Note_1_Introduction_to_Basic_Economics.ppt

Pharmacoeconomics
For 3rd Year Pharmacy
Ashagrachew Tewabe, BPharm,
Department of Pharmacy, College of Health
Sciences,
Bahir Dar University
April, 2019
Bahir Dar, Ethiopia

Course Description & Objective
Course
Description
This introductory course in pharmacoeconomics is designed
to prepare graduate pharmacists who can competently involve
involve in pharmacoeconomic decision making. Students will
be able to describe and use different methods of
pharmacoeconomic evaluation and effectively analyse and
evaluate different pharmacoeconomic studies. This course
also introduces students with the basic concepts in
economics.
Course
Objective:
After completion of this course students will be able to describe the
describe the different methods of pharmacoeconomic analysis and
analysis and evaluate pharmacoeconomic studies and effectively
effectively use them for decision making.
2

1. INTRODUCTION TO
PRINCIPLES OF
ECONOMICS
3

ECONOMICS DEFINITIONS
4
 Economy . . . . . The word economy comes from a
Greek word for “one who manages a household.”
 Economics is the study of how society manages its
scarce resources.
 Economics is alternatively defined as the systematic
study of resource allocation mechanism among
competing wants so as to maximize the satisfaction
of those wants.
 Economics is the study of choice under conditions of
scarcity.
 We must choose which desires to satisfy and how to satisfy

Definition cont…
 Economists study:
 how people make decisions: work, buy, save,
invest
 how people interact with one another
 forces and trends that affect the economy as a
whole, changes in income, unemployment, and
the rate at which prices are rising
5

Definition cont…
 The field of economics is traditionally divided into two
broad subfields:
 microeconomics and
 macroeconomics.
 Microeconomics studies the behavior of individual
households, firms, and governments
 Macroeconomics, by contrast, concerns itself with the
behavior of the entire economy
6

TEN PRINCIPLES OF ECONOMICS
 A household and an economy face many decisions:
 Society and Scarce Resources:
 The management of society’s resources is important
because resources are scarce.
 Scarcity. . . means that society has limited resources
and therefore cannot produce all the goods and services
people wish to have.
 Principles indicate:
 How people make decisions (4 principles)
 How people interact (3 principles) and
 How the economy as a whole works (3 principles)
7

HOW PEOPLE MAKE DECISIONS(4)
 People face trade-offs.
 The cost of something is what you give up to get it.
 Rational people think at the margin.
 People respond to incentives.
8

Principle #1: People Face Trade-offs
 “There is no such thing as a free lunch!”
 Making decisions requires trading off
one goal against another
 Going to college vs not
 Studying pharmacology vs pharmacoeconomics
 How to spend family income
 “guns vs butter”
 Clean environment vs reduced income
 Efficiency vs equity
9

Principle #2: The Cost of Something Is What
You Give Up to Get It
 Because people face trade-off, making decisions
require comparing costs and benefits of alternatives.
 Whether to go to college or to work?
 Whether to study or go out on a date?
 Whether to go to class or sleep in ?
 The opportunity cost of an item is what you give up
to obtain that item.
10

Principle #2: cont…
 Basketball star LeBron
James understands
opportunity costs and
incentives.
 He chose to skip
college and go straight
from high school to the
pros where he earns
millions of dollars.
11

Principle #3: Rational People Think at the
Margin
 Marginal changes are small, incremental
adjustments to an existing plan of action.
 Rational people systematically and purposefully do
the best they can to achieve their objectives.
 When a student considers whether to go to college
for an additional year, he compares the fees &
foregone wages to the extra income he could earn
with the extra year of education.
People make decisions by comparing costs
and benefits at the margin.
12

Principle #4: People Respond to
Incentives
 An incentive is something (such as the prospect of a
punishment or a reward) that induces a person to act.
 Marginal changes in costs or benefits motivate
people to respond.
 The decision to choose one alternative over another
occurs when that alternative’s marginal benefits
exceed its marginal costs!
 Eg,
 When price of meat increases
 A tax on gasoline
 The seat belt law
13

