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SECTION III
PHARMACOECONOMICS
ECONOMIC EVALUATIONS OF DRUG THERAPY
IN DISEASE MANAGEMENT
INTRODUCTION
PharmacoEconomics is the benchmark for practical authoritative reviews of
the application of health economics and pharmacoeconomics to optimum
drug therapy in disease management.
AIM AND SCOPE
PharmacoEconomics promotes the continuing development and study of
health economics, pharmacoeconomics and quality-of-life assessment as
applied to optimum drug therapy and health outcomes, providing a
practical economic background to informed clinical prescribing decisions
and allocation of healthcare resources.
The Journal includes:
 Leading/current opinion articles providing an overview of
contentious or emerging issues
 Definitive reviews of topics relating to the pharmacoeconomic
and quality-of-life assessment of healthcare interventions and
their outcomes
 Adis Drug Evaluations reviewing the pharmacoeconomic
properties and place in therapy of both newer and established
drugs
 Original research articles will also be considered for publication.
PERSPECTIVE
Unique to the methodology of pharmacoeconomics is consideration of the
perspective of the research question. It is critical to determine the perspective
from which the pharmacoeconomics analysis will be conducted, because the
chosen perspective will govern the data or outcomes collection methodology.
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Pharmacoeconomic outcomes may be measured from three perspectives:
societal, institutional, or individual. The perspective chosen is often determined
by the nature of the query. For example, it may be desirable to determine the
cost of a health care intervention to society as a result of an inquiry into a
potential reduction in gross national product. Alternatively, managed care
institutions need cost evaluations of health care interventions as a method of
formulary development. Finally, individuals may want to know the cost of a
health care intervention to determine the change in their quality of life; the cost
of medications and other health care interventions may mean not having
enough left over for other activities. Just as each of these perspectives asks a
different question, each answer requires the evaluation of a different set of
costs.
COST
There are several perspectives for pharmacoeconomics, and there are many
forms of cost. Although commonly thought of as synonymous, 'cost' is not
interchangeable with 'charge.' The total value of all of the resources that are
consumed in the production of a good or service is its cost. Charge is the cost
of goods or services plus profit. Pharmacoeconomics defines cost as expenses
incurred in the provision of health care products and services. More broadly,
the sacrifice of alternative benefits is made when a given resource is consumed
(or health care intervention is used in a given clinical situation). Examples of
these include fixed cost, variable cost, direct medical cost, direct non-medical
cost, indirect cost, average cost, marginal cost, and opportunity cost.
FIXED COST
Pharmacoeconomics differentiates between a fixed and a variable cost. A fixed
cost is a cost that does not vary with quantity or volume of output provided in
the short run (typically, within 1 year). These costs usually vary with time, but
not with quantity or volume of service provided, and may include rent,
equipment lease payments, and some wages and salaries. An applied example
would be when the costs of lighting, heating, and insurance are included in a
pharmacoeconomic analysis (e.g., cost-benefit analysis [CBA]) of an outpatient
clinic. The cost of maintaining the physical structure of an outpatient clinic is
fixed, regardless of the number of patients seen there.
VARIABLE COST
Pharmacoeconomics recognizes variable costs as those costs that vary with
changes in output volume. Examples include drugs, devices, supplies, and
procedures provided under a fee-for-service reimbursement system. Consider a
scenario in which we regard weekly therapy received by patients as the output.
The pharmaceutical expenditures will rise, as more patients are seen in the
weekly outpatient clinic, that is, as there is more output. Therefore, logically, as
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fewer patients are seen in the weekly outpatient clinic, there is a synchronous
reduction in output and a concurrent abatement in clinic drug expenditures.
DIRECT MEDICAL COST
Direct medical costs are fixed and variable costs associated directly with a
medical condition or health care intervention. These include the costs of
services and products used in the care of the patient, and may include
expenditures for: hospital stays, physician and other health professional visits
or encounters, emergency department visits, home health care visits, dental
visits, prescribed medicines, and medical equipment and supplies. This
definition, as applied to pharmaceutical products and services, encompasses
drug acquisition, storage, administration, and monitoring costs. For example,
the direct cost of a weekly outpatient IV therapy includes the cost of the drug,
the cost of the syringe and needle, and the cost of the lights and insurance to
run the outpatient clinic. As a general rule, direct costs are those that can be
monetarily reimbursed.
DIRECT NON-MEDICAL COST
Direct non-medical cost is the cost of providing to the patient all non-medical
assistance, food, lodging, and transportation because of the illness or health
care intervention. For example, the commercial or volunteer air transportation
cost for a child to receive specialized care at a major medical institution would
fall under this category. In this example, the flight to the medical institution is
directly related to the presence of the medical condition, but specialized care is
not received while in flight. The flight is for the purpose of transportation.
INDIRECT COST
Indirect costs are the costs of lost or reduced productivity resulting from
morbidity or premature mortality due to a medical condition or treatment, as
well as informal care giving costs. Morbidity costs include goods and services
not produced by the patient because of illness. Mortality costs include goods or
services the person could have produced had the illness not been incurred and
the person not died prematurely. The third aspect of indirect cost relates to lost
productivity incurred by an employee (and his/her employer) who leaves work
to provide care for the patient, usually a family member. Indirect costs are also
known as productivity costs. It is the cost of the opportunity to participate in an
alternative activity that has been lost to the passage of time. An example of an
indirect cost can be seen in the time lost receiving therapy that could have been
spent at work. As a general rule, indirect costs may not be monetarily
reimbursed.
