PHARMACOECONOMICS

Dr. Roohana Hasan

Assistant Professor
 Overview
• Introduction
• History
• Components
• Need
• Costs
• Perspectives
• Outcomes
• Methodology
 Cost-minimization analysis (CMA)
 Cost-effectiveness analysis (CEA)
 Cost-utility analysis (CUA)
 Cost-benefit analysis (CBA)

• Applications
• Challenges
• Indian scenario
• Conclusion
 DEFINITIONS
• Economics is the study of the allocation of limited resources or inputs among
alternative users to satisfy unlimited wants for outputsas follows.

• Health economics ‘The field of study that evaluates the behaviour of individuals,
firms, and markets in health care, and that usually focuses on the cost (inputs) and
consequences (outcomes) of health care interventions, such as the use of drugs,
devices, procedures, services and programs’.

The International Society for Pharmacoeconomics and Outcomes Research (ISPOR) defines the terms health economics
and pharmacoeconomics
 Introduction
• Pharmacoeconomics can be defined as the branch of economics that uses cost-
benefit, cost-effectiveness, costminimization, cost-of-illness and cost-utility analyses
to compare pharmaceutical products and treatment strategies

• It is the part of health economics that focuses on the economic evaluation of

pharmaceuticals.
• Health outcomes research, and patient-reported outcomes (PRO) in particular, aim at
understanding patient value in terms of impact of disease and its treatment on
physical functioning and psychosocial wellbeing, known also as “health-related
quality of life” (HRQL).
 HISTORY
• Economic evaluations in the field of pharmacology started about 30 years ago.
• In 1978 McGhan , Rowland & Bootman , from the university of Minnesota,
introduced the concepts of cost-benefit & costeffectiveness analyses.
• Crude parameters were used to evaluate e.g. increased labour production.
• The term pharmacoeconomics was used on a public forum for the first time in
1986 by Townsend.

“the description and analysis of the costs of drug therapy to health

systems and society”
• Pharmacoeconomics developed its roots in 1970s.

• The first book on health economics was published in

1973 and in 1978.

• In 1992, a journal named “Pharmacoeconomics” was

launched.
Components
Health
policy Health
research Economics

Health
economics
delivery Components Burden of
research of Illness
Pharmacoec
onomics

Health
technology Health
assessment economics
Disease research
Models
• Since 1961, pharmaceuticals are fallen under price regulation in
India.

• A total of 343 drugs accounting for, 85% of the drug market

was under price control in 1979.

• With successive polices, the number diminished and now a

mere 15 - 20% of the drug market is under price control.

• Therefore drug prices are quickly spinning out of reach of the

common man.
• Pharmacoeconomics adopts and applies the principles
and methodology of health economics to the field of
pharmaceutical policy

• Pharmacoeconomic evaluation therefore makes use of

the broad range of techniques used in health
economics evaluation to the specific context of
medicines management
 DRUG BILL

• It a document of a government which states the various

governmental policies that it has made for health care
improvement in the country.
• It gives the percentage of GDP of that particular country has
allotted for HEALTH CARE of the country.
• Generally the health care bill is 10 to 15% of total GDP.
• In 2015, Indian health care budget was 1.2% of the GDP.
 REASONS FOR EVALUATION

• Size of drug bill.

• Easy to measure pharmaceutical costs.
• Evidence of wasteful prescribing.
• Perception that pharma companies work for profits.
 MULTI-FACTORIAL VARIABILITY OF DRUG PRICING

• The sector in which medicines are purchased: The price is often

higher in the private sector due to distilentor’s costs and profiteering.
• The types of procurement agent: e.g. different prices may be paid for
the same product by a public sector purchaser, such as Ministry of
Health.
• The distribution route- A patient who purchases a medicine at a
hospital pharmacy may have to pay more if the hospital pharmacy
purchased the product from a local wholesaler than if it has been
purchased by tender and supplied through public health sector
distribution system.
• Many times hospital pharmacy may have limited stock of the generic drugs which
one is cheaper than the branded drugs prescribed to the patient on routine basis and
patient has to purchase the branded drugs in the emergency condition.
• The patient status: The price of patented medicine is often higher
than that of their generic equivalent at least while the patient is in
force.
• Many other factors influence the total cost of drugs is as follows:

 Prices of patented, non-patented and generic drugs

 Retail and wholesale mark-ups
 Pharmacists' professional fees
 Changes in the composition of total populatione.g.
proportion of older persons
 Changes in prescribing habits of physicians
 Changes in the utilization of drugs, i.e. number of
drugs used per patient
 Trends towards using newer drug therapy instead
of other treatments
NEED OF PHARMACOECONOMICS

• Basically the pharmacoeconomics is needful in following

manner:
In Industry- Deciding among specific research and
development alternatives.
In Government- Determining program benefits and prices
paid.
In Private Sector- Designing insurance benefit coverage.
TARGET HEALTH CARE SECTOR FOR
PHARMACOECONOMIC EVALUATION

