Policy and legal framework

Financing and sustainability

9 Pharmaceutical pricing policy
10 Economics for pharmaceutical management
11 Pharmaceutical financing strategies
12 Pharmaceutical benefits in insurance
programs 13 Revolving drug funds and user
fees
14 Global and donor
financing 15 Pharmaceutical
donations

C HA P T E R 10
Economics for pharmaceutical management

Summary 10.2 I L LU S TR AT I O N S
10.1 Economics as a tool for making Table 10-1
choices 10.2
10.2 Some basic economic concepts Examples of resource-
10.3 allocation decisions at
10.3 Economics of the public sector different levels of
10.4 government 10.3
Table 10-2 Using economic
Goals of public expenditure
analysis methods to make
10.4 Understanding the private sector choices 10.12
10.5
Markets and competition • Ethics and business B ox

10.5 Government Box 10-1 Types of costs 10.13

interaction with the c o U N T RY S T U D Y
private sector
10.7 CS 10-1 Australia: ten years of using
Market failure • Types of government interventions • pharmaco-economics in decision
Challenges to government interventions making 10.8
10.6 Efficiency concepts 10.9
Allocative efficiency • Technical efficiency
10.7 Economic evaluation of
pharmaceutical products
10.10
Cost-minimization analysis • Cost-effectiveness analysis •
Cost-utility analysis • Cost-benefit analysis • Steps for
conducting a cost-effectiveness evaluation •
Conducting pharmaco-economic evaluations
References and further readings
10.14
10.2 FINANCING AND SUSTAINABILIT Y

su MMary

Economics can help managers make services beyond what individuals

difficult resource- allocation decisions would pay for on their own.
by providing a framework and a set
of concepts and tools for evaluating The private sector is actively involved
alternatives in and often predomi- nant in health care
terms of their costs and benefits. and especially the pharmaceutical
Key economic concepts include— sector. Government involvement with
the private sector is often justified as
Scarcity: the fact that resources are a means of correcting “market failure,”
always limited which may result from equity
Opportunity cost: the benefits that are considerations, failure
given up in choos- ing one option of competition, information failure,
over the next-best alternative and externalities. Governments are
Marginal costs and marginal benefits: the not always successful in correcting
additional costs incurred and the failure.
additional benefits gained by
Efficiency means getting the most
increasing output
output for a given quantity of
Incentives: the factors related to both
resources. The tools of pharmaco-
monetary and non- monetary
economic evaluation can help
rewards or to penalties that
pharmaceutical managers identify
influence the behavior of individuals
the most efficient options. Different
or organizations
methods include cost-minimization
Considerable debate exists about the analysis, cost-effectiveness analysis,
appropriate role of government in the cost-utility analysis, and cost-
health sector. The “social welfare” benefit analysis.
perspective argues for broad
These methods are demanding and
government involvement, whereas
labor intensive, and although widely
the “market economy” perspective
used in pharmaceutical access
holds that government should
programs in high-income countries,
become involved only when the
their applicability is more limited in
market system fails. General support
low- and middle-income countries.
exists for the gov- ernment to
Essential medicines lists, standard
provide public goods, which are
treatment guidelines, generic
available
substitution, tendering and reference
for the benefit of everyone. Prominent
pricing, and tariff and tax minimization
examples include goods and services
can be more effective instruments for
with positive externalities, such as
improving pharmaceutical purchasing
immunization, and merit goods, such
and improving affordability.
as health educa- tion, which private
markets tend not to provide in suf- Pharmaco-economic analysis can be
ficient quantities. very helpful, but should be used
selectively, for instance, in assessing
Policy makers must also be
an entire public health program
concerned with distribution issues—
(such as childhood vacci- nation) or
who pays for and who benefits from
when an important product is
publicly supported services.
expensive and available from only
Through the use of subsidies, gov-
one source.
ernments can encourage the
consumption of health

10.1 Economics as a tool for making choices economics is the area of health
econom- ics that focuses on the
Health economics is about economic evaluation of medicines.
understanding both medical and Because budgets are never large
nonmedical resource-allocation enough, health managers must
decisions that affect health under constantly decide which of several
conditions of scarcity and uncertainty courses of action to follow. They may
(Drummond et al. 2005). Pharmaco- make choices among programs,
among program goals or objectives,
10.2 FINANCING AND SUSTAINABILIT Y
or among strategies or activi- ties for
achieving specific goals. This chapter they did ten years ago, because
introduces the concepts of health program managers are under increasing
economic analysis and shows how pressure to show that they are
these concepts can be applied to the obtaining value for their purchases or
selection of medicines. subsidies. These methods have been
Evidence-based medicine and used most effectively within health
pharmaco-economic analy- sis play a insurance/pharmaceuti- cal subsidy
much greater role in medicine selection schemes in high-income countries
now than (Birkett et al. 2001; Hjelmgren et al.
2001; Pearson and Rawlins 2005), but the
basic principles are relevant to low- and
middle-income countries.
As covered in other chapters,
pharmaceutical manage- ment is
characterized by a complex series of
processes, involving (a) research and
discovery, (b) product devel- opment,
(c) safety and efficacy testing, (d)
manufacture,
(e)distribution, (f) prescription, (g)
dispensing, and (h) consumption. The
first four elements constitute the costs
incurred before the manufacturer’s
distribution to wholesal- ers. The prices
the manufacturer charges are usually
many
times the marginal cost of production public health programs, such as
and are set in order to recover all of childhood immunization, or to
these costs and generate a profit expensive products from a single
margin. The patent system allows source. In fact, formal pharmaco-
manufacturers to behave as monop- economic evaluations of pharmaceutical
olists, charging what the market will classes should be aligned with the
bear. Retail prices depend on this basic elements of pharmaceutical
system and the last four processes management policy, including
listed. Therefore, the application of maintaining essential medi- cines lists,
health economics methods to the establishing generic medicines
selection of medicine must consider the policies, ensuring efficient
complexity of these processes and the pharmaceutical procurement and
often conflicting roles of the differ- ent distribution sys- tems, minimizing tariffs
stakeholders. and taxes, and encouraging rational use
Program managers can use economic of medicines.
analysis as a useful tool to augment,
but not fully replace, experience and
com- mon sense. Economic analysis can 10.2 Some basic economic concepts
lay out, sometimes in stark detail, the
costs and consequences of different Economics provides methods for
courses of action. However, real-world evaluating choices in terms of their
decision making must con- sider costs and benefits. Table 10-1 lists
political, professional, and commercial examples of resource-allocation
realities. Achieving optimal value for decisions that can benefit from using
money with every purchase or subsidy economic tools, moving from a more
is a worthy but unattainable goal; macro, or health sys- tem, level to the
however, judi- ciously and consistently micro level of individual products.
applying appropriate pharmaco- Highlighting a few basic economic
economic methods will help deliver concepts critical for understanding
greater value for money in the longer issues in public health may be useful.
term. They are scarcity, opportunity cost,
An important caveat is that health marginal benefits and costs, and
economics, done appro- priately, is a incentives.
rigorous, demanding discipline. Many
prob- lems with pharmaco-economic Scarcity. Resources are never sufficient
analyses arise because of limitations to do everything. Choices have to be
or biases in available clinical data, made about the best ways to use the
which result in unrealistic assumptions resources that are available.
about clinical benefits and cost- Resources are not limited to money;
effectiveness of medicines (Hill et al. time is a scarce resource as well, as
2000; Rennie and Luft 2000; Bell et al. every busy program manager knows.
2006). Therefore, organizations must Opportunity cost. Choices that entail
have access to clinicians, opportunity costs go beyond money
epidemiologists, statisticians, and alone. They take into account
economists to conduct pharmaco- potential benefits that are given up in
economic analyses well. Because order to follow a chosen course of
these professionals are often in short action—benefits that could be derived
supply and expensive, many countries from committing resources to the
do not have the necessary resources. next-best alternative. For example, if
Regional cooperation is likely necessary running a training course in inventory
to achieve widespread proficiency in man- agement means that another
the application of these methods. course in rational medi- cine use
In most low- and middle-income cannot be conducted, the forgone
countries, complex health economic course is the
analyses of each individual medicine
prod- uct are not necessary; rather, they
are selectively applied to

