PHARMACOECONOMICs

Azra batool
senoir Lecturer
Gulab Devi institute of pharmacy
 GENERAL CONCEPTS

• Economics
Economics is the social science that studies the
production, distribution, and consumption of
goods and services. Economics focuses on the
behaviour and interactions of economic agents
and how economies work
• Health economics
• Science of assessing cost and benefits of
healthcare
 Pharmacoeconomics
• Definition
• The description and analysis of the costs of drug therapy to
health care system and society.
• More specifically, pharmacoeconomic research is the
process of
• Identifying,
• Measuring, and
• Comparing the costs,
• Risks, and benefits of programs, services, or therapies and
• Determining which alternative produces the best health
outcome for the resource invested.
• PE is also Considering the cost of providing a pharmacy
product or service against the consequences (outcomes)
realized by using the product or service to determine
which alternative yields the optimal outcome per
dollar/rupee spent.
• This information can assist clinical decision makers in
choosing the most cost-effective treatment options.
COST—
the value of the resources consumed by drug therapy of
interest.
• CONSEQUENCE—the effects, outputs, or outcomes of
the program or drug therapy of interest.
• . For a new agent to be added to an MTF
formulary, it must first successfully clear the
clinical-effectiveness hurdles of, efficacy, and
quality. To clear the fourth hurdle, the new
agent must have a favorable economic profile
compared with existing treatments. And
finally, the new agent must be affordable.
Often an agent can clear the first four, but get
dq’d on the fifth hurdle.
• Our topic today, Budget Impact Analysis,
addresses the fifth hurdle affordability.
 Hurdles for a new drug to reach the market

AFFORDABILITY
COST
SAFETY EFFECTIVITY
EFFICACY
QUALITY
COSTS
price of drug,
price of its administration
price of hospitalization, outpatient treatment
price of transportation price of ADRs

OUTCOMES
lifetime prolongation
improved quality of life
better compliance, simplified therapeutic regime
 Outcomes research (OR)

– Study of healthcare interventions, care delivery process, and

healthcare quality that is evaluated to measure the extent to
which optimal and desirable outcomes can be reached.
Purpose of OR is to assess the value of a therapy or program in
question.
• OUTCOMES RESEARCH to identify, measure, and evaluate the
results of healthcare services in general.
Pharmacoeconomics is a division of outcomes research that can be
used to quantify the value of pharmaceutical care products and
services.
• Areas of outcomes are
• Economic outcomes,
• clinical outcomes and
• humanistic outcomes
Themes of Outcome Research
• Safety
• Efficacy
• Timeliness
• Patient Centeredness
 CONTI… Examples of outcomes measures
– Economic outcomes
• Acquisition costs
associated with care
• labor costs associated with
care
• costs to treat ADRs
• costs of treatment failure
• costs of hospital
readmissions,
• costs of emergency rooms
& clinic visits
– Clinical outcomes
• Length of hospital stay
• ADRs
• hospital readmissions
• Mortality
– Humanistic
• Patient satisfaction
• Patient preferences
• QoL assessment
PERSPECTIVES OF EVALUATION
Assessing cost and consequence
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 perspective.

– Patient perspectives - portion of costs not covered by

Insurance
– Payer’s perspective- Insurance companies, employer, Govt.
– Provider’s perspectives- Hospital Govt./Pvt. Physicians etc.
– Societal perspectives- all direct and indirect costs,
morbidity & mortality.
• example
• If comparing the value of alteplase (tissue plasminogen activator,
or t-PA) with that of streptokinase from a patient or societal
perspective, t-PA may be the best-value alternative because a 1%
reduction in mortality rates is observed in large population.

• However, from a small community hospital's perspective,

streptokinase may represent a better value because it provides
similar outcomes for less money. Once the perspective is clear, a
full evaluation of the relevant costs and consequences can begin.

• Therefore, perspective is critical because the value placed on a

treatment alternative will depend heavily on the point of view
taken.
 Patient Perspective
• Patient perspective is very important t because patients are the ultimate consumers of

healthcare services.

• cost
• 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.

