Pharmacoeconomics

Pharmacoeconomic modeling and

interpretation
Definition
 Pharmacoeconomics involves the identification,
measurement, and comparison of the costs and
outcomes associated with drug therapies,
focusing on their impact on healthcare systems
and society.
 It applies economic evaluation methods to
pharmaceutical products, services, and programs,
emphasizing both the inputs (costs) and outputs
(clinical and economic outcomes) of their use.
 Health economics is the science of assessing cost and benefits of
healthcare.
 Pharmacoeconomics is a branch of health economics which compares
the value of one drug or a drug therapy to another.
 Term Pharmacoeconomics was first published in 1986 by Townsend

Need for Pharmacoeconomic Analysis

 Assists in selecting which drug should be developed or
prioritized.
 Helpsevaluate and understand the overall impact of a
new therapy.
 Supportsinformed decision-making regarding the
appropriate and cost-effective use of existing drugs.
Pharmacoeconomic Analysis
Pharmacoeconomic analysis involves…
 Identifying and measuring costs associated with drug therapy
 Identifying and measuring consequences (outcomes) of treatment
 Choosing an appropriate perspective (e.g., patient, provider,
payer, or society).
1. Cost
Cost refers to the value of resources consumed in providing a drug therapy
or healthcare service. Costs are categorized as

 Direct Medical Costs

 These are the expenses related to medical products and services used to
prevent, diagnose, or treat a disease.
Examples include:
 Medications
 Medical supplies and equipment
 Laboratory and diagnostic tests
 Hospital stays
 Doctor or physician consultations
 Direct nonmedical costs
 Any costs for nonmedical services that are results of illness or disease but do not involve purchasing
medical services.
 These costs are consumed to purchase services other than medical care.
•Transportation to and from healthcare facilities
•Extra visits to the emergency department
•Childcare or family care services
•Special dietary needs
•Other out-of-pocket expenses
 \
Indirect medical costs
These are the costs related to reduced productivity due to illness
or death.
 Morbidity costs: Loss of income or productivity due to illness or
time off work.
 Mortality costs: Economic loss from premature death, measured
in years of life lost.
These costs are significant, especially from the patient’s
 Intangible costs.
Intangible costs refer to the non-financial effects of disease
and medical care that can be recognized but cannot be easily
measured or assigned a monetary value.
These include experiences such as:
 Pain
 Suffering
 Emotional distress
 Inconvenience and grief
Although these costs are important, they are often identified
but not formally included in economic evaluations due to the
difficulty in quantifying them.
Costs type table 8.1