Applying the principles
 You are selling your 2005 model YARIS car. You
have already spent $1000 on repairs. At the last
minute, the transmission dies. You can pay $600 to
have it repaired, or sell the car “as is.”
 In each of the following scenarios, should you have
the transmission repaired? Explain.
A. Blue book value (what you could get for the car) is
$6500 if transmission works, $5700 if it doesn’t
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t
14

Answer
 Cost of fixing transmission = $600
A. Blue book value is $6500 if transmission works,
$5700 if it doesn’t Benefit of fixing transmission =
$800
 ($6500 –5700).
Get the transmission fixed.
B. Blue book value is $6000 if transmission works,
$5500 if it doesn’t Benefit of fixing the transmission is
only $500.
Do not pay $ 600 to fix it.
15

Observations
 Trade off = selling or not, replacing or not
 Opportunity cost = on foot!!!
 The $1000 you previously spent on repairs is
irrelevant.
 What matters is the cost and benefit of the marginal
repair (the transmission).
 The change in incentives from scenario A to scenario
B caused your decision to change
16

HOW PEOPLE INTERACT(3)
Trade can make everyone better off.
Markets are usually a good way to organize
economic activity.
Governments can sometimes improve
economic outcomes.
17

Principle #5: Trade Can Make Everyone Better
Off
 People gain from their ability to trade with one
another.
 Competition results in gains from trading.
 Trade allows people to specialize in what they do
best.
 Rather than being sufficient, people can specialize in
producing one good or service and exchange it for
other goods.
 Apple and Sony companies
 Countries also benefit from trade and specialization:
 Get a better price abroad for goods they produce
18

Principle #6: Markets Are Usually a Good
Way to Organize Economic Activity
 A market economy is an economy that allocates resources
through the decentralized decisions of many firms and households
as they interact in markets for goods and services,
 “Organize economic activity” means determining
 what goods to produce how to produce them
 how much of each to produce
 Who gets them
 Three kinds of Markets
 Free Market Economy: with little government interventions
 Command economy: with substantial government involvement
 Mixed Economy: Middle Ground
19

Principle #7: Governments Can
Sometimes Improve Market Outcomes
 Market is any established operating means or
exchange for business dealings between buyers and
sellers.
 Market failure occurs when the market fails to
allocate resources efficiently.
 Market failure can be viewed as a scenario in which
individuals' pursuit of self-interest leads to bad results
for society as a whole
 When the market fails (breaks down) government can
intervene to promote efficiency and equity.
20

HOW THE ECONOMY AS A WHOLE
WORKS (3)
 Principle #8: a country’s standard of living depends on its ability to
produce goods and services
 Productivity - the quantity of goods and services produced
from each hour of a worker’s time.
 Principle #9: prices rise when the government prints too much
money
 Inflation and Deflation, in economics, terms used to describe,
respectively, a decline or an increase in the value of money.
 Inflation, an increase in the overall level of prices in the
economy where as
 Deflation is a decrease in price that typically caused by
depressed economic output and unemployment.
21

Principle #10: society faces a short-run
tradeoff between inflation and
unemployment
22
 The primary long run effect of increasing the quantity of money is
elevating level of price.
 But the short-run story is more complex & more controversial.
 Most economists describe the short-run effects of monetary
injections as follows:
 As amount of money in the market increases, the personal
spending may increase because of “buy now, it will cost more
later” attitudes.
 D for goods and services
 Higher D causes firms to raise prices and hires more workers to
produce more goods
 More hiring mean lower unemployment

The Basic Notion of Supply &
Demand
 Supply-and-demand is a model for understanding the
determination of the price of quantity of a good sold on
the market.
 Types of Competition
 The supply-and-demand model relies on a high degree
of competition, meaning that there are enough buyers
and sellers in the market for bidding to take place.
 Buyers bid against each other and thereby raise the
price, while sellers bid against each other and thereby
lower the price.
23

