COMPARATIVE RESEARCH
Cost Benefit Analysis of Pharmaceutical Care in a Medicaid
Population-From a Budgetary Perspective
L. Leanne Lai and Alan L. Sorkin
ABSTRACT: The objective was to evaluate the economic impact
of Medicaid pharmaceutical care services delivered to patients in
four hospital-based primary care outpatient clinics in Baltimore,
Maryland. Through cost benefit analysis, sensitivityanalysis, and
measurement of net present value of program benefits, the
authors concluded that pharmaceutical care services demon-
strated significantprogram benefits to the Medicaid population.
The net present value of program benefits was $724,203.70 for
437 study patients, for average benefits of $1 ,657.20 per patient
for 10 future years at a 4% discount rate. The study concluded
~ Authors
L LEANNE LAI, PH.D., is Assistant Professm;Nova Southeastern University,
Department of Pharmacy Administration, Ft. Lauderdale, FL ALAN L SORKIN,
PH.D., is Professorand Chairman for the Economic Department, University of
Maryland Baltimore County, Baltimore, MD.
AUTHOR CORRESPONDENCE: L Leanne Lai, Ph.D., Assistant Professor, Nova
Southeastern University, Department of Pharmacy Administration, 3200 S.
University Drive, Ft. Lauderdale, FL, 33328.
ACKNOWLEDGMENT: The authors gratefully acknowledgeall the committee
members serving in this research from University of Maryland at Baltimore, as
well as data support from the Maryland Department of Health and Mental Hygiene.
Copyright (ô 1998, Academy of Managed Care Pharmacy, Inc. All rights reserved.
Vol. 4,
that if this program were expanded to all Maryland Medicaid
patients who are adults, noninstitutionalized, and receiving drug
therapy, the state could save as much as $22 million in the next
fiscal year.
KEY WORDS: Medicaid, Cost benefit analysis, Sensitivity analy-
sis, Pharmaceutical care, ACG case-mix adjustment.
J Managed Care Pharm 1998; 4: 303-08
Medicaid uses federal and state funds to cover a wide
range of inpatient and outpatient services to the
poor, the permanently disabled, and the recipients
of aid to families with dependent children. Medicaid expendi-
tures increased from $12 billion in 1975 to $126 billion in
1993. During this period, Medicaid prescription expenditures
rose from $815 million to $9.7 billion, about 7.8% of the
total Medicaid budget in 1993.' This growth of pharmaceuti-
cal expenditures has caused concern among economists, poli-
cy makers, physicians, pharmacists, and consumers. Many
cost -limiting initiatives (e.g., curtailing eligibility for services,
limiting coverage, instituting copayments) have been put into
effect by individual states since the Omnibus Budget Recon-
ciliation Act of 1990 was passed. However, these financial
and regulatory strategies may result in adverse clinical out-
comes and increased costs, particularly among very ill and
poor patients.'.3 For example, the Rand Health Insurance
Experiment showed that cost sharing by nonelderly patients
reduced the number of medical care visits and resulted in less
favorable clinical outcomes among low-income, visually
impaired, and hypertensive patientsH
Rather than restricting choice or placing economic bur-
dens on those least able to overcome them, the industry must
improve the level of appropriate drug use and reduce costs
caused by drug-related adverse reactions and hospitalizations.
The theory of pharmaceutical care is proposed to improve the
appropriateness and cost effectiveness of physician prescrib-
ing decisions and patient drug use. Starting in 1993, the
University of Maryland Center on Drug and Public Policy
contracted with the Maryland Department of Health and Men-
tal Hygiene to provide a pharmaceutical care services program
(PCSP) for Medicaid recipients. The PCSP was provided to
Medicaid patients at primary care outpatient centers at four
No.3 May/June 1998 jMCP Journal of Managed Care Pharmacy 303
 Cost Benefit Analysis of Pharmaceutical Care in a Medicaid Population-From a Budgetary Perspective

inner city Baltimore hospitals: the University of Maryland METHODS

Health Center, Johns Hopkins Hospital, St. Agnes Hospital,
and Maryland General Hospital. Two clinical pharmacists
with Doctor of Pharmacy degrees provided the services. Prior
to Medicaid patients' scheduled appointments, clinical phar-
macists at each site screened all patients' Medicaid eligibility,
Data
A quasiexperimental pre- and post-test design was
applied to the control group to examine the impact of the
PCSP during its first year of operation. Patients' primary clinic

