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Pharmacoeconomics (PE)
—PE is a branch of health economics.
—Pharmacoeconomics words comes
from Greek origin:
—Pharmaco: come from a Greek word that
is “ pharmakon” that is mean any thing
related to drug, medicine.
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 Pharmacoeconomics
—The term economics comes from the
Greek word from(oikonomia,
"management of a household,) from
(oikos, "house") + (nomos, "custom"
or "law"), hence "rules of house”

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 Pharmacoeconomics
—Economics is the study of the
production, uses and outcomes of
medicine.
—So Pharmacoeconomics is the study of
use(input) and outcome (output) of
medicine.
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Pharmacoeconomics

INPUT---------------->> OUTCOMES

Economic -------- Health and economics

Resources Consequences

Cost -------------------> Consequence

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 Pharmacoeconomics
— Pharmacoeconomics has two consideration:
— COSTS: input resources utilized by the therapeutics strategy and /
or intervention under study.
— CONSEQUENCES: are the outputs ( e.g., any end result of a
particular treatment and / or intervention )

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 Pharmacoeconomics
—Pharmacoeconomics show how limited
resources can be used most efficiently and
effectively.
—Compares the costs and
consequences (outcomes) of drug
therapies and medical interventions.
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Why is PE arised?
—Most of the economics crises come
from scarcity of resources.

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Scarcity
—Scarcity means that available
resources are insufficient to satisfy
all wants and needs.
—Absent scarcity and alternative
uses of available resources, there
is no economics problem.
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The Revolution
1- Increased cost.
2- Increased number of alternatives available to
treat illness and disease.
3- Growing demand for pharmaceuticals.
4- High-cost biotechnology products.
5- Limited resources.
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Why Pharmacoeconomics?
—1- Assist in decision making.
—2- Assessing the value of new agent.
—3- Justify the addition of new
clinical service.
—4- Comparing.

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 Questions that Pharmacoeconomics may help to address
are as follows:

*What drugs should be included on the hospital

formulary?
*What is the best drug for a particular patient?

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CONTINUE…..
*What is the best drug for a pharmaceutical
manufacturer to develop?
*How do two clinic services compare?

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 CONTINU
E…….
— What is the cost per quality-adjusted year of life
extended by a drug?

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Targets for Local PEEvaluations
— Biotechnology agents
— New expensive agents
— Newly marketed agents

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—Pharmacoeconomics:
—The description and analysis of the
costs and consequences of
pharmaceutical products and
services and their impact on
individuals, health care systems
and society. (Bootman JL, 1995)

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 — In cases where any of the components of the reference case is missing,
for
example, in an analysis in which there is no comparator being evaluated
against, or missing cost/outcome data, the study will be considered as
conducting
— Full a partial compare
PE evaluations economic least two alternative drug by examining
atboth cost and consequence .
s

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 Definition of Cost
“Th [monetary]value of all
e
services, goods,
and other
consumed in theresources that
of an
are relate consequence
provision
interventionor ”*
d s

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Types of Costs
Costs

Direct Indirect Intangible

Non-Medical Medical

Outpatient Inpatient

Office Visits Hospitalizations

Procedures Procedures

Drugs Drugs

Laboratory Tests Laboratory Tests

Rehab/Nursing Homes

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 Types of Costs
• Direct medical:
Fixed and variable costs associated directly with a medical condition or healthcare
intervention.
Medications. Clinic visits.
Medication monitoring. Emergency
Medication department visits.
administration. Home medical visits.
Patient and Ambulance services.
counseling Nursing services.
consultations.
Diagnostic tests.
Hospitalizations.
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 Types of Costs
— Direct nonmedical:
The costs of non-medical costs that are the results of
illness or disease but do not involve the purchasing of
medical
goods
Traveland
costsservices.
to receive health care (bus, taxi, fuel).
Nonmedical assistance related to condition.
Hotel stays for patients or family of out-of-town care.
Childcare services for children of patients.

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 Types of Costs
— Indirect costs:
Cost of lost or reduced productivity resulting from morbidity or
premature mortality due to nonmedical condition or treatment.
productivity for patient.
Lost productivity for unpaid caregiver (e.g. family member, neighbor, friend).
productivity because premature mortality.
Lost of

Lost

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Types of Costs
— Intangible costs:
Costs assigned to the amount of suffering that occurs becaus
of the disease or healthcare intervention. e
Pain suffering.
and
Fatigue.
Anxiety.

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Outcome Research
— Definition: Outcome Research: OR
Broadly defined as studies that attempt to identify, measure and evaluate the
end result of health care services in general.
The purposeof OR is to asses the value of a program or therapy in question.
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 Relationship between Outcomes, Pharmacoeconomics and
Pharmaceutical Care

outcomes
research
pharmaco-
economics

pharmaceutical
care
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Pharmacoeconomics
To MAXIMIZE the QUALITY of CAREdelivered,
per DOLLAR spent.