Table 10-1 Examples of resource-allocation decisions at different levels of government

Central government Central ministry of health Pharmaceutical program managers

How much should the public sector How much should be allocated to primary, How much should be spent on pharmaceuticals,
spend for all recurrent budgets? secondary, and tertiary care? training, and storage?
How much should be allocated to How much should be allocated to different What methods can be used to plan for
the international
different ministries? program activities? pharmaceutical purchases when the value of
local
currency is falling?
How much should be spent on
pharmaceuticals,
personnel, and other operating costs?
How much should be allocated to different Which pharmaceutical distribution strategy
geographic jurisdictions? will deliver medicines to health facilities most
efficiently?
How much should be allocated to urban Which medicines should be purchased and at
what
compared to rural, dispersed populations, prices; to whom should they be given?
for
whom unit costs of services are higher?
 10 / Economics for pharmaceutical management 10.4

opportunity cost of running the incentives to influence the behavior of

inventory management course. The individuals or organizations. In
concept of opportunity cost is helpful charging fees, for example, they can
in evaluating alternatives by looking discourage individuals from making
explicitly at the trade- offs they unnecessary visits to health facilities
involve. for minor complaints. This assumed
Marginal benefits and costs. When resource- tendency to overuse facilities if they
allocation decisions are made, the are made available free of charge is
question is often not whether to known as “moral hazard.” However,
allocate all or nothing to a particular many studies have shown that user
activity, but fees reduce care-seeking behavior
whether to spend a bit more or a bit among poor patients, which may have
less. The additional costs of doing a negative health outcomes.
bit more are called marginal or incre- The carrot-or-stick approach can be
mental costs, and the additional extended to indus- try. For instance,
benefits that result are called by levying fines for the distribution of
marginal benefits. The relationship substandard products, governments
between the additional costs and can encourage phar- maceutical
benefits is usually called the incre- producers to maintain the quality of
mental cost-effectiveness ratio. their products. By establishing certain
For example, ministries of health kinds of controls and incentives,
are rarely faced with decisions about government can influence consumers
whether or not to provide vacci- and providers to choose lower-priced
nations; however, a program medicines.
manager might have to decide
whether to keep the clinic open for
another hour
at the end of the day. To make this
decision, the manager would
estimate the marginal cost of
keeping the facility open (in terms of
extra salaries, utilities, and so forth)
and compare this cost to the
marginal benefit (in terms of
numbers of additional children who
would be vacci- nated during the
extra hour). The incremental cost-
effectiveness ratio would be
expressed as the cost per extra child
vaccinated. The opportunity cost of
keeping the clinic open for another
hour would be the activities forgone
as a result: for example, resources
may no longer be sufficient to
conduct an educational outreach
session.
Incentives. An incentive is some kind of
compensation (a reward or penalty
that is monetary or otherwise) that
influences the behavior of individuals
or organizations. For example,
governments may provide a financial
incentive to parents to ensure that
their children are fully immunized.
Governments have an incentive to
provide preventive health care
because it should reduce the demand
for and thus the cost of providing
more expensive curative care. In
practice, however, patients and
communities strongly demand
curative care.
Governments can also create
 10 / Economics for pharmaceutical management 10.5
10.3 Economics of the public sector street lighting, sewage systems, and
parks), and public health services (such
The appropriate role of the government as aerial spraying for vector control) are
in the health sec- tor, as well as in the termed public goods. Public goods are
broader economy, has been debated for often referred to as nonexcludable,
centuries by philosophers, economic meaning that they cannot be provided
theorists, and political thinkers. Since to some and withheld from others, and
the 1980s, the debate has been nonrival, meaning that no competition
heightened by a two-pronged dilemma. exists for the goods; consumption by
On the one hand, centrally planned one person does not reduce its
economies have generally failed to availabil- ity to others (Cowen 2008).
ensure economic secu- rity for their Because of these factors, public goods
populations; on the other hand, some are often not sold in the market, and
market- focused economies have shown relying on the private sector to provide
notable inability to ensure universal them may be impractical.
access to basic social services such as
health care.
In appraising the role of government,
considering the two extreme positions
in this debate is useful. One can be
called the social welfare perspective; it
supports the vision of an active central
government that provides virtually all
social services and participates
actively in the production of goods and
services throughout the economy. This
perspective assumes without question
that education, health, and other
social services will be fully provided by
the government. What can be called
the market economy perspective, at
the other extreme, holds that the
government should intervene only if
and when the market system performs
imperfectly. The economist’s
perspective on the appropriate degree
of government involvement is to weigh
benefits against costs; in other words,
both governments and markets can be
imperfect, and the appropriate mix
needs to be assessed on a sector-by-
sector basis.