 The supply-and-demand model applies most
accurately when
 there is perfect competition.
 no single buyer or seller can unilaterally affect the
price on the market
 This is an abstraction, because no market is actually
perfectly competitive.
24

Demand
 Definition of Demand: Need + ability and
willingness to pay for a commodity.
 Demand is the amount of a good that consumers are
willing and able to buy at a given price.
 The amount of the product people are willing to
purchase at a specific price is called quantity
demanded.
 A demand schedule is a list of the quantity
demanded at different prices.
25

Demand ….
 Demand Curve – a graph showing how much a consumer is
willing and able to purchase at different market prices.
 Law of Demand – All else equal, as price falls the quantity
demanded rises and vice versa. ↓P →↑Qd
 Determinants of Demand
1. Income
2. Price of Related Goods
I. Substitute Goods
II. Complementary Goods
3. Tastes and Preferences
4. Expectations
5. Number of Buyers (POPULATION)
26

Supply
 Quantity Supplied – the amount of a good that a firm
is willing and able to offer for sale at the current
market price.
 Supply – the amount of a good that a firm is willing
and able to offer for sale at all market prices , holding
all else constant.
 Supply Schedule – a table showing how much a firm
is willing and able to offer for sale at different market
prices.
 Supply Curve – a graph showing how much a firm is
willing and able to offer for sale at different market
prices.
27

Supply...... Determinants of Supply
1. Cost of Production
a. Prices of required inputs
 ↑Price of labor
 hire less people
 produce less amount of goods at current price
 ↓S
b. Technologies used in production
 New technology
 produce output for less customers
 higher profit on output
 produce more at current price
 ↑S
2. Price of Related Products
28

Supply......
 Law of supply: Other things equal, when the price
of a good rises, the quantity supplied of the good
also rises, and when the price falls, the quantity
supplied falls as well.
29

Supply and Demand equilibrium
 Shortage (Excess Demand) – a shortage occurs when
the QD > QS at a particular price.
 Surplus (Excess Supply) – a surplus occurs when the
QD ≤ QS at a particular price.
 Market Equilibrium – occurs when there is no incentive
for prices to change (a steady state). This occurs when
there is no surplus or shortage (when QS = QD).
 Equilibrium is a situation in which there is no
tendency for change.
 A market will be in equilibrium when there is no
reason for the market price of the product to rise or
to fall.
30

Equilibrium…
 This occurs at the price where quantity
demanded equals quantity supplied.
 At this price, the amount that consumers wish
to buy is exactly the same as the amount that
producers wish to sell.
Equilibrium price: the price that balances
quantity supplied and quantity demanded.
Equilibrium quantity: the quantity supplied
and the quantity demanded at the
equilibrium price.
31

Example
Quantity
Demanded Price Quantity
Supplied
2 $5 18
5 4 15
8 3 8
12 2 2
17 1 1

32

Equilibrium…
 Equilibrium occurs at a price of $3. The equilibrium
quantity is 8 slices of pizza.
 When the price is above the equilibrium of $3, quantity
supplied is greater than quantity demanded.
 Firms are unable to sell all they want at that price. There is an
excess supply and this surplus creates pressure for the price
to fall.
 If the price is below equilibrium, there is excess demand
and the shortage creates pressure for the price to rise.
 Only at the equilibrium price is there no pressure for price
to rise or fall.
33

WHAT IS A MARKET?
 Market can be defined as any set of arrangements
which allows buyers and sellers to communicate and
thus arrange exchange of goods, services or
resources.
 A market is a place or service that enables buyers
and sellers to exchange goods and services.
 The buyers as a group determine the demand for the
product, and
 The sellers as a group determine the supply of the
34

WHAT IS A MARKET?
 WHAT IS COMPETITION?
 A market in which there are so many buyers and
so many sellers that each has a negligible impact
on the market price.
 So a market for health care must involve two
groups:
 the buyers and the sellers, who interact to trade health
care.
35

