Pharmacoeconomics

Int. J. Pharm. Sci. Rev. Res., 34(1), September – October 2015; Article No.
08, Pages: 37-46 ISSN 0976 – 044X
Research Article
Pharmacoeconomics: Principles, Methods and Indian Scenario
Soniya Scaria*, Remya Raju, Sijimol Joseph, Athira Mohan, Athira A. Nair
Assistant Professor, Department of Pharmacy Practice, Nazareth College of Pharmacy, Tiruvalla, Kerala, India.
*Corresponding author’s E-mail: [email protected]
Accepted on: 02-07-2015; Finalized on: 31-08-2015.

ABSTRACT
The rising cost of healthcare delivery systems is a major concern to all patients, healthcare professionals, and the government. The
demand for and the cost of health care are increasing in all countries as the improvement in and sophistication of health
technologies. The increase in health care spending is mainly because of increased life expectance, increased technology, increased
standard of living and increased demand in health care quality and services. Medicines form a small but significant proportion of
total health care cost. As the affordability of new medical technologies continues to be the subject of heated debate, attention is
also increasingly focused on providing quality and cost-effective healthcare. Economic evaluation of pharmaceutical products, or
pharmacoeconomics, is a rapidly growing area of research. Pharmacoeconomic evaluation is important in helping clinicians and
decision makers to make choices about new pharmaceutical products and in helping patients obtain access to new medicines. Over
the last few years, the scientific rigor of this field has increased. As a consequence of limited financial resources, health economics,
and particularly pharmacoeconomic analyses, are becoming a frequently used criterion for decision making in modern health care
policy. The purpose of this article is to provide an introduction of pharmacoeconomics, its various methods of evaluations such as
cost minimization analysis, cost benefit analysis, cost utility analysis, cost effectiveness analysis and also discuss challenges,
limitations and applications of pharmacoeconomics.
Keywords: Cost minimization analysis, Cost benefit analysis, Cost utility analysis, Cost effectiveness analysis, pharmacoeconomics.
INTRODUCTION An interest in defining the value of medicine is a common

thread that unites today’s health care practitioners. With
P harmaceuticals and other therapeutic interventions

have contributed to the important progress being
made in the health status of the population.
Corresponding to the introduction of new drug entities
during the past several decades, the mortality rates for a
serious concerns about rising medication costs and
consistent pressure to decrease pharmacy expenditures
and budgets, clinicians/prescribers, pharmacists, and
other health care professionals must answer about the
value of the pharmaceutical goods and services they can
number of diseases have declined substantially.1 Drugs
provide. Pharmacoeconomics, or the discipline of placing
account for only a small proportion of the expenditures in
a value on drug therapy, has evolved to answer this.5
hospital budgets, but drug therapy plays a crucial role in
Pharmacoeconomics has been defined as the description
the management of hospitalized patients. An average
and analysis of the cost of drug therapy to health care
hospitalized patient receives six to eight different drugs
systems andsociety.6 More specifically,
on a typical day. Effective drug therapy helps to partially
pharmacoeconomic research is the process of identifying,
explain why the mean length of stay in hospitals has
measuring, and comparing the costs, risks, and benefits of
decreased over the years.2
programs, services, or therapies and determining which
Despite the general evidence supporting the use of alternative produces the best health outcome for the
pharmaceuticals, few data exist regarding the actual costs resource invested.7
and benefits attributed to specific drug therapies. A
Pharmacoeconomics can be defined as the measurement
primary reason is the lack of defined methodologies to
of both the costs and consequences of therapeutic
evaluate medical interventions. Perhaps the current focus
decision making.8 It is a part of the tool bag, pharmacist
on reducing expenditures of pharmaceuticals and
can be used to improve the efficiency of his profession.
pharmacy services to save costs to the total health-care
Pharmacoeconomics adopts and applies the principles
system is inappropriate.3 Even though private health
and methodology of health economics to the field of
insurance and government programs cover a growing
pharmaceutical policy. Pharmacoeconomic evaluation
portion of drug expenditures; a sizable amount of drug
therefore makes use of the broad range of techniques
costs is still paid directly by consumers. The costs of
used in health economics evaluation to the specific
pharmaceuticals and pharmacy services have, therefore, 9
context of medicines management.
become an important issue to patients, third-party
payers, and governments alike. Pharmacoeconomics is the branch of economics that uses
cost-benefit, cost-effectiveness, cost-minimization, cost-
Today, and in the future, it is necessary to scientifically
of-illness and cost-utility analyses to compare
value the costs and consequences of drug therapy.4
pharmaceutical products and treatment strategies.10 The
International Journal of Pharmaceutical Sciences Review and Research