Goals of public expenditure

Historically, the role of the public sector

has been undis- puted for certain
activities. Traditionally, these areas have
included maintenance of law and order
and national secu- rity; investment in
infrastructure, such as roads, electric-
ity, and communications networks; and
provision of certain types of goods and
services. Technically, these activities
are termed public goods, externalities, and merit
goods. However, none of these areas is
now invulnerable to change, and many
governments have experimented with
privatizing areas previously regarded as
the sole province of the public sector.
Public goods. Services that are widely
agreed to be essential and that are
consumed collectively (for example,
national defense and policing), certain
types of utilities and amenities (such as
 intervention, with pharmacy services
In practice, these definitions have provided mostly by the private sec- tor,
limited applicabil- ity, and in recent without government support or
years, governments have explored ways interference.
to engage the private sector in some
forms of public infra- structure. For
example, power and water companies, 10.4 Understanding the private sector
which are traditional public entities,
have been privatized in many countries, In contrast with the public sector, private-
and new highways are often built sector resource allocation decisions are
through part- nerships between the determined largely by the interac- tion of
public and private sectors. Currently, buyers and sellers in the marketplace,
the overall effects of these policies are mediated by price. Health program
unclear, but they do represent a clear managers in the public sector some- times
shift in government thinking about think of the private sector as greedy,
provid- ing public goods. unscrupulous, unethical, and concerned
Externalities. External effects, only with profit at the expense of
sometimes called social costs or
benefits, extend beyond the party
directly involved in the production or
use of a good or service (Musgrove
1996). Examples of goods with positive
externalities are immunization and
communicable disease control; all mem-
bers of the community enjoy the
benefits of immunization or treatment
because their chances of contracting
these dis- eases are reduced as a result.
Because private markets tend to
underprovide public goods with positive
externalities, governments usually take
responsibility for funding public goods
or subsidizing their use.
Merit goods. Merit goods are things that
are good in themselves and include, for
example, providing health ser- vices for
the poor. If left to the market, merit
goods would be underprovided.
Populations want these services to be
provided, but private markets tend not
to take care of this group.
Government activity often extends
beyond these three types of goods and
services. Many people look to govern-
ment to create a supportive
environment for the private sec- tor by
encouraging stability and ensuring the
availability of basic infrastructure to
enforce laws and legally binding con-
tracts. Arguments for a more active
public sector are often most forcefully
made in developing countries, where
levels of private investment may be low,
and the private sector is consequently
less well developed. Nevertheless, the
govern- ments there are sometimes
much less developed and can have
issues with corruption and lack of
transparency.
The roles that governments can play
in the pharma- ceutical sector are
discussed in Chapter 8 and range from
total control and provision of all
pharmaceutical services (increasingly
rare) to minimal government
 Suppliers do not compete on the basis
equity and quality. They often see of price only; they may compete on
consumers as unable to judge the quality (providing a higher quality for
quality of health services and the same price), reliability, service, or
therefore vulnerable to manipulation capacity.
by the private sector. However, the In practice, this type of competitive
private sector usually plays a market is sometimes hard to achieve
significant role in the health sector in with pharmaceutical products. Because
the production, distribution, and sale information is a public good, private
of pharmaceuticals as well as in the markets will tend to underprovide it.
direct provision of a significant The scientific advances that underlie
propor- tion of health services inno- vative pharmaceuticals are an
through private clinical practices, example of this phenomenon. Various
private hospitals, and retail drug mechanisms have been developed to
sellers. This fact alone is an encourage research and development in
important reason for better medicines and vaccines for neglected
understanding the private sector, diseases. For example, an advance
which, some believe, has advantages market com- mitment, a contract from a
over the pub- lic sector in certain government or donor, guar- antees a
circumstances and for certain viable market for a new medicine or
activities. Appreciating both the vaccine that would otherwise be too
strengths and the weaknesses of the financially risky to develop—such as
public and the private sectors is
essential to good public- sector
decision making.

Markets and competition

The private sector is characterized by

buyers and sellers in the marketplace
negotiating the exchange of goods
and ser- vices through the
mechanism of price. In the
pharmaceuti- cal sector, the sellers of
medicines may be manufacturers,
wholesalers, pharmacies, or retail
drug sellers. Purchasers may be
government, private, or
nongovernmental health facilities, or
individual consumers. When multiple
suppli- ers act independently and
large numbers of purchasers exist,
markets are described as
“competitive.” Through the use of
prices as signals, competitive
markets are able to allocate
resources efficiently, making sure
that resources get to the people who
are willing and able to pay for them.
Suppliers enter the market when
they see an opportu- nity to make a
profit, that is, to earn revenues in
excess of costs. With this incentive,
they are willing to invest their own
money and take a risk as they
engage in new activi- ties, expand
into new markets, and respond to
consumer demand. Under
competitive conditions, suppliers can
be expected to earn a reasonable
level of profit; if they try to increase
their profits above this level, another
supplier will likely offer a lower price
and take away their business. In this
way, the price system functions as a
control, or disci- pline, mechanism.
a product that would benefit developing production of larger quantities leads to
countries. In 2009, five countries and lower average costs. For example, a
the Bill & Melinda Gates Foundation plant that produces 4 million tablets a
activated the first advance market day is likely to do so at a lower cost per
commitment of USD 1.5 billion to speed tablet than one that produces only
the development of a vaccine for 10,000 a day. Beyond some level of
pneumo- coccal disease (GAVI Alliance output, however, additional machinery
2009). or equipment may need to be bought,
The intellectual property system, or more resources may need to be
notably patents, also tries to address spent in supervising production, which
this shortcoming by giving innovators may increase average costs.
a time-limited monopoly in exchange Economies of scope. Economies of scope
for revealing the nature of their result when
invention. Monopolies, in general, lead combining a number of different
to higher prices and suboptimal use in activities enables them to be done at
the short run, but the intended trade-off lower average cost. Private distribution
(not always realized) is that this system networks may benefit from economies
produces a greater rate of innovation in of scope by combining the delivery of
the long run. Thus, the situation is far pharmaceuticals with the delivery of
more complex than a simple other goods and services.
competitive market.
In most countries, patents are now
granted for twenty years, although the
effective patent period of medicines is
eight to fourteen years, because of the
time development takes. After the
patent on a medicine expires, generic
sup- pliers are able to compete, and
prices typically plummet to become
much closer to the marginal cost of
production. For both patented and
generic products, the pharmaceutical
marketplace is also distorted by the
presence of public and private
insurance.
In most developed countries, the
government negotiates prices with
pharmaceutical suppliers in an effort to
provide a counteracting force
(monopsony or single-buyer power) to
offset the single-seller power of
monopolists. Government intervention
is the rule rather than the exception,
especially in rich countries. The
theoretically competitive model of
multiple suppliers and multiple
purchasers is often replaced by a more
pragmatic model of multiple
monopolistic suppli- ers of products and
one or a few large purchasers (govern-
ment or nongovernmental
organizations) who can exercise
considerable purchasing power. (See
Chapter 9 on pharma- ceutical pricing
policies.)
Economies of scale. In competitive
markets, suppli- ers have an incentive
to produce goods and services as
efficiently as possible, using the least-
cost combination of inputs. In some
cases, the private sector is able to
generate efficiency gains because of
the size and diversity of its opera- tions.
Economies of scale occur when the
Ethics and business Some are part of large international
initiatives (Medicines for Malaria
As previously mentioned, both Venture, Drugs for Neglected Diseases
nongovernmental organi- zations and Initiative, TB Alliance), and much
public-sector groups have tended to funding has come from the private
attribute unethical and unscrupulous sector (for example, the Bill & Melinda
motives to the private sector. Although Gates Foundation). Several initiatives
examples exist of suppliers that are public/private-sector partnerships,
brazenly cheat by providing substandard involving pharmaceutical manufacturers
medicines, for example, the long- term (see Chapter 3 on intellec- tual property
interests of private providers do not and access to medicines). The result
encourage engag- ing in this type of has been considerable blurring of the
activity. As long as there is the prospect traditional barriers between the public
of a continued, profitable relationship and private sectors in pharmaceutical
with a purchaser, the supplier has an research, development, and
incentive to retain customers by distribution.
providing good-quality services.
Much of the criticism of the last decade
has been directed at manufacturers of
patented pharmaceuticals. The main
arguments have centered on the price
at which they sell their products,
particularly in poorer countries, and
their lack of involvement in the
development of new medicines for some
diseases that are major causes of
morbidity and mortality in those
countries (Trouiller et al. 2002). With the
help of intense lobbying from advocacy
groups, how- ever, the pharmaceutical
industry appears to be recognizing its
wider global responsibilities and is
addressing its dam- aged reputation. As
a result, modest progress is being made
in some areas to provide greater access
to some previously unaffordable
medicines (for example, antiretroviral
medi- cines for HIV/AIDS) and in the
development of medicines for neglected
diseases. In theory, many
pharmaceutical sup- pliers will be quite
happy to sell medicines at “differential”
(lower) prices in poor countries, as long
as those prices are above their marginal
costs of production and distribution and
prohibitions against reexporting to
higher-priced mar- kets (parallel trade)
are enforceable (Danzon and Towse
2003).
Encouraged by the World Health
Organization and the
World Bank, some research-based
companies have been using differential
prices to sell their products on different
markets (WHO and WTO 2001). This
subject is discussed in more detail in the
chapter on medicine pricing (Chapter 9).
Products that have been the subject of
differential pricing include
contraceptives, vaccines, and
antiretroviral medi- cines (GAVI n.d.).
In addition, nonprofit organizations are
developing new medicines for conditions
such as tuberculosis, malaria,
leishmaniasis, and trypanosomiasis.
10.5 Government interaction with the private principal aims of pharmaco-economics;
sector techniques for achieving efficiency are
discussed later in this chapter. Efficiency in
pharmaceutical management requires that
Governments interact with the private
the medicines are effective and affordable,
sector in many dif- ferent ways. In its
represent value for money, and are used
simplest form, this interaction consists
appropriately. But govern- ments are not
of government purchases of
concerned only with efficiency. Most also
pharmaceuticals and supplies from
try to achieve a degree of equity in the
private pharmaceutical companies. In
distribution of funds and services. Lack of
theory and in relation to pharmaceutical
access to essential medicines
products, much government
discriminates against those with the least
involvement is motivated by a desire to
ability to pay, leading to avoid-
correct “imperfect” private markets.

