Chapter II

Introduction to Pharmacoeconomics

Bisrat H. ( B-pharm, MSc)

1
Pharmaceutical Supply Chain Management

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2 Learning Objectives

 Introduce fundamental concepts and principles of economics and

their application in the field of health and pharmaceutical industry.

 Appreciate peculiarities of health care market and the context in

which pharmacoeconomics is applied in the health care services

 Introduce different types and methodologies of economic evaluation.

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3 Health economics

Health Economics-Application of economic theories, tools,

and concepts of the discipline of economics to the topics of
health and healthcare.

Health economics is the science of assessing cost and

benefits.

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It is thus concerned with such matters as:

The allocation of resources to various health promoting activities
The quantity of resources used in health delivery
The efficiency with which resources are allocated and used for
health purposes
The effect of preventive, curative and rehabilitative health services
on individuals and society.
The organization and funding of health institutions
[Lee and Millis]

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5 The ‘Health Economic’ problem

 Unlimited healthcare “wants” with

rapid growth in health expenditure.

 Insufficient health sector resources.

 Choosing between ‘wants’ we can

‘afford’ given our resource ‘budget’.

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• Health economics is about making choices between options, when there

is scarcity of resources.

• Health economics is fundamentally comparative, weighing the costs and

benefits of option 1 with those of option 2 (for instance, a new drug and
the previous best therapy -traditional medical evaluation focused only on
the benefits), to determine which is the most efficient way to use our
limited resources.

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Is health a capital?
 Yes-, because it helps a person to produce other things.
Only a healthy person can be effectively productive.
Is health care an investment or a consumption good?
 Both, Because
• We enjoy life when we are healthy which is the consumption side of health.
• On the other hand, health enhances the productivity of labor and ensures
growth in future which means investment in health care increases
capital.

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8 What is meant by pharmacoeconomics?

☆ Pharmacoeconomics is a sub-discipline of the field of health

economics, which itself is a relatively new sub-discipline of
economics, only formerly appearing in the economics scientific
literature since the 1960s.

 “The description and analysis of the costs of drug therapy to

health care systems and society” - Townsend, 1987.

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9 What is meant by pharmacoeconomics ?

 The systematic assessment of the costs and consequences of

pharmaceutical products or services.
 The science of measuring the costs and outcomes associated with the
use of pharmaceuticals in health care delivery.
 The field of study that evaluates the behavior or welfare of individuals,
firms, and markets relevant to the use of pharmaceutical products,
services, and programs.
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 Pharmacoeconomics identifies, measures and compares the cost and

consequences of pharmaceutical products and services and describe
the economic relationship involving drug research, drug production
distribution, storage, pricing and use by the people.

☞So the methodology of pharmacoeconomics studies is to compare

the costs and consequences (or outcomes) of drug therapies and
medical interventions.

 In order to be a true economic analysis, at least 2 alternatives must be

compared.

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 The “cheapest” alternative—with respect to drug acquisition cost—

is not always the best value for patients, departments, institutions,
and healthcare systems.

 Quality patient care must not be compromised while attempting to

contain costs.

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 The products and services delivered by today’s healthcare professionals
should demonstrate pharmacoeconomic value— that is, a balance
of economic, humanistic, and clinical outcomes.

 Pharmacoeconomics can provide the systematic means for this quantification.

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13 Fourth Hurdle and Drug Approvals
 The classic basic elements required for approval of new drugs are
[Link] efficacy,

[Link] safety, and

[Link] quality.

 But more recently, with the realization of limited national and global
financial resources, another drug approval step has been added that
considers factors related to pricing and reimbursement.

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Is there a
beneficial effect from
the therapy? Relates to
development,
Manufacture and
distribution of the
drug?

SAFETY
How acceptable VALUE FOR
are the SE’s? MONEY

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 Therefore, there is an additional jump before the marketing of

pharmaceuticals that is often called “the fourth hurdle.”

 This criterion, usually involving cost-effectiveness and

pharmacoeconomic analyses, is required even when efficacy, safety, and
quality have been demonstrated.

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The fourth Hurdle

In other words,
☃ Does the drug produce a useful health gain (over and
above currently available treatments= “me too” drugs)
for its additional cost?