Available online at www.globalresearchonline.net 37
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Int. J. Pharm. Sci. Rev. Res., 34(1), September – October 2015; Article No. 08, Pages: 37-46 ISSN 0976 – 044X
importance of pharmacoeconomic information to the concept of cost-benefit and cost effectiveness

healthcare decision makers will depend upon the analysis. Utilizing sophisticated pharmacokinetic
viewpoint from which the analysis is conducted (i.e., protocols, Bootman published an early pharmacy
including only costs that are relevant to managed care). research article in 1979 in which cost-benefit analysis was
Pharmacoeconomic research in the managed care system employed to appraise the outcomes of individualizing
is growing. It is currently being used to make formulary aminoglycoside dosages to severely burned patients with
decisions (complementing clinical data), design disease gram-negative septicaemia. In 1983, Ohio State University
management programs and measuring the cost- College of Pharmacy initiated a specialized pharmacy
effectiveness of interventions and programs in managed academic program with the objective of providing an
11
care. overview of the application of cost benefit and cost
effective analysis in healthcare, with emphasis on their
DEFINITIONS
application to the delivery of pharmaceutical care.
Economics is the study of the allocation of limited
Initially, defined as “analysis of the costs of drug therapy
resources or inputs among alternative users to satisfy
to healthcare systems and society”, the actual term
unlimited wants for outputs. The International Society for
“pharmacoeconomics” first appeared in the literature in
Pharmacoeconomics and Outcomes Research (ISPOR)
1986 when Townsend’s work was published to highlight
defines the terms health economics and
the need to develop research activities in this new
pharmacoeconomics as follows.
discipline. In 1992, a journal named
Health economics: ‘The field of study that evaluates the “Pharmacoeconomics” was launched.15
behaviour of individuals, firms, and markets in health
PHARMACOECONOMICS: ITS NEED AND SCOPE
care, and that usually focuses on the cost (inputs) and
consequences (outcomes) of health care interventions, The demand for and the cost of health care are increasing
such as the use of drugs, devices, procedures, services in all countries as the improvement in and sophistication
and programs’. of health technologies. The increase in health care
spending is mainly because of increased life expectance,
Pharmacoeconomics: ‘The field of study that evaluates
increased technology, increased standard of living and
the behaviour of individuals, firms and markets relevant
increased demand in health care quality and services.
to the use of pharmaceutical products, services and
Medicines form a small but significant proportion of total
programs, and which frequently focuses on the costs
health care cost. All over the world, patients are affected
(inputs) and consequences(outcomes) of that use’.12
by high price of medicines. In a developing country like
History India, 85% of total health expenditure is financed by
house-hold out of pocket expenditure. Many poor people
Over the last decade there has been tremendous interest
frequently face a choice between buying medicines or
in economic evaluations of healthcare programmes,
buying food or other necessities due to limited resources
especially in the pharmaceutical field. Economic
and high pricing of drug. There are enumerable factors
evaluations started about 30 years ago as rather crude
which affect the drug pricing like the sector in which
analysis, in which the value of improved health was
medicines are purchased i.e private or government sector
measured in terms of increased labour production.13 The
and often the price is higher in private sector due to due
term Pharmacoeconomics was used in public forum in
to distilentor’s costs and profiteering. Another factor is
1986, at meeting of pharmacist in Toronto, Canada, when
the types of procurement agent: e.g. different prices may
Ray Townsend from the Upjohn company, used the term
be paid for the same product by a public sector
in presentation. Ray and few others had been performing
purchaser. Also the distribution route and the patient
studies using the term pharmacoeconomics within the
status will also influence the drug pricing. So medicine
pharmaceutical industry. Since the early eighties
prices do matter.16 Pharmacoeconomics has become
pharmacoeconomics research is a flourishing industry
more important over the past 20 years, due to an
with many practioners, a large research and application
increased emphasis on efficient drug therapies for
agenda, several journals and flourishing professional
disease, which increase health costs etc.
societies including the international society for
Pharmacoeconomics identifies, measures and compares
pharmacoeconomics and outcomes research.14
the cost and consequences of pharmaceutical products
Pharmacy was finally recognized as a clinical discipline and services and describe the economic relationship
within the healthcare system in the early 1960s. At this involving drug research, drug production, distribution,
time, disciplines within the pharmaceutical sciences such storage, pricing and use by the people. Basically the
as clinical pharmacy, drug information, and pharmacoeconomics is needful in following manner; In
pharmacokinetics became an important part of pharmacy Industry, it is useful in deciding among specific research
education and sciences. Pharmacoeconomics developed and development alternatives. In Government-
its roots in 1970s. The first book on health economics was Determining program benefits and prices paid and in
published in 1973 and in 1978; McGhan, Rowland, and Private Sector it can be used for designing insurance
Bootman from the University of Minnesota introduced benefit coverage.17

SCOPE OF PHARMACOECONOMICS medication policy, and resource allocation. For example,