Market failure

A number of potential market failures

exist in the medical marketplace in
general, and the pharmaceutical
marketplace in particular, that distort
outcomes away from the efficien- cies
that would be expected under the
simple competitive ideal—

• Insurance means that patients, and

physicians as their agents, do not
face the social costs of their
decisions to use health care.
• Information is a public good, but
the adoption of the patent system
as compensation creates
monopoly power, which can be
abused.
• In general, purchasers do not have
good information about the price
and quality of the health care
services they buy. This information
asymmetry can work to the benefit
of sellers.
• Regulatory requirements create
high barriers for new manufacturers
entering the market, which lessens
competition.

Patients’ inability to assess the quality,

safety, or efficacy of pharmaceuticals
means they must rely on the clinicians
who prescribe them, on pharmaceutical
producers to maintain production
quality standards, and on governments
to inter- vene with regulatory activities.
Inspection of medicines, registration
and licensing of pharmacists, and
medicine registration processes are all
ways in which governments attempt to
protect consumers from dangerous,
ineffective, and poor-quality medicines
(see Chapters 6 and 19). These
demanding safety standards, although
necessary, make entering the market
difficult for new companies.
Achieving economic efficiency in the
presence of market failure is one of the
able mortality, suffering, resentment, the National Health Act prevents the
and in some cases, economic decline. national medi- cines selection body (the
Governments are in the best position Pharmaceutical Benefits Advisory
to correct these inequities, and Committee) from listing a new product
access to essential medicines is now on the schedule at a higher price than
regarded by some as a human right. the comparators unless it offers better
Because private- sector decision efficacy or safety (see Country Study
making is driven more by profit than 10-1).
by equity considerations, equity is A number of issues should be
often the first motivation for considered in evaluating the potential
government involvement in essential effect of regulation: the extent of
medicines programs. The relatively coverage (for example, does it include
high cost of pharmaceuticals both public and private sec- tors?), the
compared to that of other goods capacity of government to monitor
suggests that without government compliance, the extent of enforcement
involve- ment, the poor would be and exemptions, and the extent to
denied access to lifesaving medi- which the private sector can circumvent
cines. This probability is especially or evade regulations (for example,
high in remote areas, where cash through the emergence of an
incomes are usually lower and uncontrolled parallel market for
delivery costs higher. nonessential or banned medicines).

