Lecture 3
Dr. Sahar Badr Hassan
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Cost Benefit Analysis (CBA):
Measures the value of all resources consumed (costs) and
benefits (outcomes) in monetary terms.
Both the costs and the benefits are measured and
converted into equivalent dollars ($), in the year in which
they will occur, thus alternatives with completely
different outcomes can be compared.
An advantage of this type of analysis is that many
different outcomes can be compared as long as the
outcomes measures are valued in monetary units.
The disadvantage is that placing economic values on
medical outcomes is not an easy task and there is no
universal agreement on one standard method for
performing this.
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Ideally, all costs and benefits resulting from the program
should be included. This presents considerable difficulty,
especially on the benefits side of the equation, as many
benefits are either difficult to measure, difficult to convert to
dollars, or both.
Many CBAs measure and quantify direct costs and direct
benefits only due to difficulties in measuring indirect and
intangible benefits.
For example, the benefits of improved patient quality of life,
patient satisfaction with the healthcare system, and working
conditions for the physician are not only difficult to measure,
but are extremely difficult to assign a monetary (a dollar)
value to them.
This approach is not widely used in health economics. 5
To illustrate the advantage of CBA compared with CEA, the
following table shows examples of various programs and
interventions and their corresponding cost-effectiveness and
cost-benefit ratios. (CBA ratios are expressed as benefit-
to-cost ratios, where the higher the number, the more
cost-beneficial.)
Comparison of Cost-Effectiveness Ratios and Benefit-to-Cost Ratios
Program or Intervention: Cost-Effectiveness Ratio Benefit-to-Cost Ratio
AIDS prevention and awareness $230,000/case prevented 8.4:1
program
Vaccination program for children $104,000/case prevented 0.3:1
Smoking cessation intervention $3,700/quit 6.7:1
Diabetes medication adherence $67/normoglycemic patient 15.1:1
program
Breast cancer screening program $50,000/life year saved 2.4:1
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Assume you are a decision maker and you must choose one
program from the table to implement in your organization.
If you only had cost-effectiveness ratios available to help
make the choice. How would you choose? One can quickly
see that it would be difficult to compare the programs using
only cost-effectiveness ratios because of ?????????????
because of the varying outcomes (e.g., case prevented, life
years saved, normoglycemic level).
On the other hand, the benefit-to-cost ratios can be
ranked, and programs with similar, as well as
dissimilar, outcomes can be compared.
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If the goal of the decision maker is to maximize the
investment, the program with the highest benefit-to-
cost ratio (in this case, diabetes medication adherence
program) would be chosen. If only the cost-effectiveness
ratios were available, it would be more difficult to compare
the value of the various interventions.
Comparison of Cost-Effectiveness Ratios and Benefit-to-Cost Ratios
Program or Intervention: Cost-Effectiveness Ratio Benefit-to-Cost Ratio
AIDS prevention and awareness $230,000/case prevented 8.4:1
program
Vaccination program for children $104,000/case prevented 0.3:1
Smoking cessation intervention $3,700/quit 6.7:1
Diabetes medication adherence $67/normoglycemic patient 15.1:1
program
Breast cancer screening program $50,000/life year saved 2.4:1
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Pharmacists are working in many areas of health care
providing clinical services and developing specialty clinics in
areas such as anticoagulation, diabetes, asthma, osteoporosis
and HIV.
Although clinical pharmacy programs have shown
improvements in clinical outcomes such as glycemic control,
bone density (osteoporosis) and asthma control, financial
pressures are forcing decision makers to consider the following
questions:
o Do the benefits (outcomes) of a program or intervention
outweigh (i.e., exceed) the costs?
o Which program will provide the greatest benefit (outcome)?
CBA is a tool that can be used to address (i.e. answer) these
questions. 9
The unique aspect of placing a monetary value on the
outcome or benefit in CBA also presents a challenge or
disadvantage of the method.
For example, when comparing the cost-effectiveness ratios
for an AIDS prevention and awareness program with the
vaccination program for children, it would appear that the
vaccination program would be the most cost-effective. But,
when examining the benefit-to-cost ratios, the AIDS program
is more cost-beneficial.
Comparison of Cost-Effectiveness Ratios and Benefit-to-Cost Ratios
Program or Intervention: Cost-Effectiveness Ratio Benefit-to-Cost Ratio
AIDS prevention and awareness $230,000/case prevented 8.4:1
program
Vaccination program for children $104,000/case prevented 0.3:1
Smoking cessation intervention $3,700/quit 6.7:1 10
In this example, the benefit (case prevented) was valued
higher for AIDS patients than vaccinations for children.
The controversy arises regarding the methodology used to
place a dollar value on a case prevented or a human life
saved.
Thus, the advantage of placing a dollar value on the benefit
or outcome is also a disadvantage of the method.
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CBA results can be presented in the following formats:
1. Calculate the Benefit-to-Cost (or Cost-to-Benefit) ratio
CBA results can also be calculated by summing up the total
benefits and dividing by the total costs.
The ratio may be expressed as:
o a benefit-to-cost ratio (Benefit ($)/Cost ($))
o or a cost-to-benefit ratio (Cost ($)/Benefit ($)).