Markets cont…
 Who would the buyers and sellers be in such a market?
 We all want good health and so most of us would be prepared,
if necessary, to purchase medical treatment to cure an illness.
 This suggests that everybody is potentially a buyer (or
consumer) of health care.
 More precisely, at any moment, a buyer would be any body
who was ill or who wanted preventative medical treatment
such as vaccination or who wanted guidance about their
health.
 The sellers would be those who could provide medical and
health care services, such as doctors, nurses,
physiotherapists, dentists and high street chemists.
36

Needs and demand
Need
 Someone's
subjective idea(may
be based on a
formula applied
objectively, but the
choice to use the
formula was
someone's subjective
idea).
 Money is not a factor
Demand
 Objectively
observable as
behavior in the
market.
 Money is a key
factor.
 "Demand" is also
called "effective
demand,“ because
it's expressed only by
spending money.
37

Health Care and Market failure
 In theory, markets produce the goods and services
we want in the right quantities and at the lowest
possible cost.
 This is why markets are so powerful. Nevertheless,
in the real world markets do not always work in the
way te theory predicts.
• The abuse of MARKET POWER can occur whenever a
single buyer or seller can exert significant influence over
PRICES or OUTPUT.
38

Health Care and Market failure
 It is possible for a free market to produce a Pareto
inefficient result - i.e. the market fails
 Market failure occurs when the market fails to
allocate resources efficiently.
 When the market fails (breaks down) government
can intervene to promote efficiency and equity.
39

Health Care and Market failure…
 Health care is one of the best
examples of market failure due to:
Problems of risk and uncertainty
Unequal information
Consumers as satisfaction maximisers
Imperfect competition
Externalities
Equity and health care
40

Basic Definition of Terms
1) Economics: is the study of choice under conditions of
scarcity.
2) Health Economics: the application of economic
theories, tools and concepts to the topics of health and
health care.
3) 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.
4) Outcomes research: broadly defined as studies that attempt
42

 Therefore, a formal evaluation into the costs &
benefits of drugs, interventions, & programs needs to
be assessed in order to efficiently & equitably
distribute limited resources.
 A challenge for healthcare professionals is to provide
quality patient care while assuring an efficient use of
resources.
 They must answer the question, “What is the value
of the pharmaceutical goods & services I
provide?”
43

 Pharmacoeconomics, or the discipline of placing a
value on drug therapy, has evolved to answer that
question.
 It provides a scientific & quantitative method for
estimating the value of a treatment strategy
weighted by the costs.
 The products & services should demonstrate
pharmacoeconomic value—that is, a balance of
economic, humanistic, & clinical outcomes.
44

Intro…
 The “cheapest” alternative—with respect to drug acquisition
cost—is not always the best value for patients, departments,
institutions, & healthcare systems.
 Quality patient care must not be compromised while attempting
to contain costs.
 The products & services should demonstrate
pharmacoeconomic value—that is, a balance of economic,
humanistic, & clinical outcomes.
 Pharmacoeconomics can provide the systematic means for
this quantification. 5/2/2024
45

Pharmacoeconomics (PE):
 Defined as the description & analysis of the costs
of drug therapy to health care systems & society;
 It identifies, measures, & compares the costs &
consequences (risks & benefits) of programs,
services, pharmaceutical products or therapies.
 Determines which alternative produces the best
health outcome for the resource invested.
 It is the quantitative assessment of the costs &
benefits associated with a treatment strategy.
5/2/2024
46

PE…
 Pharmacoeconomics evaluates the behavior or welfare of
individuals, firms, & markets relevant to the use of
pharmaceutical products, services, & programs.
 It focuses on the cost (inputs) & consequences (outcomes) of
that use.
 It addresses the clinical, economic, & humanistic aspect of
health care interventions (the ECHO Model).
5/2/2024
47