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 OUTCOMES
RESEARCH
Outcomes Research evaluations are
concerned
with evaluating
intervention the effects
on clinical, of medical
economic and
humanistic measures.

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 ECHO
model
— Provides a framework for comprehensive evaluation of outcomes.
— Three outcomes identified:
— A- clinical outcome
— B- economic outcome
— C- humanistic outcome

— This model normally relates to a disease and therapeutic outcomes to

assist physicians in the decision-making process.

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 OUTCOMES RELATIONSHIP

CLINICAL

OUTCOMES ECONOMIC
RESEARCH

HUMANISTIC

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 ECHO model
— To help decision making regarding a drug therapy and/or
related services, the pharmacoeconomic evaluation should
include
— an assessment of the economic, clinical, and/or humanistic
outcomes. (i.e., ECHO model).
— ECHO=OR=OUTCOME

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 Outcome types
—Medical( Clinical) outcome =The end result of
medical care
- Could be positive
- Could be negative

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outcomes
— Both positive and negative outcomes should be addressed
— Positive outcomes:
- drug efficacy measure, using the right antibiotics to treat
an infection.
— Negative outcome:
- ADR and treatment failure, using the wrong antibiotic to
treat an infection.

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 Clinical Outcomes
— Definition: Medical events that occur as a result of disease or
— Examples treatment
— Pain Relief
— Cure of Infection
— Myocardial Infarction
— Death

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Humanistic Outcomes
— Definition: Consequences of the disease or treatment on patient
functional status or quality of life
— Examples
— Health Related Quality of Life (HR-QoL)
— Patient Satisfaction
— Functional Status
— Patient Preferences

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Patient Satisfaction
— Definition: A consumer’s evaluation of the care received that indicates
the
extent to which their needs and wants are
met attitudes, values, and expectations
— Influenced by patient
— Typically measured by process and structure variables

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Economic Outcomes
— Definition: Direct, indirect, and intangible costs compared with the
consequences of medical alternatives
treatment
— Examples
— Drug Costs
— Office Visits
— ER
— Admissions
Inpatient Length of Stay
— Productivity

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 Perspective
—Point of view from which the study is
taken.
—Determines what will be measured,
what are the costs and benefits, and
how they will be valued.

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Perspective
— perspective will affect the types of costs (resource
expenditures) and benefits that will be considered
relevant to the analysis.
— Determine which costsand outcomes are included in
the analysis.

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 Types of perspective
—Societal
—Provider
—Payer
—Patient

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 Societal perspective
— The broadest of all perspective that
comprehensively evaluates all costs and
consequences.
— Considers the benefits to society as a whole
— Include costs:
Direct: overall cost of providing care
Indirect: loss of productivity
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 Provider perspective
—Concerned with the expenses of providing products
or services.
—Included costs:
- Direct medical costs only.

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 Payer perspective
— Social/Government, third party payors
— E.g. Private insurance companies and employers
— Included costs:
— Direct costs
— Indirect costs
- relevant to employers
- lost workdays
- lost productivity at work

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 Patient Perspective
— All the relevant cost and consequences experienced by
the patient.
— Included costs;
- Direct
- Indirect
-intangible

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Pharmacoeconomic Evaluation
Types of pharmacoeconomic include:
evaluations
— Cost-Minimization Analysis (CMA),
— Cost-Benefit Analysis (CBA),
— Cost-Effective Analysis (CEA),
— Cost-Utility Analysis (CUA)

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 Types of Pharmacoeconomic Analysis
Methodology Cost measurement Outcome unit
unit

Cost minimization Dollars Various- but

equivalent in
comparative groups

Cost benefit Dollars Dollars

Cost effectiveness Dollars Natural units (life

years, mg/dl blood
sugar, LDL
cholesterol)

Cost utility Dollars Quality adjusted life

years ( QALY )

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 Cost Minimization Analysis (CMA)
— Definition - Compares the costs of two or more alternatives that have a
demonstrated equivalence in therapeutic outcome (i.e., therapeutically
equivalent alternatives).
— CMA is a relatively straight forward and simple method.
— Choose the least cost alternative.