Patient and
Family

Resources Health Care

consumed Programs

Other Sectors
NATURE OF PHARMACOECONOMIC
ASSESSMENTS
 COSTS
• The value of the resources consumed by a program or drug
therapy, is defined as Cost.
Direct costs- Medical and Nonmedical
Indirect costs
Intangible costs
Opportunity costs
Direct Medical costs Direct Non-Medical
Costs

Drugs
medical supplies and
equipment
laboratory and diagnostic
tests
Hospitalizations
physician visits.
Transportation to and
from healthcare facilities
extra trips to the
emergency department
child or family care
expenses
special diets
various other out-of-
pocket expenses.
Indirect Costs
-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
cost of travel to hospital etc
This would include not just the patient themselves but also their
family and society as a whole.
Intangible
-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:

Cost / unit
Cost / treatment
Cost / person
Cost / person / year
Cost / case prevented
Cost / life saved
Cost / DALY (disability-
adjusted life year)
Opportunity costs
• The amount lost by not using economic resources in its best
alternative use (labour, capital, building, management etc.)
• Resources invested in one area will be at expense of loss of
another opportunity
PERSPECTIVES
 PATIENT PERSPECTIVE
• All the relevant cost and consequences experienced by the patient
• Included costs:
 Direct
 Indirect
 Intangible
 PROVIDER PERSPECTIVE
• One of the primary uses of pharmacoeconomics in
clinical practice is to aid clinical and policy decision
making.
• Complete pharmacotherapy decisions should contain
three basis evaluation components; clinical, economic,
and humanistic outcomes.
• Concerned with the expenses of providing products or
services
• Included costs:
• Direct costs only
 PAYER PERSPECTIVE
• Social Security/Government, third party payers eg. private
insurance companies and employers
• Included costs:
Direct costs
Indirect costs relevant to employers lost workdays lost
productivity at work
 SOCIETAL PERSPECTIVE
• The broadest of all perspectives that comprehensively evaluates all costs
and consequences
• Considers the benefits to society as a whole
• Included costs:
 Direct-overall cost of providing care
 Indirect-loss of productivity
OUTCOMES RELATIONSHIP
• Clinical
As a result of disease or treatment – cure, confort, survival /
mortality -morbidity
• Economic-
Costs -Expense, saving, cost avoidance
• Humanistic
Patient preferences
Utilities -Quality of life
Physical, emotional, social function
 Performance
The expected benefits outcomes might be measured in:
• “Natural” units e.g. years of life saved, strokes prevented, and peptic
ulcers healed etc.

• “Utility” units -
 Utility estimates can be obtained through direct measurement (using
techniques such as time trade off or standard gambles, or by imputing them
from the literature or expert opinion.
 They are often informed by measures of quality of life in different disease
states.
 METHODOLOGIES
• Humanistic evaluation
• Health Regulated Quality
of Life (HRQOL)
• Patient preferences (PRO)
• Patient satisfaction (PRO)

• Economic evaluations

Partial economic Full economic evalulations

evaluations
• Cost consequence
analysis(CCA) or Cost
outcome analysis(COA)
• Cost of illness(COI)
evaluation
• Cost-minimization analysis
(CMA)
• Cost-effectiveness analysis
(CEA)
• Cost-utility analysis (CUA)
• Cost-benefit analysis (CBA)
 COST-OF-ILLNESS EVALUATION