reviewed their medical charts, and identified potential drug-
related problems. They were permitted to write recommenda-
tions to physicians and/or request interviews while the patients
were being seen by their doctors during clinic hours. They
also performed follow-up pharmacotherapy consultations
with and clinical outcomes assessments (e.g., hypertension,
asthma, anticoagulation) of the patients, if necessary
7
In a previous study", we discussed the impact of the
PCSP from utilization outcome perspectives. The major find-
ings were: 1) PCSP "capped" the total cost of services by
holding costs constant while the control group costs rose sig-
nificantly; 2) specialty care physician visits remained stable
for the intervention group while increasing significantly in the
control group; 3) primary care physician visits remained sta-
ble for the intervention group while they declined in the con-
trol group; 4) fewer prescription medications were used in
the intervention group than in the control group; and 5)
while the total cost of prescriptions increased for both groups,
the costs for the intervention group were less than those for
the control group (see Table I). In this study, ongoing cost-
benefit analyses were performed to evaluate the economic
impact of the PCSP during its first year of operation; sensitivi-
ty analyses were performed as well.
data were abstracted from the outpatient clinic medical records
and maintained in a database. Patients' utilization and eco-
nomic data were obtained from the Maryland Medicaid pro-
gram's paid claims history files. The linking element between
these two data sets is "Medicaid recipient identification." The
Maryland Department of Health and Mental Hygiene provid-
ed relevant data tapes for fiscal years 1992, 1993, and 1994
and provided technical assistance in using these tapes. The
analysis files used for this study came from a number of files
maintained by the Maryland Medicaid program as part of its
management information system, including the recipient eli-
gibility file, the prescription claims file, the paid claims histo-
matching mortality file9
ry files, and the
SAMPLING
PCSP (Intervention) Group
There were 1,036 Medicaid patients who received any
level of the PCSP intervention between April 1, 1993, and
March 31, 1994. Only patients who were continuously eligi-
ble for the Medicaid enrollment for a period of at least one
year prior to the beginning of the PCSP (April 1, 1992 to
March 31, 1993) and one year after it began (April 1, 1993 to

Table 1. Utilization and Cost Comparison by Group-Post-Intervention Comparisons

Variables PCSP Group Control Group P-value

(n=437) (n=437)
Mean (SE) Mean (SE)

Number of primary physician visits 7.24 (0.32) 5.11 (0.40) 0.00'

Number of specialty physician visits 6.19 (0.46) 8.77 (0.43) 0.00*

Number of emergency room visits 0.06 (0.01) 0.057 (0.02) 0.82

Number of hospitalizations 0.14 (0.02) 0.20 (0.03) 0.11

Number of prescription medications 1,152.44 (113.46) 1,631.09 (209.85) 0.045*

Number of dental services 0.01 (0.01) 0.01 (0.00) 0.91

Number of home health services 2.74 (0.41) 2.10 (0.30) 0.20

Number of special services 2.12 (0.29) 2.32 (0.27) 0.60

Total prescription costs $577.36 (22.98) $719.52 (31.40) 0.00*

Total costs to Medicaid Program $3,412.13 (248.69) $4,236.41 (247.05) 0.02*
*
As of one year post-PCSP intervention (Aprill, 1993-March 31, 1994)

304 Journal of Managed Care Pharmacy jMCP May/June 1998 Vol. 4, No.3
 Cost Benefit Analysis of Pharmaceutical Care in a Medicaid Population-From a Budgetary Perspective

March 31, 1994) were included in the study If the patients
were out of the Medicaid program for less than 31 days, they
were still included in the. study because we assumed the short
period of ineligibility was due to delays in document process-
ing. Additionally, 15 subjects who were served by the PCSP
and died during the study period were included because they
would be qualified by the above eligibility criteria if they had
lived. Of the entire group, 437 subjects met all the criteria to
selection were essentially the same for both groups up to the
point that matching took place. Further, the ambulatory care
group (ACG) case-mix adjustment system was used to classify
each study subject's medical condition for differences in uti-
lization. This method is based on a person's demographic
characteristics and pattern of disease over an extended period
of time and can explain more than 50% of the variance in
ambulatory resource use if applied retrospectively
10

be included in the study
Control (Comparison) Group
Ideally, the study and control groups should be equiva-
lent with regard to age, sex, hospital, disease types, and
Medicaid utilization/cost The sampling procedures for group
In this study, we applied ACG by accessing the patients'
Medicaid ID, age, sex, and primary and secondary diagnosis
codes (lCD-9) as the input data from the database of approxi-
mately seven million electronic Medicaid claims. Table 2 pre-
sents patients' demographic characteristics and ACG classifi-
cation. The mean age of the PCSP group was 58 years, which