PE…
 Pharmacoeconomics is often referred to as “health
economics” or “health outcomes research,” especially
when it includes comparison with non-
pharmaceutical therapy or preventive strategies
such as surgical interventions, medical devices, or
screening techniques.
5/2/2024
48

PE vs Economics
 Similar to basic economics, PE assesses the
choices that a decision maker selects & the
cascading costs & outcomes associated with
that choice.
 What distinguishes PE from economics is the
assessment of health weighted by costs.
 In economics, decision makers are only
interested in the overall costs associated with a
choice or strategy,
 Whereas, in PE, costs are weighed by the
5/2/2024
49

Pharmacoeconomic analysis
 Pharmacoeconomic analysis is composed of two
basic elements: costs & benefits (health related
outcomes).
 Cost is defined as the value of the resources
consumed by a program or drug therapy of
interest.
 Price is what the customer is asked to pay
 Consequence is defined as the effects, outputs,
or outcomes of the program or drug therapy of
interest.
 Consideration of both costs and consequences
differentiates most pharmacoeconomic evaluation
methods from traditional cost-containment
50

Relationships of outcomes research,
pharmacoeconomics & pharmaceutical
care
 Outcomes research is an attempt to identify,
measure, & evaluate the end results of health
care services in general.
 It may include not only clinical & economic
consequences, but also outcomes such as patient
health status & satisfaction with their health
care.
 If the research involves economic & clinical
outcome evaluations & comparisons of pharmacy
products or services, it can be termed a
pharmacoeconomic study.
 Pharmaceutical care is the responsible provision
of drug therapy for the purposes of achieving
definite outcomes.
51

In general, questions that
pharmacoeconomics may help to
address are as follows:
 What is the best drug for a particular
patient?
 Will patient quality of life be improved by a
particular drug therapy decision?
 What is the cost per quality year of life
extended by a drug?
 Which drug delivery system is the best for
the hospital?
52

Questions in pharmacoeconomics ….
 What is the best drug for this particular
disease?
What are the patient outcomes of
various treatment modalities?
 What drugs should be included on the
hospital formulary?
 What is the best drug for a
pharmaceutical manufacturer to
develop.
53

Traditionally, there have been 3 hurdles that a drug
must pass to obtain a license…… now 4th = “Money”
54
EFFICACY
Is there a
beneficial
effect from
the
therapy?
SAFETY
How
acceptable
are the
SE’s?
QUALITY
Relates to
development
,
Manufacture
and
distribution
of the drug?
VALUE FOR
MONEY

Fourth hurdle cont… Drug Approvals
 Phase I trials
 Determine toxicity profile
on healthy adults
 COI evaluation
 Phase II trails
 Establish optimal dosage
range and therapeutic
activity
 COI, QOL
 Phase III trials
 Efficacy and rare
effects identified
 Pharmacoeconomic
studies needed
 Phase IV
55

Pharmacoeconomic evaluation
56
 It is a method that defines “added value” that the product
contributes to the health of society.
 It aids the decision-making process in terms of
 generating reliable information on which decisions are
based,
 allows decision-makers to make informed choices based
on evidence,
 Ultimately contributes to an efficient resource allocation.

Six-step economic evaluation
57
Step example
1. Define the objective Prevent mother-to-child transmission
(MTCT) of HIV
2. List the different ways to
achieve the objective
A: Give nevirapine to mother &baby
B: Perform no intervention
3. Identify and measure the costs
of each option
Costs of option A:
Introduction / monitoring / counselling
Provision of nevirapine to all HIV+
pregnant women.
Treatment costs of infected infants
Costs of option B:
Treatment of infected infants

Six steps cont`d…
58 step Example
4. Identify and measure
the benefits of each
option
Benefits of option A: MTCT reduced from 32% to
16%: Costs for treatment of infected infants are
halved.
For every 1000 births, 160 lives are saved
Benefits of option B:
No costs for introduction / monitoring /
counselling or for providing nevirapine to all HIV-
positive mothers
5. Calculate and interpret
the cost-effectiveness of
the each option
Compare the costs and the benefits: Taking into
account costs of counselling and nevirapine
alone, option A is more expensive, but saves
lives. You could calculate a cost per life saved.

