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Pharmacoeconomics is defined as the description and the analysis of the cost of drug therapy to

health care systems and the society. It involves the process of identifying, measuring, and comparing the

costs, risks and benefits of programs, service, or therapies and determining which alternative produces

the best health outcome for the resource invested (Varma). In simple terms, one weighs the cost of

producing a product or service such as medicines against the outcomes of using the product in which one

must gain the optimal outcome per dollar spent. This in turn helps clinicians in choosing the most cost-

effective treatment options.

Pharmacoeconomics is a new and a rapidly developing field. It is based on health economics

which is a specialized aspect of economics that first emerged in the 1960s. Most concepts involved in

pharmacoeconomics such as cost-benefit analysis and cost-effectiveness have been developed in the

late 1970s. From thereon, measurement tools for health and clinical outcomes assessment have been

created and further improved. In the late 1980s, pharmacoeconomics emerged from health economics as

an independent entity which vary among other specialized economic methods.

For just 2 decades, pharmacoeconomicshas evolved as an important part of health systems

because of the increasing emphasis on efficient and cost effective drug therapies for disease. Rising

health expenditures have led to the necessity to find the optimal therapy at an affordable price.

Governments across the globe are spending more money in healthcare. Pharmaceutical expenditure,

which constitutes the largest part of healthcare expenditures, has been increasing at a much faster rate

than total healthcare expenditures (Varma). Increasing demand by consumers to alternative drugs also

fuels the need for economic evalutation of pharmaceutical products. Thus, pharmacoeconomics is an

innovative method that aims to decrease expenditures while optimizing healthcare results.

The increasing concern of patients, healthcare professionals, and the general public to the

escalating cost of healthcare products and services has prompted demand for the use of economic

evaluation of alternative healthcare outcomes. Healthcare funders are trying to meet the rising costs by

maintaining, if not reduce, drug cost by price negotiation, patient co-payments or dedicated drug budgets.

Because healthcare resources are not easily accessible and affordable to many patients,

pharmacoeconomics strives to guide the optimal utilization and proper allocation of these resources.

However, most pharmaceuticals are accused of having excessive profits and overpriced drugs.

This focus on drug costs in isolation, rather than the value of drug therapy, benefits and its cost has led to

the demand of pharmaceuticals for evidence of value for money from drug therapy. Drug therapy

therefore is open only because there are high quality trials supporting most new drugs¶ licensing


Health economics therefore is the science of assessing cost and benefits, not to make decisions

about resource use but to inform those decisions. The aim is to identify what is most efficient so that the

greatest amount of benefit can be bought for a given amount of money or resources. However, not all the

time is efficiency the most important objective. We also prioritize caring for dying patients or treating

patients with serious disease. Pharmacoeconomics is a branch of health economics that particularly

considers drug therapy where the pharmaceutical companies who after developing the new drug, and

after the hurdles of efficacy, safety and tolerability must now face the next step, cost-effectiveness. It

must also be of interest of industrial pharmacologists that their roles in assessing new drugs and conduct

of clinical trials must also include an economic component.

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Efficiency is the key concept in economics. It means buying the greatest amount of benefit for a

given resource use. If applied in the pharmaceutical industry, it means providing the greatest amount of

pharmaceutical product or best services for a given resource.


Another concept is opportunity cost. This means the benefit foregone when selecting one therapy

alternative over the next best alternative. In simple terms, this means that the money spent on healthcare

intervention such as the development of a new drug, cannot be used on something else. Therefore, the

benefits that are lost due to use of money for the said healthcare intervention is of primary concern rather

that the cost of the intervention itself. In another sense, it means that there are more benefits for spending

money on a new drug therapy than spending that money in some other part of the healthcare system. In

addition, incremental analysis of costs and benefits is of primary importance. Since there are usually

current treatments for most conditions, as well as their associated costs and benefits, these treatments

should not be stopped but rather we should be interested on the added costs and benefits of the new

treatment regimen over the existing treatments.

Marginal cost is the change in total cost that arises when the quantity produced changes by one

unit. It is different from average cost which means the total costs divided by the total quantity produced.

