Thae Principles of Pharmacoeconomics

University of Tripoli
Faculty of Pharmacy Pharmacy Practice I Prepared by: Eman Dyab, MSc

Department of Pharmaceutics Spring-2024 E-mail:e.dyab@uot.edu.ly
Pharmacoeconomics
Pharmaco + economics
(= remedy) (= the science of scarcity and choice)
Which drug / technology has the highest therapeutic benefit by using accessible resources?
 Definition of Pharmacoeconomics
It is a process of identifying, measuring, and comparing the costs, risks, and benefits of programs,
services, or therapies. It is used to determine which alternative produces the best health outcome for the
resource invested. Pharmacoeconomics helps us determine whether the additional benefit a product or
service provides is worth the additional cost. In so doing, we allocate scarce resources more efficiently.
It is basically economics applied to healthcare and it is most commonly used to help decision makers
make difficult choices. This is the field which:
o Analyses the supply and demand for healthcare.
o Provides a structure for understanding decisions and their consequences.
Purpose of Pharmacoeconomic Analysis is to:
• Provide a description and analysis of the costs of drug therapy to health care systems and society
• Determine whether the added benefit of a pharmaceutical product, service, or intervention is
worth the added cost
• Evaluate and compare the total costs and outcomes of pharmaceutical treatments, services, and
interventions
Pharmacoeconomic dimensions (cost & outcome)
I. Cost: is defined as the value of the resources consumed by a program or drug therapy of interest. It is
the amount paid to the suppliers.
Medicines form a small but a significant proportion of total health care cost. The writing of a prescription
is the most common therapeutic intervention in medicine. Drugs cost money to buy, but their use may
also save costs in other areas. For example, the purchase of one specific type of drug may lead to
reductions in the following:
• Use of other drugs.
• The number of patients requiring hospitalization or in the length of stay in hospital.
• The number of doctor visits required.
• Administration and laboratory costs compared with those incurred by using another drug to treat
the same condition.
The cost can be measured in following ways:
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o Cost / unit
o Cost / treatment o Cost / case prevented
o Cost / person o Cost / life saved
o Cost / person / year o Cost / DALY (disability-adjusted life year)
 Types of costs
The first step in any cost analysis is identification of the various costs. These can be direct, indirect and
intangible.
1. Direct cost mainly covers cost of resources used related to the illness and it consists of medical cost and
non-medical cost.
a) Direct medical cost is related to resources that are directly used in treating the patient such as the
cost of medication, diagnostic, treatment, follow up, rehabilitation and hospital admission. It also
includes the costs of treating side effects.
b) b) Direct non-medical cost cover personal facilities, travel, food, lodging, paid personal care, etc.
2. Indirect cost refers to resources lost as a result of the treatment and illness that involve morbidity and
mortality. This includes both paid and unpaid productivity loss such as temporary sickness
absenteeism, permanent functional impairment, premature death, etc this cost experienced by the
patient or society
Examples of indirect costs are lost time from work (absenteeism) and unpaid assistance from a family
member. While absenteeism means that the person is not physically able to work at their job,
presenteeism means that although the person is physically present, they may not be functioning to their
fullest capacity due to the disease or treatment. An example of the latter may be nausea due to
chemotherapy or drowsiness due to antihistamine treatment of allergies.
There are three methods typically employed to calculate indirect costs— human capital, friction cost
and willingness to pay (WTP).
 The human capital method values the individual’s productivity in society and estimates the
hours of work lost by the person due to the disease and multiplies them by an hourly wage.
 The friction cost method estimates the value of human capital when another person from the
unemployment pool replaces the present value of a worker’s future earnings until the sick or
impaired worker returns or is eventually replaced.
 The WTP method suggests that the avoidance of a disease can be estimated from the amount
people would be willing to pay to reduce the probability of morbidity or mortality due to a disease.
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3. Intangible cost represents cost as a consequence of the treatment not measurable in monetary terms.
These costs can be pain, grief, and suffering, 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.
 Perspective
Perspective can be defined as “whose costs are relevant based on the purpose of the study”. Perspectives
can include those of the society, payer, health care provider, and patient. The health care costs taken
into consideration will depend on the perspective of the study. It is essential to specify the perspective
because an item that may be a cost from one perspective may not be from another. For example, from
the societal perspective, all medical and nonmedical costs are relevant. However, from the health care
insurer perspective, certain categories of costs may not be relevant, such as patient productivity loss,
caregiver time, travel costs, and other indirect costs.
II. Outcomes (benefits): The second fundamental factor of a pharmacoeconomic study is outcomes. In
assessing outcomes, it is also important to take into account both positive and negative outcomes.
Positive outcome is a measure of the drug’s efficacy. Negative outcomes include side effects, treatment
failure, and the development of drug resistance.
 Outcomes quantification
o Efficacy: clinical effect under defined conditions (in clinical trials, RCT).
o Effectiveness: clinical effect under real conditions (in real world clinical practice).
o Utility: health state preferred by individuals = quality of life.
o Efficiency: (cost-effectiveness) measures how well resources are used in order to achieve a
desired output.
In general, a well-designed pharmacoeconomic analysis will involve the following steps:
1. Defining the problem
2. Determining the study’s perspective
3. Determining the alternatives and outcomes
4. Identifying study resources
5. Establishing the probabilities of the outcomes
6. Placing a monetary value on the outcomes and adjusting costs
7. Selecting the appropriate pharmacoeconomic method and conducting the analysis
8. Presenting the results, along with any limitations of the study
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Types of Pharmacoeconomic Evaluations