Six steps cont`d…
59
Steps Example
When taking into account subsequent
treatment costs of infected infants, option A
is less expensive, and saves lives.
The “cost” per life saved, or incremental
cost-effectiveness ratio, would be negative.
6. Perform sensitivity
analysis on the
conclusions
Consider possible variations: percentage of
pregnant women reached, morbidity in
treated mothers and/or infants etc.

Sensitivity analysis
60
Sensitivity analysis
 a way to deal with uncertainties in assumptions
underlying the economic analysis.
 Hence, it examines how results of analysis will be
influenced by changing the parameters in key
assumptions.

Sensitivity analysis cont…
61
It includes the following steps:
 Identify the assumptions which are uncertain i.e
“uncertain parameters”,
 define credible range of variations of “uncertain
parameters” from literatures
 Recalculate study results using the most
conservative estimate, the “best guess” and the least
conservative estimate.
How will the differences affect the
conclusions? Matters most in sensitivity analysis

PE Evaluation Techniques/Methods
62
 Are analytical tools to identify which of several
alternatives offers the greatest benefit compared
with its cost.
 The commonly used are
 Cost minimisation analysis (CMA)
 Cost-effectiveness analysis
 Cost-utility analysis
 Cost-benefit analysis
 and described here in increasing order of
methodological and practical difficulty.

1. Cost Minimisation Analysis (CMA)
63
→ calculates the cost of two or more alternatives that
have the same outcome to identify the lowest-cost
option.
→ focus entirely on the cost
→ easily applied and understood by doctors
→ Eg., A decision to introduce generic prescribing
rather than by brand name which would achieve the
same level of benefit at a reduced cost.

2. Cost-Effectiveness Analysis(CEA)
64
 Measures both costs and benefits of alternatives to
find the strategy with the best ratio of benefits per
money unit.
 health benefits are in natural units (e.g. years of
life saved or ulcers healed etc) and
 the costs are measured in monetary terms.

CEA cont…
65
CEA:
 compares therapies which can be measured on a
common scale of outcome but perhaps exhibit
different success rates.
 the most commonly applied form of economic
analysis
 However, it does not allow comparisons to be
made b/n two totally different areas of medicine
with different outcomes.
Eg., Relief from ulcer due to use of PPI and H2
-
receptor blocker

3. Cost-Utility Analysis(CUA)
66
 CUA :
 Measures the effect of interventions in both
quantitative and qualitative terms, using utility-
based units such as QALYs.
 Cost is measured in monetary units.
 Outcome is not measured on a common natural
scale rather in terms of changes in patient
wellbeing (utility).
and,
 Since such an outcome measure is not disease
specific, CUA can in theory compare the ‘value’ of

4. Cost-Benefit Analysis (CBA)
CBA compares the costs and benefits of an intervention
by translating the health benefits into a money value.
 Both costs and benefits are measured in the same
units i.e monetary units
67

Types of Pharmacoeconomic Analysis
Methodology Cost measurement unit Outcome unit
Cost minimization Dollars Various- but equivalent
in comparative groups
Cost effectiveness Dollars Natural units (life years,
mg/dl blood sugar, LDL
cholesterol)
Cost utility Dollars Quality adjusted life
years(QALY)
Cost benefit Dollars Dollars
68

Outcomes evaluated in
pharmacoeconomic studies
 In pharmacoeconomic research, an outcome
is a consequence of drug therapy intervention.
 Similar to costs, the outcomes or
consequences of a disease and its treatment
are equally important.
 The manner in which consequences are
quantified is a key distinction among
pharmacoeconomic methods
 The consequences (or outcomes) of medical
care can be categorized. One approach is to
separate outcomes
 into: economic, clinical, & humanistic
5/2/2024
Tena.M
69