Example, a patient is discharged a day earlier because of the new treatment. The average cost of a

hospital bed, e.g. cost of laboratories, kitchens, and building maintenance, is not counted as savings of

resources since this is almost unchanged. Rather, the only cost which changes, such as the patient

having physically occupied the bed, considered as the marginal cost is counted in incremental analysis.

Cost is defined as the value of resources consumed by a program or drug therapy of interest.

Consequences are defined as the effects, outputs, or outcomes of the program of drug therapy of


Cost can be classified direct, indirect and intangible. An example of direct cost is cost from the

perspective of the healthcare funder. These include the budget for staffs, capital and cost for acquisition.

Indirect costs are costs from the perspective of the society as a whole. These include loss of earnings,

loss of productivity, and loss of leisure time, due to the illness, cost to travel to hospital, etc. Intangible

costs include worry, pain, or distress to the patient or family. These are impossible to measure

quantitatively but may be measured as the quality of life.


Benefits can be measured in different ways. Benefits measured as natural units include years of

life saved, number of strokes prevented, PUD healed, etc. Utility unit is the sense of well-being and is an

attempt to evaluate the quality of life of a state of health and not just its quantity. Associated Economic

benefits are usually measured in money and may include the economic benefit of someone returning to

work. Last, economic evaluation is the formal process of weighing costs and benefits in an incremental

analysis. It is an essential framework which draws up a balance sheet between costs and benefits to

assist in decision making.


There are two major methodologies utilized in Pharmacoeconomics for health economics analysis

and these are:

· cost analysis

· cost outcomes

  puts into consideration, the costs of providing healthcare products or services

without considering the outcomes experienced by patients or providers.

 (more commonly utilized) has four types:

· cost-minimisation analysis;

· cost-effectiveness analysis;

· cost-benefit analysis; and

· cost-utility analysis.

The type of analysis to be used will depend on the kind of problem being studied.

  is used to compare two or more treatment options for a specific

condition. Cost-effectiveness is dependent on the value in nonmonetary terms that is placed on the

outcome in relation to the cost.

This analysis makes a comparison of the unit of effectiveness ± i.e. number of years of life saved,

number of lives saved, percentage lowering of glucose level, etc. ± with the cost of the treatment. Results

will be plotted and those treatments that fall under the µeffectiveness frontier¶ have the  and

 . One can call a treatment as cost-effective if the outcome is   

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For example, a drug may well be the most inexpensive treatment for a certain condition but it

requires the accompaniment of a mineral supplement thereby adding to the cost of the treatment. So it is

eminent that this therapy is not always considered the most cost effective treatment. This type of cost-

outcomes analysis method is the most  #" method.

  is used if two alternative therapies are essentially the same. This is the

method that determines which treatment minimises costs after the effectiveness has been determined

and it is a pharmacoeconomic tool that makes a comparison on all the costs and consequences of two or

more therapeutic interventions. The simplified aim of this particular method is to select the least costly

among multiple equivalent interventions. It is commonly used to compare brands with generics, various

routes of administration and different settings of administration, etc.

$ makes a comparison between the  "  of alternative

therapies wherein the outcome is expressed in monetary terms. It is a method that permits researchers to

compare a wide variety of alternatives. It serves to evaluate the costs involved in implementing a

programme with the value of the outcome. Different endpoints can be studied, since the endpoints are

measured in monetary terms such as a surgical procedure weighed against a pharmaceutical


 is carried out in similarity with cost-effectiveness analysis except that the

endpoint differs. The endpoint of cost-utility analysis is described as µquality-adjusted life years saved¶

thereby allowing it to compare therapies for different diseases. Cost-utility analysis includes both the

 "  # of a therapy into its comparison. This method indefinitely measures the

final outcomes in changes of life-expectancy. Commonly used when a programme affects morbidity and


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Cost-effectiveness analysis compares two or more treatment options for a specific condition. It is

dependent on the value in non-monetary terms that is placed on the outcome in relation to the cost. In

this analysis the health benefit can be defined and measured in natural units (eg years of life saved,

ulcers healed) and the costs are measured in money. This compares the unit of effectiveness like the

number of years of life saved, number of lives saved, percentage lowering of glucose level, etc. with the

cost of the treatment. The results are then plotted and those treatments along the µeffectiveness frontier¶

have the lowest cost and highest effectiveness.

