CHAPTER

PHARMACOECONOMICS IN
HEALTHCARE

1 2
33
Mahendra Rai1 and Richa Goyal2
Tata Consultancy Services, Mumbai, Maharashtra, India QuintilesIMS, Mumbai, Maharashtra, India

33.1 INTRODUCTION
Pharmacoeconomics can be considered as a branch of health economics which identifies, measures,
and compares the costs and consequences of pharmaceutical products and services. It describes the
economic relationship which combines the drug research, its production and distribution, storage,
pricing, and further use by the people. Pharmacoeconomics can be classified as the field of study
that evaluates the behavior or welfare of individuals, firms, and markets for the relevance of pharma-
ceutical products, services, and programs. Pharmacoeconomics can be summarized is a collection of
descriptive and analytic techniques that evaluate pharmaceutical interventions, spanning from indi-
vidual patients to the healthcare system as a whole, which can aid the policy makers and the health-
care providers in evaluating the affordability of and access to rational drug usage [1]. The
pharmacoeconomic techniques include cost-minimization, cost-effectiveness, cost-utility, cost-
benefit, cost-of-illness, cost-consequence, or other economic analytic techniques helpful in providing
information to healthcare decision makers. It has been observed that cost-effectiveness evaluations
of pharmaceutical options are becoming mandatory for attaining adequate reimbursement and pay-
ment for services. Further, pharmacoeconomic methods help in verifying the costs and benefits of
various therapies and pharmaceutical services which may help in establishing significances for those
options and help in appropriate resource allocation in ever-changing healthcare landscapes.

33.2 BASICS OF PHARMACOECONOMICS

33.2.1 PERSPECTIVES
Some key factors are of pivotal consideration in pharmacoeconomics, and one of those is the phar-
macoeconomic perspective. Pharmacoeconomic perspectives take into consideration who pays the
costs and who receives the benefits. Further, the values of saving money for society may be viewed
differently by private third‑party payers, administrators, health providers, governmental agencies, or
even the individual patient (Fig. 33.1).

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© 2018 Elsevier Inc. All rights reserved. 465
466 CHAPTER 33 PHARMACOECONOMICS IN HEALTHCARE

FIGURE 33.1
Various costs in Pharmacoeconomic analysis.

33.2.2 COST
While considering costs, a distinction must be made between financial and economic concepts.
Financial costs relate to monetary payments associated with the price of a good or service traded in
the marketplace. Economic costs relate to the wider concept of resource consumption, irrespective
of whether such resources are traded in the marketplace. In pharmacoeconomics, costs can be
classified as direct, indirect, and intangible costs [2] (Fig. 33.1).

33.3 TYPES OF PHARMACOECONOMIC ANALYSIS

The cost of the drugs is important as it plays a substantial part of the total cost of healthcare—
typically 10% 15% in developed countries and up to 30% 40% in some developing countries.
However, drug costs are generally inferred in the context of the overall (net) costs to the health sys-
tem. 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
• Number of patients requiring hospitalization or in the length of stay in hospital
• Number of doctor visits required
• Administration and laboratory costs compared with those incurred by using another drug to treat
the same condition
Assessing the true cost to a health system of using a specific drug will therefore require the cost
of acquisition of the drug to be adjusted against cost savings resulting from the use of the drug and
the extra health benefits which may occur. However, costs may arise from adverse drug reactions
both in the short-term and, particularly, the long-term. Assessing the value for money of using a
drug requires the extra health benefits achieved to be weighed against the extra net cost. This
 33.3 TYPES OF PHARMACOECONOMIC ANALYSIS 467