There are mainly five basic types of pharmacoeconomic studies. Each type measures cost in monetary
terms but they differ by means of, how the health outcomes are measured and compared.
• Cost of illness evaluation (COI)
• Cost minimization analysis (CMA)
• Cost benefit analysis (CBA)
• Cost effectiveness analysis (CEA)
• Cost utility analysis (CUA)
1. Cost of illness (COI)
It is also known as burden of disease (BOD), Cost of illness is the evaluation and assessment of the
resources used in treating an illness. This technique is used to obtain the baseline cost information before
the introduction of a new intervention. Costs are measured in terms of dollars. Like any PE analysis, the
evaluator needs to define the analysis perspective. A different perspective will change the cost structure.
For example, from a patient's perspective, the cost of illness will include the transportation to and from
the treatment site. Time duration of the disease can be critical in determining the cost and may be a source
of bias. No comparison is made in this type of analysis.
COI studies are used to indicate the magnitude of resources needed for a specific disease or condition,
and they may be used to compare the economic impact of one disease versus another (e.g., costs of
schizophrenia versus costs of asthma) or the economic impact of a disease on one country compared with
another (e.g., costs of HIV in the United States versus costs of HIV in Zimbabwe). These estimates are
sometimes used by pharmaceutical firms to determine the market potential for a new product or by payers
to set priorities for reimbursement.
EXAMPLE: The direct costs of treating hyponatremia in the United States on an annual basis were
estimated to range between $1.6 billion and $3.6 billion.
2. Cost-Minimization Analysis
It is a method of calculating drug costs to project the least costly drug or therapeutic modality. This
method of cost evaluation is the one used most often in evaluating the cost of a specific drug. It can be
only used to compare two products that have been shown to be equivalent in dose and therapeutic effect.
The underlying assumption for this type of analysis assumes that consequences are equivalent. Therefore,
only cost is compared. The cheapest intervention will be chosen for implementation.
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A CMA is the simplest type of pharmacoeconomic analysis. In a CMA, only the costs of treatment are
compared between two or more interventions or products, because the health outcomes are identical or
assumed to be identical. The input measure for a cost minimization analysis is cost, and the outcomes
are assumed to be equivalent.
A CMA can be used to compare a brand name item to a generic equivalent, two generic equivalents, or
the administration of the same medicine in different settings (outpatient versus inpatient).
Equivalent outcomes may not necessarily be equal. One needs to determine the key outcome of each
comparator. For example, two drugs may have the equivalent therapeutic value but different side effect
profiles. In such cases, consequences may not be equivalent, and this technique is not appropriate.
CEA should be used instead.
Advantages and Disadvantages
An advantage of a CMA is that it is simple to conduct. Disadvantages include the fact that it cannot
be used when outcomes of the products are not equivalent. Types of interventions and products that
can be compared in a CMA are limited because the outcomes must be equivalent.
3. Cost-Effectiveness Analysis (CEA)
It is a technique used to assist the decision maker in identifying a preferred choice among possible
alternatives within similar consequences (e.g., same therapeutic category) in terms of health
improvement created (e.g., life year gained, clinical cures). It is not used to compare different
consequences for each alternative, such as blood pressure reduction to degree of cholesterol lowering.
Generally, the incremental cost of a program or an intervention from a specified perspective is compared
to the incremental health effects. An example is the cost per unit of blood pressure reduction with each
antihypertensive agent compared. The results of the analysis normally are stated in terms of cost per unit
of effectiveness.
Cost-effectiveness analysis involves a more comprehensive look at drug costs. While cost is measured
in monetary terms, effectiveness is determined independently and may be measured in terms of a clinical
outcome such as number of lives saved, complications prevented or diseases cured.
Cost-effectiveness analysis thus measures the incremental cost of achieving an incremental health benefit
expressed as a particular health outcome that varies according to the indication for the drug. Examples
of ICERs using this approach are:
The cost per extra patient achieving a 10 mm Hg fall in blood pressure;
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An advantage of a CEA is that medical practitioners are familiar with the natural health unit outcomes)
used in a CEA comparison, which makes it easy to explain the concept of cost effectiveness. A
disadvantage is that the treatments/alternatives must have outcomes that are measured in the same natural
health units (i.e., a hypertensive treatment cannot be compared to a diabetic agent). If treatments for the
same condition are compared, the same natural health units must be compared in the analysis (e.g., for
asthma medication, treatments can be compared based on symptom-free days or FEV). If both
comparisons (FEV and symptom free days) are needed, two separate cost-effectiveness calculations must
be performed. The CEA cannot be summarized for different types of outcomes for one treatment.
In order to take the proper decision, there are 2 ways to illustrate the cost effectiveness. (I) A cost-
effectiveness grid and (II) Cost-Effectiveness Plane.
(I) Cost-Effectiveness Grid
The cells represent possible results when comparing two alternatives with regard to costs and
effectiveness. If one compares a new alternative with a standard alternative, four possible results
could be obtained:
a. If the new treatment is both more effective and less costly (cell G), is more effective at the
same price (cell H), or has the same effectiveness at a lower price (cell D), then it is considered
cost-effective.
b. On the other hand, if the new drug is less effective and more costly (cell C), has the same
effectiveness but costs more (cell F), or has lower effectiveness for the same costs (cell B),
then it is not cost-effective.
a) If the comparison falls in the non-shaded cells A or I, more information is needed (e.g., how
much extra cost per extra unit of outcome, which is determined by conducting an incremental
cost-effectiveness ratio).
b) If the comparison shows similar effectiveness and similar costs (cell E), other factors may be
considered to take the suitable choice between two medications.
Table 2. Represent cost effectiveness grid.
COSTEFFECTIVENESS Lower Cost Same Cost Higher Cost
A B C
Lower effectiveness
Conduct ICER Dominated** Dominated
D E F
Same effectiveness
Dominant* Arbitrary Dominated
G H I
Higher effectiveness
Dominant Dominant Conduct ICER
Dominant option is both more effective and less expensive than the other.
*
Dominated option it is less effective and more expensive than the other.
**
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(II) Cost-Effectiveness Plane.