• For example, various costs from a patient's perspective might include insurance

copayments and out-of-pocket drug costs, as well as indirect costs, such as lost wages.
 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 private-practice physicians.
From this perspective, direct costs such as drugs,
hospitalization, laboratory tests, supplies, and salaries
of healthcare professionals can be identified,
measured, and compared.
• However, indirect costs can be of less importance to
the provider.
 Payer’s 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 (absenteeism),
being at work but not feeling well and therefore having lower
productivity (presenteeism), 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.
 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.
• Theoretically, all direct and indirect costs are included in an
economic evaluation performed from a societal perspective.
• Costs from this perspective include patient morbidity and
mortality and the overall costs of giving and receiving medical
care.
• An evaluation from this perspective also would include all the
important consequences an individual could experience.
• In countries with nationalized medicine, society is the
predominant perspective.
 COSTS

cost :

Value of the resources consumed by a program or drug therapy

– Total cost
– Average cost
– Fixed cost
– Variable cost
– Incremental cost
– Direct cost
– Indirect cost
– Allowable cost
– Opportunity cost
– Operational cost
Categories of healthcare cost

Direct medical costs – drugs, medical supplies, laboratory

tests and diagnostic tests, hospitalizations, and physician
visits

Direct non-medical costs – transportation to and from

healthcare facilities, extra trips to A&E, special diets and
various other out-of-pocket expenses

Indirect costs – morbidity costs (loss of productivity),

Mortality (loss of years of services due t0 premature death)
Intangible costs – nonfinancial outcomes of the
disease and medical care e.g. pain, suffering,
inconvenience, and grief

Opportunity costs - the cost of the benefit of

pursuing an alternative course of action. Loss of
potential gain
Direct costs = Direct medical costs + Direct
nonmedical costs
Indirect costs = Morbidity costs + Mortality
costs
Total costs = Direct costs + Indirect costs +
 Relation between price and outcome
Analyze, place for
higher PhE analyses (ICER)
Nothing to solve: price
Refuse A
Q4 Q1
B
lower higher
effect effect
0
WTP Nothing to solve:
Can be analyzed
but who wants Accept
Q2
such a drug?
Q3
lower
price
0…baseline
Application of Pharmacoeconomics

Pharmacoeconomic Studies

Research and Pricing and Communication

Development Reimbursement to Physicians
Strategy Strategy and Patients

Phase II Phase III Regulatory Marketing

Phase Phase
GUIDELINES OF PERFORMING PE ANALYSIS

• Defining the problem

• Determining the study’s perspective
• Determining the alternatives and outcomes
• Selecting the appropriate PE method
• Placing monetary values on the outcomes
• Identifying study resources
• Establishing the probabilities of the outcomes
• Applying decision analysis
• Presenting the results along with any limitations of
the study.
 PE methodologies
• Economic evaluation
Economic evaluation is to identify ,measure ,value and compare
the costs and consequences of alternatives being considered.
• two distinguishing characteristics of economic evaluation are
as follows
is there a comparison of two or more alternatives and are both
costs and consequences of the alternatives examined ?
A full economic evaluation encompasses both characteristics
where as partial economic evaluation addresses only one.
pharmacoecomic evaluation conducted in todays healthacare
settings can be either partial or full economic evaluations.
• Partial economic evaluation
Cost of illness (COI)
• Cost consequence analysis (CCA)

• Full economic evaluations

• Cost minimization analysis (CMA)
• Cost benefit analysis (CBA)
• Cost effectiveness analysis (CEA)
• Cost utility analysis (CUA)
 Cost of Illness (BOD)
• Total economic burden of a particular disease on society

• Includes cost of prevention, treatment, losses caused by

morbidity and mortality, etc. along with the decrease in
health status and quality of life (QoL), and financial
aspects including direct and indirect expenditures that
result from premature death, disability or injury due to
corresponding disease and/or its comorbidities.
• Estimated costs gained due to a disease or a condition
• Medical Costs: inpatient visits, emergency department visits,
outpatient visits, prescription drugs, medical equipment, and home
health services
• Non-medical Costs:
• child care and travel expenses associated with receiving treatment and
special education costs if cognitive function is impaired by the illness.
• Loss in Productivity: use human capital approach, it calculates a
person’s production potential based on average wages, with some
adjustments for household productivity.
• Although the human capital approach is fairly standard in cost-of-
illness analysis, other methods include, such as the friction cost
method, which calculates productivity based on what an employer
would have to pay to replace you as an employee
Cost of Illness or Burden of Disease
• Measured in terms of DALYs – measures loss
of years of healthy life
• Disability adjusted Life Years (DALYs), where
• DALYs = YLL+ YLD
• YLL = Years of Life Lost –
• measures social burden of fatal outcomes
• YLD = Years lost to Disability –
• estimates non-fatal outcomes.
 Cost-Consequence Analysis
• it is a form of health economic evaluation study in which all direct and indirect
costs and a catalog of different outcomes of all alternatives are listed separately. No
specific preference for one costing approach or one outcome measure (as is the
case for cost‐effectiveness analysis or cost-utility analysis) is made
• the decision maker has to form their own opinion concerning the relative
importance of costs and outcomes
• 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).