1. Clinical outcomes
 Are the medical events that occur as a result of
disease or treatment (e.g., safety & efficacy end
points, mortality, cardiovascular events, and adverse
events).
 For example, a drug may cure, prevent, or slow the
progression of a disease (a favorable outcome) but
also have serious side effects or toxicity associated
with it (an unfavorable outcome).
5/2/2024
Tena.M
70

2. Humanistic outcomes
 Look at a therapy from the patients’ points of view.
 Address such questions as how the patient feels &
what they perceive their quality of life to be.
 Represent patient preferences, satisfaction,
functional status, quality of life (HRQOL), general
health & wellbeing ,,, as a consequence of the
intervention or disease.
 A drug that prolongs a patient’s life may not be
considered beneficial by the patient if he or she
believes quality of life has become suboptimal.
5/2/2024
Tena.M
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Humanistic…
 HRQOL : is assessment of the functional effects
of illness & its consequent therapy as perceived
by the patient.
 These effects often are displayed as physical,
emotional, & social effects on the patient.
 Measurement of HRQOL usually is achieved
through the use of patient-completed
questionnaires w/h may be either disease-
specific or generic measures of health status.
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3. Economic outcomes
 Are the costs associated with a therapy.
 Are the direct, indirect, and intangible costs
compared with the consequences of medical
treatment alternatives.
 Assessing the economic, clinical, and
humanistic outcomes (ECHO) associated with a
treatment alternative provides a complete model
for decision making.
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Positive vs Negative Consequences
 Consequences (outcomes) can be further
categorized as positive or negative.
 Positive outcome is a desired effect of a drug
(efficacy or effectiveness measure), possibly
manifested as cases cured, life-years gained, or
improved health-related quality of life (HRQOL).
 A negative outcome is an undesired or adverse effect
of a drug, possibly manifested as treatment failure,
ADR, development of drug resistance, drug toxicity,
or even death.
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Positive vs Negative
Consequences…
 Pharmacoeconomic evaluations should include
assessments of both types of outcomes.
 Evaluating only positive outcomes can be
misleading because of the potential detriment and
expense associated with negative outcomes.
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Applications of
Pharmacoeconomics
 Applied pharmacoeconomics is defined as putting
pharmacoeconomic principles, methods, and
theories into practice to quantify the value of
pharmacy products and pharmaceutical care
services used in real-world environments.
 It helps assess if scarce health care resources are
being spent wisely on pharmacy products & services.
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Applied pharmacoeconomics can provide the
means or tools:
 To justify the value of the products & services provided.
 To aid clinical and policy decision making practitioners
and administrators can make better, more informed
decisions regarding the products and services they
provide.
 Complete pharmacotherapy decisions should contain
assessments of three basic outcome areas whenever
appropriate: economic, clinical & humanistic outcomes
(ECHO).
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Applications of Pharmacoeconomics,,,,
 It is no longer appropriate to make drug-selection
decisions based solely on acquisition costs and/or on
the clinical outcomes (e.g., safety and efficacy)
associated with a treatment alternative.
 Pharmacoeconomics plays a pivotal role in
formularydecision-making
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Applications of Pharmacoeconomics,,,,
 Pharmacoeconomic data can be a powerful tool to
support various clinical decisions, ranging from the
level of the patient to the level of an entire healthcare
system.
 At the individual patient level, used to determine the
best medication (t/t) for each patient, depending on
demographic, clinical, and economic considerations
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Applied Pharmacoeconomics,,,
 The application of pharmacoeconomics to decision
making is divided into two basic areas:
1. drug therapy evaluation and
2. clinical pharmacy service evaluation---Justify the
cost of pharmaceutical care
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Drug Therapy Evaluation
 Pharmacoeconomic principles & methods have been
applied to make more informed & complete decisions
regarding drug therapy through providing sound
pharmacoeconomic data:
 To support the addition or deletion of a drug to or from a
formulary.
 To develop & implement appropriate-use guidelines or
policies; influencing prescribing patterns & ensuring the
most appropriate & cost-effective use of agents
throughout the healthcare system.
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3. DECISION ANALYSIS
AND
PHARMACOECONOMIC
EVALUATIONS
87