38 (8.7%) 47 (10.8%)
135 (30.9%) 133 (30.4%)
229 (52.4%) 226 (51.8%)
>77 35 (8.0%) 31 (7.0%)
Total 437 (100%) 437 (100%)
Mean (SO) 58.41 (14.49) 57.34 (1392)

Femalè

Total

Care
ACG 3 Acute Minor 1 (0.2%) 1 (0.2%)
ACG 4 Acute Major 1 (0.2%) 1 (0.2%)

ACG 7 Asthma 1 (0.2%) 1 (02%)

ACG 11 OphthalmologicalJDental 8 (1.8%) 8 (1.8%)
ACG 13 Psychosocial, without Psychosocial Unstable 1 (0.2%) 1 (0.2%)

ACG 16 Preventive/Administrative 2 (0.5%) 2 (0.5%)

ACG 18 Acute Minor and Acute Major 3 (0.7%) 3 (0 7%)
ACG 21 Acute Minor and Likely to Recur, Age >5, Without Allergy 1 (02%) 1 (0.2%)

ACG 23 Acute Minor and Chronic Medical: Stable 3 (0.7%) 3 (0.7%)

ACG 32 Acute Minor/Acute MajorlLikely to Recur, Without Allergl' 2 (0.5%) 2 (0.5%)
ACG 36 Acute Minor/Acute MaJorlLikely to Recur/Eye &: Dental 11 (2.5%) 11 (2.5%)

ACG 39 2-3 other ADG Combinations, Males A 1 (0.2%) 1 (0.2%)

e 17-34
ACG 402-3 other ADG Combinations, Females Age 17-34 2 (05%) 2 (0.5%)
ACG 41 2-3 other ADG Combinations, Age >34 27(6.2%) 27 (6.2%)
ACG 43 4-5 other ADG Combinations, Age 17-44 20 (4.6%) 20 (4.6%)
ACG 44 4-5 other ADG Combinations, Age >44 43 (9.8%) 43 (98%)
ACG 47 6-9 other ADG Combinations, Male A e 17-44 1 (0.2%) 1 (0.2%)
ACG 49 6-9 other ADG Combinations, Female A 6 (1.4%) 1 (1.4%)
e 17-44
ACG 49 6-9 other ADG Combinations, Age >34 91 (20.8%) 91 (20.8%)
ACG 50 10+ other ADG Combinations 77 (17.6%) 77 (17.6%)
ACG 51 No Diagnosis or Only Unclassified Diagnosis 134 (30 7%) 134 (307%)

Vol. 4, No.3 May/June 1998 }MíP Journal of Managed Care Pharmacy 305
 Cost Benefit Analysis of Pharmaceutical Care in a Medicaid Population-From a Budgetary Perspective

Figure 1. Direct Benefit Equation Perspective of Cost Benefit Analysis

The main purpose of cost benefit analysis is to provide
B1=[(Wd-Wc)-(Wb-W~J useful information to decision makers by determining'whether
= [ ($1,851,315.54 -
$1,642,787.88) -
($1,491,100.81 -

the net value of goods and services produced rises or falls

$1,456,223.84) ]
when a specific project is undertaken. Before taking up specif-
= $173,650.69
ic identification or measurement issues, one must determine
the accounting stance used as the basis for a particular cost
B1 = the total benefitsfor the first year after pesp intervention.
benefit analysis. The accounting stance issue revolves around
of study group dunng premterventIOn penod
.

W = the total Medicaid cost

W~ the total Medicaid cost
= of study group during post-intervention the question: Should a cost benefit analysis describe the change
period in the value of output for the world or for just some part of it
of control group during preinterventIOn (e.g., a nation, region, state, program, or even person)?ll
.