  Intervention 1 Intervention 2 Difference
Costs Mean (95% CI) Mean (95% CI) Mean (95% CI)

Cost of intervention $ ($, $) £ (£, £) £ (£, £)

NHS secondary care £ (£, £) £ (£, £) £ (£, £)

NHS primary care £ (£, £) £ (£, £) £ (£, £)

Informal care £ (£, £) £ (£, £) £ (£, £)

Social care £ (£, £) £ (£, £) £ (£, £)
Costs to patient £ (£, £) £ (£, £) £ (£, £)

Welfare payments £ (£, £) £ (£, £) £ (£, £)

Cost of productivity
loss £ (£, £) £ (£, £) £ (£, £)
• Humanistic evaluation
– HRQOL
– Patient preferences
– Patient satisfaction
 full economic evaluation

Methodology
Cost-Minimization Analysis (CMA)
Cost-Effectiveness Analysis (CEA)
Cost-Utility Analysis (CUA)
Cost-Benefit Analysis (CBA)
Cost Outcome
Measurement Unit Measurement Unit
Dollars or Monetary Units Assumed to be equivalent in
comparable groups
Dollars or Monetary Units Natural units (life years gained,
mm Hg blood pressure, mMol/L
blood glucose)
Dollars or Monetary Units Quality-adjusted life year (QALY)
or other utilities
Dollars or Monetary Units Dollars or monetary units
Rascati, 2009
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A. Cost-Minimization Analysis (CMA)

Dollars or Monetary Units Assumed to be equivalent in

comparable groups

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Cost-Minimization Analysis (CMA)
Cost-Minimization Analysis (CMA)
When we perform a PE analysis, we always
compare two (or more) pharmaceutical
interventions or alternatives.
In a CMA, we assume that the alternatives have
equivalent outcomes, so we are only concerned
with the costs.
The objective is simply to choose the least costly
alternative among equally effective alternatives.
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• Cost comparison of same drug therapy in different
settings
• Ex: Comparing the cost of receiving IV antibiotics in a
hospital setting vs. receiving IV antibiotics (same
drug and dose) at home via a home health care
service.
CMA is not appropriate for comparing different classes
of medications.
Ex: Comparing an ACE inhibitor and a beta blocker for
treating hypertension. A CMA would not be
appropriate because one is not necessarily a substitute
for the other.
Cost-Minimization Analysis (CMA)
Common Applications
Comparing two generic medications rated as
equivalent by FDA
Ex: Comparing two different generic antibiotics for
the same type of infection; each may have different
costs and possibly different adverse events, but
their effectiveness is considered equivalent.
Ex; Prilosec versus Prevacid for the treatment of
duodenal ulcers.
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Cost-Minimization Analysis (CMA)

Advantages and Disadvantage

– Advantage: CMA is the simplest analysis to
conduct. Since the outcomes of the alternatives
being compared are considered equivalent, only
the costs need to be compared.
– Disadvantage:
– CMA cannot be used when the outcomes of the
interventions are different and, therefore, CMA
has limited use.

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B. Cost-Effectiveness Analysis (CEA)

Dollars or Monetary Units

Natural units
(life years gained, mm Hg
blood pressure, mmol/L
blood glucose)

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 cost effective analysis
• A CEA is a PE analysis where the health effects
of two or more interventions are not identical
but outcomes are measures in natural or
clinical units.
• Ex:mmHg for blood pressure,
• mg/dL for cholesterol levels,
• symptom-free days for allergic rhinitis,
• life-years saved for cancer treatment
Two methods of reporting cost-effectiveness:
• Average Cost-Effectiveness Ratio (CER) =
Cost of Intervention
Effectiveness of Intervention
• Incremental Cost-Effectiveness Ratio (ICER) =
Cost of Intervention B – Cost of Intervention A
Effectiveness of Intervention B – Effectiveness of Intervention A

• Average CER is calculated for a single intervention,

while ICER is calculated for a comparison of two
interventions
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B. Cost-Effectiveness Analysis (CEA)
Example Problem: In 2006, a federal vaccine advisory panel recommended
that 11- and 12-year-old girls receive the human papillomavirus (HPV) vaccine
designed to protect against cervical cancer.