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 CMA
— Examine only the cost of competing technologies.
— Examples:
— Brand vs. Generic products
— Different antibiotic therapies
— Different rout of administration of the same drug

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Cost per month of selected oral antidiabetic
agent
— Drug Cost per Month
Glybride ( diabeta) 22.5o$
Glybride( MIRCONASE) 29.25$
Glybride(glynase) 24.75$

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,
 The following questions illustrate the types of that shoul
questions
be raise whe reviewin pharmacoeconomi studies. d
d n g c

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 From reading the title,
What is being compared?
What type of study is being conducted ?
For example, a title such as Pharmacoeconomic Analysis of Glipizide versus Glyburide in
the Veterans Administration doesn’t specify the type of study (CMA, CEA, CBA, or CUA)
conducted.
Although this is not wrong, readers may prefer to know what type of study was conducted
when searching for articles that are relevant to their purpose.
In addition, sometimes the title is vague about what is being compared
For example, Cost-Effectiveness Analysis of Two Antibiotic Therapies in a Large Teaching
Hospital does indicate the type of study but not the alternatives that were compared.
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 This should be clearly stated at the beginning of the article.
Examples of clear objectives:
“The objective of this study was to calculate the benefit-to-cost ratio
of pharmacist interventions in our hospital.”
“Our purpose was to perform an incremental costutility analysis of
standard chemotherapy compared with palliative treatment alone for
patients with inoperable lung cancer.”
An example of an unclear statement: “The objective of our study is to
determine if Ultraceph is better than Megaceph.” This statement
leaves the reader wondering better in what way?
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 Compare or measure the new product against a standard
current
therapy
new treatment should be compared with the next best
Aalternative it may replace
alternatives may include drug treatments & nondrug
The
treatments (e.g., Medication versus surgery)
many cost-benefit analyses (CBAs), the options may be
Inthought of as a “with or without” option.

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 Two pharmaceutical products are compared, dosages and length of therapy
the
should be included.
dose drug vs. high dose competing drug !!
Low

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 perspective tells the readers whose costs are measured.
The
important to identify from whose perspective the analysis
It be conducted because this determines the costs to be
isevaluated.
will
Some articles are not clear what type of costs or whose
a b o u t c o s t s i s u s e d i n t h e and it is up to the reader to
calculations, guess the
perspective.

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 It is helpful if the type of study is mentioned in title
the
articles contain more than one type of study
Some

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 Based on the stated perspective, were the appropriate types of costs assessed?
Were costs collected for an appropriate time period?
If these costs estimated from other research or source material, they should
were
be referenced.

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 Are these the clinical outcomes that are important to clinicians?
Were outcomes measured for an appropriate time period?
For example,when comparing medications that reduce blood pressure, clinicians
agree that the main outcomes are change in systolic and diastolic blood pressure.

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 Was Discounting Appropriate? If So, Was It Conducted?
If the costs or benefits were extrapolated more than 1 year out, the time-value
ofmoney must be incorporated into the cost estimates, using discount rates to calculate
the present value.

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 Pharmacoeconomic studies frequently require researchers to use estimates of
costs
orWhenever
outcomes.estimates are used, there is a possibility
these estimates may not be
that
precise.
estimates may be referred to as assumptions.
These

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 Were Sensitivity Analyses Conducted for Important Estimates or Assumptions?
Sensitivity analysis allows one to determine how the results of an analysis
change when “best guess” estimates, or assumptions, are varied over a relevant
would
range of values.
method helps determine whether the analysis is robust.
This

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 Because of practical restrictions, no study is ideal; therefore, the authors should mention the
most important limitations of their study.
Using retrospective databases may increase the possibility of selection bias.
Selection bias occurs when patients with certain characteristics more likely to receive one
are
treatment over another.
a specific population may limit generalizability of results.
Using

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 Were Extrapolations Beyond the Population Studied Proper?
If the study is based on data from a specific population of patients who may
be
patient population,
atypical (e.g., in age,the researchers should
socioeconomic status, caution
resourcereaders against generalizing,
use) compared or
with the general
extrapolating the results beyond the population studied.

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 Was an Unbiased Summary of the Results Presented?
Sometimes the conclusions seem to overstate or overextrapolate the data presented
in the results section.
the authors choose appropriate alternatives and use unbiased reasonable
Did
estimates when determining the results?
In general, do you believe results of the study?
the
Does the study make sense?

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 In summary, when assessing the soundness and usefulness of a
research article, readers need to keep in mind questions as:
pharmacoeconomic
such
o Were comparators appropriate?
o Was the correct type of analysis conducted?
o Were the costs and outcomes measured appropriately?
o Did the authors account for differences in costs across
o Were assumptions reasonable?
time?
o Were sensitivity analyses conducted when
o Were
needed?
limitations addressed?
o Did the tone of the article seem
unbiased?

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 What do you think of this title ?
Does the title identify the two therapeutic options that were being compared?
Does the title indicate that the type of study was a CMA ?
The title did identify the two therapeutic options that were being compared.
The title
did not indicate that the type of study was a CMA.

