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PHARMACOECONOMICS: AN OVERVIEW

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Review Article
Universal Journal of Pharmacy ISSN 2320-303X
Take Research to New Heights

PHARMACOECONOMICS: AN OVERVIEW
Sri lakshmi G1, Sai Shankar K1, Desu Prasanna Kumar1*, Venkateswara Rao P2
1
Department of Pharmaceutics, ST. Mary’s Group of Institutions Guntur, Chebrolu (V & M), Guntur (Dt), Andhra Pradesh, India
2
Department of Pharmaceutical Chemistry, ST. Mary’s Group of Institutions Guntur, Chebrolu (V & M), Guntur (Dt), Andhra Pradesh, India

Received 30-03-2018; Revised 28-04-2018; Accepted 26-05-2018

ABSTRACT
Objective: Phamacoeconomics can aid the policy makers and the healthcare providers in decision making in evaluating
the affordability of and access to rational drug use. Efficiency is a key concept of pharmacoeconomics, and various
strategies are suggested for buying the greatest amount of benefits for a given resource use. Phamacoeconomic
evaluation techniques such as cost minimization analysis, cost effectiveness analysis, cost benefit analysis, and cost
utilization analysis, which support identification and quantification of cost of drugs, are conducted in a similar way,
but vary in measurement of value of health benefits and outcomes.
Overview: This article provides a brief overview about pharmacoeconomics, its utility with respect to the Indian
pharmaceutical industry, and the expanding insurance system in India.
Conclusion: Pharmacoeconomic evidences can be utilized to support decisions on licensing, pricing, reimbursement,
and maintenance of formulary procedure of pharmaceuticals. For the insurance companies to give better facility at
minimum cost, India must develop the platform for pharmacoeconomics with a validating methodology and appropriate
training. The role of clinical pharmacists including Pharm.D graduates are expected to be more beneficial than the
conventional pharmacists, as they will be able to apply the principles of economics in daily basis practice in community
and hospital pharmacy.
Keywords: Drug costs, Drug industry, Formularies, Health insurance, Pharmacoeconomics

INTRODUCTION started about 30 years ago

“Pharmacoeconomics can be defined as the branch of
the economics that uses cost-benefit, cost-
effectiveness, cost-minimization, cost-of-illness and
cost-utility analyses to compare pharmaceutical
products and treatment strategies.”

Pharmacoeconomics is the application of economic
analysis to the use of pharmaceutical products,
services and programs, with frequently focuses on
the cost (inputs) and consequences (outcomes) of
that use.

“Research that identifies measure and compares
the costs (resources consumed) and the economic,
Clinical and Humanistic outcomes of diseases, drug
therapies and programmes directed to the
diseases”.

Its need is undeniable, especially in developing
countries.

Economic evaluations in the field of pharmacology
*Corresponding author:
Prasanna Kumar Desu
Department of Pharmaceutics, ST. Mary’s Group of
Institutions Guntur, Chebrolu (V& M), Guntur (Dt), Andhra
Pradesh, India – 522212, Mobile No: 9966916329

In 1978 McGhan , Rowland & Bootman , from the
university of Minnesota , introduced the concepts
of cost-benefit & cost-effectiveness analyses

Crude parameters were used to evaluate e.g.
increased labour production.

The team pharmacoeconomics was used on a public
forum for the first time in 1986 by Townsed
Pharmaceuticals and other therapeutic intervention
shave contributed to the important progress being
made in the health status of the population.
Corresponding to the introduction of new drug entities
During the past several decades, the mortality rates for
a number of diseases have declined substantially.1
Effective drug therapy helps to partially explain why
the mean length of stay in hospitals has decreased over
the years2. ‘Pharmacoeconomics’ is a new word; but
economic interest in drug and other treatments of
health problems is much older. Decisions about what
treatments should be available within a health-care
system have always been influenced by the resources
available to pay for them3.
Health care funders (governments, social security
funds, insurance companies) are struggling to meet
their rising costs. They make many efforts to contain

