
them back in the next 3 years.
• You wouldn’t agree to lent me the money unless I paid you
back more than 1000.
• Money promised in future, health cost savings promised in
future is valued less than money received today
WHY value of money decrease overtime?
People prefer to receive money now rather than later because
they can generate benefits immediately
People prefer to pay out money later rather than now
Another example
• Think of the benefit or outcomes of surgery vs. long-term
treatment with medication for knee pain ?
• In this situation, surgical costs are incurred in the present,
whereas medication costs stretch well into the future.
DISCOUNTING
• Discounting is an economic method that captures an
individual’s preference for income today rather than income in
the future.
• This time preference is often explained by the opportunity
cost of interest. Income earned today can earn interest
through investment.
• In numbers;
• an interest rate of 3 %, a payment of $100 today is worth
more than the same payment in one year because JDs 3 of
interest can be earned if the payment is received today
• You would have 103 JDs (PV = payment/ (1+r)n. r is the interest
rate.
Discount Rate for Future Costs
• Determination of the most appropriate discount rate for costs
in economic analyses is still being debated by health
economists, though typically rates of 3% to 5% are used.
• Discounting occur when intervention lasts for more than one
year. Not discounting will lead to overestimate the future
costs and benefit.
• In practice, most health economists agree that it is reasonable
to select a central "best estimate" of the discount rate, such
as 2%, and to then determine the effect that higher and lower
rates (e.g. 2% to 6%) have on study findings and conclusions
(i.e. sensitivity analysis).
•
Present Future value
value (PV) (FV)
discounting
• In any economic evaluation where costs and benefits occur
over a number of years should consider discounting.
• Discounting adjusts for costs (and benefits) occurring at
different points in time.
Example
Alternatives Year 0 Year 1 Year 2 Total
Surgery 3000 3000
Drug cost 1000 1000 1000 3000
(undiscounted)
Drug 1000 ??? ??? ???
(discounted)
Which of these interventions more costly?
Knowing the discount rate 5%, what would be the costs after
year 1 and 2?
5%
Answers
Alternatives Year 0 Year 1 Year 2 Total
Surgery 3000 3000
Drug cost 1000 1000 1000 3000
(undiscounted)
Drug 1000 952 907 2859
(discounted)
• What do you think?
Answers
• Costs occurring in Years 1 and 2 are discounted with Year 2
costs discounted at a higher rate
• Future costs are given less weight because they "impose" on
us less than an equivalent cost arising now
Inflation
• Inflation refers to the general upward of the service or good
price over time
• For example the unit cost (price) of drug will be higher in 2018 as
compared to 2017
• Adjusting for inflation by using a constant price weight to
value all services, most commonly using the year when the
trial is stopped
• Such as using 2018 price weight to value all resource uses even if
the resource uses were collected over a period of years
•
Inflation versus Discounting
• Inflation is concerned with the unit cost (price) whereas
discounting (time preference) concerned with when the total
cost have been consumed.
• Adjusting for inflation or not is based on whether we choose a
constant or time varying price to value the resource use. The
latter occur if we used hospital billing data to cost outpatient
care observed over a period of time.
• Adjusting for time preference occur if patients or participants
in the trials are followed for more than one year.
Patient follow-up
Price weight Less than one year More than one year
Constant Do not adjust for inflation; do not discount Do not adjust for inflation; discount
Time varying Don’t adjust for inflation; do not discount Adjust for inflation; discount
Think about this
• If the patients were enrolled in the trial during a 3-year
period, but each is followed for one year only. In addition, the
investigators collect hospital bills to estimate inpatient cost.
• Do we need to adjust for inflation and discounting?
Summary
• Discounting is a technique used to reflect the present value
of a cost or health benefit that will occur at some future
date.
• Future costs are discounted to account for the time value of
money, and future health benefits are discounted to account
for the delay in satisfaction from these outcomes.
• The effect of discounting is to give future costs and health
benefits less weight in an economic analysis.
• Economics call discounting the notion of time preference