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 Clear objective?
Appropriate
alternatives? alternatives?
Detailed description of
the
Perspective stated?
Type of study?
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 Clear Objective: The objectiv “was to perfor a cost-
analysi comparin theecost of Oncoplatimgive inminimization
two dose versu
s g combined with NoNausea
Oncoplatin n n
administered ins one dose.”
s
This was
clear.
Appropriate Alter natives: The authors explained why the
alternatives were important and referenced clinical literature to back
up the similarity of outcomes.
Alternatives Described: The dosing and days of dosing were listed.
Perspective Stated: The perspective of the study was explicitly
stated as the third-party payer, which would entail measuring direct
medical costs only.
Type of Study: The study was correctly identified as a CMA
because the outcomes were assumed to be the same based on past
clinical research.
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 Relevant costs?
Based on the perspective, only direct medical costs to a third-party
wer assessed. Othe costs, suc as patien or famil costs , direc
payer
e
nonmedical r
costs otherhsector costs),
t y
and productivity t
(e.g., , were not
costs ( indirect)
measured.
Although these not measured, if they were included, they would
were
likely the have
amoun of cost saving estimate for the once-
increased t s d per-
cycle dose.

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 Relevant Outcomes:
Because this study was a CMA, the effectiveness of the two
methods of dosing was not directly measured, but was assumed
to be the same based on previous clinical studies.
However, because the avoidance of nausea was an important
this treatment,
factor in the prevalence of event in both group was
adverse andwasfoun to be similar.
evaluate s s
d d

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 Adjustment or discounting?
All costs were valued in 2007 US dollars. Costs and
assesse for
outcomes lessthan1 year, discountin wasnot needed.
were
d so g

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 Sensitivity analyses?
Sensitivity analyses were based on all third party direct
medical costs (medicine, administration, and visits), and the
results were found to be robust.
Practically , as long as the cost of the antinausea was less than
drug
visit that included of chemotherap the aonce per cycl
administration
dosin woul be costsaving. y, e
g d

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 Limitations Addressed?
The authors did not directly address any limitations.
Readers might ask, “If some patients are more susceptible to nausea,
they automaticall be placed
should once-per- dosing?” Cost wer
y
measured on
only one cycle cycle Did any patients sto switch
of treatment. e
for ask
dosin on subsequen administratio becaus to of advers
twice-a- g t n e e
cycle
events?

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 Unbiased conclusions?
As with most CMAs, believability of the findings hinge on one
important question: Does the reader accept that the clinical
outcomes of the
are the same? options
If so, as long as the cost of the antinausea
extra
is lower than the of the administratio medication
or visit, the choic of
cost
once-a- extra
dosin is costsaving. n e
cycle g

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 Cost-Effectiveness Analysis (CEA)
— Definition- is a form of economic evaluation whose goal is to identify,
examine, and compare the relevant costs and consequences of
competing drug regimens and interventions.
— Costs are expressed in monetary terms.
— Outcome measure in non dollar units.
— CEA involves comparing programs or treatment alternatives with different
safety and efficacy profiles.

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 CEA
— Consequences are measure in their natural units, such as:
— - Cases cured
— - Lives saved
— - Hospitalization prevented
— - Clinical outcome measure.
— - Prevention of event.
— Results are expressed as a Cost-Effectiveness Ratio (CER)
and/or
Incremental CER (ICER)

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 CEA
— Results expressed as cost effective
ratio.
— Eg; cost/outcome
— cost/treatment
— cost/life saved
— Outcome must be measured in the natural unit to compare
same
intervention.

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Cost Effectiveness Analysi
Cost Lower cost s cost
Same Higher
cost effectiveness

Lower A B C
effectiveness Conduct ICER
Dominated
Same D E F
effectiveness Arbitrary
Higher G H I
effectiveness Dominant Conduct
ICER
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 CEA
— Comparing a new drug with the current standard treatment.
— If the new treatment is:
— 1- both more effective and less costly ( cell G )
— 2- more effective at the same price ( cell H ).
— 3- has the same effectiveness at the lower price ( cell D).

— So the new therapy is considered cost effective.( blue color letter)

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 CEA
— On the other hand, if the new drug is :
— 1- less effective and more costly ( cell C).
— 2- has the same effectiveness but costs more ( cell
F).
— 3- has lower effectiveness for the same cost (cell B ).
— Then the product is not effective
(red color letter)

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 CEA
— 1-If the new drug is more expensive and more effective (cell I )
— 2- less expensive but less effective ( cell A )
— 3- has the same price and the same effectiveness as the
standard
product ( cell E).
— For the cell E other factors may be considered to determine which
medication might be best.
— For the other an ICER is calculated to determine the extra cost
for each extra unit of outcome.