This analysis compares therapies with qualitatively similar outcomes in a particular therapeutic

area and does not allow comparisons to be made between 2 totally different areas of medicine with

different outcomes. For instance, in severe reflux oesophagitis, we could consider the costs per patient

relieved of symptoms using a proton pump inhibitor compared to those using H2 blockers. CEA is the

most commonly applied form of economic analysis in the literature, and especially in drug therapy. A

treatment can be referred to as being cost-effective if its outcome is worth its corresponding cost in

relation to alternative therapies. This is seen in patients who use hydrochoro-thiazide. The diuretic

hydrochloro-thiazide may be the most inexpensive treatment for hypertension, but it often requires a

potassium supplement. The additional cost involved in the therapy means that this drug is not always the

most cost-effective therapy. This method of cost-outcomes analysis is the most frequently utilised


¨C <Rc


Where Rc* = maximum acceptable cost-effectiveness ratio (e.g., 50,000 per QALY)

There is no general agreement on Rc*, the maximum acceptable cost-effectiveness ratio can

differ among decision makers. A single decision maker might consider use of different maximum

acceptable cost-effectiveness ratios depending on other features of the decision problem

Net monetary benefit is a composite measure (part cost-effectiveness, part costbenefit analysis),

usually expressed in dollar terms that are derived by rearranging the cost-effectiveness decision rule: (ǻQ

Rc*) - ǻC > 0. This is proposed primarily because it overcomes statistical problems that arise when

estimating ratios. Its advantages includes: always having a defined confidence intervals, facilitates power

calculations, allows patient-level statistical tests of value for the cost for specific values of maximum

acceptable cost-effectiveness ratio and facilitates calculation of the ³value of information´ statistic.

Disadvantages includes: little agreement about the maximum acceptable cost-effectiveness ratio,

estimate of NMB and its confidence interval for any one Rc is unlikely to provide sufficient information for

policy decisions.

In cost effective drug pricing if a drug is said to be effective, there is some price at which it will be

cost effective. Te maximum price one can charge for a drug if one is to satisfy a maximum acceptable

cost effectiveness ration is determined by this formula:

Pmax = RC ¨Q + P0D0 - ¨OC


where pmax = the maximum price that can be charged for drug 1; Rc* = maximum acceptable cost-

effectiveness ratio; ǻQ = the difference in effectiveness; p0 = the price of the alternative drug; D0 = the

quantity of alternative drug dispensed for the patient; ǻOC = the difference in costs other than drug

aquisition associated with the two drugs; and D1 = the quantity of drug 1 dispensed for the patient.

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The process of weighing the benefits and costs in an incremental analysis is termed as economic

evaluation. It aims to create a framework that balances the costs and benefits to aid decision making.

The basic components of economic evaluation are shown in Figure. . In this figure, a new drug is

compared with existing practice (e.g older drug), a non-pharmacological intervention or no active therapy

(utilized in ³breakthrough´ drugs).

Figure .Basic components of economic evaluation.

In considering the costs and consequences, the two treatments will have acquisition costs, but

the economic costs and consequences will be much broader.

For possible results from evaluations can be considered. (Figure .) First, if the costs are lower

and health benefits are higher for one drug than the other drugs, the first drug is the preferred treatment

(quadrant II). Second, the opposite applies for a new drug which is more expensive and less effective.

This drug is considered inferior and is not recommended. The most common case is the third possible

result wherein the new drug is both more effective and more expensive than the standard (quadrant 1).

Based on these results, the decision must be made whether the additional benefits of the drug are worth

the extra costs, therefore whether it is cost effective. The fourth case, which is similar to the third, except

that the roles of new therapy and the standard are reversed, gives rise to the question whether the extra

benefits provided by the standard justify the additional costs of the retaining it as the preferred treatment

since a newer option which is cheaper but less effective is available.