Pharmacoeconomics can provide critical cost-
To Pharmaceutical manufacturers
effectiveness data to support formulary addition or
Pharmacoeconomics can be a very useful tool long before removal. The formulary is a regularly revised collection of
a drug is approved for use by the FDA. Pharmaceutical pharmaceuticals based on current clinical judgment and
manufactures need to spend enormous resources in the helps the medical staff of a given institution and experts
drug development process. If proper pharmacoeconomic in the diagnosis and treatment of disease.
research is conducted the manufactures can avoid Pharmacoeconomic data can support the inclusion or
spending vast resources to the development of a drug exclusion of a drug on or from the formulary and support
that does not provide competitive advantage. practice guidelines that promote the most cost-effective
Competitive advantage in the present healthcare or appropriate utilisation of pharmaceutical products.
environment may be defined as a drug that is cost- Various strategies can be used to incorporate
effective. Cost effective can mean a drug that is less pharmacoeconomics into formulary decision making.
costly and at least as effective as an alternative; more These include using published pharmacoeconomic studies
effective and more costly than an alternative, but and economic modelling techniques, and conducting local
improved health outcomes justify additional expenditures pharmacoeconomic research. Pharmacoeconomic
, or less effective and less costly than an existing assessments of formulary decisions help to ensure that
alternative, but a viable alternative for some patients. the agents promoted by our formularies yield the highest
outcome per dollar spent.18 In fact, the
The potential for an investigational new drug to leave the
pharmacoeconomic assessment of formulary action is
laboratory is a function of its expected safety and
becoming a standardized part of many pharmacy and
efficacy, which are both factors comprised of several
therapeutic (P&T) committee decision making process, if
specific measures or evaluations (e.g., toxicology, adverse
based on sound pharmacoeconomic data, when
reaction, teratogenicity and pharmacology). An additional
competing for hospital resources, pharmacoeconomics
factor worth considering is the expected
can provide the data necessary that a pharmacy service
pharmacoeconomics of the investigational drug. That
maximizes the resources allocated to it by hospital
factor also would be comprised specific evaluation such
administration.
as societal and individual costs of the illness for which the
drug is indicated, the costs and consequence of existing Evaluating the impact a drug has on a patient’s health-
treatment methods, and the impact of the disease and related quality of life can be useful when deciding
existing treatment on the patients quality of between two agents for an individual patient treatment
life(QOL).Having such information very early in the decision.
development of a drug would help reduce uncertainties
In the past, inclusion of economic outcomes (costs) in
and contribute to the knowledge base used to decide
clinical decisions seemed to necessitate compromise in
whether to further evaluate a treatment via prospective
the quality of care delivered. However, when used
clinical trials. Cost efficacy and QOL components can be
appropriately, pharmacoeconomics can assist in
incorporated into appropriate phase III studies to provide
balancing cost with patient outcome (quality of care),
additional information regarding a drugs impact on
often resulting in maintaining or improving quality of
patient outcome. If such parameters are applied
care, with potential cost savings. Best valued drugs will be
systematically to all new treatment candidates, the
those with optimal patient outcome per rupee/ dollar
scientific basis of drug therapy decision making will
spent compared to competitors. In the cost conscious
increase substantially.
environment, Pharmacoeconomic research is important
To Healthcare Practitioners to the healthcare practitioner.
One of the primary uses of pharmacoeconomics in clinical To Pharmacists
practice is to aid clinical and policy decision making.
Drug use evaluation is one of the important services
Complete pharmacotherapy decisions should contain
provided by pharmacists. Ideally, that value should be
three basis evaluation components; clinical, economic,
translated into patient and financial outcomes. Apart
and humanistic outcomes. No longer can drug selection
from concentrating on inappropriately prescribed therapy
decisions be based solely on acquisition costs. This
and overprescribing, drug use evaluation focuses on the
strategy is misleading because of the inability to capture
most cost-effective therapy. A high degree of
potential costs associated with diminished safety and
sophistication is required in order to make such
efficacy profiles. Through the appropriate application of
determination fairly, considering patient factors, disease
Pharmacoeconomic principles and methods incorporating
factors, and other issues.
these three critical components into clinical decision can
be accomplished. Drug formulary services, Pharmacy and therapeutics
committees are viewed as a means of reducing drug
Pharmacoeconomic data can be a powerful tool which
budgets and have had some value in encouraging drug
supports various clinic decisions, including effective
therapy cost considerations, but they do not provide
formulary management, individual patient treatment,
incentives to take into account overall medical costs, nor acquisition costs. It includes physicians’ fees, cost of
do they necessarily consider all consequences such as administering the medication, costs of treating an
potential drug interactions, adverse reactions, and adverse drug reaction, etc.
treatment response rates. Conducting cost-effectiveness
Indirect i.e. costs from the perspective of society as a
studies allows an evaluation of total costs and
whole: for example, these might include loss of earnings,
consequences from various perspectives.12
loss of productivity, loss of leisure time, due to the illness,
Methods of Pharmacoeconomics and cost of travel to hospital etc). This would include not
just the patient themselves but also their family and
The basic task of economic evaluation is to identify,
society as a whole.
measure, value, and compare the costs and
consequences of the alternatives being considered. The Intangible i.e. the pain, worry or other distress; which a
two distinguishing characteristics of economic evaluation patient or their family might suffer. These may be
are as follows: (1) Is there a comparison of two or more impossible to measure in monetary terms, but are
alternatives? and (2) Are both costs and consequences of sometimes captured in measures of quality of life.
the alternatives examined?.19 A full economic evaluation
The cost can be measured in following ways:
encompasses both characteristics, whereas a partial
economic evaluation addresses only one. • Cost / unit
Pharmacoeconomic evaluations conducted in today's
• Cost / treatment
healthcare settings can be either partial or full economic
evaluations. • Cost / person
Partial economic evaluations can include simple • Cost / person / year
descriptive tabulations of outcomes or resources
• Cost / case prevented
consumed and thus require a minimum of time and
effort. If only the consequences or only the costs of a • Cost / life saved
program, service, or treatment are described, the
• Cost / DALY (disability-adjusted life year)
evaluation illustrates an outcome or cost description. A
cost-outcome or cost-consequence analysis (CCA) Outcomes
describes the costs and consequences of an alternative
The second fundamental component of a
but does not provide a comparison with other treatment
pharmacoeconomic study is outcomes or benefits. The
options.20 Another partial evaluation is a cost analysis
expected benefits might be measured in:
that compares the costs of two or more alternatives
without regard to outcome. A. “Natural” units e.g. years of life saved, strokes
prevented, and peptic ulcers healed etc.
Full economic evaluations include cost-minimization,
cost-benefit, cost-effectiveness, and cost-utility analyses. B. “Utility” units - Utility is an economist’s word for
Each method is used to compare competing programs or satisfaction, or sense of well being, and is an attempt to
treatment alternatives. The methods are all similar in the evaluate the quality of a state of health, and not just its
way they measure costs (in dollars) and different in their quantity. Utility estimates can be obtained through direct
measurement of outcomes. Although a full economic measurement (using techniques such as time trade off or
evaluation generally provides higher quality and more standard gambles, or by imputing them from the
useful information, the time, resources, and effort literature or expert opinion. They are often informed by
employed are also great. measures of quality of life in different disease states.16
Thus healthcare practitioners and clinicians also find it Application of economic evaluation methods to
necessary to employ various partial economic healthcare products and services, especially
evaluations.21 pharmaceuticals, might increase their acceptance by
21
healthcare professionals and society.
Costs
Cost-of-Illness Evaluation
Costs involved in pharmacoeconomic evaluation can be
mainly divided into financial cost (mandatory cost) and A cost-of-illness (COI) evaluation identifies and estimates
economic cost (resource for which no mandatory the overall cost of a particular disease for a defined
payment is made). population. This evaluation method is often referred to as
burden of illness and involves measuring the direct and
Opportunity cost is the benefit foregone when selecting
indirect costs attributable to a specific disease. The costs
one therapy alternative over the next best alternative.
of various diseases, including diabetes, mental disorders,
The first step in any cost analysis is identification of the
and cancer, in the United States have been estimated.
various costs. These are direct, indirect and intangible.
By successfully identifying the direct and indirect costs of
Direct i.e. costs from the perspective of the healthcare an illness, one can determine the relative value of a
funder: including staff costs, capital costs, drug treatment or prevention strategy. For example, by
determining the cost of a particular disease to society, 1. To determine if it is a sound investment/decision