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 Average Cost-effectiveness ratio
— Specifies the cost of an agent required to achieve each
unit of effect.
— An ACER represents the total cost of a program or
treatment alternative divided by its clinical outcome to
yield a ratio representing the dollar cost per specific
clinical outcome gained, independent of comparators.
The ACER can be summarized as follows,

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 Average Cost-effectiveness ratio
Average cost-effectiveness =

Cost of drug
Resulting effect = Cost per unit of effect achieved

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 Example
— Drug A = 6000
— Effectiveness =
60%
— 6000/0.6
— Drug B = 3000
— Effectiveness =
80%
— Calculate ICER? No need icer , drug B
Dominant
— Lower cost with higher effectiveness Drug B

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 Average Cost-effectiveness
Example:
— Average cost-effectiveness of Agent
A
$5000
50 units of effect = $100 per
unitof Agent
— Average cost-effectiveness
B
$15000
90 units of effect = $166 per
unit
— ICER = 15000-5000/166-
100
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Incremental Cost Analysis (ICA)
— When comparing 2 therapies, ICA assesses what the added
cost
per net effect for alternative therapy would be
— ICA is the difference in total costs of 2 therapiesdivided by
difference in effectivenes of the 2 therapies
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 ExamplTherapy A: costs $2500 and 10
e saves lives
C/E ratio= $250/life saved
Therapy B: costs $5000 and 15
saves lives
C/E ratio= $333/life saved
ICA: $5000-$2500 or addition al life
save $500/each
d 15-
10
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CE Example: Prevention of strock
A — Drug A
— Total cost for 100 patient = $ 10000
— = 10 strokes
Effectiveness prevented
— Drug B
— Total cost for 100 patient = $ 60000
— = 50 strokes
Effectiveness prevented

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Stroke prevention example average CE
— Agent total cost for 100 pts strock prevented COST/Strock
prevent

— DRUG A $ 1000 1 $
0 0 1000
— DRUG B $ 50 $
60000 1200

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Incremental cost effectiveness analysis
— $ 60000 - $
1000050 –
10
= $
50000
40
= $ per additional stroke prevented
1250

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Example

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 Cost Utility
analysis
— A comparison in which inputs are measured in monetary
units and outcomes are as patient
measured preferences-
weighted extensions of life.
— Measures outcomes based on years of life that are adjusted
by
utility weights.
— UTILITY is a measure of the relative preferences for various
options or satisfaction gained.

— Some consider it a subset of

CEA.
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Cost Utility analysis
— Cost is in monetary units ($$$).
— Outcomes are in quality adjusted life years (QALY’S).
— Quality-adjusted life-years (QALYs) measure health as a combination of
the duration of life( Quantity ) and the health-related quality of life.
— Computes a C/U ratio. C/ QALY

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Cost Utility
analysis
— Used to compare drugs/ programs that are life extending with serious side
effects.

— QALYs incorporates both the quality (morbidity) and the quantity

(mortality) of life.

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Cost Utility analysis
ADVANTAGES:
— Different outcomes can be compared (unlike CEA).
— Incorporates morbidity and mortality in one outcome unit (QALY’S)
without estimating the monetary value (unlike CBA).

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Cost Utility
analysis
DISADVANTAGES:
— Difficult to determine an accurate utility value.( Quality of life)

— It is more of a rough estimate than a precise measure.

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 Cost-utility analysis
— Cost-utility analysis :Cost-utility analysis In cost-utility analysis (CUA),
the benefits are measured in healthy years, to which a value has been
attached. Unlike CEA, CUA is multidimensional and incorporates
considerations of quality of life as well as quantity of life using a common
unit. E.g. In Hormone Replacement Therapy, benefits such as reduction in
fracture risk, alleviation of menopausa symptoms and risks such asstroke
or breast cancer. l

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— Quality adjusted life years :Quality adjusted life years Combines
quantity and quality of life. It is calculated by estimating the total number
of life-years gained from treatment and weighting each year with a quality
of life score to reflect the quality of life in that year. For example, a patient
living for 10 years but with a quality of life of say, 0.7 on a scale of 0 to 1
(with 0 as death and 1 as perfect would live for seven (0.7 x 10)
health),
QALYs.
— QALY == Quality
— 0.7 * 10( Utility
= 7 )* Quantity
Qaly

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 CUA ratio denominator

Healthy

Quality-adjusted
Morbidity Life Year (QaLY)
Gained

Mortality
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 Short life; full health:
50 life years lived with quality
of life weight 1 .00 (perfect
50 x
health): 1.00 = 50 QALYs

Perfect 1 .00 - - - - - - - - - �

- Q
Long life; reduced health:
. s: 80 life years lived with quality
C)
Q)
of
life weight 0.6 25 health):
� (reduced
80 x 0.625 = 50 QALYs
0.625

A
..Q..).
.......
0
�

L s
0
:::,
0

Death 0 . 0 0 - - - - - - - - - - - - - - - - - - -
50 80
Life years

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Steps in calculating QALYs
— Develop a description of each disease state. (Amount of pain,
any restrictions on activity, time of treatment, any mental change).
— Choose the method for determining utilities.
— Choose subjects who will determine utilities. (Who should
utility)? determine
— Multiply utilities by the length of life for each option to obtain QALYs.