A. Current Screening Program Only B. HPV Vaccine at 90% Efficacy

(“PAP test”) + Screening Program
Total Lifetime Costs $1111 $1400

Women avoiding cervical cancer

during lifetime due to 2.78% 3.28%
intervention

Would you recommend the new$1111

Average
Cost-Effectiveness Ratio
HPV vaccine program?
/ 0.0278 $1400 / 0.0328
= $39,964 per case of cancer prevented
(Cost / Effectiveness) = $42,683 per case of cancer prevented
Would you recommend the new HPV vaccine program?
Incremental ($1400 - $1111) / (0.0328 – 0.0278)
Cost-Effectiveness Ratio = $289 / 0.0050
(Δ Costs / Δ Effectiveness) = $57,800 per additional case of cancer prevented

Adapted from Goldie SJ, Kohli M, Grima D, Weinstein MC, Wright TC, Bosch FX, et al. Projected Clinical Benefits and Cost-effectiveness of a
Human Papillomavirus 16/18 Vaccine. J Natl Cancer Inst. 2004;96(8):604-615; as reported in Arnold, 2010 46
 application of CEA
Common Applications
– Common CEA application: medications with the
same type of primary outcomes, and most often
for treatment of the same types of health
condition
– CEA is only performed when the outcome of one
intervention is both better than another AND the
cost is greater.

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 IV. Types of Pharmacoeconomic Studies

C. Cost-Utility Analysis (CUA)

Dollars or Monetary Units Quality-adjusted life year

(QALY) or other utilities

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• An alternative measurement for the consequences
of a health care intervention is the concept of utility.
• Utility provides a method for estimating patient
preference for a particular intervention in terms of
the patient's state of well-being or quality adjusted
life year gained
• Quality-Adjusted Life Year (QALY)
• 1.0 QALY = 1 year of life in perfect health
• 0.0 QALY = death
Utility is described by an index which ranges
between 0 (death) and 1 (perfect health).
 Cost-Utility Analysis (CUA)
Example Problem 1
Human papillomavirus (HPV) vaccine +screening vs. screening only.

A. Current Screening Program Only B. HPV Vaccine at 90% Efficacy

(“PAP test”) + Screening

Total Lifetime Costs

$1111 $1400

Quality-Adjusted Life Expectancy

Would you recommend the new HPV vaccine25.9815 QALYs
program? 25.9934 QALYs

Averageyou recommend the new HPV vaccine program?

Would
Cost-Utility Ratio $1111 / x 25.9815 QALYs $1400 / 25.9934 QALYs
(Cost / QALYs) = $42.76 per QALY = $53.86 per QALY

Incremental ($1400 - $1111) / (25.9934 – 25.9815)

Cost-Utility Ratio = $289 / 0.0119
(Δ Costs / Δ QALYs) = $24,286 per additional QALY

Adapted from Goldie SJ, Kohli M, Grima D, Weinstein MC, Wright TC, Bosch FX, et al. Projected Clinical Benefits and Cost-effectiveness of a
Human Papillomavirus 16/18 Vaccine. J Natl Cancer Inst. 2004;96(8):604-615; as reported in Arnold, 2010 50
 Cost-Utility Analysis (CUA)
Common Applications
Quality of life and length of life (quantity) are
different
Ex: cancer treatments
Quality of life is different but length of life
(quantity) is unaffected and
Ex: hearing loss, seasonal allergies.

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 Cost-Utility Analysis (CUA)
Question:

• Do negative QALYs make sense?

Answer:
• Some researchers point out that there are disease states
worse than death – such as living in uncontrollable,
excruciating pain, or living in a coma – so negative QALYs
may be needed to depict these values. Whether or not
negative QALYs make sense is debatable.