Universal Journal of Pharmacy, 07(03), May-June 2018 1

Desu Prasanna Kumar et al. UJP 2018, 07 (03): Page
drug costs, by price negotiation, patient co-payments
or dedicated drug budgets. Expenditure on drug
therapy is a particular target for their attention for
several reasons: the size of the drug bill (10-15% of
most national health care budgets, and usually the
second largest item after salaries); the ease of
measurement of pharmaceutical costs in isolation, in
contrast to most other health care costs; evidence of
wasteful prescribing; and a perception that many drugs
are overpriced and that the profits of the
pharmaceutical industry are excessive.4Healthcare
community is ever more sensitive to costs, as the
overall health expenditures are escalating. Accordingly,
appraisal of goods and services in healthcare goes
beyond evaluation of safety and efficacy in which the
economic impact of these goods and services on the
cost of healthcare is also considered. As in economics,
efficiency is the key concept in the pharmaco
economics, and this principle helps one to design
strategies for buying the greatest amount of benefits
for a given resource use5. Pharmacoeconomics has been
defined as the descriptionand analysis of the cost of
drug therapy to health care systems andsociety.6 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 invested7.
 The main role of clinical pharmacologist in this
discipline is to assess the quality and suitability of
clinical trials data for inclusion in overall analysis.
 The idea is to determine whether a new drug has
any clinical advantage over the existing
treatments.
 It is necessary to arrive at an objective quantitative
evaluation of ‘benefit’ or ‘effectiveness’ to put
into cost-effectiveness models that health
economists have developed.
 The clinical pharmacologist is uniquely able to do
this evaluation which may end up not conforming
to the appraisal or claim submitted by
manufactures.
OBJECTIVES:
 Explain pharmaco-economics & prescription cost
 Evaluate the cost-effective drug therapy
 Discuss the significance of pharmaco-economics in
various strata of society
 Explain drug compliance, adherence and
therapeutic failure
 Discuss consequences of non compliance
NEEDAND SCOPE:
Pharmacoeconomics is a subdivision of health
economics and results from that discipline coming of
age through consolidation to diversification. Health
Economics, as a branch of economics is itself relatively
young. Basically the pharmacoeconomics is needful in
following manner;
Universal Journal of Pharmacy, 07(03), May-June 2018
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In Industry- Deciding among specific research and
development alternatives.
In Government- Determining program benefits and
prices paid.
In Private Sector- Designing insurance benefit
coverage8.
The increase in health care spending is mainly because
of increased life expectance, increased technology,
increased standard of living and increased demand in
health care quality and services. Medicines form a
small but significant proportion of total health care
cost. All over the world, patients are affected by high
price of medicines. In a developing country like India,
85% of total health expenditure is financed by house-
hold out of pocket expenditure. Another factor is the
types of procurement agent: e.g. different prices may
be paid for the same product by a public sector
purchaser. Also the distribution route and the patient
status will also influence the drug pricing. So medicine
prices do matter9. In Industry, it is useful in deciding
among specific research and development alternatives.
In Government Determining program benefits and
prices paid and in Private Sector it can be used for
designing insurance
benefit coverage10.
Scope of Pharmacoeconomics are of three types:

To pharmaceutical manufacturers

To health care practitioners

To pharmacists
CHALLENGES:
The main challenges for pharmacoeconomics continue
to be:
Establishing guidelines or standards of practice
Creating a cadre of trained producers and
consumers of pharmacoeconomic work.
Continuing education on the relevant features of
this discipline for practitioners, government
officials, private sector executives.
Stable funding to support applied
pharmacoeconomic research.
Lack of full appreciation of the potential
importanceand application of Pharmacoeconomics
studies.
Poor technical skills of healthcare professionals,
especially of pharmacists.
Lack of appropriate database of the health care
system in order to bring about research adaptation
from another country11.
PHARMACOECONOMIC METHODOLOGIES:

Economic evaluations
 Partial economic evaluations
 Cost consequence analysis (CCA) or Cost outcome
analysis (COA)
 Cost-of-illness (COI) evaluation