Figure . Possible results of economic evaluation

Clinicians may need to conduct a Pharmacoeconomic evaluation if there is insufficient literature, if

published results cannot be extrapolated to clinical practice, or if building a model is not appropriate.

Before conducting a Pharmacoeconomic evaluation, clinicians should be familiar with the similarities,

differences, and appropriate application of Pharmacoeconomic methods

This process contains 14 fundamental steps for conducting a Pharmacoeconomic evaluation in a

health care system and can be applied to virtually any therapeutic area or health care service.

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A broad problem might be, "which antiemetic regimen represents the best value for the

prevention of chemtherpy-incduced emesis (CIE)?" However, a more succinct and measurable problem

would be "which regimen is the best valule for preventing acute CIE patients receiving highly emetogenic


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The study tem can provide early "busy-in " and additional resources for a Pharmacoeconomic

evaluation. Team members vary depending on the analysis but may include representatives from

medicine, nursing, pharmacy, hospital administration, and information systems.

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Choose a study perspective(s) mostly relevant to the problem. For example, if the problem is as

listed in Step 1, than the perspective of the institution or health care system may be most appropriate.

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Treatment alternatives can include pharmacologic and nonpharmocologic options but should

include all clinically relevant alternatives. The outcomes identified should include both positive and

negative clinical outcomes.

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Pharmacoeconomic methods to choose from include CMA, CBA, CEA and CUA. Employing the

incorrect method can adversely affect medication decisions influencing both cost and quality of care.

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Placing a monetary value on treatment alternatives and outcomes includes not only drug

administration and acquisition costs but also the cost of positive and negative clinical outcomes (e.g.

determining the cost of ADRs and treatment failures.) this can be measured prospectively or

retrospectively or estimated using comprehensive databases or expert panels.

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Resources necessary will vary by study but may include access to medical or computerized

records, average medical personnel wages, and specially medical staff.

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What are the probabilities of the outcomes identified in step 4 actually occurring in clinical

practice? Using primary literature and expert option, these probabilities can be obtained and may be

manifested as efficacy rates and incidence of ADRs.


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Costs and consequences that occur in the future must be discounted back to their present value.

Sensitive variables must be tested over a clinically relevant range and results recalculated. If appropriate,

an incremental analysis of the costs and consequences should be performed.

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Results should be presented to the cross-functional team and the appropriate committees.

Presentation style and content may vary depending on the audience.


Take the study results and develop a policy or an intervention that can improve or maintain

quality of care, possibly at a cost savings.


Spend adequate time and resources strategically implementing the policy or interventiuon.

Educate those health care professionals most likely to be affected by this policy, using various strategies,

including verbal, written, and online communication.


Once the intervention or policy has been implemented for a reasonable period of time, collect

follow up data. These data will provide feedback on the success and quality of the policy or intervention.

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In sampling uncertainty an acceptable point estimate may not be sufficient evidence for adoption

of a therapeutic programme. For instance one might inquire ³how certain are you that the therapy

represents good value?.´ The data used in the evaluation is used to provide a measure of the precision of

estimates in the light of sampling uncertainty. The common measures of sampling uncertainty includes:

Confidence intervals for cost-effectiveness ratios, confidence intervals for net monetary benefit, and

acceptability curves.

In confidence intervals for cost-effectiveness ratios the decision threshold is based on the

question whether the cost-effectiveness ratio is less than Rc. In conceptualizing a confidence interval for

NMB on the other hand has its decision threshold based on the question is the difference greater than 0.

One must calculate separate CI for each policy-relevant maximum acceptable cost-effectiveness ratio.

The CI and resulting policy inference derived for a single Rc may have little in common with CI and

resulting policy inference derived for other values of Rc.

In quantifying uncertainty using acceptability curves the evaluation of the acceptability criterion is

based on the probability that the estimated ratio falls below a specified Rc. The acceptability criterion is

defined on the cost-effectiveness plane as a line passing through origin with a slope defined by Rc. Points

from the cost/effect distribution falling in quadrants ENE, SE, and SSW satisfy the criterion.