comparison is usually expressed as an incremental cost-effectiveness ratio (ICER), which is the net
incremental cost (costs minus cost offsets) of gaining an incremental health benefit over another
therapy. Further, concerns about the cost of medical care in general, and pharmaceuticals in particu-
lar, are currently being expressed by all health systems. There is a focus on providing quality care
within limited financial resources. Decision-makers are increasingly dependent on clinical eco-
nomic data to guide policy formulation and implementation. Some of the concepts used in making
such decisions include: cost-minimization, cost-effectiveness, cost-benefit, and cost-utility.
Using pharmacoeconomics and disease management concepts, health providers can produce
more cost-effective outcomes in a number of ways. For example:
• Decrease drug drug and drug lab interactions
• Increase the percentage of patients in therapeutic control
• Reduce the overall costs of the treatment by utilizing more efficient modes of therapy
• Reduce the unnecessary use of emergency rooms and medical facilities
• Reduce the rate of hospitalization attributable to or affected by the improper use of drugs
• Contribute to better use of health manpower by utilizing automation, telemedicine, and
technicians
• Decrease the incidence and intensity of iatrogenic disease, such as adverse drug reactions

33.3.1 COST MINIMIZATION ANALYSIS

Cost minimization analysis (CMA) comprises for the least costly alternatives when the outcomes of
two or more therapies are virtually identical. CMA involves calculating drug costs to analyze the
least costly drug or therapeutic modality. It also reflects the cost of preparing and administering a
dose. This method of cost evaluation is the one used most often in evaluating the cost of a specific
drug. This method can only be used to compare two products that have been shown to be equiva-
lent in dose and therapeutic effect. Therefore, this method is most useful for comparing generic and
therapeutic equivalents drugs. In many cases, there is no reliable equivalence between two products
and if therapeutic equivalence cannot be demonstrated, then cost-minimization analysis is inappro-
priate. Many sources of clinical evidence can be used to support economic analyses; however, the
“gold standard” is normally considered to be the randomized controlled trial (RCT), which holds
everything constant with the exception of the drug being evaluated. However, as the results of clini-
cal trials cannot be known in advance, it is impossible to plan to undertake a CMA alongside an
RCT because it is not certain that the health outcomes being compared will be equivalent [3].
Therefore, no prospective economic evaluation starts out as a CMA; only when the health outcomes
generated are empirically demonstrated to be “identical or similar” will the CMA be adopted as an
appropriate methodology by the health economist.
The CMA is frequently portrayed as being the “poor relation” among health economic method-
ologies, with its apparent simplicity making it unworthy of being considered alongside more theo-
retically rigorous health economic methodologies. However, it is important that health economists
recognize and acknowledge that the theoretical underpinnings of CMA are just as rigorous as those
underpinning other methods of economic evaluation.
468 CHAPTER 33 PHARMACOECONOMICS IN HEALTHCARE

33.3.2 COST EFFECTIVENESS ANALYSIS

Cost effectiveness analysis (CEA) is used when two or more therapeutic approaches have differen-
tial effectiveness. The numerator states the costs of all direct medical utilization for the treatment
of the condition and the indirect costs (work impact) and the denominator states the patient-level
unit of benefit measured in temporal units (life-years saved or healthy days). Further, the incremen-
tal cost-effectiveness analyses assess the difference between the two therapies.
Cost effectiveness ratio 5 Cost=Outcome
Cost-effectiveness analysis (CEA) involves a broader look at drug costs. Cost is measured in
monetary terms and effectiveness is measured independently and may be measured in terms of a
clinical outcome for, e.g., number of lives saved or complications prevented or diseases cured [4].
CEA 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. CEA provides a
framework to compare two or more decision options by examining the ratio of the differences in
costs and the differences in health effectiveness between options. The overall goal of CEA is to
provide a single measure, the ICER, which relates the amount of benefit derived by making an
alternative treatment choice to the differential cost of that option. When two options are being com-
pared, the ICER is calculated by the formula [5]:
Cost (treatment 2) 2 Cost (treatment 1)/Effectiveness (treatment 2) 2 Effectiveness (treatment 1)
In medical or pharmacoeconomic cost-effectiveness analysis, health resource costs (the numera-
tor) are in monetary terms, representing the difference in costs between choosing treatment 1 or
treatment 2. In cost-effectiveness analysis, the differential benefits of the various options (the
denominator) are non-monetary and represent the change in health effectiveness values implied by
choosing treatment 1 over treatment 2. Typically, these health outcomes are measured as lives
saved, life years gained, illness events avoided, or a variety of other clinical or health outcomes.
Unlike CEA, cost-benefit analysis values both the costs and benefits of interventions in monetary
terms.
CEA compares medical intervention strategies through the calculation of the ICER, a measure
of the cost of changes in health outcomes. These analyses can be performed on clinical trial data
when information on both costs and effectiveness is available or, more commonly, through the use
of decision analysis models to synthesize data from many sources. Interpretation of CEA results
can be challenging due to the variety of health outcomes that can be used as the effectiveness term
in these analyses and to the absence of a definitive criterion for “cost-effective.”