Basic concepts of probability
 Experiment: a measurement process that produces
quantifiable results (e.g. throwing two dice,
measuring heights of people)
 Outcome :is the result of a single trial of a random
experiment. For example, getting a {2} when a dice
is rolled.
 Sample space (some refer to it as “universe”) is the
set of all possible outcomes of a single trial. E.g For
the rolling of a dice, the sample space is S = {1, 2, 3,
4, 5, 6}.

Note_1_Introduction_to_Basic_Economics.ppt

Definition
 The classical definition of probability states:
 If there are m outcomes in a sample space (universal
set), and all are equally likely of being the result of an
experimental measurement, then the probability of
observing an event (a subset) that contains s outcomes
is given by 𝑠/𝑚 .
 From the classical definition, we see that the ability to
count the number of outcomes in an event, and the
number of outcomes in the entire sample space
(universal set) is of critical importance.
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Properties of Probabilities
 Let the sample space S consist of two events A and B
with probabilities p(A) and p(B) respectively. Then:
1. Probabilities are always b/n 0 &1, inclusive;
i.e. 0 ≤ P(A) ≤ 1
2. The sum of probabilities of mutually exclusive
outcomes is equal to 1. i.e. P (E1) + P (E2) + … + P
(En) = 1
3. Probabilities of disjoint events can be added;
P(A or B) = P(A) + P(B), when A and B are disjoint.
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Decision Analysis
 Decision analysis is used when:
There are real alternatives
There is uncertainty
When consequences are important or
have series consequences
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Decision Analysis Approaches
 Most frequently used healthcare /
pharmaco economic decision analytic
approaches
 Decision trees
 Markov models
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Decision Trees
 “Models” that use a tree-like structure to
organize thoughts and data about
problems (e.g., treatment decisions) and
their consequences.
 Characterized by decisions, chances,
and outcomes
 Results based on probabilities and
“rewards” for outcomes
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Types of Nodes
 Decision trees have a (horizontal) “trunk” and
“branches”
 Main branch point is a decision, characterized by
decision node (square)
 Succeeding branch points usually chances,
characterized by chance nodes (circles)
 Terminal nodes (branch endings, commonly
triangles)
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Modeling Good Research Practices
 Consult with experts and stakeholders prior to,
during, and after model development.
 “Develop clear statement of decision problem,
modeling objective, and scope of model”
 “Conceptual structure of a model should be driven
by the decision problem or research question
and not determined by data availability.
 Model simplicity aides transparency, but model
needs to be complex enough to answer question.
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Steps in decision making
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Structuring the problem
Developing a decision tree
Estimating probabilities
Valuing consequences
Averaging-out and folding back
Interpreting results and conduct sensitivity analysis

Rules in decision tree
Rule 1
 Node branches must be exhaustive and mutually
exclusive.
Rule 2
 At each chance node, the sum of the branch
probabilities must equal one.
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Economic evaluation
 If a decision analytic model incorporates costs, it
becomes an economic evaluation model.
 Economic evaluation is the formal process of
weighing benefits & costs in an incremental analysis.
 The two main types of economic evaluations in health
care are cost-effectiveness analysis & cost–benefit
analysis.
 CBA, which requires the conversion of health benefits
into monetary terms, has been less well-accepted.

Economic evaluation…
 CEA is used to measure the relative value of
healthcare interventions in terms of the cost per
health benefit gained, such as the cost per death
averted.
 If health outcomes are measured using a preference
based measure, such as QALYs, which integrate
morbidity & mortality, then the analysis is considered
to be a cost–utility analysis, a special case of cost
effectiveness analysis.

Note_1_Introduction_to_Basic_Economics.ppt

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