This document defines pharmacoeconomics and outlines its key principles and methods. Pharmacoeconomics is defined as the description and analysis of the costs of drug therapy to health systems and society. It considers the economic relationships of drug research, production, distribution, and use. Methods of pharmacoeconomics include cost-of-illness analysis, cost-benefit analysis, cost-effectiveness analysis, and cost-utility analysis. These methods are used to evaluate healthcare programs and therapies to determine the optimal use of resources. Pharmacoeconomics can help inform decisions around drug formularies, new drug approvals, and pharmaceutical policies.

1. PHARMACOECONOMICS
By
Ijeh Cyril PharmD

2. DEFINITION
 Economics quite simply is the study of how the forces of supply and demand allocate
scarce resources.
 Pharmacoeconomics as a term was first publicly used in 1986 at a meeting of pharmacist in
Toronto, Canada by Ray Townsend.
 Pharmacoeconomics (PE) has been defined as the description and the analysis of the cost
of drug therapy to health care systems and society1.
 It is the process of identifying, measuring, and comparing the costs, risks/consequences,
and benefits of programs, service, or therapies and determining which alternative produces
the best health outcome for the resource invested.
 It describes the economic relationship involving drug research, drug production
distribution, storage, pricing and use by the people2

3. Definiton contd
 PE is distinctly related to Outcome Research, and Pharmaceutical care.
Outcomes research is defined more broadly as studies that attempt to
identify measures and evaluate the results of health care services in general1,3
Pharmaceutical care has been defined as the responsible provision of drug
therapy for the purpose of achieving definite outcomes.
Pharmacoeconomics is a division of outcomes research that can be used to
quantify the value of pharmaceutical care products and services.

4. Cost
 the value of the resources consumed by a program or drug therapy of interest
 Assessing costs and consequences-the value of pharmaceutical product or service
depends heavily on the perspective of the evaluation.
 To evaluate the economics of drug therapy, cost is categorized into (Fig.1): i.
Direct cost: this may be medical or non-medical
ii. Indirect cost: his is the cost incurred by the patient, family, friends or society
iii. Intangible cost: These are costs related with the patient’s pain and
suffering; worry and other distress of the family members of a patient; effect on
quality of life and health perceptions

5. Cost of Drug
Direct cost
Medical cost
Eg laboratory cost,
medications, hospital
charges
Non-medical cost
Eg food, transportation
Indirect cost
Eg morbidity, mortality
Intangible cost
Eg inconveniences,
sufferings
Fig 1 Cost of Drug4

6. Perspective of PE
 The ‘point if view’ considered in economic analyses influences the
outcomes and costs considered to be most relevant:
 Patient perspective eg drug cost, insurance co-payments
 Provider perspective eg laboratory test, hospitalization
 Payer perspective eg insurance company.
 Social perspective eg morbidity, mortality.

7. Applications of PE
 Essential Drug List formulation. Essential medicines are those that
satisfy the priority health care needs of the population. They are
selected with due regard to disease prevalence, evidence of efficacy,
safety and comparative cost-effectiveness.
 Consideration of new drugs. Here evaluation of their relative efficacy,
safety, quality, price and availability are carried out (W.H.O. 1999).
 A decision-making criteria for Pharmacy and Therapeutics (P&T)
committee in hospitals. Table 1.

8. Applications of PE contd
Table 1. Relative importance of criteria for
managed care P&T committee decision-
making7.

9. Methods of PE
Broadly classified into two categories:
Economic (Cost consequence, Cost benefit, Cost effectiveness, Cost
minimization, Cost utility) and;
Humanistic (Quality of life, Patient preferences, Patient satisfaction)
evaluation techniques)5
a. Cost of Illness (COI): this identifies and estimates the overall cost of
particular disease for a defined population. COI provides an estimation of
the financial burden of a disease. Thus the value of prevention and
treatment strategies can be measured against this illness cost.

10. Methods of PE contd
b. Cost minimization analysis (CMA): involves the determination of the least costly
alternative when comparing two or more treatment alternatives. The alternatives
must have an assumed or demonstrated equivalency in safety and efficacy (i.e., the
two alternatives must be therapeutically equivalent).
c. Cost benefit analysis (CBA): the benefit is measured as the associated economic benefit
of an intervention (e.g. monetary value of returning a worker to employment earlier). It
aims to express both costs and benefits in the same monetary terms.
A clinical decision maker would choose the program or treatment alternative with the
highest net benefit or the greatest benefit to cost (B/C) ratio6. Guidelines for the
interpretation of this ratio are indicated
If B/C ratio> 1, the program or treatment is of value.
If B/C ratio = 1, the benefits equal the cost.
If B/C ratio <1, the program or treatment is not economically beneficial. The cost of
providing the program or treatment alternative outweighs the benefits realized by it.

11. Methods of PE contd
d Cost Effective Analysis (CEA): involves programs or treatment alternatives with different safety
and efficacy profiles. A cost is measured in monetary units, and outcomes are measured in
terms of obtaining a specific therapeutic outcome (such as drop in BP, reduction in body
temperature). For instance, in severe reflux oesophagitis, we could consider the costs per
patient relieved of symptoms using a proton pump inhibitor compared to those using H2
blockers.
e Cost Utility Analysis (CUA): differ from CEA by expressing therapeutic outcome in patient-
weighted utilities rather than in physical units. Often the utility measure used is a quality-
adjusted life year (QALY) gained.
In calculating QALYs, one year of life in perfect health is given a score of 1.0 QALY. This
allows for comparison between mortality (score 0) and morbidity. The summated rating scale
whereby patients score their state of health is commonly employed.
Results of CUA are also expressed in a ratio, a cost –utility ratio (C/U ratio). Most often, this
ratio is translated as the cost per QALY gained. The preferred treatment alternative is that
with the lowest cost per QALY (or other health status utility).

12. Methods of PE contd
Methodology Cost measurement unit Outcome measurement unit
CMA Monetary Assumed to be
equivalent/comparable groups
CBA Monetary Monetary
CEA Monetary Natural units (eg CD4+ count)
CUA Monetary QALYs or other units
Table 1. Summary of Methods of Pharmacoeconomics8,9

13. How to Conduct a PE Evaluation
 Establish a perspective
 Describe all the treatment or intervention options under consideration.
 For each alternative, specify the possible outcomes and the probability of their
occurrence
 Specify and monitor the health-care resource, and non-medical resource
consumed in each alternative.
 Assign monetary values to each resource consumed.
 Specify and monitor nonmedical resources consumed by each alternative.
 Identify the appropriate pharmacoeconomic method to employ
 Specify the unit of outcome measurement.
 Specify other noneconomic attributes of the alternatives if appropriate.
 Analyse the data
 Develop a policy or an intervention.

14. Conclusion
Pharmacoeconomics evaluation has become an important area of interest to find the
optimal therapy at the lowest price as healthcare resources are not easily accessible
and affordable to many patients.
In a developing country like Nigeria, PE can help the middle and low class in society to
obtain adequate health care.
Applied PE has been the “missing link” in pharmacy. By understanding the principles,
methods, and application of pharmacoeconomics, pharmacists will be prepared to
make better, more-informed decisions regarding the use of pharmaceutical products
and services, that is, decisions that ultimately represent the best interests of the
patient, the health care system, and society.