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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. 23 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 24 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. 25 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. 26 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 27 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. 28