Chapter 23Pharmacoeconomic Calculations

Ellen S. Campbell, Ph.D.Associate ProfessorDivision of Economic, Social & Administrative Pharmacy

OutlineCase StudyPharmacoeconomics definedPE Analyses Steps Perspectives Alternatives Examples of 4 types Sensitivity analysis Discounting

Pricing Issues

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

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.

Question

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

What is …

MCO P&T committee Formularytier

What information would you use to answer the question?

Does Bob request that the P&T committee add the new drug to the formulary?

Answer

Adopt a new drug or treatment if…

the additional benefit is higher than the additional cost

(global economic principle)

Health Outcomes

What are the consequences of a particular treatment?

Pharmacoeconomics is

a set of methods that evaluate theEconomic, Clinical and Humanistic Outcomes

(ECHO Model) of pharmaceutical products and

services…

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

Four types of Pharmacoeconomic Analyses

1. Cost-minimization (CMA)2. Cost-benefit (CBA)3. Cost-effectiveness (CEA)4. Cost-utility (CUA)

Comparison of PE Methods

Method Cost Consequences

Cost Minimization Dollars Natural units(show

equivalency)

Cost Effectiveness Dollars Natural units

Cost Benefit Dollars Dollars

Cost Utility Dollars QALYs

Steps for conducting a PE Analysis

1. define the problem2. identify the perspective and

alternative interventions to be compared

3. identify and measure outcomes of each alternative

4. identify, measure and value costs of all alternatives

5. use discounting and sensitivity analysis when appropriate

Define the problem and state the objective

What is the most cost effective treatment of type II diabetes?

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.

Different Perspectives

Perspective Relevant: Costs Consequences

Patient OOP costs, lost income, transportation

Therapeutic effectiveness,Adverse events, QOL

MCO Hospitalization,Pharmacy, Personnel,& supplies

Therapeutic effectiveness,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.

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.

At least two comparators

1. New sulfonylurea Versus

2. Most commonly used drug

Cost and Effectiveness Comparison Grid for Drug 1 vs Drug 2

Effectiveness

Cost

1 > 2 1 = 2 1 < 2

1 > 2 Analyze Choose 2 Choose 2

1 = 2 Choose 1Indifferent

Choose 2

1 < 2 Choose 1 Choose 1 Analyze

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

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.

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.

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

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 $7.50Drug 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

Cost differential (or incremental cost) for entire regimenTotal cost of Drug A = 30 days x 2 x $7.50 = $450Total 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 = $33Incremental cost of changing from Drug A to Drug B is $33

Cost differentials for chronic diseases are calculated on

Per patient per dayPer patient per month (30 days)

Why?

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

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)

Two ratio calculations for CEA

Cost-Effectiveness Ratio = Cost ($)

Therapeutic effect (Natural units)

Incremental Cost-Effectiveness Ratio = cost differential ($) outcome differential (Natural units)

Cost-effectiveness Example

In this example, effectiveness is mg of glucose lowered. Could also measure effectiveness as cure rate as in the textbook example.

Cost Effectiveness

Avg. C/E Ratio

IncrementalC/E Ratio

Drug A $50 30 mg/dl

Drug B $70 40 mg/dl

Cost-effectiveness Example

In this example, effectiveness is mg of glucose lowered. Could also measure effectiveness as cure rate as in the textbook example.

Cost Effectiveness

Avg. C/E Ratio

IncrementalC/E Ratio

Drug A $50 30 mg/dl 50/30

Drug B $70 40 mg/dl 70/40(70-50)/(40-30)

Cost-effectiveness Example

In this example, effectiveness is mg of glucose lowered. Could also measure effectiveness as cure rate as in the textbook example.

Cost Effectiveness

Avg. C/E Ratio

IncrementalC/E Ratio

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

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:

1. Calculate the Benefit to Cost ratio for each action

Benefit ($) Cost ($)

Gives you the value gained per dollar spent (>1)2. Or calculate the Net Benefit

= Benefit ($) – Cost ($) Gives you the net gain (loss) from the action

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 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

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 0 - 100

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 healthDeath QALY = 0.0

Example: 3 years of life as disabled (rated at utility 0.5) = 1.5 QALYs

Two ratio calculations for CUA

Cost-Utility Ratio = Cost ($)

QALYs

Incremental Cost-Utility Ratio = cost differential ($) outcome differential (QALYs)

Cost-Utility example

Surgery vs Surgery plus chemotherapy

Treatment

Cost life year

s

Utility

(0-1)

QALY

CU Ratio

Incremental CU ratio

Surgery14000 3 .8 2.4

$5833 per

QALY

Surgery + chemo

27000 5 .6 3.0$9000

per QALY

$21,667 per QALY

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).

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.

Sensitivity analysis of Cost-Utility example

Surgery vs Surgery plus chemotherapy

Treatment

Cost life year

s

Utility

QALY

range

CU Ratio

Incremental CU ratio

Surgery14000 2 - 4 .8

1.63.2

$8,750$4,375

Surgery + chemo

27000 4 - 6 .62.43.6

$11,250

$7,500

no gain - $6,500 per

QALY

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 (.03 - .06 is typical)and n = the number of years in the future.

Discounting example

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%)

Year Costs PV

this year

1,500 1,500

1 1,500 1,429

2 1,500 1,361

3 1,500 1,296

total

$6,000

$5,586

Pharmaceutical PricingWhen trying to assess cost you need

to accurately reflect depending on the perspective.

Two issues impact drug price the pharmacy must pay

1. Patent2. Available substitutes

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)

Pricing conceptsSeries 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.

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 = .655100% – 65.5% = 34.5% discount rate

MarkupPercent 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?

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.

Summary of Pharmacoeconomic issues1. Perspective2. Type of analysis3. Appropriate Comparators?4. Relevant costs and consequences5. Validated instruments6. Time period, discounting7. Sensitivity analysis8. Generalizability