• COI identifies and estimates the overall cost of a particular

disease for a defined population.
• COI evaluation method is also known as burden of illness.
• It involves measuring the direct and indirect costs attributable to
a specific disease such as diabetes, mental disorders, or cancer.
• COI evaluation is not used to compare competing treatment
alternatives but to provide an estimation of the financial burden
of a disease.
• By successfully identifying the direct and indirect costs of an
illness, one can determine the relative value of a treatment or
prevention strategy
• example by determining the cost of a particular disease to
society, the cost of a prevention strategy could be subtracted
from this to yield the benefit of implementing this strategy
nationwide.
• COI evaluation is not used to compare competing treatment
alternatives but to provide an estimation of the financial burden
of a disease.
• Thus the value of prevention and treatment strategies can be
measured against this illness cost.
 COST-MINIMIZATION ANALYSIS
(CMA)
• Cost-minimization is applied when comparing multiple drugs
of equal efficacy and equal tolerability.
• This is done when the outcomes are the same for the two
interventions.
• In this, only the input, i.e. the cost, is considered.
• The objective of this method is to select the least costly among
multiple equivalent interventions.
• It cannot be used to evaluate programmes or therapies that lead
to different outcomes.
• The option that has the least cost is selected,
e.g. if a hospital decides to introduce compulsory prescribing
of generic names of drugs instead of their brand names, then
the pharmacoeconomic evaluation of this would be done by
CMA.
Ex. if drugs A and B are antiulcer agents equivalent in
efficacy and adverse drug reactions (ADRs), then the costs of
using these drugs could be compared using CMA.
• CMA is a relatively straightforward and simple method for
comparing competing programs or treatment alternatives .
• If no evidence exists to support this, then a more
comprehensive method such as costeffectiveness analysis
should be employed
 COST-EFFECTIVE ANALYSIS
• CEA is a technique designed to assist a decision-maker in identifying a
preferred choice among possible alternatives.
• Cost-effectiveness is defined as a series of analytical and mathematical
procedure that aid in the selection of a course of action from various
alternative approaches.
• CEA evaluates multiple drug treatments for the same condition.
• The cost of the drug treatments are weighed against the effectiveness of the
drug.
• The costs of drug treatments include acquisition costs, physician
involvement, and nursing costs for administration of the drug.
• The effectiveness of drug treatment is measured in tangible
measures such as length of hospital stay, duration of treatment
required, and mortality rate.
• The results of a CEA are expressed as cost/outcome for both
therapies.
• Pharmacoeconomic analysis should be incorporated in the
clinical trial itself.
• However, for the majority of drugs, CEA is done on the basis of
pre-existing data available in the medical literature.
• CEA is the most commonly applied form of economic analysis
in the literature, and especially in drug therapy.
• It does not allow comparisons to be made between two totally
different areas of medicine with different outcomes.
• The key measure of these evaluations is the incremental cost
effectiveness ratio (ICER), which can be determined as follows:
• Incremental cost effectiveness ratio= Cost of drug A - Cost of drug B

Benefits of drug A - Benefits of drug

B
 COST BENEFIT ANALYSIS (CBA)

• CBA is the most comprehensive and the most difficult of all economic
evaluation techniques.
• In this technique, the benefits are also assigned a monetary value so that
costs and benefits can be easily compared.
• Thus, totally different interventions can be compared, making it a useful
tool (like CUA) for resource allocation by policy-makers.
• It is a basic tool that allows for the identification, measurement, and
comparison of the benefits and costs of a program or treatment
alternative.
 CBA has 2 purposes

• To determine if it is a sound investment/decision

(justification/feasibility),

• 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.
• CBA should be employed when comparing treatment alternatives in which
the costs and benefits do not occur simultaneously.
• CBA also can be used when comparing programs with different objectives
because all benefits are converted into dollars and to evaluate a single
program or compare multiple programs.
• The benefits realized from a program or treatment alternative are compared
with the costs of providing it.
• Both the costs and the benefits are measured and converted into equivalent
dollars in the year in which they will occur.
• Future costs and benefits are discounted or reduced to their current value.
• These costs and benefits are expressed as a ratio (a benefit-to-cost ratio), a
net benefit, or a net cost.

Net cost or benefit = benefit – cost

• If the B:C ratio equals 1, the benefits equal the cost. The
benefits realized by the program or treatment alternative are
equivalent to the cost of providing it.

• If the B:C ratio is less than 1, the program or treatment is

not economically beneficial. The cost of providing the
program or treatment alternative outweighs the benefits
realized by it.
• The most difficult and challenging part of CBA lies in
calculating the benefits in economic terms.
• Some benefits are easy to convert, others need subjective
judgment.
• CBA may ignore intangible benefits (pain, anxiety, stress)
that are difficult to express in monetary terms.
 COST UTILITY ANALYSIS (CUA)
• CUA is a type of evaluation in which drugs/interventions with different
outcomes can be compared.
• CUA is the most appropriate method to use when comparing programs and
treatment alternatives that are life extending with serious side effects (e.g.,
cancer chemotherapy), those which produce reductions in morbidity rather
than mortality (e.g., medical treatment of arthritis), and when HRQOL is the
most important health outcome being examined.
• CUA is employed less frequently than other economic evaluation methods
because of a lack of agreement on measuring utilities, difficulty comparing
QALYs (quality adjusted life years) across patients and populations, and
difficulty quantifying patient preferences.
• Sometimes it can be used to measure patient preference or
quality of life when comparing competing treatment
alternatives.
• 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.
• Cost is measured in dollars, and therapeutic outcome is
measured in patient-weighted utilities rather than in physical
units.
• Often the utility measurement used is a quality-adjusted life
year (QALY) gained.
• QALY is a common measure of health status used in CUA,
combining morbidity and mortality data.
• Results of CUA are also expressed in a ratio, a cost-utility ratio
(C:U ratio).
• Most often this ratio is translated as the cost per QALY gained
or some other health-state utility measurement.
• The preferred treatment alternative is that with the lowest cost
per QALY (or other health-status utility).
• QALYs represent the number of full years at full health that are
valued equivalently to the number of years as experienced.
• For example, a full year of health in a disease free patient would equal 1.0
QALY, whereas a year spent with a specific disease might be valued
significantly lower, perhaps as 0.5 QALY, depending on the disease
 ANALYSIS OF RESULTS IN
PHARMACOECONOMIC
EVALUATION
• Health economics, and particularly its branch precision health
economics, help us choose between two alternatives, which we
compare with regard to their clinical benefit on one hand and
their cost on the other.
• Health benefits and costs can be accessed from a different
viewpoint called "perspective".
• There are three common types of perspectives in economic
studies: a producer's perspective, a payer's perspective and a
social perspective.
• The perspective of an economic assessment is important. In
general, the social perspective is the broadest and most
appropriate for making financial decision because it leads to
optimal decisions but other perspectives are also valid.
DIFFERENCE IN COSTS
 APPLICATIONS OF
PHARMACOECONOMICS
• To aid clinical and policy decision making. Complete
pharmacotherapy decisions should contain assessments of three
basic outcome areas whenever appropriate: economic, clinical,
and humanistic outcomes (ECHO).
• To support various clinical decisions, ranging from the level of
the patient to the level of an entire healthcare system. For
discussion purposes, the application of pharmacoeconomics to
decision making is divided into two basic areas: drug therapy
evaluation and clinical pharmacy service evaluation.
DECISIONS FOR PHARMACOECONOMIC
APPLICATIONS