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Pharmacoeconomic analyses
provide quantitative evidence for more rational new drug
approvals.
with post marketing surveillance and patient registries, PE
also helps sustain cost-effective drug utilization throughout
the life cycle of the therapy.
Is PE a friend or foe to discovery of new drugs?

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18 What are the kinds of questions Pharmacoeconomics
tries to answer?
Examples:
 Should clinicians check the blood pressure of each adult
whom they see?

 Should an expensive new drug be approved for use?

 Should a hospital buy a new expensive diagnostic instrument?

 Should a drug A be used instead of surgery?

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☀In today’s healthcare settings, pharmacoeconomic methods

can be applied for:
effective formulary management,
individual patient treatment,
medication policy determination, and
resource allocation

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 Pharmacoeconomic evaluation
20
It is a method that defines “added value” that the product
contributes to the health of society.
It aids the decision-making process in terms of:
 generating reliable information on which decisions are
based,

 allows decision-makers to make informed choices based

on evidence,

 Ultimately contributes to an efficient resource allocation.

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21 Why is economic evaluation important?

1. Without systematic analyses, it is difficult to identify clearly

the relevant alternatives

2. Viewpoint assumed in an analyses is important

MOH, Patient, society

3. Without some attempt at measurement, the uncertainty

surrounding order of magnitude can be critical

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Pharmacoeconomic Analysis

Deals with both inputs( costs of resources used) and

outputs( health status)
Concerns itself with choice

Definition: Comparative analysis of alternative courses

of action in terms of both their costs and
consequences
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 Nature of Comparative Analysis
23

Costs A Consequences A
Program A

Choice
Consequences B
Program B
Costs B
Note:
(1) If program A is subject of interest, program B can represent some other program,
or no program at all.
(2) The difference in costs is compared to the difference in consequences.
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 Taxonomy of Health Evaluations
Are both costs and consequences of the alternatives examined?
24

Is there comparison of two or more alternatives?

NO YES

Reproduced from Drummond et al., 1997

Outputs Only Costs Only

NO 1A Partial Evaluation 1B 2 Partial Evaluation

Outcome-Cost
Outcome Cost
Description
Description Description

3A Partial Evaluation 3B 4 Full Economic

Evaluation
Efficacy or Cost Analysis CMA
YES Effectiveness


CEA
Evaluation
CUA

CBA

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PE is about making decisions on the most efficient use of limited

resources for health care.
Health managers must constantly decide which of several courses
of action to follow in order to use their limited budgets to the
greatest possible benefit.
These may be choices among
programmes,
programme goals/objectives, or
strategies or activities for achieving specific goals.
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These decisions are made

 at central level (e.g., How much should be allocated to the
different ministries?),

national departments of health (e.g., How much should be

allocated to different programme activities?

local level (regional offices, district offices and individual facilities),

for instance,
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Questions at national and local level:

How much should be spent on medicines, training and storage?

Which distribution strategy will deliver medicines to health

facilities most efficiently?

Which medicines should be purchased and used?)

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28 Methods of economic evaluation

 All economic evaluation has common structure which involves

explicit measurement of inputs(costs) and measure outcomes.

 The common issues in pharmacoeconomic evaluation are:

Perspectives

Costs

Outcomes (benefits)

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Perspectives
 Perspective is the point of view from which a pharmacoeconomic analysis is
conducted or is an economic term that describes whose costs are relevant
based on the purpose of the study.
 The common perspectives of pharmacoeconomic analysis
☞Patient
☞Provider
☞Payer
☞Society

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 Assessing costs and consequences—the value of a pharmaceutical

product or service—depends heavily on the perspective of the
evaluation.

 A pharmacoeconomic evaluation can assess the value of a product or

service from single or multiple perspectives.

Clarification of the perspective is critical because the results of a

pharmacoeconomic evaluation depend heavily on the perspective taken.
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32 Patient Perspective

 Costs from the perspective of patients are essentially what patients pay
for a product or service, that is, the portion not covered by insurance.

 Consequences, from a patient’s perspective, are the clinical effects, both

positive and negative, of a program or treatment alternative.

This perspective should be considered when assessing the impact of drug

therapy on quality of life or if a patient will pay out-of-pocket expenses for a
healthcare service.
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Provider Perspective
 Costs from the provider’s perspective are the actual expense of providing a
product or service, regardless of what the provider charges.

 Providers can be hospitals, managed-care organizations (MCOs), or physicians.