the cost of a prevention strategy could be subtracted (justification/feasibility),
from this to yield the benefit of implementing this
2. To provide a basis for comparing projects. It involves
strategy nationwide. COI evaluation is not used to
comparing the total expected cost of each option
compare competing treatment alternatives but to provide
against the total expected benefits, to see whether
an estimation of the financial burden of a disease. Thus
the benefits outweigh the costs, and by how much.
the value of prevention and treatment strategies can be
measured against this illness cost.22 CBA is related to, but distinct from cost-effectiveness
analysis. In CBA, benefits and costs are expressed in
Cost-Minimization Analysis
monetary terms, and are adjusted for the time value of
Cost-minimization analysis (CMA) involves the money, so that all flows of benefits and flows of project
determination of the least costly alternative when costs over time (which tend to occur at different points in
comparing two or more treatment alternatives. With time) are expressed on a common basis in terms of their
CMA, the alternatives must have an assumed or “net present value.”
demonstrated equivalency in safety and efficacy (i.e., the
These costs and benefits are expressed as a ratio (a
two alternatives must be equivalent therapeutically).
benefit-to-cost ratio), a net benefit, or a net cost. A
Once this equivalency in outcome is confirmed, the costs
clinical decision maker would choose the program or
can be identified, measured, and compared in monetary
treatment alternative with the highest net benefit or the
units (dollars).
greatest benefit-to-cost (B: C) ratio. If the B:C ratio is
CMA is a relatively straightforward and simple method for greater than 1, the program or treatment is of value. The
comparing competing programs or treatment alternatives benefits realized by the program or treatment alternative
as long as the therapeutic equivalence of the alternatives outweigh the cost of providing it.24
being compared has been established. If no evidence
 If the B:C ratio equals 1, the benefits equal the cost.
exists to support this, then a more comprehensive
The benefits realized by the program or treatment
method such as cost-effectiveness analysis should be
alternative are equivalent to the cost of providing it.
employed. Remember, CMA shows only a “cost savings”
of one program or treatment over another.  If the B:C ratio is less than 1, the program or
Employing CMA is appropriate when comparing two or treatment is not economically beneficial. The cost of
more therapeutically equivalent agents or alternate providing the program or treatment alternative
outweighs the benefits realized by it.
dosing regimens of the same agent. This method has
been used frequently, and its application could expand CBA should be employed when comparing treatment
given the increasing number of “me too” products and alternatives in which the costs and benefits do not occur
generic competition in the pharmaceutical market.23 simultaneously. CBA also can be used when comparing
programs with different objectives because all benefits
Cost-Benefit Analysis
are converted into dollars. CBA also can be used to
Cost-benefit analysis (CBA) is a method that allows for the evaluate a single program or compare multiple programs.
identification, measurement, and comparison of the However, valuing health benefits in monetary terms can
benefits and costs of a program or treatment alternative. be difficult and controversial. The expression of some
The benefits realized from a program or treatment health benefits as monetary units is neither appropriate
alternative are compared with the costs of providing it. nor widely accepted. Therefore, unless the benefits of a
Both the costs and the benefits are measured and program or treatment alternative are expressed
converted into equivalent dollars in the year in which appropriately in dollars, CBA should not be employed.
they will occur. Future costs and benefits are discounted
CBA can be an appropriate method to use in justifying
or reduced to their current value.
and documenting the value of an existing healthcare
Cost–benefit analysis (CBA), sometimes called benefit– service or the potential worth of a new one. For example,
cost analysis (BCA), is a systematic approach to estimating when a clinical pharmacy service is competing for
the strengths and weaknesses of alternatives that satisfy institutional resources, CBA can provide data to
transactions, activities or functional requirements for a document that the service yields a high return on
business. investment compared with other institutional services
It is a technique that is used to determine options that competing for the same resources. However, the relative
provide the best approach for the adoption and practice magnitude of the costs and benefits for the service must
in terms of benefits in labor, time and cost savings etc. be considered when making this resource-allocation
The CBA is also defined as a systematic process for decision.25
calculating and comparing benefits and costs of a project, Cost-Utility Analysis
decision or government policy (hereafter, "project").
Cost-utility analysis (CUA) is a method for comparing
Broadly, CBA has two purposes: treatment alternatives that integrates patient