W = the total Medicaid cost

c
Researchers should approach the analysis from either 1) a
~~
Wd = the total Medicaid cost
.

of control group during post-interventIOn

.

societal perspective, whereby all costs and benefits-direct

period and i'ndirect, as well as measurable and nonmeasurable-are
considered, or 2) a budgetary perspective, whereby only costs
and benefits with direct effects on short term budgets are
was not significantly different from the mean age of each of included.12 In this project, Medicaid, hospital, or pharmacy
the control groups (t test, p>O.lO). The majority of the study
administrators must decide whether to implement a pharma-
subjects in each group were female. The PCSP group was
ceutical care services program. Therefore, their proper perspec-
76% female and the control groups were 7S% female. The
tive is the budgetary or institutional approach. This approach
proportion of age and gender distributions between the PCSP to cost benefit analysis is concerned only with the direct
group and each of the control groups was not significantly costslbenefits spent or gained by the budgetary sponsor.
different (x2=O.149, p>0.10). Overall, the study subjects in
the PCSP group were relatively similar to those in each of the
RESULTS AND DISCUSSIONS
control groups with regard to age and gender. Patients are cat-
egorized into 22 mutually exclusive ACG groups. Approx-
Direct Costs Determination
imately one-third (30.7%) of the patients were classified as
Since the main goal of this study is to evaluate the impact
ACGS1, indicating either no diagnosis or unclassified diagno-
of PCSP during its first year of operation, only the costs
sis. Patients older than 34 years who had six to nine ambula-
incurred by PCSP in the first year after implementation were
tory diagnosis group (ADG) combinations in one year
included. Of course, the funds to establish and prepare the
(20.8%) were classified as ACG49. Patients classified as
program were taken into account, although they were expend-
ACGSO, with greater than 10 ADG combinations in one year,
ed before the program started. Normally, the cost of the pro-
represented 17.6% of the population. Overall, approximately
gram is divided between start-up costs an d operatmg costs.
.
13

67% of the patients had more than two ADG case-mix combi-
However, PCSP was a service project funded through a con-
nations in one year, indicating a need for concern regarding
tractual relationship with the Maryland Medicaid program.
comorbidity Since 30.7% of study subjects fell into the
The Medicaid program provided $200,000 per year to the
unclassified diagnosis group, the multiple student t tests were
University of Maryland Center on Drug and Public Policy to
used to .verify differences in age, sex, and each outcome vari-
implement this project. Because it is a fixed-budget project,
able at theO.OS level between the study and candidate control
dividing the start-up and operating costs was not necessary.
groups on the baseline (preintervention). Repeating 100% of A total of 1,036 patients were involved in this program,
the matching control procedures yielded qualified control
but only 437 of them were included in the study Therefore,
candidates. Finally, 437 patients, including 20 who died dur-
the prorated cost was $84,362.93 per year for these patients
ing the study period, were selected for the control groups.
during the study period.
They were statistically similar to the study group with regard
to age, sex, ACG, hospital, and cost/utilization of Medicaid Direct Benefits Determination
program during the preintervention period. Direct benefits are associated with the immediate conse-
quences of the intervention program. For example, the mone-

Figure 2. Net Present Value Formula tary benefit of reduced costs from fewer outpatient physician
visits can be considered a direct benefit. In this study, a cost-
NPV."- ~". 1 (B 1-C)/(l +r)i=~lO. 1$89287. 76/ (1 +4%)'0=$724,203.71 saving methodology was applied to estimate the direct bene-
1='
-

1 1= 1
fits value. The theoretical ba,ckground of the cost-saving
B. = dollar value of total benefits incurred at timer approach assumes that when there is insufficient information
~ = dollar value of total costs incurred at timer
(4%) to derive a demand curve per se, willingness to pay can be
r = discount rate 14
n =
10 years estimated by the cost savings realized from the project. This
estimate of savings results in the appropriate values to use in

306 Journal of Managed Care Pharmacy }M{,p May/June 1998 Vol. 4, No.3
 Cost Benefit Analysis of Pharmaceutical Care in a Medicaid Population-From a Budgetary Perspective

a cost benefit analysis because it represents a lower estimate of Table 3. Discount Rates Used in Health Care Programs
the amount the program would be willing to pay rather than
forgo the project. Year Discount Researcher Type of Study
In this study, the total Medicaid cost of the PCSP group Rate(r) (in %)
during the preintervention period was $1,456,223.84. The
1961 4,10 Weisbrodl8 General
total Medicaid cost of the PCSP group during the post-inter-
1968 8 Prest and Turvey19 General
vention period was $1,491,100.81. The total Medicaid cost of 4,
1976 5 tason et al. 20
the control group during the preintervention period was 1,5,10 Hypertension Therapy
$1,642,787.88. The total Medicaid cost of the control group 1979 1,5, 10 Bootman et al.
21
Pharmacokinetics
during the post-intervention period was $1,851,315.54. In service

conclusion, the direct benefit was $173,650.69 (see Figure 1).