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 Quality-adjusted life years (QALY
s) of the quality of
— Adjust quantity of life years saved to reflect a valuation
life
— If healthy QALY = 1
— If unhealthy QALY < 1
— QALY can be <0

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 Example

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Cost-Benefit Analysis
— Evaluation of the costs of an intervention in relation to the outcome,
where the outcome is expresse in dollars
d

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 CBA
Advantages:
— Decision makers can determine whether the benefits of a program or
intervention exceed the cost of implementation.
— You can compare different programs or interventions with similar or
unrelated outcomes.

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 CBA
Disadvantages:
— It is difficult to place a monetary value on health outcomes. ( no universal
standard method)

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 Conducting a CBA
— Determine type of program or intervention to be considered.
— Identify alternatives.
— Identify the costs and benefits (cost savings).
— Determine the perspective of the study.
it is recommende that CBA should be conducted from the societal
d
perspective.

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 Calculating Results of Costs and Benefits
After all costs and benefits have been identified and quantified, results
can be presented in the following ways:
— Net benefit calculations.
Net benefits = total benefits – total costs.
Net cost = total costs – total benefits.
Interventions would be considered cost if:
beneficial Net benefit > 0 , net cost < 0

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Calculating Results of Costs and Benefits
— Benefit to cost ratio.
B/C ratio = total benefits/total costs
C/B ratio = total costs/total benefits
Interventions are considered beneficial if
cost
B/C
C/B ratio
ratio <1>1

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 CBA
— B/C ratios greater than one indicate that a project is efficient
(benefits exceed costs).
— B/C ratios less than one indicate that a project is inefficient
(costs exceed benefits)

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 Example
Suppos a decision maker had to choose two proposals for
e
implementation. Assume projects are between
for one year.
Proposal A : cost =$1000, benefit =
$2000.
Determine whichProposal B :proposalsis
of the two cost =$5000, benefit
cost =
beneficial using net benefits
$7500.
and B/C ratio. Comment.

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Example
Proposal A Proposal B
Net Benefit 2000-1000 = 1000 7500-5000=2500
Net cost 1000-2000= - 1000 5000-7500 = -2500
B/C Ratio 2000/1000=2 7500/5000=1.5
C/B Ratio 1000/2000=0.5 5000/7500=0.7

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4
 What would you prefer, To be given 100 $ today or after 5
years?
100 $ five years from now is valued less than 100 $ today.
If I ask you to borrow 1000 $ today and assured you to pay them back in
the
next 3 years.
You wouldn’t agree to lend me the money unless I paid you back more than
1000.
Money promised in future is less valuable than money received
today.

12
6
 There is a time value associated with money, the passage of time has an
impact on
costs & outcomes.
People prefer to receive money today rather than later.
Therefore, money received today is worth more the same amount of
than money
received next year.
Discounting is an economic method that an individual’ preferenc for
captures s e
income today rather than income in the future.
Different from inflation adjustments.

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7
 Discounting is a technique used to the presen valu of a costor health
that
reflect occu at some date. t e benefit
will r future

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8
 The Process of converting monetary amounts , either paid or
received, over
time periods of more than one year to their present value.
Done when cost values different points in are compared.
generated at time
Net present
value
NPV =: Future value * 1/( 1+
r )n
Wher r = interest rate) , n = time
e rate(discount ( years )

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 Future health care costs/savings (money) is valued at a lower rate than present
day
health care savings (money).
Therefore, any future health care costs/savings must be discounted to present
day value.
An accepted annual discount rate is usually between 2% and 6%.
Discounting occur when intervention lasts for more than one year.
In any economic evaluation where costs and benefits occur over a number of
years
should consider discounting.
Discounting adjusts for costs and benefits occurring at different points in time.