Given that there is no agreed upon maximum acceptable cost-effectiveness ratio for use in

hypothesis testing of cost-effectiveness ratios, the routine estimation of the probability of acceptability

over the range of possible positive values of willingness to pay is done.


To be 1-Į confident that the therapy is or is not acceptable, at Rc*, either less than Į/2 or more

than 1-(Į/2) of the density should be acceptable (e.g., to be 95% confident, either less than 2.5% should

be acceptable or more than 97.5% should be acceptable)

If one's primary interest is identifying ranges of willingness to pay where: One can be confident

that therapy A is cost-effective compared to B, One can be confident that therapy B is cost-effective

compared to therapy A, and one cannot be confident that therapy A differs from therapy B then all 3

methods would provide the same information. The CI for CER identifies the boundaries between these

ranges for a specific level of certainty (e.g., 95% CI define the boundaries where one can be 95%

certain). The advantage of acceptability curves is that they report these boundaries for varying levels of


If one is planning to extend adoption criteria to account for sampling uncertainty one is to

consider that there is no uniform approach to how decision makers evaluate measures of sampling

uncertainty. If decision makers were to adopt a pharmaceutical decision making paradigm, they might

require p<0.05 evidence that a therapy is good value.

If the point estimate is acceptable but the confidence intervals are wide, they may require more

information either before or after approval.

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The ever increasing rate of inflation and the reality that resources for medical care are limited has

led to significant changes in the reimbursement for health care services. These influences have

convinced health care policy makers to closely evaluate innovative health services in terms of the benefits

and costs. New pharmaceutical services must be economically justified in order to exist in the future. This

is crucial to the expansion and adoption of pharmaceutical services.

Application of economic evaluations is not new to the health care sector. Until recently, there

were no incentives to transfer this interest into widespread use. As health care expenditures have

escalated over the past two decades, the number of applications of these techniques has increased.

Especially significant are cost benefit and cost effectiveness evaluations of medical practice,

pharmaceuticals, and other health care technologies.


Pharmacoeconomic analysis is an important tool to assist in the evaluation of new

pharmaceutical services and technologies. Essentially, economic analytical methods are used to weigh

the positive and negative consequences of alternative courses of action. The usefulness of

pharmacoeconomic analyses is in resource allocation, with the purpose of achieving the highest return on

investment or accomplishing a given objective in the least costly manner. E.g. Therapeutic drug


Pharmacoeconomics play an important role in effective decision making process.

Various applications of pharmacoeconomics are:

· Hospital formulary- it helps in either addition or deletion of drugs in formulary based on its

cost effectiveness and availability to the patients.

· Clinical and policy decision making

· Powerful tool to support various clinical decisions, ranging from the level of the patient to the

level of an entire healthcare system.

· Drug therapy evaluation

· Clinical pharmacy service evaluation (e.g. TDM)

· Clinical research- these studies help in evaluating IP (investigational product) in terms of its

cost and effectiveness. Applicable to all phases of clinical trials (I to IV).

· Public health programmes

· Community surveys

Application of Pharmacoeconomics:

1. Pricing of a new drug

2. Re-pricing of an old drug

3. Generation of a data for promotional material

4. Legislative requirement for drug licensing and medical reimbursement


5. Justify clinical pharmacy evaluation

6. Used to justify use of pharmacy products and pharmaceutical care

7. Principle of Pharmacoeconomic also influences health care decision making and individual

patient care

8. Earlier clinical decisions were solely based on outcomes. Now cost, outcome, humanistic

outcome are also considered

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Belien, P.(2000).Healthcare systems. A New European Model?PharmacoEconomics, 18 (S1) , pp. 85±93.

Bootman, J., Townsend, R. and McGhan, W. (1999), Principles of Pharmacoeconomics, Harvey Whitney

Books: Cincinnati.

Varma, S., and ShameelHH, K. Principles of Pharmacoeconomics, National College of Pharmacy,

Manaserry, Calicut.

Walley, T. Pharmacoeconomics and Economic Evaluation of Drug Therapies, University of Liverpool,


Wilson,E.A. (1999). De-Mystifying Pharmacoeconomics, Drug Benefit Trends, 11(5) , pp. 56±58, 61±62,