33.3.2.1 HOW IS ICER USED?

Most countries do not use $/QALY for policy making. Some countries do use this measure as an
aid in decisions, but the threshold varies:
• Relatively uniform ICER across disease
• ICER varies by disease
• Implementation varies by country
 33.3 TYPES OF PHARMACOECONOMIC ANALYSIS 469

Threshold of ICER:
• USA: US $50,000/QALY
• Canada: CAN $20,000 to CAN $100,000/QALY
• Australia: AU $42,000 to AU $76,000/LYG
• NICE: d20,000 to d30,000/QALY
Plane depicting ICER is described in Fig. 33.2.

33.3.3 COST UTILITY ANALYSIS

Cost utility analysis (CUA) is an economic analysis in which the incremental cost of a program
from a particular point of view is compared to the incremental health improvement expressed in
the unit of quality adjusted life years (QALYs) [6]. CUA is used to determine cost in terms of utili-
ties, to say in quantity and quality of life. Differing from cost-benefit analysis, cost-utility analysis
is used to compare two different drugs or procedures whose benefits may be different. CUA
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 QALY. This approach incorporates both
increases in survival time and changes in quality of life into one measure. An increased quality of
life (QoL) is expressed as a utility value on a scale of 0 (dead) to one (perfect quality of life). The
use of incremental cost-utility ratios enables the cost of achieving a health benefit by treatment
with a drug to be assessed against similar ratios calculated for other health interventions

FIGURE 33.2
Plane depicting ICER.
470 CHAPTER 33 PHARMACOECONOMICS IN HEALTHCARE

(e.g., surgery or screening by mammography). It therefore provides a broader context in which to

make judgments about the value for money of using a particular drug.
CUA is a special case of CEA, where the numerator of the ICER is a measure of cost and the
denominator is measured typically using a metric called the QALY. A QALY accounts for both
survival and QoL benefits associated with the use of a healthcare technology. The QoL component
of the QALY is measured using a metric known as a health utility; hence, the term cost-utility anal-
ysis is used to describe this form of CEA. Given that the QALY can be used to measure the sur-
vival and QoL benefits of a healthcare technology, the QALY can serve as a common metric from
which to compare the benefits of very different healthcare technologies.

33.3.4 COST BENEFIT ANALYSIS (CBA)

Cost benefit analysis (CBA) is an economic analysis in which both the costs and consequences are
expressed in monetary terms. The numerator states the monetary benefit gained from the treatment
and the denominator defines the monetary investment for the treatment. CBA comes to play so as
to value both incremental costs and outcomes in monetary terms and therefore allowing a direct
calculation of the net monetary cost of achieving a health outcome. A gain in life-years may be
regarded as the cost of the productive value to society of that life-year. The methods for analyzing
gains in quality of life include techniques such as willingness-to-pay, where the amount that indivi-
duals would be willing to pay for a quality-of-life benefit is assessed (Table 33.1).

33.4 IMPACT OF PHARMACOECONOMICS ON HEALTHCARE

Pharmacoeconomics began as an applied field. It was an urgent practical response to a number of
new products mostly pharmaceuticals reaching the market at an unprecedented rate just before the