preferences and HRQOL. CUA can compare cost, quality, measured in terms of obtaining a specific therapeutic
and the quantity of patient-years. Cost is measured in outcome. These outcomes are often expressed in physical
dollars, and therapeutic outcome is measured in patient- units, natural units, or non dollar units (e.g., lives saved,
weighted utilities rather than in physical units. Often the cases cured, life expectancy, or drop in blood pressure).
utility measurement used is a quality-adjusted life year
The results of CEA are also expressed as a ratio—either as
(QALY) gained. QALY is a common measure of health
an average cost-effectiveness ratio (ACER) or as an
status used in CUA, combining morbidity and mortality
incremental cost-effectiveness ratio (ICER). An ACER
data. Results of CUA are also expressed in a ratio, a cost-
represents the total cost of a program or treatment
utility ratio (C:U ratio). Most often this ratio is translated
alternative divided by its clinical outcome to yield a ratio
as the cost per QALY gained or some other health-state
representing the dollar cost per specific clinical outcome
utility measurement. The preferred treatment alternative
gained independent of comparators.
is that with the lowest cost per QALY (or other health-
status utility). QALYs represent the number of full years at
full health that are valued equivalently to the number of
years as experienced. For example, a full year of health in
a disease-free patient would equal 1.0 QALY, whereas a This allows the costs and outcomes to be reduced to a
year spent with a specific disease might be valued single value to allow for comparison. Using this ratio, the
clinician would choose the alternative with the least cost
significantly lower, perhaps as 0.5 QALY, depending on
the disease. This method is used to compare treatment per outcome gained. The most cost-effective alternative
alternatives that are life extending with serious side is not always the least costly alternative for obtaining a
effects (e.g., cancer chemotherapy), those which produce specific therapeutic objective. In this regard, cost-
reductions in morbidity rather than mortality (e.g., effectiveness need not be cost reduction but rather cost
medical treatment of arthritis), and when HRQOL is the optimization.
most important health outcome being examined. CUA is Often clinical effectiveness is gained at an increased cost.
employed less frequently than other economic evaluation Incremental CEA can be used to determine the additional
methods because of a lack of agreement on measuring cost and effectiveness gained when one treatment
utilities, difficulty comparing QALYs across patients and alternative is compared with the next best treatment
populations, and difficulty quantifying patient alternative. Thus, instead of comparing the ACERs of each
preferences. treatment alternative, the additional cost that a
Cost-Effectiveness Analysis treatment alternative imposes over another treatment is
compared with the additional effect, benefit, or outcome
Cost-effectiveness analysis (CEA) is a form of economic it provides. The ICER can be summarized as follows:
analysis that compares the relative costs and outcomes
(effects) of two or more courses of action. Cost-
effectiveness analysis is distinct from cost-benefit
analysis, which assigns a monetary value to the measure This formula yields the additional cost required to obtain
of effect. Cost-effectiveness analysis is often used in the the additional effect gained by switching from drug A to
field of health services, where it may be inappropriate to drug B.
monetize health effect. Typically the CEA is expressed in
terms of a ratio where the denominator is a gain in health CEA is particularly useful in balancing cost with patient
from a measure (years of life, premature births averted) outcome, determining which treatment alternatives
and the numerator is the cost associated with the health represent the best health outcome per dollar spent, and
gain. The most commonly used outcome measure is deciding when it is appropriate to measure outcome in
quality-adjusted life years (QALY). Cost-utility analysis is terms of obtaining a specific therapeutic objective. In
similar to cost-effectiveness analysis. Cost-effectiveness addition, CEA can provide valuable data to support drug
analyses are often visualized on a cost-effectiveness policy, formulary management, and individual patient
plane consisting of four-quadrants. Outcomes plotted in treatment decisions. Globally, CEA is being used to set
Quadrant I are more effective and more expensive, those public policies regarding the use of pharmaceutical
in Quadrant II are more effective and less expensive, products (national formularies) in countries such as
those in Quadrant III are less effective and less expensive, Australia, New Zealand, and Canada.26
and those in Quadrant IV are less effective and more The cost-effectiveness analysis (CEA) ratio can be a more
expensive. practical tool for decision making than CBA in that it
Cost-effectiveness analysis (CEA) is a way of summarizing involves the comparison of the costs of achieving a
the health benefits and resources used by competing particular non-monetary objectives; such as lives saved,
healthcare programs so that policymakers can choose health improvement, or quality of life. CEA ratios can be
among them. CEA involves comparing programs or applied when the costs are expressed in money and the
treatment alternatives with different safety and efficacy benefits are in specific health outcomes. Benefits can be
profiles. Cost is measured in dollars, and outcomes are expressed in any unit of measure (asthma free days,