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D. Cost-Benefit Analysis (CBA)

Dollars or Monetary Units Dollars or Monetary Units

53
 D. Cost-Benefit Analysis (CBA)
Cost-Benefit Analysis (CBA)
– A PE analysis in which both costs and benefits are
valued in monetary units
– The results of a CBA can be presented in several formats:
1. Net Benefit = Total Benefits – Total Costs
Cost beneficial if Net Benefit > 0
2. Benefit-to-Cost Ratio = Total Benefits / Total Costs
Cost beneficial if Benefit-to-Cost > 1
3. Internal Rate of Return (IRR) = The rate of return that equates
the present value of benefits to the present value of costs
4. Break-Even Point = The time required to recoup the investment

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 IV. Types of Pharmacoeconomic Studies

D. Cost-Benefit Analysis (CBA)

Example problem: Implementation of a pharmacy bar-code
system to reduce medication dispensing errors.
5-year time horizon Pharmacy Bar-Code System

Total (Incremental) Costs $2.24 million

Total (Incremental) Benefits $5.73 million
Net-Benefit = $5.73 million - $2.24 million =
Total Benefits – Total Costs $3.40 million
Benefit to Cost Ratio = $5.73 million / $2.24 million =
Total Benefits / Total Costs 2.56

Internal Rate of Return

104% annualized return on investment
Break-Even Point
Within the first year of operation

Was the bar-code system a good financial decision?

Adapted from Saverio M, et al. Cost-Benefit Analysis of a Hospital Pharmacy Bar Code Solution. Arch Intern Med. Apr 23, 2007;167(8):788-94.
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 Cost-Benefit Analysis (CBA)

Common Applications
• CBA is most useful when
– Analyzing a single intervention to determine whether its total benefits exceed the costs,
or
– Comparing alternative interventions to see which one achieves the greatest benefit.

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 Cost-Benefit Analysis (CBA)

Advantages and Disadvantages

– Major advantages:
• Can determine if benefits exceed costs of program –
less subjective than CEA or CUA
• Can compare multiple programs with either similar or
unrelated outcomes (anticoagulation and diabetes
clinics)
– Disadvantage:
• Difficult to place a monetary value on health outcomes

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Essential Elements of a Pharmacoeconomics
Study
A. Pharmaceutical Alternatives
– All clinically relevant alternatives should
considered, including a “do nothing” alternative, if
appropriate
– All relevant costs and consequences/outcomes
should be carefully determined and included

58
 V. Essential Elements of a
Pharmacoeconomics Study

B. Incremental Analysis of Costs and Outcomes

– For CEA and CUA, present both
• Average cost analysis of each alternative
– Cost Effectiveness Ratio
– Cost Utility Ratio
• Incremental cost analysis of one alternative over
another
– Incremental Cost Effectiveness Ratio
– Incremental Cost Utility Ratio
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 V. Essential Elements of a
Pharmacoeconomics Study

C. Perspective – economic term that describes

whose costs are relevant (being measured) based on
the purpose of the study
– Societal Perspective – measuring all costs to all sectors,
– Payer Perspective – measuring costs to Health
department, Patient, private insurance plan, or
combination of these
– Institution or Provider Perspective – measuring costs to
hospital/clinic/physician practice/ pharmacy/etc.

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Essential Elements of a Pharmacoeconomics
Study
D. Discounting of Costs and Benefits – a method
used to adjust future costs and benefits to their
present market value.
• If performing a retrospective study (i.e., looking
at past costs), bring past costs to the present
• Use a discount rate, typically between 3% and
5%
• Discounting can also apply to outcomes

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Essential Elements of a Pharmacoeconomics
Study
Sensitivity Analysis – determine how the results of
an analysis would change when “best guesses,”
or assumptions, are varied over a range of values
– Analysis is repeated with high and low estimates of
costs and outcomes to determine range of answers
– Results are insensitive when results do not change
over entire range
• Strengthens confidence in study results
– Results are sensitive when results vary depending on
the range of a variable
• Weakens confidence in study results
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Metho
ds
Summary
Description of PE methodologies
Application Cost unit Outcome
unit

COI Estimates the cost of Provide baseline to $$$ N/A

disease in a defined compare
population prevention/treatment
options

CCA Measure multiple costs Examines whether the use $$$ Reported
and outcomes without of a drug produces an separately
aggregating the two into outcome that decreases
CE or CB ratio costs and offsets the price
cost of the new therapy

CMA Finds the least expensive When consequences are $$$ Assumes to
cost alternative the same be
equivalent

CBA Measures benefits in Can compare programs with $$$ $$$

monetary units and different objectives
computes a net gain
 Conti…
Method Description Application Cost unit Outcome
s unit

CEA Consequences are Can compare the $$$ Natural

measured in the most drugs/programs that differ units
obvious natural units of in clinical outcomes and use
effects same unit of benefit

CUA Measures therapeutic Use to compare $$$ QALY

consequences in utility drugs/programs that are life
units rather than physical extending with serious side
units effects or those producing
reductions in morbidity