Types of government interventions

In a broad sense, arguments are that

government interven- tions are
needed to correct market
imperfections, ensure the safety and
efficacy of medicines, and improve
access and affordability. These aims
can be advanced by various types of
legislation; in addition, governments
can influ- ence prices by becoming
large purchasers (or subsidizers) of
medicines and using their extensive
purchasing power. Pharmaco-
economic analysis can facilitate the
use of this approach as a tool for
calculating social willingness to pay,
as discussed below.
The term regulation refers to the set
of tools that govern- ments use to
ensure that private-sector actions are
consis- tent with the broader welfare
of society. The objectives of
regulation are usually improvements
in quality, efficiency, or equity.
Pharmaceutical legislation and
regulation are dis- cussed further in
Chapter 6.
With pharmaceuticals, the
instruments used to regulate the
private sector (for example,
manufacturers, distribu- tors,
pharmacies) include controls on
medicine and service quality through
mandatory inspection programs;
controls on imports (restricting
imports of dangerous products or
permitting the import of only
essential medicines); and registration
and licensure of pharmacists.
Restrictions have also been widely
imposed on the prices at which
pharma- ceuticals can be sold. For
example, in Australia, a section of
Country study 10-1
australia: Ten years of using pharmaco-economics in decision making
In Australia, the federal government commission criticized the PBAC about
subsidizes the use of pharmaceuticals the level of disclosure in its decision
through the maintenance of a making. In 2002, the Department of
“positive” formulary, called the Health and Aging began publishing
Pharmaceutical Benefits Schedule summaries of PBAC’s positive
(PBS). Recommendations to list new recommendations on its website, but
medicines on the PBS are made to the so far full details of the assessment
health minister by a Pharmaceutical process are still not provided.
Benefits Advisory Committee (PBAC),
based on the importance of the
medicine, the need for it in the com-
munity, its efficacy and safety
compared to other medi- cines or
treatments for the condition, and,
since 1993, its cost-effectiveness. In
addition, the committee considers the
financial implications of adding the
medicine to the formulary.
The PBAC analyzes the relative
clinical performances and costs of
both the potential new medicine and
com- parable medicines already
listed on the PBS. The PBAC bases its
decisions on the principle that if a
medicine is no better than a
comparable product, it should not
cost more. If the product is superior
to existing therapies but more
expensive (a common situation), and
funds are available, any extra
expenditure should represent “value
for money.” Costs are not limited to
each product’s acqui- sition cost, but
can include savings in other areas—
for instance, decreased use of other
medicines or fewer con- sultations,
tests, and hospital admissions.
Incremental cost-effectiveness ratios
for the new medi- cine compared to
existing medicines are then
developed. These economic data
inform decision making, but no
formal “threshold” exists for what is
cost-effective. Other issues, including
clinical need and social values, are
influ- ential. Decisions projected to
cost more than 10 million Australian
dollars (AUD) per year must be
approved by the cabinet of the
federal government.
More than ten years’ experience in
using pharmaco- economic
evaluations in PBAC decision making
has resulted in several observations.
The processes have survived multiple
technical and ethical challenges, nota-
bly but not exclusively from industry.
A government productivity
No evidence suggests that Australia
has been denied access to important
medical advances by the demand
that a new medicine demonstrate
“value for money,” with the PBS
subsidizing a comprehensive range of
medicines for patients. The PBS is a
positive formulary, in that
the PBAC does not seek to limit choice
or restrict the numbers of medicines
within a classification. However,
pressures on the system are real; for
example, patient advocacy groups
with particular clinical needs continue
to seek relaxation of decision-making
criteria that affect them.
As in most other countries, the costs
of medicines are a concern, and the
viability of the PBS has been ques-
tioned. To curtail growth in
pharmaceutical costs, the PBAC
increasingly relies on restricting
subsidies by defining eligibility
criteria that target patients in whom
the new medicine has been
demonstrated to be cost-
effective. During the decade in which
the PBAC has used pharmaco-
economic analyses, expenditure on
the PBS has risen from about AUD 1
billion per year in the early 1990s to
about AUD 6 billion in 2005. This
increase does not mean that the use
of economic information in deci- sion
making has been a failure—rather, it
suggests that the other side of the
cost equation, the demand side, has
been less well managed. Prescribers
often ignore restric- tions, and the use
of new medicines for indications and
patient populations in which the
medicine has not been shown to be
cost-effective has contributed to the
rapid growth in PBS costs.
Using pharmaco-economic analyses
in decision mak- ing is not a
panacea for rising pharmaceutical
budgets. However, such techniques
do make the trade-offs between the
costs and benefits of the medicine
more transparent. Although
considerable progress has
been made in the technical aspects
of the conduct of pharmaco-
economic analyses, progress on
managing prescribing practices has
been notably less successful. The
challenge ahead is how to use the
available infor- mation on cost-
effective medicine use to influence
how medicines are prescribed and
used in the Australian community.
Source: Birkett et al. 2001; Hailey 2009.
 payments may result in suppliers’ raising
When regulations are in place, they their prices or deciding not to bid at all on
should be regularly eval- uated to government contracts.
determine whether they are achieving Inequities in revenue collection can
the desired effects or, as is frequently result in a reduc- tion in health services,
the case, the government interven- tion which is felt most acutely by lower- income
has had unforeseen and negative groups, which are most dependent on
consequences. them. If the more affluent members of
Legislation designed to improve the society succeed in avoiding taxes and
affordability of medi- cines is harder to other government levies, the financial
implement when the government does burden for government activity falls on
not subsidize medicines and thus is those with fewer means and options.
unable to use its extensive purchasing Even honest, well-meaning politicians
powers. For example, since 1997, South and officials are subject to interest-group
Africa has tried to regulate medicine pressures. Political supporters, members
prices in the private sector, but it has of the same ethnic group, and concerned
met stiff resistance from stakeholders, business organizations can influence
including pharmaceutical bureaucrats to allocate services and
manufacturers, wholesalers, and retail resources in ways that do not promote
phar- macists (Republic of South Africa equity. Generally,
1997). To achieve greater control over
prices and improve affordability and
access, the South African government
plans to introduce a form of national
health insurance before 2014 (ANC Today
2009).
The capacity required to implement
and monitor the effects of regulations—
and the costs of monitoring them—
needs to be carefully weighed against
the proposed benefits.

Challenges to government interventions

Arguments in favor of government

involvement often con- trast private-
market failure with “perfect”
government inter- vention, but this
result is never achieved in practice. The
private market may fail, but
government intervention also fails
sometimes. Governments in all
countries at all levels of development
are subject to threats to their
effectiveness. Informed decisions about
public involvement in essential
medicines programs must acknowledge
the sources of gov- ernment
ineffectiveness, including inefficiency in
service delivery, inequities in revenue
collection, interest-group pressures,
lack of good governance, and
widespread corrup- tion.
Inefficiency in service delivery arises
from a lack of individual incentives for
good performance, bureaucratic
inflexibility, and political pressure to
create employment. Overexpenditure
on staff and underexpenditure on phar-
maceuticals, for example, could result
in having idle staff who are unable to
meet the needs of patients.
Inefficiencies in government accounting
systems that cause lengthy delays in
 we spend money on prevent- ing
the more affluent are able to exert cardiovascular deaths or childhood
such pressures; ironically, the less illness? Or should we spend money on
well-off may lose directly and education or health? Technical efficiency is
indirectly—by paying more in taxes concerned with determining the right
as well as by receiving fewer quantities of differ- ent inputs and the
services. least-expensive combination of inputs to
Finally, lack of good governance achieve a given outcome; for example,
and corruption can be revealed in what is the most cost- effective way to
self-interested manipulation of the reduce cardiovascular deaths? The
medicine selection process, concepts of allocative and technical
corruption in the award of tenders, efficiency are closely linked and in real
nep- otism in the appointment of key life cannot be separated.
staff, sales of medicines on the
outside by health staff, and other Allocative efficiency
destructive prac- tices. Indeed, the
World Bank has identified corruption Allocative efficiency has relevance to
as one of the greatest obstacles to a pharmaceuticals, not least because
country’s economic and social medicines can consume 25 to 65
development (see percent of entire health budgets in
http://www.worldbank.org/anti some low-income countries (WHO
corruption).