hospitalizations, etc.) but can only be reliable and treatment or a treatment with low efficacy rates is a
meaningful when the output units are consistent across waste of time and money. This new treatment should
projects or models. The goal of applying CEA is to allow be compared with the next best alternative it may
for comparison of a variety of interventions in terms of replace. The alternatives may be drug treatments or
non-monetary (health) gains at a given cost, keeping the nondrug treatments.
comparators in the same terms or units of measure. In
 Select the appropriate pharmacoeconomic model-
essence, different entities are compared once common
The pharmacoeconomic model selected will depend
measure of the outcome is established, and a common
on how the outcomes are measured. When all
cost has been determined as a means of assigning relative
outcomes for each alternative are expected to be the
effectiveness to different modes of treatment or
same, CMA is used. If all the outcomes for each
intervention. Future CEA applications in formulating
alternative considered are measured in monetary
health policy are controversial. Recent legislation in the
units, CBA is used. When outcomes of each
USA (i.e., the Patient Protection and Affordable Care Act)
treatment alternative are measured in the same
explicitly prohibits the use of cost-utility analysis,
nonmonetary units, CEA is used. When patient
specifically QALY, in directing recommendations about
27 preferences for alternative treatment are being
healthcare technologies, treatment and services . The
considered, CUA is used.
study of cost-effective analysis will continue to gain
importance and credibility as there is greater confidence  Measure inputs and outcomes- All resources
in measuring such intangible, albeit real, consequences or consumed by each alternative should be identified
outcomes; such as functional status and feelings of and measured in monetary value. The cost for each
health. alternative should be listed and estimated. When
evaluating alternatives over a long period of time (eg:
There is a growing consensus in healthcare-related
greater than 1 year). The concept of discounting
literature emphasizing the benefits of cost-effectiveness
should be applied. Measuring outcomes can be
analysis and other related methods of determining
relatively simple (eg; cure rates] or relatively difficult
incremental cost effectiveness ratios. Medical literature,
(eg; QALYs). Outcomes may be measured
both nationally and internationally, supports the role of
CEA and CER in ability to identify and rank treatments in prospectively or retrospectively. Prospective
terms of their social welfare effects.28 measurements tend to be more accurate and
complete, but may take considerably more time and
General Steps in Designing an Economic Evaluation resources than retrospective data retrieval.
The prerequisite for conducting or evaluating a  Identify the resources necessary to conduct the
pharmacoeconomic evaluation is advanced knowledge of analysis- The availability of resources to conduct the
research methods and biostatistics, both of which are study is an important consideration. Data may be
essential to design a protocol or evaluate the validity of a obtained from a variety of sources, including clinical
published. trials, medical literature, medical records,
The basic steps in designing the pharmacoeconomic study prescription profiles or computer databases.
are as follows.  Establish the probabilities for the outcomes of the
 Define the problem - This step is self-explanatory. treatment alternatives- Probabilities for the
What is the question that is the focus of the analysis? outcomes identified should be determined. This may
The important thing to remember in this step is to be include the probability of treatment failures or
specific. success or adverse reactions to a given treatment or
alternative.
 Determine the study’s perspective- It is important to
identify from whose perspective the analysis will be  Construct a decision tree – Decision analysis can be a
conducted. Is the analysis being conducted from the very useful tool when conducting pharmacoeconomic
perspective of the patient or from that of the analysis. Constructing a decision tree creates a
hospital, clinic, insurance, company or society? graphic display of the outcomes of each treatment
Depending on the perspective assigned to the alternative and the probability of their occurrence.
analysis different results and recommendations Decision analysis is the application of analytical
based on these results may be identified. method for systematically comparing different
decision options. This method of analysis assists in
 Determine specific treatment alternatives and making decisions when the decision is complex and
outcomes- In this step, all the treatment alternatives there is uncertainty about some of the information.
to be compared in the analysis should be identified.
This selection should include clinical options and/ or  Conduct a sensitivity analysis – Whenever estimates
options that are used most often in that setting at are used, there is a possibility that these estimates
the time of study. If a new treatment option is being are not precise. These estimates may be referred to
considered, comparing it with an out-dated as ‘assumptions’. A sensitivity analysis allows one to

