1. Chapter 23 Pharmacoeconomic Calculations
Ellen S. Campbell, Ph.D.
Associate Professor
Division of Economic, Social & Administrative Pharmacy

2. Outline Case Study Pharmacoeconomics defined PE Analyses
Steps
Perspectives
Alternatives
Examples of 4 types
Sensitivity analysis
Discounting
Pricing Issues

3. Case Study background
Bob is director of pharmacy for a large MCO where he manages all aspects of the health plan’s pharmacy budget.
The health plan has more than 300,000 members
Last year more than $78 million was spent for pharmaceuticals.
This was 20% higher than the previous year

4. Case Study problem a new sulfonylurea has been approved by the FDA.
The product is similar to products on the market and is approved for the treatment of type II diabetes.
Drug representatives have pointed out that it has a more favorable side effect profile than products currently on the market
It is priced 20% higher than the current medications used by the MCO.

5. Question
Does Bob request that the P&T committee add the new drug to the formulary? If so, at what tier?

6. What is …
MCO
P&T committee
Formulary
tier

7. What information would you use to answer the question?
Does Bob request that the P&T committee add the new drug to the formulary?

8. (global economic principle)
Answer
Adopt a new drug or treatment if…
the additional benefit is higher than the additional cost
(global economic principle)

9. Health Outcomes
What are the consequences of a particular treatment?

10. Pharmacoeconomics is a set of methods that evaluate the Economic,
Clinical and
Humanistic Outcomes
(ECHO Model)
of pharmaceutical products and services…

11. Pharmacoeconomics is
to compare the economic resources consumed (inputs) to produce the health and economic consequences of products or services (outcomes).
INPUTS OUTCOMES
Economic Health and Economic
Resources Consequences

12. Four types of Pharmacoeconomic Analyses
Cost-minimization (CMA)
Cost-benefit (CBA)
Cost-effectiveness (CEA)
Cost-utility (CUA)

13. Comparison of PE Methods
Cost
Consequences
Cost Minimization
Dollars
Natural units
(show equivalency)
Cost Effectiveness
Cost Benefit
Cost Utility
QALYs

14. Steps for conducting a PE Analysis
define the problem
identify the perspective and alternative interventions to be compared
identify and measure outcomes of each alternative
identify, measure and value costs of all alternatives
use discounting and sensitivity analysis when appropriate

15. Define the problem and state the objective
What is the most cost effective treatment of type II diabetes?

16. Identify the perspective…
that is, who will be utilizing the information to make what decisions.
This will guide you in choosing the relevant costs and benefits.

17. Different Perspectives
Relevant: Costs
Consequences
Patient
OOP costs,
lost income, transportation
Therapeutic effectiveness,
Adverse events, QOL
MCO
Hospitalization,
Pharmacy, Personnel,
& supplies
Adverse events
Third-Party Payers
Hospitalization, Pharmacy, Nursing home care
None
Society
All possible costs including lost productivity
All possible consequences including QOL, & life years.

18. Identify Alternative Interventions
What are the relevant choices?
Often a head-to-head comparison of the most used (traditional) treatment with the new one.
It’s important to compare with the most likely substitute for a realistic result.
The comparator doesn’t have to be a drug therapy.

19. At least two comparators
New sulfonylurea
Versus
Most commonly used drug

20. Cost and Effectiveness Comparison Grid for Drug 1 vs Drug 2
1 > 2
1 = 2
1 < 2
Analyze
Choose 2
Choose 1
Indifferent

21. Identify and measure outcomes of each intervention (natural units or $)
Typical outcomes include:
cured of illness
improved quality of life
decreased incidence of morbidity
extended life
relief or reduction in symptoms
Adverse events (drug interactions and side-effects)
mortality

22. Identify, Measure and Value costs
Costs include:
direct medical costs like treatment costs,
direct non-medical costs like transportation,
indirect costs like missed work,
intangible costs like pain.
Be sure to include those costs that are relevant to your perspective.