Full economic evaluations
 Cost Minimization Analysis (CMA)
 Cost Benefit Analysis (CBA)
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Desu Prasanna Kumar et al. UJP 2018, 07 (03): Page
 Cost Effectiveness Analysis (CEA)
 Cost Utility Analysis (CUA)

Humanistic evaluation
 Health Regulated Quality of Life (HRQOL)
 Patient Preferences
 Patient Satisfaction
PHARMACOECONOMIC EVALUATION
Pharmacoeconomic evaluations conducted in today's
healthcare settings can be either partial or full
economic evaluations. Partial economic evaluations can
include simple descriptive tabulations of outcomes or
resources consumed and thus require a minimum of
time and effort. If only the consequences or only the
costs of a program, service, or treatment are
described, the evaluation illustrates an outcome or cost
description. A cost-outcome or cost-consequence
analysis (CCA) describes the costs and consequences of
an alternative but does not provide a comparison with
other treatment
options1.
Figure 1: Issues in pharmacoeconomic evaluation
Costs:
Costs involved in pharmacoeconomic evaluation can be
mainly divided into financial cost (mandatory cost) and
economic cost (resource for which no mandatory
payment is made).
Direct i.e. costs from the perspective of the health
care funder: including staff costs, capital costs, drug
acquisition costs. It includes physicians’ fees, cost of
administering the medication, costs of treating an
adverse drug reaction, etc.
Table 1: Example for the application of CMA in Pharmaceconomic Decisions in Microlevel. Source: Own resource
The name of the medication / form of therapy
Medication “A”
Clinical effectiveness of dose
Cost of preparation of dose
Cost of supply of dose
Other expenditures related to preparation
All costs of dose
Decision on further application
In macro level we examine not only the clinical
effectiveness of medication, but also the impact of
that in long term to the main factors which
determining the expenditure size of health budget such
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Indirect i.e. costs from the perspective of society as a
whole: for example, these might include loss of
earnings, loss of productivity, loss of leisure time, due
to the illness, and cost of travel to hospital etc). This
would include not just the patient themselves but also
their family and society as a whole.
Intangible i.e. the pain, worry or other distress; which
a patient or their family might suffer. These may be
impossible to measure in monetary terms, but are
sometimes captured in measures of quality of life. The
cost can be measured in following ways:
Steps in Economic Evaluation:
Step 1: Quantify the costs of the intervention/drug
(input)
Step 2: Quantify the outcomes / consequences (output)
Step3: Compare magnitude of differences in costs and
evaluate “value money”(e.g., by reporting a cost-
effectiveness ratio)
Step 4: Evaluate the precision of these comparison
(sensitivity Analysis)
METHODS OF PHARMACOECONOMIC EVALUATION:
There are basically 4 categories or types of
pharmacoeconomic studies. These are presented here
in order of detail,
A. Cost-minimization analysis (CMA)
B. Cost-effectiveness analysis (CEA)
C. Cost-utility analysis (CUA)
D. Cost-benefit analysis (CBA)
A. COST MINIMIZATION ANALYSIS (CMA)
Cost-minimization analysis (CMA) involves the
determination of the least costly alternative when
comparing two or more treatment alternatives. With
CMA, the alternatives must have an assumed or
demonstrated equivalency in safety and efficacy CMA is
a relatively straightforward and simple method for
comparing competing programs or treatment
alternatives as long as the therapeutic equivalence of
the alternatives being compared has been established.
If no evidence exists to support this, then a more
comprehensive method such as cost-effectiveness
analysis should be employed. Remember, CMA shows
only a “cost savings” of one program or treatment over
another.
Medication “B
Equivalent
160 Euro/dose 180 Euro/dose
100 Euro/dose 90 Euro/dose
4O Euro/dose 60 Euro/dose
300 Euro/dose 330 Euro/dose
Yes No
as structure of types of diseases in society, the income
status or the technical quality of the health system:
the impact of drug groups to these factors must also be
equivalent to compare the related drug price subsidies
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Desu Prasanna Kumar et al. UJP 2018, 07 (03): Page www.ujponline.com