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AVERAGE COST
Average costs are the total cost of health care intervention provided, divided by
the total quantity of the intervention (i.e., product or service provided).
Consider the following as an example of average costs. A unit of output may be
defined as a patient treated by the weekly outpatient IV clinic. This particular
clinic sees three patients a week, or produces three outputs a week. However,
the total cost of health care intervention provided to each patient varies; patient
A=$212; patient B=$147; patient C=$145. Therefore, it costs $168 per unit of
output to provide this health care intervention ($212 + $145 +
$147=$504/3=$168).
MARGINAL COST
Marginal cost is the change in total cost of producing one more, or one less,
unit of output. (In the preceding example, the marginal cost of treating one
more patient in the clinic is $168.) Marginal costs may be viewed as the
average variable cost. However, the production of one additional unit of
outcome may result in escalation of total cost. An example of this may be seen
in the production of pharmaceutical products. If we define a unit of outcome as
a dose of medicine, then the cost of the production of one more dose of the
medication, or one more unit of outcome, remains stable as long as the raw
materials used to produce the medication are abundant. However, once the raw
materials are depleted, the marginal cost, specifically the cost to produce one
more dose or unit of output of the medication, increases. This increased
marginal cost may be due to the costs associated with the acquisition of other
sources of material, other suppliers, and/or reformulation.
OPPORTUNITY COST
Opportunity cost is defined as the amount that a resource could earn in its
highest-valued alternative use; it is the value of the alternative that must be
forgone when something else is produced. From an institutional perspective, an
example of opportunity cost may be demonstrated in the scheduling of a
hospital operating room. Operating room time may be consumed by a knee
replacement surgery or a coronary artery bypass graft (CABG) surgery, but not
by both simultaneously. The alternative chosen will depend on the value placed
on each option. In a competitive marketplace, the price of a good or service -set through the interaction of supply and demand -- is its opportunity cost. In
the previous example, if the CABG surgery was scheduled in preference to the
knee surgery, the opportunity cost, or value of the forgone benefits, to the
institution would be the benefits generated from the scheduled knee
replacement surgery. Institutions often rely on pharmacoeconomic methods to
determine the value of alternative uses of health care resources, or opportunity
costs.
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DISCOUNTING
Discounting is defined, as a procedure used in economic analysis (e.g., CEA) to
express as "present values" those costs and benefits that will occur in future
years. This procedure is based on two premises: individuals prefer to receive
benefits today rather than in the future; and resources invested today in
alternative programs could earn a return over time. Consideration of the
lengthy timeline involved in the accrual of benefits derived from many health
care interventions and time preference for money supports the use of
discounting in Pharmacoeconomics.
Pharmacoeconomics uses discounting to account for the time preference
associated with money in its methodology. Due to the benefits and returns that
can be gained in the interim, individuals prefer to receive dollars sooner rather
than later. For the same reason, we prefer to pay out dollars at some later date
rather than today. In other words, a dollar today is worth more than a dollar
tomorrow.
Future costs must be discounted to reflect their current value, because current
and future dollars are not valued equally. When a program extends over a
period of several years, the present value of the program may be calculated by
multiplying the future costs by a discount factor. The discount factor depends
on two variables: the number of years into the future that the expense is
incurred (n) and the discount rate (r). Discounting can be expressed by the
formula PV=FC x DF (n, r).
Determining the proper rate for discounting future benefits and costs is a key
issue in pharmacoeconomic analysis. There is no set rule as to the best discount
rate to use in economic analysis, but a rate of 5% is frequently used. It is
recommended that the selection of a rate be based on similar projects, followed
by a sensitivity analysis to determine the effect of a range of discount rates.
Recommendations for the selection of the range of discount rates are
government-recommended rates (5%, 7%, 10%) and, as mentioned above, rates
used in previous studies.
The discounting rate is not the inflation rate; these are different concepts.
Inflation is the change in price. Discounting accounts for time preference with
respect to monetary value. Discounting is appropriate whenever a program
extends over multiple years -- even if the inflation rate is zero. For example, the
value of $5.00 of health care intervention 1 year from now when discounted for
1 year at a rate of 5% is worth $4.75 regardless of what the rate of inflation is.
COST-MINIMIZATION ANALYSIS
Cost-minimization analysis (CMA) is defined as a type of cost comparison
study involving two or more treatments considered to be of comparable
effectiveness in terms of clinical and quality-of-life outcomes, with economic
cost being the only differentiating factor. This is the simplest of all methods of
economic evaluation, although its definition shrouds the potential for error. To
the extent that the assumption of equal effect is flawed, the analysis makes an
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incorrect cost comparison of two different things. For example, a comparison
of two angiotensin-converting enzyme (ACE) inhibitors that have the same
mechanism of action indicates that Drug A produces significant side effects,
while Drug B produces minimal side effects. Careful and thorough analysis of
all corollaries (both clinical and economic) of the two interventions must be
conducted prior to the application of a CMA. The identification of any
variation in outcome eliminates CMA as a methodological choice.
CMA uses monetary units to measure its outcomes. When two or more
interventions result in identical outcomes, a CMA is the appropriate tool for
deriving the cost associated with each outcome. Because the outcomes of two
different drugs are rarely, if ever, equal, this type of study is applicable and
most useful for evaluating different dosage forms of the same drug, or for
evaluating generically equivalent drugs for which outcomes have been
demonstrated to be equivalent. A determination of preference is then made
between the two or more alternatives based on cost minimization.
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