It is a visual method for representing the comparison of alternatives. For example, when comparing a
new alternative with the standard alternative. The point on the plane, where the x and y axes cross,
indicates the starting point of costs and effectiveness for the standard comparator. A point is placed on
the plane for each alternative to the standard comparator by indicating how much more or less it costs
than the starting point (y-axis) and how much more or less effective it is than the starting point (x-axis).
Figure. Cost-effectiveness plane
i. If the new alternative is more effective but at a higher cost, this comparison will fall into quadrant
I, which indicates that the decision maker must decide if the higher effectiveness is worth the higher
cost.
ii. If the new alternative is less effective, but at a lower price (quadrant III), the decision maker must
again make a decision: Is the lower price enough to outweigh the lower effectiveness?
iii. If the new alternative is more effective at a lower cost (quadrant II), then it “dominates” the
standard and is considered cost-effective.
iv. If the new alternative is less effective at a higher cost (quadrant IV), it is “dominated” by
the standard and is not considered cost-effective.
Calculation of CEA
A. Cost-Consequence Analysis (CCA)
Sometimes, for each alternative the costs and various outcomes are listed but no ratios are conducted.
B. Average Cost Effective Ratio (ACER): is the ratio of the cost to benefit of an intervention without
reference to a comparator. It deals with a single intervention and evaluates that intervention. ACER is
calculated by dividing the total cost of the intervention by the total number of health consequences
prevented by the intervention. It is generally described as cost per unit of outcome.
Healthcare Costs
𝐀𝐀𝐀𝐀𝐀𝐀𝐀𝐀 =
Clinical Outcomes
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C. Incremental Cost-Effective Ratio (ICER): compares the difference between the costs and health
consequences of two alternative interventions that compete for the same resources. It is generally
described as the additional cost per additional health consequence.
Cost of drug X − Cost of drug Y
𝐈𝐈𝐈𝐈𝐈𝐈𝐈𝐈 =
Eeffect of drug X − Effect of drug Y
This formula yields the additional costs required to obtain additional effects gained by switching from
drug X to drug Y.
EXAMPLE:
Treating stomach ulcers using three therapy options (drugs A, B, or C) and using two outcome measures,
symptom-free days (SFDs, or how many days, on average, patients did not have gastrointestinal
symptoms during the year) and percent healed.
Drug A Drug B Drug C
Cost $600 per year $210 per year $530 per year
outcomes GI SFDs 130 200 250
% Healed 50 70 80
Conduct cost-effectiveness analysis using CCA, ACER, and ICER?
4. Cost-Benefit Analysis (CBA)