23. Measuring Costs over time
Costs are measured over a relevant time period such as a month or year. The length used depends on the typical span of the illness of interest.
Analysis of acute disease such as the flu would have a short span; while chronic or long-term illness such as depression or heart disease would span years.

24. 1. Cost-Minimization Analysis (CMA)
This type of evaluation compares two or more alternative treatments that are clinically equivalent in terms of outcomes or consequences. Once equivalency is demonstrated, the focus is on choosing the one with the smallest total costs.
Example – generic versus name brand

25. Calculating cost differentials between therapeutic agents
Drug A is administered via 100 mg tablet orally, twice a day, for 30 days. Each 100 mg tablet costs $7.50
Drug B requires three weekly IV administrations with increasing dosages as follows:
(dose 1) 250,000 IU
(dose 2) 500,000 IU
(dose 3) 750,000 IU
Cost of Drug B is $68 per 250,000 IU and administration is $25 per dose

26. Cost differential (or incremental cost) for entire regimen
Total cost of Drug A = 30 days x 2 x $7.50 = $450
Total cost of Drug B = drug cost + adm
Dose 1 = (1 x 68) + 25 = 93
Dose 2 = (2 x 68) + 25 = 161
Dose 3 = (3 x 68) + 25 = 229
= $483
Cost differential is 483 – 450 = $33
Incremental cost of changing from Drug A to Drug B is $33

27. Cost differentials for chronic diseases are calculated on
Per patient per day
Per patient per month (30 days)
Why?

28. Different outcome?
Using Cost Minimization Analysis (CMA) is only appropriate if the outcomes are shown to be equivalent.
If not – must use alternative technique to account for the differenced in outcomes

29. 2. Cost-effectiveness Analysis (CEA)
If you can measure the therapeutic effect in “natural units” (I.e. weight gained, blood cholesterol level reduction) you compare the Cost per gain in therapeutic effect. Choose the smallest.
Cost-Effectiveness Ratio =
Cost ($)
Therapeutic effect (Natural units)

30. Two ratio calculations for CEA
Cost-Effectiveness Ratio =
Cost ($)
Therapeutic effect (Natural units)
Incremental Cost-Effectiveness Ratio =
cost differential ($)
outcome differential (Natural units)

31. Cost-effectiveness Example
Avg.
C/E Ratio
Incremental
Drug A
$50
30 mg/dl
Drug B
$70
40 mg/dl
In this example, effectiveness is mg of glucose lowered. Could also measure effectiveness as cure rate as in the textbook example.

32. Cost-effectiveness Example
Avg.
C/E Ratio
Incremental
Drug A
$50
30 mg/dl
50/30
Drug B
$70
40 mg/dl
70/40
(70-50)/(40-30)
In this example, effectiveness is mg of glucose lowered. Could also measure effectiveness as cure rate as in the textbook example.

33. Cost-effectiveness Example
Avg.
C/E Ratio
Incremental
Drug A
$50
30 mg/dl
$1.67per mg/dl
Drug B
$70
40 mg/dl
$1.75per mg/dl
$2 per additional mg/dl
In this example, effectiveness is mg of glucose lowered. Could also measure effectiveness as cure rate as in the textbook example.

34. 3. Cost-Benefit Analysis (CBA)
When all costs and benefits of alternative actions are expressed in dollars.
There are two ways to express the results:
Calculate the Benefit to Cost ratio for each action
Benefit ($)
Cost ($)
Gives you the value gained per dollar spent (>1)
Or calculate the Net Benefit
= Benefit ($) – Cost ($)
Gives you the net gain (loss) from the action

35. Example of Cost-Benefit Analysis
Four therapies are used to control hyperglycemia.
Per patient Per day A B C D
Cost
5.88
4.96
4.08
3.78
Benefit
53.75
43.85
33.42
Net Benefit
47.87
48.79
39.77
29.64
Benefit/Cost Ratio
9.14
10.84
10.74
8.84