 From this perspective, direct costs such as drugs, hospitalization, laboratory tests,
supplies, and salaries of healthcare professionals can be identified, measured, and
compared.

When making formulary management or drug-use policy decisions, the

viewpoint of the healthcare organization should dominate.
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34 Payer Perspective
 Payers include insurance companies, employers, or the government.

 From this perspective, costs represent the charges for healthcare products
and services allowed, or reimbursed, by the payer.

 The primary cost for a payer is of a direct nature. However, indirect costs,
such as lost workdays and decreased productivity, also can contribute to the
total cost of healthcare to the payer.
When insurance companies and employers are contracting with MCOs or
selecting healthcare benefits for their employees, then the payer’s perspective
should be employed.
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35 Societal Perspective

 The perspective of society is the broadest of all perspectives because it is the

only one that considers the benefit to society as a whole.

 A societal perspective is the most comprehensive, as it includes all costs and

benefits irrespective of who pays and who benefits, but often more limited
perspectives are adopted.

In countries with nationalized medicine, society is the predominant

perspective.
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 In general, the societal perspective is considered the most appropriate, but a

health care manager with a limited budget might be tempted to ignore the
societal view and consider only the costs that fall on his own budget.

A study of migraine which took the health

service perspective only might suggest that
sumatriptan in migraine (an expensive drug in
an area which previously cost the health
service very little) was highly undesirable, but
a study taking a societal perspective might
come to the opposite conclusion.

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What is cost?

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 Costs are calculated to estimate the resources (or inputs) that are
used in the production of a good or service. Resources used for one
good or service are no longer available to be used for another.

 According to economic theory, the “true” cost of a resource is its

opportunity cost—the value of the best-forgone option or the “next
best option”—not necessarily the amount of money that changes
hands.
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 Most textbooks categorized pharmacoeconomic (PE)- related costs

into four types: direct medical costs, direct nonmedical costs,
indirect costs, and intangible costs.
1. Direct costs are those associated directly with the delivery of medical
care.
2. Indirect costs are those associated with lost production capacity, e.g.
time lost from work due to illness or death.
3. Intangible costs are those associated with pain ,and suffering , or other
distress which a patient or their family might suffer.
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Cost
Direct
medical cost Intangible cost

Direct non-
medical cost Indirect cost
 Medications
 Medication
administration and
monitoring
 Patient counseling and
 Pain and suffering
consultations  Lost productivity for
 Fatigue
 Diagnostic tests  Travel costs to patient
 Anxiety
 Hospitalizations receive health care  Lost productivity for
 Grief
 Clinic visits (bus, gas, taxi) unpaid caregiver (e.g.,
 Emergency department  Child or family care family member, neighbor,
visits expenses, friend)
 Home medical visits  Special diets,  Lost productivity
 Ambulance services Bisrat H  various other out-of- because of prematurechapter II
 Nursing services pocket expenses mortality
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►Direct Costs = Direct Medical Costs + Direct non-medical costs

►Indirect Costs = Morbidity costs + Mortality costs

►Total costs = Direct costs + Indirect costs + Intangible costs

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Costs described in many ways:

The cost can be measured in following ways,
 Cost/ unit (cost/tab, cost/vial)
 Cost/ treatment
 Cost/ person
 Cost/ person / year
 Cost/ case prevented
 Cost/ life saved
 Cost/ DALY (disability-adjusted life year)
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Costing and cost analysis

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 Cost analysis: basic steps
44

1. Define the unit of service.

2. Determine number of service units provided.

3. Determine the full cost of service.

4. Compute the average unit cost.

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Costing is a four step process(with some elaboration)….

I. Identification of the items (costs) to be included in the analysis (which

will depend on the perspective of the analysis)

II. Measurement or counting the number of units of each resource used

III. Valuation of each of these resources.

 What is the value of the resources used?

IV. Calculate Summary measures

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Outcomes(consequences)

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47 Outcomes(consequences)

 Similar to costs, the outcomes or consequences of a disease and its

treatment are an equally important component of pharmacoeconomic
analyses.

Definition

 Outcomes Research evaluations are concerned with evaluating the effects of

medical intervention on clinical, economic and humanistic measures.