Type Explanation Example

Cost of antibiotics, lab
Direct Medical Hospital, drugs, tests
reports

Related to illness but non- Patient transport, food,

Direct Non-Medical
medical caregiving

Lost productivity due to

Indirect Time off work, early death
illness/death

Pain, grief, emotional

Intangible Non-measurable outcomes
stress

Direct Costs = Direct Medical Costs + Direct non-medical costs

Indirect Costs = Morbidity costs + Mortality costs
Total costs = Direct costs + Indirect costs + Intangible costs
2. Consequence
In pharmacoeconomics, consequences refer to the outcomes or
effects of a drug therapy or healthcare intervention. Just like costs,
consequences are a crucial component in evaluating the overall
value of treatment.
Consequences are broadly classified into three categories:
1. Clinical Outcomes
These are the medical results of treatment, such as
improvements in symptoms, disease control, safety, and efficacy.
2. Economic Outcomes
These include direct, indirect, and intangible costs,
evaluated in relation to the treatment benefits and alternatives.
3. Humanistic Outcomes
These reflect the impact on a patient’s quality of life,
covering physical, emotional, and social well-being, including life
satisfaction and daily functioning.
Assessing the Economic, Clinical, and Humanistic
outcomes — known as the ECHO model — provides a
comprehensive framework for making informed
healthcare decisions.
These outcomes can be further classified as:
 Positive Outcomes
Desired effects of a drug, such as improved efficacy,
symptom relief, or disease control.
 Negative Outcomes
Undesirable effects, such as adverse drug reactions
(ADRs), side effects, or drug toxicity.
3. Perspective
Pharmacoeconomic studies can be conducted from various perspectives, each influencing
the scope of costs considered. These perspectives help to measure costs from different
viewpoints within the healthcare system and society.
Here's a breakdown of common perspectives:
•Societal Perspective: This is the most comprehensive viewpoint, as it accounts for the
overall benefit to society. It theoretically includes all direct and indirect costs associated
with a drug therapy or healthcare intervention.
•Patient Perspective: This perspective focuses on the costs directly borne by the
patient, typically the portion of expenses not covered by insurance.
•Provider Perspective: From this viewpoint, such as that of hospitals, the primary focus
is on direct costs incurred in providing healthcare services.
•Payer Perspective: This perspective considers costs from the standpoint of entities
responsible for reimbursement, including insurance companies, employers, or government
agencies.
Pharmacoeconomic methodologies
All these methods are similar in measuring costs
(usually in monetary terms like dollars), but they differ
in how they measure outcomes.
The main types of economic evaluation methods
include:
1. Cost-of-Illness (COI) Evaluation
2. Cost-Minimization Analysis (CMA)
3. Cost-Benefit Analysis (CBA)
4. Cost-Utility Analysis (CUA)
5. Cost-Effectiveness Analysis (CEA)
 1. Cost-of-Illness (COI) Evaluation
A Cost-of-Illness (COI) evaluation is used to identify and estimate the total
economic burden of a specific disease on a defined population.
It is also referred to as the “burden of illness” approach.
🔹 Purpose:
• To quantify the overall cost of a disease, including both direct and indirect costs.
• Not used to compare treatment options, but to understand the financial impact of
the disease itself.
🔹 Examples of Diseases:
 Diabetes
 Mental disorders
 Cancer
 Peptic ulcer disease
🔹 Example Scenario:
To estimate the cost of diabetes over six months in KTH, we would include:
 Direct Costs: Consultation fees, hospitalization, medications, lab investigations, food,
and travel
 Indirect Costs: Lost working days due to illness
By identifying these costs, COI studies help in understanding the economic impact of
diseases and in supporting decisions for prevention or management strategies.
Category Cost Rupees

Direct medical costs Medications 45000

Medical Supplies 1000
Laboratory tests 5000
Health care professionals’ 6000
time 2000
Hospitalization

Total Direct Cost 77000

Direct nonmedical costs Transportation 4000

Food 8000

Total Direct nonmedical costs 12000

Indirect nonmedical costs Lost wages 50000

Income forgone due to 15000
premature
death (mortality)

Total Indirect nonmedical costs 65000

Grand Total 142000

2 . Cost-Minimization Analysis (CMA)
CMA is used to compare two or more treatment alternatives that are already proven to be
therapeutically equivalent in terms of safety and efficacy.
🔹 Purpose:
• To identify the least costly option among equivalent treatments.
🔹 Key Features:
• Requires evidence of equal clinical outcomes before comparing costs.
• Costs are measured in monetary units (e.g., dollars or rupees).
• Simple and direct method, used when therapeutic equivalence is established.
• If equivalence is uncertain, a different method like Cost-Effectiveness Analysis (CEA)
should be used.

🔹 Examples:
• Comparing two anti-ulcer drugs (A and B) with the same effectiveness and side-effect
profile.
→ Total costs compared: drug price, preparation, administration, and storage.
• Choosing a generic drug over a branded one with the same therapeutic effect.
CMA highlights cost savings when clinical outcomes are not a variable.
3. Cost Benefit Analysis (CBA)

CBA is a method used to identify, measure, and compare the costs and benefits of one or
more healthcare programs or treatment alternatives, with both expressed in monetary
terms.
🔹 Purpose:
To determine which program or treatment option provides the greatest economic value.
🔹 Key Features:
• Both costs and benefits are converted into monetary values (e.g., dollars, rupees).
• Enables comparison between alternative interventions, even from different areas of
healthcare.
• Results are often expressed as a Benefit-to-Cost Ratio (B/C Ratio).
• If B/C > 1, the benefits exceed the cost, and the intervention is considered worthwhile.