36. 4. Cost-Utility Analysis (CUA)
Similar to Cost-Effectiveness, this type of evaluation measures cost per gain in utility derived from the intervention. Utility is a measure how happy, healthy or satisfied someone is. The scale varies. Common examples are 0 – 1 or 0 – 10 or

37. Quality-Adjusted Life Years
Utility is often combined with a measure of life expectancy to obtain quality-adjusted life years (QALYs).
One healthy QALY = 1.0 is one year in perfect health
Death QALY = 0.0
Example: 3 years of life as disabled (rated at utility 0.5)
= 1.5 QALYs

38. Two ratio calculations for CUA
Cost-Utility Ratio =
Cost ($)
QALYs
Incremental Cost-Utility Ratio =
cost differential ($)
outcome differential (QALYs)

39. Cost-Utility example Surgery vs Surgery plus chemotherapy Treatment
life years
Utility
(0-1)
QALY
CU Ratio
Incremental CU ratio
Surgery
14000 3 .8
2.4
$5833 per QALY
Surgery + chemo
27000 5 .6
3.0
$9000 per QALY
$21,667 per QALY

40. Cost-Utility
Pro: This is the only measure that includes patient quality information.
Con: There is a lack of standardization in utility measurement ( I.e. subjective).

41. Sensitivity Analysis
When estimating costs and outcomes, you typically have a range of possible values. Sensitivity analysis requires that the results be recalculated at the different values to see if the conclusions change.

42. Sensitivity analysis of Cost-Utility example
Surgery vs Surgery plus chemotherapy
Treatment
Cost
life years
Utility
QALY
range
CU Ratio
Incremental CU ratio
Surgery
14000
2 - 4 .8
1.6
3.2
$8,750
$4,375
Surgery + chemo
27000
4 - 6 .6
2.4
3.6
$11,250
$7,500
no gain - $6,500 per QALY

43. Discounting
If the analysis spans more than a year, then the dollar values must be adjusted to a common time.
Discounting adjusts future costs or benefits using an expected interest or discount rate.
Present Value = Future value
(1+r)n
where r = discount rate ( is typical)
and n = the number of years in the future.

44. Discounting example Year Costs PV this year 1,500 1 1,429 2 1,361 3
1,296
total
$6,000
$5,586
You wish to implement a diabetes DSM program which will cost you $1500 per year. The benefits from this program won’t be evident for 2 years, so you want to evaluate it after 4 years.
Use r = .05 (i.e. 5%)

45. Pharmaceutical Pricing
When trying to assess cost you need to accurately reflect depending on the perspective.
Two issues impact drug price the pharmacy must pay
Patent
Available substitutes

46. Pricing concepts
Acquisition cost (AAC) for pharmacy is the trade price less discounts
Quantity discounts
Promotional discounts
Advertising or display allowances
Average Wholesale price (AWP) is often used by third-party payers (insurers)

47. Pricing concepts
Series discounts occur when you have more than one discount applied to a product. You cannot simply add the discounts together to get the single discount equivalent. They are applied to an already discounted amount.
To get a single discount equivalent, subtract each rate from 100% and multiply the percents. Subtract the result from 100% to get the single discount rate.

48. Series discount example
Your business gets a standard trade discount of 25% from list price. Your order gets a 10% quantity discount. Finally, you get a 3% cash discount.
.75 x .90 x .97 = .655
100% – 65.5% = 34.5% discount rate

49. Markup
Percent over cost that is charged for a product (source of profit).
Example if your standard markup is 75%, then how much will you charge for a bottle of aspirin that costs you $1?
What is your profit on the sale of that aspirin?

50. Pricing for prescriptions & pharmaceutical services
Generally a markup is added to cost of ingredients to get price charged.
A dispensing or professional fee can also be added to obtain a final price.
This fee is typically an average value of pharmacist services (wage x time spent) provided during a transaction. It should be independent of the cost of ingredients.

51. Summary of Pharmacoeconomic issues
Perspective
Type of analysis
Appropriate Comparators?
Relevant costs and consequences
Validated instruments
Time period, discounting
Sensitivity analysis
Generalizability