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Outcomes relationship

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Clinical Outcomes
 Clinical outcomes are medical events
Examples
Pain Relief
that occur as a result of disease or
Cure
treatment or Comfort
Survival
Myocardial Infarction
 Clinical outcomes are the clinical blood pressure in
consequences of pharmacological hypertension
Death
treatment or strategy.

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Humanistic Outcomes
Examples
 Definition: Consequences of the
 Functional status such as Physical,
disease or treatment on patient emotional, social
functional status or quality of life  Health Related Quality of Life (HR-QoL)

along several dimensions  Patient Satisfaction

 Patient Preferences

 General health

 Role performance

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Economic Outcomes

An outcome expressed in terms of the cost or value of

delivering care
Example
Expense
Savings
Cost Avoidance

 Direct, indirect, and intangible costs compared with the consequences

of medical treatment alternatives
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52 Positive versus Negative Consequences

 Positive Consequences- is a desired effect of a drug (efficacy or effectiveness

measure)
 Life-years gained
 Cases cured
 Improved health related quality of life
 Negative Consequences- is an undesired or adverse effect of a drug, possibly
manifested as a,
 treatment failure
 Adverse effects
 Toxicity
 Even death

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Positive versus Negative Consequences…..

 Pharmacoeconomic evaluations should include assessments of both

types of outcomes. Evaluating only positive outcomes can be
misleading because of the potential detriment and expense
associated with negative outcomes.

 Thus the balancing of positive and negative consequences is

important in any pharmacoeconomic evaluation

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Intermediate and Final Consequences

 Consequences also can be discussed in terms of intermediate and final

outcomes.
 Intermediate outcomes can serve as a proxy for more relevant final
outcomes.
 For example, achieving a decrease in low-density lipoprotein
cholesterol levels with a lipid-lowering agent is an intermediate
consequence that can serve as a proxy for a more final outcome
such as a decrease in myocardial infarction rate.

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Economic

Clinical

Humanistic
Outcomes

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56 Sources for Outcomes Data

 Internal sources of outcomes

medical chart, pharmacy computer systems, administrative
databases
 Patient-focused outcomes
valid and reliable health status or patient satisfaction
questionnaires, visual analog scale
 External sources of outcomes
published clinical trials, outcomes studies, government web
sites,…

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57 Outcomes (Benefits)……

 The benefits we expect from an intervention might be measured in:

I. “Natural” units - e.g. years of life saved following lipid lowering

or antiretroviral therapy, strokes prevented, peptic ulcers healed
etc.

II. “Utility” units - utility is an economist’s word for satisfaction, or

sense of well being, and is an attempt to evaluate the quality of a
state of health, and not just its quantity.

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58 Outcomes (Benefits)……

 The Quality Adjusted Life Year (QALY) is one widely used measure, which
attempts to integrate both quality and the quantity of life.

Example -if a treatment increases one’s life expectancy by 2 years, but causes
adverse effects or inconvenience, such that one’s quality of life or
utility are decreased by 25%, the net gain is 2 x 0.75 = 1.5 QALYs.

 Despite criticisms, the concept of the QALY has advanced thinking on

how to incorporate quality of life into economic evaluations.

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59 Outcomes (Benefits)……

 Utility estimates can be obtained through direct measurement

(using techniques such as time trade off or standard gambles, or
by imputing them from the literature or expert opinion.

 Utility estimates are often informed by measures of quality of

life in different disease states.

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60 Types of economic Analysis

Economic evaluation is the formal process of weighing

benefits and costs in an incremental analysis.

Economic evaluation is essentially a framework which

draws up a balance sheet between costs and benefits to
assist decision making.

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The costs and benefits or outcome measures selected give

rise to the four common types of economic evaluation.

These studies are often complex and require use of

economic models.

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 Classification of pharmacoeconomic studies
Does it examine two or more alternatives?
62

No Yes

Does it examine cost and Does it examine cost

health effects? and health effects?