determine how the results of an analysis would Although the clinical role of the profession is appreciated,
change when these assumptions are varied over a it is the role of the pharmacist in advising on medicines
relevant range of values. expenditure and ensuring economical use of medicines
that has increased demand for their services. In many
 Present the results - The results of the analysis should
directorates the only person with the required
be presented to the appropriate audience, such as P
knowledge, experience and expertise to manage the
& T committees, medical staff, or third party payers.
medicines budget is the directorate pharmacist.
The steps outlined in this section should be
Medicines management technicians are now also seen as
employed when presenting the results. State the
essential to the overall improvement in efficiency and
problem, identify the perspective, and so on. It is
reduction on Medicines expenditure. Knowledge of
imperative to acknowledge or clarify any
health economics and application of its techniques is
assumptions.12
essential to today’s pharmacist.29
Pharmacoeconomics – A Tool for Pharmacists
Pharmacoeconomics – Indian Scenario
Pharmacoeconomics helps us to make decisions about
The Indian pharmaceutical industry (IPI) is the world’s
the use of medicines. Most pharmacoeconomic studies in
fourth-largest by volume and is likely to lead the
health care are cost-effectiveness studies set out to
manufacturing sector in India. The Indian Patent Act in
demonstrate how to achieve an objective with the least
1970 played a major role in developing a base for the
use of resources. This should not be confused with
manufacturing unit in India. The change in law in 2005
efficiency, which measures how well we use resources in
has created opportunities for both international firms and
order to obtain the desired outcome.
local Indian companies for sharing expertise. This has
Pharmacoeconomics is used at all stages in the certainly created tremendous job opportunities mainly in
development of medicines by the pharmaceutical the field of clinical research, thus making way for health
industry, when medicines are researched, produced and outcomes research.
marketed. Some countries insist on pharmacoeconomic
In addition, many governments worldwide are seeking to
evaluations as part of the licensing process. Most hospital
curb their soaring prescription drug costs by greater use
pharmacists use pharmacoeconomics to assist with
of generics, thus giving importance to cost-effectiveness
making decisions involving formularies and how
and cost-benefit analysis studies. In other words, they are
medicines can be used in a more cost-effective or cost-
implementing the concept of Pharmacoeconomics.
beneficial manner.
Unfortunately, even after the availability of tremendous
Knowledge of health economics coupled with political data on health sciences and clinical research, this data is
insight is essential to understand resource allocation and not used for outcomes research and pharmacoeconomic
expenditure in a modern health care system. Pharmacists, analysis, the reason for this being the quality of primary
with their unique knowledge of medicine, are crucial in data available and its suitability for secondary database
using pharmacoeconomic analysis to influence research. Therefore, the centre point for the future of
expenditure and distribution of resources on medicines. outcomes research and pharmacoeconomic analysis in
The basis of financing secondary care is currently India is the development of a proper database to be used
changing. Under “payment by results”, providers of care for comparative effectiveness research. In India, the
are paid for each patient spell according to a national concept of Pharmacoeconomics is still not used by the
tariff, which is based on a national average cost for a government in order to make reimbursement decisions.
particular patient spell. As foundation trusts increase, the Furthermore, the concept of Pharmacoeconomics is not
number of hospitals that depend on tariff payments for being used in academic research though cost
their income also grows. effectiveness studies have been performed in various
parts of India.
Therefore, using the most efficient methods of working to
reduce cost and maximize benefits is becoming Pharmacoeconomics is yet to make an appearance in
increasingly important. Pharmacoeconomics is part of the India where majority of healthcare spending is done by
tool bag pharmacists can use to improve the efficiency of patients out of their own pockets, unlike medical
their hospital. insurance policies in most developed countries. It is
important that Pharmacoeconomic researches should be
In theory, if hospitals improve their efficiency and deliver
introduced strongly in the India and should be performed
increased activity the trust will make a profit, which
from the clinical trial onwards so that the government
should then be invested in improving health care. In some
can ensure that money spends in the right direction and
medical disciplines the medicines element to the overall
also reduce the financial burden on patients.
tariff price can be considerable, and savings on costs of
medicines can make the difference between a profit and As third largest producer of drugs by volume, Indian
loss for the trust. The application of pharmacoeconomics pharmaceutical industry has diversity of medicines; yet,
to improve the efficient use of medicines is a key brand name prescriptions are the rule of the day.
component in this productivity drive. Formulary system is very weak and treatment protocols