Table 33.1 Summary of Various Types of Pharmacoeconomic Analyses

Cost Minimization Cost Effectiveness Analysis Cost Utility Analysis Cost Benefit Analysis
Analysis (CMA) (CEA) (CUA) (CBA)
Compares the costs of • Most common analysis used • A type of CEA • Not often used in
two or more alternatives to decide between different • Can compare modern health
that produce equivalent treatments for the same treatments for economics
health outcomes condition different disorders, • Both costs and
No value is given to • Measures cost per unit of as the outcome consequences are
benefits; only costs, effect measure is the same measured in monetary
measured in monetary • Costs measured in monetary • Costs measured in units
units, are compared units, benefits measured as monetary units, • Can use willingness-
outcome measures or in benefits measured as to-pay to value
natural units (e.g., life-years “utilities” benefits
gained, symptom-free days) • Best known utility • Any treatment with
measure is the benefits greater than
QALY costs is considered
“worthwhile”
 33.5 GOING FORWARD 471

turn of the century, and to the growing perception that healthcare budgets were being strained as a
consequence of pharmaceuticals expenditures outpacing those in other healthcare sectors.
Manufacturers were suddenly facing requests from payers to justify the price of their products, and
they looked up to clinical experts, decision analysts, and economists for help in providing answers.
Initially, most of these justifications were not guided by theory. They mainly involved documenta-
tion of the clinical effects—often in broader, more patient-oriented terms—and some attempt at
quantifying the expected costs.
Pharmacoeconomics can certainly help in decision making when evaluating the affordability of
and access to the right medication to the right patient at the right time, comparing two drugs in the
same therapeutic class or drugs with similar mechanism of action, and in establishing accountability
that the claims by a manufacturer regarding a drug are justified. Proper application of pharmacoe-
conomics will allow the pharmacy practitioners and administrators to make better and more
informed decisions regarding products and services they provide. Pharmacotherapy decisions tradi-
tionally depended solely on clinical outcomes like safety and efficacy, but pharmacoeconomics tea-
ches us that there are three basic outcomes including clinical, economic, and humanistic, that
should be considered in drug therapy. It is accepted by all that appropriate drug selection decisions
could not be made today based on acquisition costs only. Hence, applied pharmacoeconomics can
help in decision making, in assessing the affordability of medicines to the patients, access to the
medicines when needed, and comparing various products for treatment of a disease. It will provide
evidence contraindicating the promotion of certain types of high-cost medicines and services.
One theory suggests that the role of healthcare systems is to maximize collective health across
society within a fixed budget and that the worth of any new intervention can be appraised by esti-
mating the amount of additional cost that is required to produce an additional unit of health [7].
Furthermore, the practitioners proposed that health should be measured in QALYs which is a unit
that conflates life expectancy with the expected quality of that life relative to some undefined “per-
fect” health. However, the concept did not have any empirical basis. It was observed that the actual
decision makers were not seeking to maximize aggregate health—they were trying to deal with ill-
ness and its consequences. This led to requirement of a cost-effectiveness threshold. Thresholds
that were and continue to be put forward have been arbitrary, inconstant, and out of line with
exploratory research on society’s evaluation of health outcomes.

33.5 GOING FORWARD

There are some areas which require more evolution in the field of pharmacoeconomics so as to
deal with the actual problems occurring in decisions, including resource allocation. This might
require estimating the total additional costs an intervention will accrue in the population of patients
who will be affected but not the per-patient costs. The analyses will place much more emphasis on
the near term, which is the time period of most relevance to actual decisions. This will also have to
consider how quickly and which patients take up the intervention. The analyses will call for using
real cost offsets that can be expected by the healthcare system, rather than hypothetical ones that
might occur under ideal circumstances.
472 CHAPTER 33 PHARMACOECONOMICS IN HEALTHCARE

The expected advantages can be with the intervention for patients using it with realistic esti-
mates of the uptake estimated based on real data. Also, it will be important to compare effect pro-
file and cost impact with those of the other interventions available for the condition at issue. In
most instances, this will mean that not only the new technologies are evaluated, but also the full
array of available interventions. The analysis will need to take up the question of what existing
interventions would need to be given up to cover the new one, or what level of budget increases
will be required if nothing is removed. Most important, new interventions will need to fit into the
relevant practice guidelines, and what effect the new intervention will have on the guideline. There
will be several consequences of the maturation of pharmacoeconomics, not only methodological
developments, but also effects on other research areas such as efficacy clinical trials, and even on
the structure of pharmaceutical companies.

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