Cost Effects only both Cost Effects both

only only only

Cost Health Cost Cost minimization analysis

Cost Efficacy
description description Outcome analysis and/or
Cost benefit analysis
(cost of description effectiveness Cost effectiveness analysis
illness) analysis (QOL Cost utility analysis
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studies) chapter II
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PE Evaluation techniques

 Analytical tools to identify which of several alternatives offers the greatest

benefit compared with its cost.
The commonly used are
Cost minimization analysis (CMA)
 Cost-effectiveness analysis (CEA)
 Cost-utility analysis (CUA)
 Cost-benefit analysis (CBA)
 and described here in increasing order of methodological and practical
difficulty.
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 Six-step economic evaluation
64

Step example
1. Define the objective Prevent mother-to-child transmission
(PMTCT) of HIV
2. List the different ways to A: Give nevirapine to mother &baby
achieve the objective B: Perform no intervention

3. Identify and measure the costs Costs of option A:

of each option  Introduction / monitoring / counselling
 Provision of nevirapine to all HIV+
pregnant women.
 Treatment costs of infected infants
Costs of option B:
 Treatment of infected infants

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 Six steps cont`d…
65 step Example
4. Identify and measure the Benefits of option A:
benefits of each option
MTCT reduced from 32% to 16%: Costs for treatment of
infected infants are halved.
For every 1000 births, 160 lives are saved
Benefits of option B:
No costs for introduction / monitoring / counselling or for
providing nevirapine to all HIV-positive mothers
5. Calculate and interpret Compare the costs and the benefits:
the cost-effectiveness of
each option Taking into account costs of counselling and nevirapine
alone, option A is more expensive, but saves [Link] could
calculate a cost per life saved.
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Steps Example

When taking into account subsequent treatment

costs of infected infants, option A is less expensive,
and saves lives.
 The “cost” per life saved, or incremental cost-
effectiveness ratio, would be negative.

6. Perform sensitivity Consider possible variations: percentage of

analysis on the conclusions pregnant women reached, morbidity in treated
mothers and/or infants etc.
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Sensitivity analysis

Sensitivity analysis
a way to deal with uncertainties in assumptions underlying
the economic analysis.
Hence, it examines how results of analysis will be
influenced by changing the parameters in key assumptions.

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It includes the following steps:

 Identify the assumptions which are uncertain i.e. “uncertain
parameters”,
Define credible range of variations of “uncertain parameters”
from literatures
Recalculate study results using the most conservative estimate,
the “best guess” and the least conservative estimate.
How will the differences affect the conclusions?
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Cost minimization analysis (CMA)

 This involves measuring only costs, usually only to the health

service, and is applicable only where the outcomes are identical and
need not be considered separately.

 An example would be prescribing a generic preparation instead of

the brand leader (lower cost but same health outcomes).

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 CMA has the advantage of being the simplest to conduct because

the outcomes are assumed to be equivalent; thus, only the costs of
the intervention are compared.

 The advantage of the CMA method is also its disadvantage: CMA

cannot be used when outcomes of interventions are different.

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Cost minimization analysis (CMA) is used to define the most
economical treatment among different alternatives with equal efficacy
/effectiveness and safety profiles.
 CMA is a relatively straightforward and simple method.
Very frequently, however, CMA is confused with COI, but they are
substantially different in scope and methodology.

The ideal situation for a CMA is the comparison of a

brand and equivalent generic drug.
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Examples

Fluoroquinolone versus SMX/TMP for the treatment of

urinary tract infection

Prilosec versus Prevacid for the treatment of duodenal

ulcers

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73 Cost effectiveness analysis (CEA)

 Refers to a particular type of evaluation, in which the health

benefit can be defined and measured in natural units (e.g years
of life saved, ulcers healed) and the costs are measured in
money.

 CEA compares therapies with qualitatively similar outcomes in

a particular therapeutic area.

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74 CEA….cont’d

 For instance, in severe reflux esophagitis, we could consider the

costs per patient relieved of symptoms using a PPI compared
to those using H2 blockers.

 CEA is the most commonly applied form of economic analysis

in the literature, and especially in drug therapy.

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75 CEA….cont’d

 It does not allow comparisons to be made between two

totally different areas of medicine with different outcomes.

 The broad form of these evaluations are shown in below, and

the key measure is the incremental cost effectiveness ratio
(ICER).

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76 CEA….cont’d

Incremental Cost Effectiveness Ratio = (cost of drug A-cost of drug B)

(benefits of drug A-benefits of drug B)

 ICER (e.g., $ per life save, $ per disability day avoided, or $ per case
treated) is used to make decisions. The alternative with the lowest
ICER will be chosen.
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77 Cost utility analysis (CUA):

 This is similar to cost effectiveness in that the costs are measured

in money and there is a defined outcome.