10.6 Efficiency concepts

Efficiency concepts form the basis

for understanding the use of
pharmaco-economic analysis.
Whereas effectiveness con- cerns
the degree to which services are
provided or outputs are produced
(for example, how well does a
medicine work in practice?),
efficiency can be understood as
getting the most output for a given
quantity of resources committed or,
alternatively, achieving a given level
of output at minimum cost. In this
field, efficiency is usually referred
to as “cost- effectiveness”
(Drummond et al. 2005).
Several types of efficiency concepts
exist, with a variety of definitions
that are characterized by some lack
of agree- ment. Generally, economic
efficiency refers to economic sys- tems
that can provide more goods and
services to society without using
more resources. Scale efficiency occurs
when the production costs are
reduced because of higher produc-
tion volume. Productive efficiency in a
health system refers to maximizing
health outcome for a given cost, or
the mini- mizing cost for a given
outcome. Because types of efficiency
relate to the pharmaceutical sector,
this chapter takes a pragmatic
approach by referring to the
concepts of alloca- tive efficiency and
technical efficiency. Allocative efficiency is
the broad concept of undertaking the
best combination of activities to
achieve the greatest net benefit to
the com- munity; for example, should
 expiry, and stockouts reduce program
2010). In some countries, 20 to 30 output and lead to expensive
percent of pharmaceuti- cal expenditure emergency orders.
is for products that have no relevance In pharmaceutical distribution, when
to the main health problems of the not enough trans- portation is available
population—clearly an ineffi- cient or vehicles are often inoperative,
allocation of scarce resources, which personnel may be underused. The
might be better used in public health same output could be achieved with
programs or education (WHO 2010). fewer personnel, or output could be
Decisions affecting allocative dramati- cally increased with a slightly
efficiency are most often made at the greater expenditure on vehicle
policy level, for example, deciding maintenance. A program manager
whether to allocate additional funds to might consider the costs and benefits
the ministry of health or the ministry of of changing from using a fleet of
education. Within the ministry of health, program vehi- cles to contracting
decisions involve how much to spend on delivery to a commercial transportation
primary, second- ary, and tertiary care firm in an effort to increase efficiency.
or whether to spend additional pro- Rational use of medicines has the
gram funds on controlling tuberculosis potential to improve efficiency; for
or treating sexually transmitted example, prescribing excessive courses
infections. Such allocative decisions can of
have unintended and undesirable
effects; a decision to reduce spending
on pharmaceuticals and supplies in
order to pay salaries could lead to
inefficiency if staff are then underused
because of other shortages (for
example, a surgeon who can- not
perform operations because the
operating-room equip- ment has not
been maintained or because
anesthetics are in short supply).

Technical efficiency

Technical efficiency means obtaining

the maximum physi- cal output from
the physical inputs in pursuit of a
particular goal, such as reducing deaths
from HIV/AIDS by increasing the
number of individuals receiving and
adhering to effec- tive antiretroviral
medicines. Technical efficiency includes
not only the cost-effectiveness of the
medicines, but also the system that
selects, procures, distributes, and
dispenses the medicines to
consumers.
Selection of medicines should
consider the medicines’ comparative
efficacy and cost-effectiveness,
measured in terms of the money
spent in achieving an adequate and
sus- tained suppression of the AIDS
virus, for example.
In procurement, the use of
competitive international tendering has
advantages. As discussed in Chapter 9
on medicine pricing, improving the
efficiency of the ten- dering process can
result in substantial price reductions.
Determining the appropriate quantities
of medicines to buy also affects
efficiency: overstocking brings risks of
antibiotics is inefficient, because the
same outcome could be achieved using 10.7 Economic evaluation of pharmaceutical
fewer. Similarly, a subtherapeutic products
medicine dose fails to achieve the
desired clinical outcome and wastes Although concepts of efficiency are
resources because the patient is likely vital to all aspects of pharmaceutical
to return for further treatment. management, including procurement,
Polypharmacy leads to lower rates of distribution, and dispensing, as well as
adherence to treatment and is to the selection of essential medicines
inefficient; resources are consumed, for formularies and reimbursement lists,
but the desired clinical outcome is not pharmaco-economics is defined as the
achieved. analysis of the costs and benefits of
Program managers can control only medicine therapy to health care
some of the factors that affect technical systems and society (ISPOR 2003).
efficiency. For example, program man-
agers may not have control over the
allocation of funds among different
line items, such as personnel and fuel,
making it difficult to use inputs in the
most efficient combi- nations.
Incentives and management structures
are impor- tant. If a more efficient use
of resources leads to tangible benefits
for health workers, they are more
likely to make more efficient choices. If
they are penalized (for example, if
underspending a budget leads to less
money being allo- cated next year with
no offsetting incentives), health work-
ers are unlikely to behave in an
efficient and cost-saving manner.
Information is important in increasing
technical effi- ciency: managers and
health care providers who have
information about the costs of
alternatives are more likely to make
efficient use of their resources than
those who do not. Formulary manuals,
standard treatments, and thera- peutic
guidelines are intended to provide such
information to health workers. Relatively
simple performance indicators have
been developed using information that
should be avail- able to most supply
system managers; such indicators can
be used to monitor supply system
efficiency on a routine basis (see
Chapter 48).
Health care decision makers can use
information on effi- ciency to improve
the current situation and make better
plans related to performance, costs, and
staff utilization. In addition, efficiency is
an important economic concept because
demonstrating that existing resources
are being used efficiently provides
powerful support to requests for
additional resources. But achieving both
allocative and technical efficiency
depends on access to information on
both costs and outcomes of competing
treatment programs. Exploring the
relationships between costs and benefits
lies at the center of economic
evaluation.
 simple) is to identify the lowest-cost
The essential characteristic of alternative, and the analysis is limited to
pharmaco-economic analy- ses is that cal- culation of the costs. For example, if
they involve comparisons—usually a new two medicines have the same therapeutic
medi- cine is compared with the best benefits, have the same safety profile, and
existing treatment; therefore, decisions are of equivalent quality, the medicine
are almost always made “on the with the lower cost would be selected.
margin.” The best analyses are those In practice, CMA can be more demanding
that are based on high-quality clinical than it appears. The first challenge is to
studies (Birkett et al. 2001). define an acceptable degree of thera-
The term economic evaluation refers to a peutic equivalence before comparing the
set of analyti- cal tools that can help costs of two regi- mens. Generally,
identify which of several alternative noninferiority is the term used to define
treatments offers the greatest benefit equivalence (Djulbegovic and Clarke
compared with its cost. These analytical 2001). In other words,
tools can help address questions such
as: What medicines should be included
on the formulary? What are the patient
outcomes of various treatment modali-
ties? How do two options for providing
pharmacy services compare?
Four methods of economic analysis
are commonly distin- guished and are
described here in increasing order of
meth- odological and practical difficulty
(Drummond et al. 2005).