Cost-benefit analysis compares both costs and benefits in monetary units. A CBA helps policy makers
answer two questions: Do the benefits of a program or intervention outweigh the costs? Which program
will provide the greatest benefit?
The 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.
A CBA is regarded as the most comprehensive pharmacoeconomic analysis but also the most difficult
to apply
An advantage of a CBA is that, unlike a CEA, many different outcomes can be compared because the
benefits are measured in monetary units. If conducted correctly, it is a very comprehensive analysis. If
interventions for different disease states are compared (e.g., an asthma clinic compared to a diabetes
clinic), the intervention with the highest benefit to cost ratio would most likely be selected to maximize
resources. This advantage can also be viewed as a disadvantage because it is difficult to attach monetary
value to some types of outcomes (e.g., lives saved), making the analysis complex to conduct.
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Three types of calculations might be conducted to determine if an intervention is cost-beneficial: net

calculations and ratio calculations.
I. Net Calculations
It is the difference between the total costs and total benefits.
Net benefit = total benefits - total costs.  Interventions Net Benefit > 0
are cost-
Net cost = total costs - total benefits. beneficial if: Net Cost < 0
• If B-C = 0, the benefits equal the cost. The benefits realized by the program or treatment
alternative are equivalent to the cost of providing it.
II. Benefit-to-Cost (or Cost-to-Benefit) Ratio Calculations
It can be calculated by summing up the total benefits and dividing by the total costs. The ratio may be
expressed as a benefit-to-cost ratio or a cost-to-benefit ratio. Depending on how the ratio is calculated.
• If B/C ratio = 1, the benefits equal the cost. The benefits realized by the program or treatment
alternative are equivalent to the cost of providing it.
Example: Suppose a decision maker had to choose between two proposals for implementation. Also
assume that the projects are for 1 year, so discounting is not needed.
Proposal A: Cost = $1,000; Benefit = $2,000.
Proposal B: Cost = $5,000; Benefit = $7,500.
Which product are more cost benefit than the other? Answer:
Method Option A Option B Rule
Net benefit $2,000 − $1,000= $1,000 $7,500 − $5,000= $2,500 Net Benefit > 0
Net cost $1,000 − $2,000= −$1,000 $5,000 − $7,500= −$2,500 Net Cost < 0
Benefit/cost ratio $2,000/$1,000= 2.0 $7,500/$5,000 = 1.5 Benefit to cost > 1
Cost/benefit $,000/$2,000= 0.5 $5,000/$7,500= 0.7 Cost to benefit < 1
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5. Cost-Utility Analysis
Cost-utility analysis is used to determine cost in terms of utilities, especially quantity (mortality) and
quality (morbidity) of life. This type of analysis is controversial (disadvantage) because it is difficult to
put a value on health status or on an improvement in health status as perceived by different individuals
or societies. Unlike cost-benefit analysis, cost-utility analysis is used to compare two different drugs or
procedures whose benefits may be different. 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. Cost-utility analysis expresses the value for money in terms of a single
type of health outcome. The ICER in this case is usually expressed as the incremental cost to gain an
extra quality-adjusted life-year (QALY).
This approach incorporates both increases in survival time (extra life-years) and changes in quality of
life (with or without increased survival) into one measure. An increased quality of life is expressed as a
utility value on a scale of 0 (dead) to one (perfect quality of life). An increased duration of life of one
year (without change in quality of life), or an increase in quality of life from 0.5 to 0.7 utility units for
five years, would both result in a gain of one QALY. This allows for easy comparison across different
types of health outcome, but still requires value judgements to be made about increases in the quality of
life (utility) associated with different health outcomes.
For some research questions, utility adjustments may not be necessary. For example, if two
pharmaceutical products have different outcomes based on the number of life-years saved (LYS), but the
quality of each year of life for those on the two treatments are thought to be the very similar (FIGURE
3)
Figure 1 Example illustrating when two