NET PRESENT VALUE
Subtracting the cost from the program benefits($173,650.69-
$84,362.93) yields a net present value (NPV1) of $89,287.76,
or $204.32 per patient, for the first-year benefit after PCSP
intervention. Figure 2 presents the computing NPV formula
that was used to interpret and predict the results of cost bene-
fit analysis over a lO-year period of time with a 4% discount
rate. The result indicates that the net present value of program
benefit for the upcoming 10-year period is $724,203.71.
The NPV is particularly useful in stating the net economic
benefit to society in choosing a particular course of action. 15
The basic criterion for the acceptability of a project is the pre-
sent value of its net benefits-the benefits and costs being
defined in incremental terms as compared to the situation
without the project. The NPV method also reduces a stream of
discounted costs and benefits to a single number indicating
the highest level of total net benefits. 16
A time horizon (n) of 10 years
was chosen because it is
the horizon most commonly used in the health field when
common discount rates applied in health care programs during
the period 1961-1979. These differences represent more than
academic concern because the choice of discount rate can have
a substantial effect on the final results. The question, however,
is how the social discount rate should be determined. In this
study, the average NPV of program benefits for each PCSP
pa-
tient over a 10-year period ranges from $1,068.71 to $2,043.20
at discount rates ranging from 0% to 10% (see Table 4).
CONCLUSIONS
Because health care resources are scarce, competition
among health care professionals for these limited resources is
increasing. Even within institutions, pharmacy will have to
compete with nursing, medical, and other services for ade-
quate budget supportn To compete successfully, pharmacy
must produce more significant evidence of the positive eco-
nomic influence of pharmaceutical care services.
The application of the cost benefit analysis in this study
demonstrates significant savings for the Maryland Medicaid
program during the first year of the PCSP operation. From a

budgetary perspective, only direct costs and benefits were

cost benefit analysis is applied. With regard to drug therapy of
pharmaceutical care services, benefits and costs are likely to
occur over a long period following initial therapy When health
outcomes are realized in the form of lives saved through pre-
vention of premature death or management of a chronic con-
included in the analysis. The study reveals a net benefit of
$89,287.76 for theA37 study patients after one year of PCSP
intervention, with an average savings per patient of $204.32
the first year. The study also places average NVP of PCSP's

dition, benefits often are observed over many yearS.17 estimated future value (at a 4% discount rate) at $1,657.22
All savings realized after the initial period must be dis- per patient for the next 10 years. Theoretically, if the PCSP
counted at an appropriate rate (r%), however. Future costs were expanded to serve all Maryland Medicaid adult noninsti-
and benefits are discounted in recognition of the economic tutionalized patients receiving drug therapy, the state of Mary-
concept that a dollar next year is less valuable than a dollar land could save as much as $22 million in the next fiscal year.
today because resources can be productively invested for
future gains. Thus, $100 invested at 5% interest will become
Table 4. Sensitivity Analysis
$105 in one year. In discounting, the principle works in
reverse: $105 next year has the present value of $100 when
the discount rate is 5%. Further, performing analyses with sev-
Discount Net Present Value Net Present Value
Rate (r) of All Study Subjects per Study Subject
eral rates that generally are considered reasonable, to see how
(10 years) (10 years)
sensitive the results are to changes in those rates, is a sensible
approach. This is known as "sensitivity analysis," and is dis-
cussed in the next section. r=O $892,877.60 $2,043.20
r=4% $724,203.71 $1,657.22
Sensitivity Analysis
r=5% $689,456.41 $1,577.70
Economists and policy makers disagree about the appro-
r=lO% $467,464.37 $1,069.71
priate discount rate to use in the analysis. Table 3 presents the

Vol. 4, No.3 May/June 1998 }MíP Journal of Managed Care Pharmacy 307
 Cost Benefit Analysis of Pharmaceutical Care in a Medicaid Population-From a Budgetary Perspective

11. Anderson L, Russell S. Benefit cost analysis: a practical guide. Lexington,

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452-72

MANAGED CARE plJARMACYø

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November 7-12, 1998

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now and in the future.

Watch your mail... an informational brochure is scheduled to be

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308 Journal of Managed Care Pharmacy }M{'P May/June 1998 Vol. 4, No.3