exist only in theory. The resources are scarce and  Continuing education on the relevant features of this
competing programs are plenty in healthcare. The discipline for practitioners, government officials,
concept of healthcare insurance is yet to be popularized private sector executives.
in the country. Given the issues prevalent in the Indian
healthcare system, pharmacoeconomics has many  Stable funding to support applied
applications. Pharmacoeconomics can aid in decision pharmacoeconomic research.
making when evaluating the affordability of and access to  Lack of full appreciation of the potential importance
the right medication to the right patient at the right time, and application of Pharmacoeconomics studies.
comparing two drugs in the same therapeutic class or
drugs with similar mechanism of action, and in  Poor technical skills of healthcare professionals,
establishing accountability that the claims by a especially of pharmacists.
manufacturer regarding a drug are justified.  Lack of appropriate database of the healthcare
Practicing pharmacists in community, hospital, and system in order to bring about research adaptation
clinical settings in India can benefit considerably from the from another country.31
application of the principles of pharmacoeconomic into CONCLUSION
their normal practice settings. Proper application of
pharmacoeconomics will empower the pharmacy Pharmacoeconomics evaluation has become an
practitioners and administrators to make better and more important area of interest to find the optimal therapy at
informed decisions regarding products and services they the lowest price as healthcare resources are not easily
provide. Pharmacotherapy decisions traditionally accessible and affordable to many patients. Numerous
depended solely on clinical outcomes like safety and drug alternatives and empowered consumers also fuel
efficacy, but pharmacoeconomics teaches us that there the need for economic evaluations of pharmaceutical
are three basic outcomes to be considered clinical, products. In a country like India the PE can help the poor
economic, and humanistic in drug therapy. It is accepted and middle class Indians to obtain well health care
by all that appropriate drug selection decisions could not services because many households are below poverty
be made today based on acquisition costs only. Applied line, unaffordable for private health care. Costs of the
pharmacoeconomics can help in decision making, in medicines are growing constantly. In Asian countries with
assessing the affordability of medicines to the patients, scarce resources and an ever growing population with
access to the medicines when needed, and comparing diverse health care needs, innovative method called,
various products for treatment of a disease. It will provide pharmacoeconomic evaluation plays an essential role in
evidence contraindicating the promotion of certain types determining the delivery of reasonable and cost-effective
of high-cost medicines and services. health services.32
Pharmacoeconomics has use in health policy decision By understanding the principles, methods, and
making and can be applied by a number of healthcare application of pharmacoeconomics, pharmacists will be
professionals such as policy makers, primary healthcare prepared to make better, more-informed decisions
providers, health-care administrators, and health regarding the use of pharmaceutical products and
managers. services, that is, decisions that ultimately represent the
best interests of the patient, the health care system, and
Available in large quantities, Indian primary care society. PE can be applied to any therapeutic area like
providers are often bombarded with many new drugs of hospital pharmacy, using a variety of application
the same category, in addition to the existing drugs. strategies. As the healthcare sector is progressing day by
Introduction of new drugs can confuse the doctors and day the need to develop Pharmacoeconomics area is
administrators for the judicious selection and rational use must. Healthcare sector is not just a small area but it
of medicines. became an industry now. It has more dimensions to
When introducing new medications, its outcome should explore. Patients also get benefit out of
be equal or more effective compared to the existing drug Pharmacoeconomics findings. Pharmacoeconomics
and shall have some economic or related advantage. research should be strongly supported in a country like
India where majority of health care spending is done by
Evidence about pharmacoeconomics can aid pharmacists the patient’s themselves.
and policy makers in the decision-making process about
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Source of Support: Nil, Conflict of Interest: None.


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What is pharmacoeconomics?

What is pharmacoeconomics?

What are the different types of economic evaluations in pharmacoeconomics?

What are the different types of economic evaluations in pharmacoeconomics?

Int. J. Pharm. Sci. Rev. Res., 34(1), September – October 2015; Article No.

08, Pages: 37-46 ISSN 0976 – 044X

Pharmacoeconomics: Principles, Methods and Indian Scenario

Accepted on: 02-07-2015; Finalized on: 31-08-2015.

INTRODUCTION An interest in defining the value of medicine is a common

P harmaceuticals and other therapeutic interventions

International Journal of Pharmaceutical Sciences Review and Research

importance of pharmacoeconomic information to the concept of cost-benefit and cost effectiveness

International Journal of Pharmaceutical Sciences Review and Research

SCOPE OF PHARMACOECONOMICS medication policy, and resource allocation. For example,

determining the cost of a particular disease to society, 1. To determine if it is a sound investment/decision

International Journal of Pharmaceutical Sciences Review and Research

International Journal of Pharmaceutical Sciences Review and Research

International Journal of Pharmaceutical Sciences Review and Research

International Journal of Pharmaceutical Sciences Review and Research

International Journal of Pharmaceutical Sciences Review and Research

Source of Support: Nil, Conflict of Interest: None.

International Journal of Pharmaceutical Sciences Review and Research

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