13
0
 62 year old femal was recently to hav rena failure,
physicia wass of either
e her underg hemodialysi
diagnosed e l3 times/wee
her or
transplantation
n kidney for let
thinking her. He asks oto informs him making
k a
you before total cost of
decision,
end offor
knowing that life expectancy in jordan is years each year, the total cost weekly
females, of kidne
70 the y
dialysis is 55 $ paid by government at
the
transplantation total procedures is 14000
$.
Consider an average discount rate 5%;
Calculate net present value?
( hemodialysis)

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1
 NPV = Future value * )n
1/( 1+ r
Annual cost of dialysis = 55 * 52 weeks =
2860 $
Total expected years life = 8 years ( 70-62=8)
Total cost of dialysis = 8 * 2860 = 22880 $
NPV = 22880 * ( 1 / 1+0.05)8 = 15485 $

What will be the future cost of the kidney 8 years?

transplantation after
14000 = F.C * ( 1 / 1+0.05)8 ( for kidney transplantation)

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2
 Formula for 3% discount rate:
Cost value ($) * 1/(1+0.03)n
n= # years the annual discount rate is
applied to
E.g.,
$ 5000 first year (not discounted)
in
second year = 1000* 1/(1+0.03) =
$ 1000
in $970 third year = 1000 * 1/(1+0.03)2

$ 1000 = $943
in

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3
 Which of these interventions more
costly?
Knowing that the discount 5%, what would be costs after year 1 and
rate the 2?

Alternatives Year 0 Year 1 Year 2 Total

Surgery 3000 3000

Drug cost 1000 1000 1000 3000
(undiscounted)

Drug 1000 ? ? ?
(discounted)

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 Alternatives Year 0 Year 1 Year 2 Total

Surgery 3000 3000

Drug cost 1000 1000 1000 3000
(undiscounted)

Drug 1000 952 907 2859

(discounted)

What do you think

now?

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 The following table presents the costs of two drugs for the same indication
proposed
to your formulary, The dose should be repeated yearly for three years.
At year 1, which of these would look more attractive to you ( less costly)?
At the of the program (total), which of these would look more attractive to you (less costly),
end
Why?
Year Drug A Drug B
Year 1 300 $ 550 $
Year 2 100 $ 50 $
Year 3 260 $ 50 $
Total 660 $ 650 $

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6
 Discount the costs to the present values at 5%; use PV (present value) =
future costs/
(1+r)n.
At the end of the program, which of these would look more attractive to you (less costly),use
discounted value?
on how discounting might/might not change conclusion on costs over time?
Comment

Year Drug A PV at 5% Drug B PV at 5%

Year 1 300 $ 300/(1+0.05)1 = 550 $

285.7

Year 2 100 $ 50 $

Year 3 260 $ 50 $

Total 660 $ 650 $

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 Example of Discounting : NPV = Future value * )n
1/( 1+ r
Cost assessed at beginning of each , discount rate ( the first-year costs
not
yeardiscounted) 5%, are
Year Estimated cost Calculation Present
value without
discounting
Year 1 $ 5000 5000/1 5000

Year 2 $ 3000 3000* 1/( 1.05)1 2857

Year 3 $ 4000 4000 * 1/ ( 1.05)2 3628

Total $ 12000 $ 11485

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 Example of Discounting : NPV = Future value * r )n
1/( 1+ at end of each
Cost , discount rate
assessed year 5%

Year Estimated cost Calculation Present

value without
discounting
Year 1 $ 5000 5000*1/(1.05)1 4762

Year 2 $ 3000 3000*1/ (1.05 )2 2721

Year 3 $ 4000 4000*1/ ( 1.05)3 3455

Total 12000 $ 10.938

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9
 Adjustment of cost : A method used to value cost that are collected over 1
oneto
year point in time (When costs are estimated from collected for
information more
than 1 year before the study).
Past --- ---- Adjustment
( Present )
present ---- future ) Discountin ( 2% - 6%)
- g
(

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 A standard approach to manage uncertainty in PE evaluations.
A tool that tests the ro bustn ess of PE evaluation results a nd
conclusions when these underlying assumptions or estimates are
var ied through a relevant range; by holding other evaluation
parameters constant, the study results are recalculated. E.g. different
discounting rates
If changing the values of specific variables does not substantially
alter the results, you will have more confidence in the original
findings (analysis is robust, insensitive).
Sensitivity analysis enhances extrapolation of the results.