treatment options produce different
outcomes on the basis of the number of
life years saved (LYS), but the quality of
each year of life for those on the two
treatments are thought to be the very
similar (quality adjustment not needed).
However, in many cases—for example, cancer treatment—both the length of life and the quality of life
are different, depending on the therapy selected. Sometimes the treatments that extend life the longest
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are also the most toxic, so a measure that incorporates both length of life and quality of life is needed in
these cases
Figure 4 Example illustrating when both

the length of life and the quality of life
are different depending on the therapy
selected (quality adjustment appropriate).
Many health conditions do not have an impact on patients’ length of life, but only on the quality of their
life, and CUA may be a good choice for comparing treatments for these conditions (Figure 5). Examples
include conditions such as hearing loss, seasonal allergies, and erectile dysfunction.
Figure 5 Example illustrating options that

do not have an impact on patients' length
of life but only on the quality of their life
(quality adjustment appropriate).
An example: to demonstrate the QALY Calculations:
Under Treatment No Treatment

Estimated years of life = 5yrs life Estimated years of = 1 year
Quality of life in relevance to relevance to Quality of life in perfect health = 0.4
Perfect health = 0.8
Cost =9000 Cost =0
QALY under treatment = 5 x 0.8 =4 QALY with no treatment = 1 x 0.4= 0.4
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 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶
𝐶𝐶𝐶𝐶𝐶𝐶
 𝑄𝑄𝑄𝑄𝑄𝑄𝑄𝑄
9000 − 0
𝐶𝐶𝐶𝐶𝐶𝐶 = $2500
4 − 0.4
CUA is more appropriate to treatments having greater adverse effects and those which are life extending
like cancer chemotherapy. It is also effective for programs that bring about a decrease in morbidity rather
than mortality as in case of arthritis.
.
Summary of pharmacoeconomic methods:
Model Type Units Outcomes Comparison
Cost Minimization Costs in $ Assumed to be equal 2+ similar alternatives

Cost Benefit Costs and Can differ by type of 2+ interventions/programs or 1
benefits in $ outcome vs. benchmark
Cost Costs in $, Presumed to differ, 2+ alternatives
Effectiveness/Utility benefits in but must be same
non $ units type of outcome
……………………..The end. GOODLUCK……………………….
13

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University of Tripoli

Faculty of Pharmacy Pharmacy Practice I Prepared by: Eman Dyab, MSc

Types of Pharmacoeconomic Evaluations

(II) Cost-Effectiveness Plane.

Figure. Cost-effectiveness plane

4. Cost-Benefit Analysis (CBA)

Three types of calculations might be conducted to determine if an intervention is cost-beneficial: net

Figure 1 Example illustrating when two

Figure 4 Example illustrating when both

Figure 5 Example illustrating options that

An example: to demonstrate the QALY Calculations:

Under Treatment No Treatment

QALY under treatment = 5 x 0.8 =4 QALY with no treatment = 1 x 0.4= 0.4

Cost Minimization Costs in $ Assumed to be equal 2+ similar alternatives

……………………..The end. GOODLUCK……………………….

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