1. Cost-minimization analysis (CMA): calculating

the cost of two or more alternatives
that have the same outcome to
identify the lowest-cost option
2. Cost-effectiveness analysis (CEA): measuring
both costs and benefits of
alternatives to find the strategy with
the best ratio of benefits, measured
in therapeutic (clinical) or program
effects, per money unit of expen-
diture
3. Cost-utility analysis (CUA): same as cost-
effectiveness analysis, except that
benefits are measured in “utility”
units, which in theory can be
compared across differ- ent disease
states
4. Cost-benefit analysis (CBA): comparing
the costs and benefits of an
intervention by translating the
health benefits into a monetary
value, so that both costs and
benefits are measured in the same
unit

The distinctions among these four

methods mainly con- cern the benefits
of intervention.

Cost-minimization analysis

In cost-minimization analysis, the

benefits have to be mea- sured in the
same or equivalent units, and all the
alternatives considered need to produce
the same quantity of benefits. The
choice (which appears deceptively
 medicine may enable more patients to
a new treatment should be no worse be treated and more lives to be saved,
than an existing medi- cine. A although the medi- cine is less
noninferiority boundary is set during efficacious. When working with a fixed
the statistical analysis, to represent budget, comparing the cost-
the tolerable maximum level of inferi- effectiveness ratios of each medicine
ority that will be allowed (for with no treatment is important. Usually,
example, 10 percent); the sta- tistical the medicine with the lowest ratio of
confidence interval around the cost to units of health gained is prefer-
difference between the two able. If the budget is not fixed and
treatments must lie below this level. some growth is possible, the
The costs of the medicines can be incremental cost-effectiveness ratio,
compared on that basis. Because the which compares the new (more
costs of medicines tend to vary effective) medicine with existing
somewhat with dose, the doses at treatment, should be used to commit
which the products can be additional funds.
considered equivalent must be CEA’s main challenge is to compare
determined. These equivalent- different therapies: Is 5,000 dollars per
effective doses are then used to heart attack avoided or 50 dollars per
establish the relative price of the new symptom-free period for asthma
product. The costs of administration patients a better deal? Or is spending
must also be included. An oral 1,000 dollars per life-year gained by
medica- tion replacing an reducing disability from a stroke or
intravenous form with identical 5,000 dollars per life year gained for a
efficacy and safety will have the breast cancer survivor better? In the
advantage of not requiring nursing latter instance, although the
time and injection equipment. “outcomes” seem to be the same, they
are not,
Cost-effectiveness analysis

With cost-effectiveness analysis,

the unit of output of the
alternatives is the same, but the
quantities of output, or
effectiveness of the strategy, differ.
The outcomes are often described
in natural units; for instance,
resolution of pneu- monia or cases
of malaria prevented must be
consistent for the treatments being
compared. CEAs of this type are
use- ful in judging technical
efficiency. Sometimes the outcome
measured is deaths avoided or life
years gained by the use of a new
treatment compared with an
existing therapy. The challenge is to
identify the option with the lowest
cost per unit of benefit gained. For
example, different vaccination
strategies (fixed point, outreach,
campaign) may reach dif- ferent
numbers of children and have
varying levels of effec- tiveness, but
cost-effectiveness analysis can help
identify the one that has the lowest
cost per fully immunized child.
Cost-effectiveness must be
considered alongside thera-
peutic effectiveness. Generally, but
not always, the new treat- ment is
considered superior to the old one.
Occasionally, it is less effective but
much cheaper. If the budget is
fixed, pur- chasing the lower-cost
Table 10-2 Using economic analysis methods to make choices

Medicine therapy choice: antibiotic a versus

antibiotic B for Transportation scheme choice:
Type of analysistreating childhood program fleet versus contracted
pneumonia
Cost minimization Of two medicines with equal effectiveness, which is private firm
Assuming that both options are identically
the effective, which is the least expensive?
least expensive?
The two options have different performances with
Cost-effectiveness Two medicines have different degrees of respect to on-time delivery: What is the cost per
effectiveness: medicine kit delivered using program transport versus
What is the cost per child cured using antibiotic A a contracted firm? (Perpetually late deliveries are
versus antibiotic B (allowing for different efficacy factored in as a smaller level of desired output.)
of drugs A and B)?
Because the outcome of interest is the same in
both cases (that is, medicines delivered on time),
Cost utility What is the cost per QALY saved of treating no need exists to use a specially constructed measure
childhood of output.
pneumonia with drug A versus treating tuberculosis
with short-course chemotherapy? (Note: This method
is controversial for comparing medicine therapies.) Because the outcome of interest is the same in
both cases (that is, medicines delivered on time),
Cost benefit What is the cost-benefit ratio (value of costs per no need exists to use a specially constructed measure
value of output.
of life saved) for treating childhood pneumonia
versus the cost-benefit ratio for saving lives through
improved road lighting? (Note: This method is
normally not used to compare alternative
therapies.)

because quality of life will differ DALY saved; and measles vaccination
between stroke and breast cancer costs 4 dollars per DALY saved
survivors. For this reason, health (Laxminarayan et al. 2006). By
economists have sought different contrast, interventions such as cancer
metrics that enable them to make treat- ment and environmental control
compari- sons across different disease of dengue fever both cost thousands of
states. dollars per DALY saved. The 1993 World
Development Report (World Bank 1993) was
Cost-utility analysis the first major analysis to use this
outcome measure.
Cost-utility analysis is cost-effectiveness QALYs are similar to DALYs in that
analysis conducted with the program they calculate pro- gram benefits in
outcomes measured in utility units. The terms of life-years saved, except that in
most common utility measures are the the
quality-adjusted life- year (QALY) and
the disability-adjusted life-year (DALY),
which is more commonly used in
studying developing countries
(Drummond et al. 2005).
The DALY is a measure of health
outcome used to com- pare
interventions with different types of
output (Murray 1994). This approach is
useful for making decisions about
allocative efficiency because it enables
comparisons of treat- ments for
different conditions, such as malaria,
depression, and heart disease. DALYs
combine mortality and morbidity (or
disability) into a single measure by
weighting the life- years saved by the
amount of disability associated with a
specific outcome.
For example, diagnosis and treatment
of African trypano- somiasis costs 15
dollars per DALY saved; treatment for
zinc deficiency costs 73 dollars per
case of QALYs, the years are weighted
by the “quality” of those years when
they are lived in less-than-perfect
health. Like DALYs, QALYs also allow
comparison of interventions with
different outputs. QALYs are
controversial because individual
qualities of life and preferences are
difficult to compare. Furthermore,
survey-based quality-of-life scales are
not perfect measures, nor are they
easily translated into QALYs.