or tax benefits connection with the research and
development activities. Nonetheless, in reality mostly
this method is not suitable for analysis, because there
cannot find reliable equivalence between two form of
therapy or drug group.
COST EFFECTIVENESS ANALYSIS (CEA):
Cost-effectiveness analysis (CEA) is a form of economic
analysis that compares the relative costs and outcomes
(effects) of two or more courses of action. Cost
effectiveness analysis is distinct from cost-benefit
analysis, which assigns a monetary value to the
measure of effect. Cost-effectiveness analysis is often
used in the field of health services, where it may be in
appropriate tomonetize health effect. Typically the
CEA is expressed in terms of a ratio where the
denominator is a gain in health from a measure (years
of life, premature births averted) and the numerator is
the cost associated with the health gain. The most
commonly used outcome measure is quality-adjusted
life years (QALY). Cost-utility analysis is similar to cost-
effectiveness analysis. The results of CEA are also
expressed as a ratio—either as an average cost-
effectiveness ratio (ACER) or as an incremental cost-
effectiveness ratio (ICER). An ACER represents the total
cost of a program or treatment alternative divided by
its clinical outcome to yield a ratio representing the
dollar cost per specific clinical outcome gained
independent of comparators.
    ($)
ACER =
   (   $)

Table 2: Methods of economic evaluation

Method of economic Measurement of outcome
Synthesis of costs and benefits
evaluation (Health Benefits)
Assumed to be equivalent and can take any form
Cost minimization Additional costs of therapy A
(e.g. number of cases detected, reductions in
analysis relative to B
cholesterol levels, years of life saved)
Cost effectiveness Health benefits across therapies are measured in Cost per life year gained Cost per
analysis similar natural units patient cured, Cost per life saved, etc.
Health benefits across therapies are valued in Cost per QALY gained Cost per HYE
Cost utility analysis
similar units based on individual preferences gained