Depending on how the ratio is calculated, interventions are
cost-beneficial if: Benefit-to-cost > 1 or Cost-to-benefit < 1
2. Or calculate the Net Benefit (or Net Cost)
simply presents the difference between the total costs and
benefits.
Net benefit= total benefits ($) - total costs ($)
Net cost= total costs ($) - total benefits ($)
Intervention would be considered to be cost-beneficial if:
Net Benefit > 0 or Net Cost < 0
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Cost Utility Analysis (CUA):
Is an economic tool (i.e. evaluation) in which the intervention
consequence is measured in terms of quantity and quality
of life.
It is much the same as cost-effectiveness analysis. Some
consider cost-utility analysis (CUA) a subset of CEA
because the outcomes are assessed using a special type of
clinical outcome measure, usually the quality-adjusted life-year
(QALY).
The CUA takes patient preferences, also referred to as
utilities, into account when measuring health consequences.
As mentioned above, the most common outcome unit used in
CUA is the QALY, which incorporates both the quality
(morbidity) and quantity (mortality) of life.
Utility: the state of being useful or beneficial.
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Other outcome units that are seen less frequently include
disability-adjusted-life years (DALYs) and healthy-year
equivalents (HYEs).
The advantage of a CUA is that different types of health
outcomes and diseases with multiple outcomes of interest can
be compared (unlike in CEA) using one common unit such as
the QALY.
CUA incorporates morbidity and mortality into this one
common unit without having to determine or estimate the
monetary value of these health outcomes (unlike CBA).
The disadvantage of this method is that it is difficult to
determine an accurate utility. Therefore, although the number
of CUA research articles in the literature is increasing yearly,
the methods for estimating utilities/QALYs may not be fully
understood. 16
HRQOL measure is an utility, having value between 1.0
(perfect health) and 0.0 (death).
To estimate utility weight (score) for various conditions
two broad methods are used to generate, these scores:
direct elicitation methods (rating scale, standard gamble,
and time tradeoff) and indirect elicitation methods, using
standardized weightings (e.g., EQ-5D and SF-6D surveys).
Quality-adjusted life years (QALYs) are then claculted by
multiplying the time in a health state by the appropriate
utility score.
Quality Adjusted Life Years
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• QALY = Utility x # years in a health state
• One year at full health QALY = 1.0
• Death QALY = 0.0
• 3 years disabled (U =0.5) = 1.5 QALYs
This method is well suited to the evaluation of chronic
diseases that have deleterious effects on HRQOL.
Differences between treatments are expressed as the
incremental cost per QALY gained.
CUA can compare cost, quality, and the quantity of patient-
years.
CUA is employed less frequently than other economic
evaluation methods because of a lack of agreement on
measuring utilities, difficulty comparing QALYs across
patients and populations, and difficulty quantifying patient
preferences.
In CEA, the costs are measured in money and there is
a defined outcome. But in CUA, the outcome is an unit of
utility (e.g. a QALY).
Intermediate outcomes are not appropriate to use in
cost-utility analysis
Results of CUA are expressed in a ratio, a cost-utility ratio
(C:U ratio).
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we compare two treatment options, drug A and drug B. Although drug B
extends the person’s life for more years, the quality of life for those years
(for B) is lower than with drug A.
Cost for Treatment (dollars) Years of Utility for QALYs
Life Each Year of
Saved Life Saved
Drug A $10,000 5 0.8 4.0
Drug B $20,000 7 0.5 3.5
Calculation Result
CEA ($20,000 − $10,000) / (7 years – 5 years) $5,000 per extra year of life
CUA ($20,000 − $10,000) / (3.5 QALYs – 4.0 QALYs) Drug A dominant
If a CEA were conducted, option B would be relatively cost-effective at an
incremental cost per year of life of $5,000.
If the quality of those years is incorporated into the equation by
calculating QALYs, option A becomes dominant in that it costs less and
provides a better outcome (more QALYs).
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Questions that pharmacoeconomics may help to address are as
follows:
What drugs should be included on the hospital formulary?
What is the best drug for a particular patient?
What is the best drug for a pharmaceutical manufacturer to
develop?
Which drug delivery system is the best for the hospital?
How do two clinical pharmacy services compare?
Which drugs should be included in a Medicaid formulary?
What is the cost per quality-adjusted year of life extended by a
drug?
Will patient quality of life be improved by a particular drug therapy
decision?
What is the best drug for this particular disease?
What are the patient outcomes of various treatment modalities?
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Importance of Pharmacoeconomics:
Pharmacoeconomic analysis helps to achieve maximum
benefit in limited cost.
Clinicians want their patients to receive best care and
outcome available.
The payers want to manage rising costs.
Pharmacoeconomics combines the objectives of both clinician
and payers by estimating the value of patient outcomes for
the expenditure spent on medications and other healthcare
services.
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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Conclusions:
Pharmacoeconomic research is used to identify, measure,
and compare the costs, risks, and benefits of programs,
services, or therapies and determine which alternative
produces the best health outcome for the resources
invested.
Each pharmacoeconomic method measures costs in
monetary terms; the differences lie in the valuation of
outcomes.
In CMA, the outcomes are considered to be equal and
therefore are not measured.
CBA measures outcomes in currency.
CEA measures outcomes in nonmonetary units.
In CUA, outcomes expressed in nonmonetary units are
adjusted for health-related quality of life (HRQOL).
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