Micro

Clinical
decision

Formularly
management
Drug use
policy/guidelines

Disease management

Resource Allocation
Macro
• Assessing the value of a new agent
• Drug policy decisions, treatment guidelines & Justify the
addition of new clinical service
• Pricing in pharmaceutical industry
• Decision on reimbursement
Third-party; payers use such information to decide whether to
pay for a particular treatment, or to determine what price they
are willing to pay
 GENERAL STEPS IN DESIGNING
AN ECONOMIC EVALUATION
• Define the problem conduct the analysis
• Determine the study’s perspective • Establish the probabilities for the
• Determine specific treatment outcomes of the treatment
alternatives and outcomes alternatives

• Select the appropriate • Construct a decision tree

pharmacoeconomic model • Conduct a sensitivity analysis
• Measure inputs and outcomes • Present the results

• Identify the resources necessary to

 INTERNATIONAL SOCIETY OF
PHARMACOECONOMICS & OUTCOMES
RESEARCH
• The mission of ISPOR is to increase the efficiency, effectiveness, and
fairness of health care to improve health.
• ISPOR is recognized globally as the authority for outcomes research and its
use in health care decisions towards improved health.
• The ISPOR scope and sphere of influence includes outcomes researchers,
health technology developers and assessors, regulators, health economists,
health care policy makers, payers, providers, patients, populations, and
society as a whole.
 PHARMACOECONOMICS –
INDIAN SCENARIO

• The Indian pharmaceutical industry (IPI) is the world’s fourth-

largest by volume and is likely to lead the manufacturing sector
in India.
• The Indian Patent Act in 1970 played a major role in developing
a base for the manufacturing unit in India.
• The change in law in 2005 has created opportunities for both
international firms and local Indian companies for sharing
expertise.
• As fourth largest producer of drugs by volume, Indian
pharmaceutical industry has diversity of medicines; yet, brand
name prescriptions are the rule of the day.
• Formulary system is very weak and treatment protocols exist
only in theory.
• The resources are scarce and competing programs are plenty in
healthcare.
• The concept of healthcare insurance is yet to be popularized in
the country.
 CHALLENGES

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 importance and
application of Pharmacoeconomics studies.
Poor technical skills of healthcare professionals, especially of
pharmacists.
Lack of appropriate database of the healthcare system in order to
bring about research adaptation from another country
 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 our developing economy, India, the words
“pharmacoeconomics” and “outcomes research” are new to
health care practitioners, but we are determined to familiarize
ourselves with these concepts and put them into practice.
• In most developing countries, the patients continue to suffer due
to an ignorance about information, and practice and resources
being overburdened.
• There is a universal need to optimize both, which is possible by
adopting the practice of pharmacoeconomics, outcomes
research, and Health Technology Assessment.
• PE guide choices among alternative medications, treatment regimens and
services based on a combination of costs and outcomes.
• Results and interpretation of pharmacoeconomic studies are influenced by
the perspective of the study—there is no one “right” answer.
• Time and money can only be spent once- choice is inevitable. Whether done
unconsciously or with a consistent process, health care professionals are
constantly evaluating patient care choices & acting on them.
• Enhance the quality of your practice by strengthening your evaluation
process and increasing the probability that you deliver better value in patient
care.
 AN IDEAL APPROACH OF
PHARMACOECONOMIC EVALUATION

various decisions that can be supported using

pharmacoeconomics, including