🔹 Example:
• If a clinical pharmacy service is competing for hospital funding, CBA can show whether it
provides greater financial return compared to other services.
CBA helps in making resource allocation decisions, especially when different services or
programs compete for limited funding.
Return (Benefit) Investment

Medicine Sold Rs. 70000 Pharmacist salary Rs 40000

Patient Counseling fee Rs. 20000 Pharmacy Technican Salary Rs 15000

Dose adjustment savings Rs. 30000 Security Staff Salary Rs 10000

Adverse drug reactions prevention Rs. 10000 Medicine purchased Rs. 30000

Immunization Rs. 20000 Utility bills Rs 5000

Pharm.D student training Rs. 50000

Total Return Rs. 200000 Total Investment Rs 100000

Benefit to Cost ratio (B/C) 2:1

4. Cost Utility Analysis (CUA)
CUA is an economic evaluation method that compares treatment alternatives by considering both their
costs and their impact on quality and quantity of life, incorporating patient preferences.
🔹 Purpose:
To assess the value of treatments in terms of both life extension and quality of life improvements.
🔹 Key Features:
• Costs are measured in monetary units (e.g., dollars or rupees).
• Outcomes are measured in Quality-Adjusted Life Years (QALYs), which combine length of life and
quality of life into a single unit.
• Especially useful for life-extending treatments with serious side effects (e.g., cancer chemotherapy),
or for treatments that reduce morbidity but not necessarily mortality.

🔹 Limitations:
• Less commonly used due to:
• Challenges in measuring utilities (patient preference weights)
• Difficulty comparing QALYs across populations
• Variability in how patients value health states
• CUA is best when the impact of a treatment goes beyond survival and includes how well patients live.
5. Cost Effectiveness Analysis (CEA )
CEA is a method used to evaluate and compare the health benefits and costs of different treatment
alternatives to help policy makers and healthcare providers make informed decisions.
🔹 Purpose:
To determine which treatment provides the best health outcome for the cost incurred — often
described as the best value for money.
🔹 Key Features:
• Costs are measured in monetary units (e.g., dollars or rupees).
• Outcomes are measured in natural units, such as:
• Years of life saved
• Number of ulcers healed
• Blood pressure reduction, etc.
• Used to compare therapies with similar goals, but different efficacy and safety profiles.
🔹 Practical Use:
• Helps in balancing cost and patient benefit
• Supports drug policy decisions, formulary selection, and clinical choices
• Widely used in national healthcare systems (e.g., Australia, New Zealand, Canada)
Example:
Comparing proton pump inhibitors vs H2 blockers in treating severe reflux
oesophagitis — both aim for the same result, but differ in effectiveness and
cost.
🔹 Limitations:
 Cannot compare treatments with completely different outcomes (e.g.,
comparing a heart drug to a cancer drug).

🔹 CEA Result Format:

 Expressed as a Cost-Effectiveness Ratio
• Commonly as an Average Cost-Effectiveness Ratio (ACER)
• ACER = Total Cost / Total Health Benefit
• Example: Cost per life-year gained
CEA helps identify treatments that offer the greatest clinical benefit for the
lowest cost within a specific therapeutic area.
 Outcome
Method Cost Unit Purpose Example
Unit
Estimates
Cost of
COI (Cost of total cost
₹/$ None diabetes care
Illness) burden of a
in KTH
disease

CMA (Cost- Outcomes

Finds the least Generic vs
Minimization ₹/$ assumed
costly option branded drug
Analysis) equal

Compares
CBA (Cost-
costs and Pharmacy
Benefit ₹/$ ₹/$
benefits in service ROI
Analysis)
money terms

Cancer
CUA (Cost- Assesses cost treatment
Utility ₹/$ QALYs vs quality and (e.g.,
Analysis) quantity of life chemotherapy
)

Finds most
CEA (Cost- Natural units PPI vs H2
effective
Effectiveness ₹/$ (e.g., years of blocker in
option per
Analysis) life) reflux
cost
 Table V Summary of Pharmacoeconomic methodologies
Key: CBA, cost-benefit analysis; CEA, cost-effectiveness analysis; CMA, cost-minimization analysis; COI, cost-of-
illness evaluation; CUA, cost-utility analysis, QOL, quality of life; QALY, quality-adjusted life-year.

Methods Description Application Cost Unit Outcome Unit

COI Estimates the cost of a disease on a Use to provide baseline to $ NA
defined population Compare prevention/treatment options
against
CMA Finds the least expensive cost Use when benefits are the same $ Assume to be
alternative
equivalent
CBA CBA Measures benefit in monetary Can compare programs with $ $
units different objectives

CEA Compares alternatives with Can compare drugs/programs that $ Natural Units
therapeutic effects measured in differ in clinical outcomes and
physical units; computes a C/E use the same unit of benefit
ratio

CUA Measures therapeutic Use to compare drugs/programs that are $ QALY

consequences in utility units life extending with serious side effects
rather than physical units; or those
computes a C/U ratio producing reductions in Morbidity