Often clinical effectiveness is gained at an increased disease-free patient would equal 1.0 QALY, whereas a
cost. Incremental CEA can be used to determine the year spent with a specific disease might be valued
additional cost and effectiveness gained when one significantly lower, perhaps as 0.5 QALY, depending on
treatment alternative is compared with the next best the disease. This method is used to compare treatment
treatment alternative. Thus, instead of comparing the alternatives that are life extending with serious side
ACERs of each treatment alternative, the additional effects (e.g., cancer chemotherapy), those which
cost that a treatment alternative imposes over another produce reductions in morbidity rather than mortality
treatment is compared with the additional effect, (e.g., medical treatment of arthritis), and when HRQOL
benefit, or outcome it provides. is the most important health outcome being examined.
Cost  ($) − Cost  ($) This is similar to cost effectiveness in that the costs are
ACER = measured in money and there is a defined outcome.
Cost  (%) − Cost  (%)
CEA can provide valuable data to support drug policy, But here the outcome is a unit of utility (e.g. a QALY).
formulary management, and individual patient Since this endpoint is not directly dependent on the
treatment decisions. Globally, CEA is being used to set disease state, CUA can in theory look at more than one
Public policies regarding the use of pharmaceutical area of medicine, e.g. cost per QALY of coronary artery
products (national formularies) in countries such as bypass grafting versus cost per QALY.
Australia, New Zealand, and Canada13.
The cost-effectiveness analysis (CEA) ratio can be a
more practical tool for decision making than CBA in
that it involves the comparison of the costs of
achieving a particular non-monetary objectives; such as
lives saved, health improvement, or quality of life.
COST UTILITY ANALYSIS (CUA):
Cost-utility analysis (CUA) is a method for comparing
treatment alternatives that integrates patient
preferences and HRQOL. CUA can compare cost,
quality, and the quantity of patient-years. QALYs
represent the number of full years at full health that
are valued equivalently to the number of years as Figure 2: Pharmacoeconomics
experienced. For example, a full year of health in a
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Desu Prasanna Kumar et al. UJP 2018, 07 (03): Page
COST BENEFIT ANALYSIS (CBA):
CBA may also seem to discriminate against those in
whom a return to productive employment is unlikely,
e.g. the elderly, or the unemployed. However the
virtue of this analysis is that it may allow comparisons
to be made between very different areas, and not just
medical, e.g. cost benefits of expanding university
education (benefits of improved education and hence
productivity) compared to establishing a back pain
service (enhancing productivity by returning patients to
work). Cost–benefit analysis (CBA), sometimes called
benefit. Cost analysis (BCA), is a systematic approach
to estimating the strengths and weaknesses of
alternatives that satisfy transactions, activities or
functional requirements for a business. It is a technique
that is used to determine options that provide the best
approach for the adoption and practice in terms of
benefits in labor, time and cost savings etc.
The CBA is also defined as a systematic process for
calculating and comparing benefits and costs of a
Table 3: Cost Benefit Results
Drug Cost($) Benefit ($) Benefit-Cost-ratio(B/C)
A 1.00O 1.500 1,5:1
B 10.000 14.OO 1,4:1
ADVANTAGES COST-BENEFIT ANALYSIS:
• Multiple OUTCOMES can be combined or different
outcomes can be compared.
• Maximizes benefit of investment
• Problems: How do you value pain and suffering or
QOL
LIMITS OF PHARMACOECONOMIC EVALUATION:
Health economics and pharmacoeconomics is a
younger science and is slowly developing and
testing its methodologies.
Many problems limit the use of health economics in
practice.
The whole process may be open to bias, in the
choice of comparator drug, the assumptions made,
or in the selective reporting results.
Most studies are conducted or funded by
pharmaceutical companies who obviously ae
interested in results, and there is publication bias
towards those studies favourable to sponsoring
companies.
Health economics is therefore sometimes misused
as a marketing ploy.
Clinical pharmacologists should welcome
pharmacoeconomic evaluation as a means to
promote efficiency and effectiveness of
prescribing.
APPLICATIONS OF PHARMACOECONOMICS:
Health care practitioners can benefit from applying
the principles and methods of pharmacoeconomics
to their daily practice settings.
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project, decision or government policy (hereafter,
"project"). Broadly, CBA has two purposes
1. To determine if it is a sound investment/decision
(justification/feasibility),
2. To provide a basis for comparing projects. It involves
comparing the total expected cost of each option
against the total expected benefits, to see whether the
benefits outweigh the costs, and by how much.
Figure 3: Pie Chart for cost related to Different Products
Net present value (B-C) ROI (B-C)/C
500 50%
4000 4O%
Pharmacoeconomics aid clinical and policy decision
making.
Complete pharmacotherapy decisions should
contain assessments of three basic outcome areas
whenever appropriate economic, and humanistic
outcomes (ECHO)
Traditionally, most drug therapy decisions where
based solely on the clinical outcomes (e.g.. safely
and efficacy) associated with a treatment
alternative.
Over the past 15 to 20 years, assessment of the
economic outcomes associated with a treatment
alternative become popular.
The current trends is to incorporate the humanistic
outcomes associated with a treatment alternative,
that is, to bring the patient back into this decision-
making equation.
In today’s health care environment, it is no longer
appropriate to make drug-selection decisions based
solely on acquisition costs.
CONCLUSION
Pharmacoeconomics evaluation has become an
important area of interest to find the optimal therapy
at the lowest price as healthcare resources are not
easily Accessible and affordable to many patients.
Numerous drug alternatives and empowered consumers
also fuel the need for economic evaluations of
pharmaceutical products. In a country like India they
can help the poor and middle class Indians to obtain
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Desu Prasanna Kumar et al. UJP 2018, 07 (03): Page
well health care services because many households are
below poverty line, unaffordable for private health
care. Costs of the medicines are growing constantly. In
asian countries with scarce resources and an ever
growing population with diverse health care needs,
innovative method called, pharmacoeconomic
evaluation plays an essential role in Determining the
delivery of reasonable and cost-effective health
services14.
As the healthcare sector progressing day by day the
need to develop Pharmacoeconomics area is must.
Healthcare sector is not just a small area but it became
an industry now. It has more dimensions to explore.
Patients also get benefit out of Pharmacoeconomics
findings. Pharmacoeconomic is acts as socioeconomics
too. It relates patients, society, and economy, to drug
therapy.
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