 But here the outcome is a unit of utility (e.g. a QALY).

 Since this endpoint is not directly dependent on the disease state,

CUA can in theory look at more than one area of medicine,

 e.g. cost per QALY of coronary artery bypass grafting versus cost
per QALY for erythropoietin in renal disease.
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78 CUA…

 CUA measures outcomes based on years of life that are adjusted by

“utility” weights, which range from 1.0 for “perfect health” to 0.0 for
“dead.”

 These utility weights incorporate patient or society preferences for

specific health states.

 When morbidity and mortality are both important outcomes of a

treatment, CUA should be used to incorporate both into one unit of
measure.
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79 CUA…

The main disadvantage of CUA

is that there is no consensus on how to measure these utility
weights, and they are more of a “rough estimate” than a precise
measure.

Some researchers consider CUA as a subset of CEA.

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 Calculating QALYs
80

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81 Cost benefit analysis (CBA)
 CBA is unique in that not only are costs valued in monetary terms,
but also the benefits.

 Measuring both costs and benefits in monetary terms has two major
advantages:
First, clinicians and other decision makers can determine whether the
benefits of a program or intervention exceed the costs of implementation.

Second, clinicians and other decision makers can compare multiple

programs or interventions with similar or unrelated outcomes.
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82 CBA…

Both costs and benefits are expressed in money. Thus, CBA

may ignore many intangible but very important benefits not
measurable in money terms, e.g. Relief of anxiety.

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83 CBA…

 It may allow comparisons to be made between very different

areas, and not just medical,

 e.g. cost benefits of expanding university education (benefits of

improved education and hence productivity) compared to
establishing a back pain service (enhancing productivity by
returning patients to work).

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This approach is not widely used in health economics,

although many economists like it on theoretical grounds and
because it removes some of the “sacred cow” protection
which surrounds health care.
They argue that ‘health should be another commodity’, and not
necessarily valued more than other possible uses of the
resources.
Example Cost of a Heart Drug($)
Reduced Hospital Days ($)
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85 Cost of Illness

 Evaluation of all economic and humanistic resources associated

with a given illness/disease
Examples
• Cost of asthma
• Cost of strokes caused by phenylpropanolamine (PPA)
 The cost of illness study (COI), which is concerned with
the identification and estimation of the overall cost of a
particular disease on a defined population.

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86 COI….

COI studies are used

to indicate the magnitude of resources needed for a specific disease
or condition,
to compare the economic impact of one disease versus another (e.g.,
costs of schizophrenia versus costs of asthma) or
To compare the economic impact of a disease on one country with
another (e.g., costs of HIV in the United States versus costs of HIV in
Zimbabwe).
These estimates are sometimes used by pharmaceutical firms to
determine the market potential for a new product or by payers
to set priorities for reimbursement.
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 Evaluation of all clinical, economic, and humanistic outcomes

associated with an intervention or group of interventions
Example
 Review of a new migraine drug for addition to a hospital
formulary
• Clinical outcomes (HA relieved)
• Economic outcomes (direct & indirect costs)
• Humanistic outcomes (productivity loss)

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88 Cost-Consequence analysis

 Not a formal method

 More attractive to decision makers who apply their own weight to

various outcomes and preferred where many disparate outcomes can
not be condensed into single outcome

 Presented as disaggregated form

 Decision making very difficult and usually reflects how decisions are
made in REAL world
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89 Cost-Offset Analysis

Evaluates whether using a pharmaceutical therapy or

program produces an outcome that decreases pharmacy
or medical costs that offsets the purchase price of the
new therapy

Clinical

Economic

Humanistic

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Example:
• If a new drug only has to be administered once a day instead of
three times a day, this saves nursing time and pharmacy time
and therefore may offset the increase in cost of the new drug.

• If a new drug does not require levels to be monitored, this

would decrease pharmacy time and laboratory costs that may
offset the increase in cost of the new drug.

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91 Budget Impact Analysis (BIA)

 Estimate the financial effect of an intervention on a health plan or

program

 BIA is often requested by managed care organizations in the US or

national health insurance programs (e.g., Canada, UK)

 Most BIA analysis has a one year time frame.

 BIA taking a longer time frame need to consider the impact of new
interventions on the underlying disease prevalence and make
appropriate adjustments in analyses.
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