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2
 Used to see if study conclusion change as assumptions are
altered.
Necessary whenever uncertaint abou key variables.
there is y t
Parameter uncertainty
Methodological
uncertainty
Structural uncertainty
Heterogeneity / Bias

14
3
The major problem facing by a study of economic analysis is an uncertainty
regarding
the correct value used for a given cost or benefit or whether the correct
discount rate
was used. To eliminate this problem, a researcher comes up with sensitivity
analysis.
If original analysis used a discount rate of 4% for calculating cost or benefit,
then a
sensitivity analysis would use the range of discount rates (2 to 6%). For each
discount
rate, a sensitivity analysis would obtain cost or benefit and compare those
values with
the original analysis (4% discount rate).
If the difference between values obtained from the original analysis and
sensitivity 14
4
analysis is minor, researcher would be confident that the discount rate used
 Analytical / quantitative method
Systematically compares the relative costs and consequences of different
treatment options
Graphically displays choices and potential events, and facilitates the
calculation of
values needed to compare these options
It assists with selecting the best or most cost-effective alternative
Assists in making decisions when the decision is complex and is
there uncertainty
about some of the information
In a decision analysis, we structure a problem using a
decision tree
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5
 Simplest type of economic model
Graphically display all treatment
alternatives being compared, then
br a n c h e s o u t t o e x p l o r e a l l p o t e n t i a l
health
thes outcomes
alternativeassociated
& costs with and the
e s,
probabilitie arisin from thes treatmen
s g e t
alternatives.
can be used to reflect treatmen
It pathways for disease with the short time t
horizon.

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6
 1 • Identify the Specific Decision

2
• Specify Alternatives

3
• Draw the Decision Analysis Structure
(Tree)
4
• Specify Possible Costs, andProbabilitie
Outcomes, s
5
•
Perform Calculations
6 •
Conduct a Sensitivity Analysis
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7
 Case Consider adding a new antibiotic on a hospital formulary

Use a decision analysis to compare the new antibiotic to

Task
the current/standard
treatment

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8
1. TH SPECI DECIS
IDENTIF E FIC ION
YConsider the following points in specifying the
decision:
o What is the objective of the
study?
o Time (ove wha perio of timewillthe analysi be conducted)
horizon r t d s
o
Perspective

14
9
 Ste 1
p
Identi th speci decisi
fy e fic on
Determine if a new antibiotic should be added to
Objective
an
institutional formulary and replace standard
care
Perspective Institution

Time period Treatment period (2 weeks)

,
15
0
 2. TH ALTERNAT
SPECIF E IVES
YCompare the most effective treatments/
alternatives
New drug can be compared to older, standard
treatment
More than two treatments can be
compared
Could compare intervention versus no
intervention

, 15
1
 Step 2
Speci th Alternative
fy e s

use of the
new vs. the current
standard
medication
(antibiotic B)
(antibiotic A)

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2
 ST 3:DRA TH DECIS TR
EP W E ION EE

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3
 Lines/branches/arms are drawn to connect these
nodes
, 15
4
 Ste 3
Dra th Decisi p
w e on Tree

15
5
 4. POSSI COS OUTCO PROBABIL
SPECIF
For each
BLE TS, MES, ITIES
Yoption:
Probability of
occurrence
Sum of probabilities for each branch of the chance nodes must 1.00.
equal
Consequences of the
occurrence
Reported as monetary outcomes, health-related outcomes, or
both.
Cost of the
occurrence
Estimates resources (e.g., literature review, clinical trial, expert
opinion).
, 15
6
 Ste 4
Spec Possi Cos pOutco Probabili
ify ble ts, mes, ties

, 15
7
 5. CALCULA
PERFO TIONS
RM Sum the costs for each
branch
Outline the probabilities for each
branch
Multiply probabilities for each branch of chance
nodes
- probabilities should equal
1.00
Multiply the total cost by the probability for each
total branch

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8
, 15
9
, 16
0
 Antibiotic A Antibiotic B
Range From 600-1600$ From 500-1500$
Average cost 700$ 650$

Antibiotic A has a higher cost but a higher effectiveness, better clinical option
(higher
probability of success and lower probability of adverse events) than the standard
treatment B.
Decision makers could use either the incremental cost-effectiveness ratio (ICER)
or the incremental net benefit (INB) calculations to determine whether to add
antibiotic A to the formulary.

, 16
1
 6. A SENSITI ANALY
CONDU VITY SIS
CTUncertainty surrounds estimates
the used
to construc
t
economi
c
models.
A sensitivity analysis is conducted to determine the
whether results
changes if range of high and low of cost and probabilitie
a estimates s s
are into the decision model.
inserted

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2
 builder of decisio tree should to captur all
While
clinicas possibilitien and s trythe tree may
e quickl
realistic
gro in
l s
complexity. outcomes, y w
The complexity of model building increases for chronic in
whic treatmen and outcome are measure ove long period of
conditions
h t s d r s
time.

16
3
, 16
4
, 16
5
 analysi is a techniqu that can be use to incorporat
Decision
informatios and estimate
e in a systemati way to
d compar e differen
n s c e t
options.
Decision analysis is being used more commonly in
pharmacoeconomic
evaluations.
The use availability of programs to with the
and computer
mak it fairl easy assist
for someon to multiple
automat their
calculation e y e e
s
evaluations.

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6