Cost-benefit analysis

In cost-benefit analysis, both costs and

outcomes are mea- sured in financial
units. Cost-benefit analysis is rarely
undertaken in the health sector because
of the difficulty and equity implications
of assigning a monetary value to life-
years saved (Drummond et al. 2005). Its
main advantage is that it allows the
comparison of programs with different
outcomes—for example, investment in
health versus invest- ment in education.
Table 10-2 shows how each of these
tools can be applied to make a range of
choices, for instance, between
alternative medicine therapies or
alternative transportation schemes.

Steps for conducting a cost-effectiveness evaluation

Conducting a cost-effectiveness
evaluation has six key steps.
Step 1. Define the objective. For example, in
terms of program output—

• Which medication regimen should

be the therapy of choice for the
treatment of childhood
pneumonia?
• What is the best approach to
transporting essential medicines
to health facilities?
 Step 2. Enumerate the different ways to achieve the Sensitivity analysis measures how various
objective. For example— assumptions made in the course of
estimating costs and outputs affect the
• Short-course chemotherapy with conclusions. Sensitivity analysis deals with
more expensive medicines (option uncertainty in assumptions that underlie
1), versus traditional long-course the analysis or with problems of imprecise
chemotherapy with cheaper measurement. In practice, sensitivity
medicines (option 2) analysis identifies the values or
• Purchase of program vehicles for assumptions about which uncer- tainty
delivery of medi- cines to health exists; determines their likely range of
facilities (option 1) versus a values; and recalculates study results
contract with a private transport based on a combination of the “best
firm for delivery of medicines guess,” most conservative, and least
(option 2) conservative esti- mates of these key
values. The question of interest is whether
Step 3. Identify, measure, and value the benefits of the conclusions of the analysis would be
each option. In the step 2 medicine-choice changed with these extreme values.
example, benefits could be measured in
DALYs, which would require mea- sures
of therapeutic effectiveness and
epidemiological data on the course of
illness without treatment. For the
transport example, an indicator of
performance could be used, such as on-
time delivery of pharmaceutical
consignments to a health facility.
In the clinical arena, the benefits of
competing treat- ments are usually
measured in controlled clinical trials.
The highest level of clinical evidence to
use in economic analy- sis is a
systematic review and meta-analysis of
all avail- able high-quality trials that
compare interventions. Failure to use
high-quality clinical data often leads to
suboptimal pharmaco-economic
analyses.
Step 4. Identify, measure, and value the costs of each
option. All the inputs required for each
option should be identified and the
costs determined. Capital as well as
recur- rent costs should be included.
Box 10-1 lists different types of costs
that should be considered (see also
Chapter 41). During this process,
defining a relevant timeframe for these
analyses is important. For instance, the
efficacy of statins in the prevention of
heart attacks and strokes has to be
mea- sured over years, not weeks or
months.
Step 5. Calculate and interpret the cost-effectiveness
of
each option. The incremental cost-
effectiveness ratio is the difference in
total cost between the intervention and
com- parison options, divided by the
difference in the number of units of
output. Better overall efficiency is
indicated by a lower cost per unit of
output.
Step 6. Perform sensitivity analysis on the
conclusions.
 Although certain costs or benefits
cannot be measured accurately, it
may be possible to show that the
results of the analysis do not change
over any reasonable range of cost or
benefit. Alternatively, the difficulties
in measurement may indicate that
the results are very sensitive to error
in mea- surement and that caution
should be used in interpreting the
results of the study. Sensitivity
analysis is easy to do and is essential
to properly use and defend study
results.

Conducting pharmaco-economic evaluations

As noted, conducting full

pharmaco-economic analyses that
deal adequately with all of the
sources of uncertainty is very
demanding of time and resources.
For the analyses to be valid and
error-free, they must draw on the
skills of epidemiologists,
biostatisticians, and economists.
Given the need to integrate a variety
of information of varying quality,
pharmaco-economic analysis can
be prone to errors—and even
manipulation—that can make any
product look more economically
attractive than it really is. To guard
against this possibility, systematic
checklists (see Drummond et al.
2005) are helpful for critical review.
The principles of economic analysis
are best understood by further
read- ing and through exercises
that involve the calculation and
interpretation of cost-effectiveness
ratios (see References

Box 10-1
Types of costs
Recurrent cost: The cost of goods that are consumed or
used up over the course of a year (for example, staff,
pharmaceuticals, fuel).
Capital cost: The cost of goods that are intended to last
for longer than a year (such as buildings, vehicles,
medical equipment).
Annualized capital cost: Capital cost per year of use- ful
life for a building, vehicle, or other capital item.
Fixed cost: Cost that does not change with the level of
output (for example, building, equipment, salaries to a
certain extent).
Variable cost: Cost that changes, depending on the
amount of services delivered (for instance, pharmaceu-
ticals and supplies).
Total cost: The sum of recurrent costs and annualized
capital costs.
Average cost per unit: Total cost divided by the num-
ber of units produced (for example, cost per patient
treated, per immunization given, per cure dispensed).
additional unit.
and Further Readings). In addition, the World Health Organization has published
Introduction to Drug Utilization Research and Drugs and Money: Prices, Affordability and Cost
Containment (WHO 2003; Dukes et al. 2003), which contain practical advice and
exercises in cost-effectiveness analysis and a review of cost-containment
measures. n

References and further readings

H = Key readings.
ANC (African National Congress) Today. “A Unified, Equitable and Integrated National Health System that
Benefits all South Africans.” July 24, 2009. <http://www.polity.org.za/article/anc-today-
statement-by-african-national-congress-outlining-the-proposed- national-health-insurance-
scheme-25072009-2009-07-25>
Bell, C. M., D. R. Urbach, J. G. Ray, A. Bayoumi, A. B. Rosen, D. Greenberg, and P. Neumann. 2006.
Bias in Published Cost- Effectiveness Studies: Systematic Review. BMJ 332:699–703.
Birkett, D. J., A. S. Mitchell, and P. McManus. 2001. A Cost-Effectiveness Approach to Drug
Subsidy and Pricing in Australia. Health Affairs 20(3):104–14.
H Bootman, J. L., R. J. Townsend, and W. F. McGhan. 2004. Principles
of Pharmacoeconomics. 3rd ed. Cincinnati, OH: Harvey Whitney
Books.
Carrin, G. 1984. Economic Evaluation of Health Care in Developing Countries. London: Croom Hel.
Cowen, T. 2008. “Public Goods.” In: The Concise Encyclopedia of Economics. 2nd ed. David R. Henderson
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