Subject: Community Medicine

Topic: Health Economics

Lecturer: Dr. Brizuela
Date: January 19, 2016

OUTLINE risks, and benefits of programs, services, or therapies and

I. Health Economics determining which alternative proceduces would be the best
II. Pharmacoeconomics health outcome for the resource invested.
III. Terminologies  Pharmacoeconomic research goes beyond being safe and
IV. Perspectives
efficacious which is what clinical trials are able to support
V. Full Economic Analyses
A. Cost Minimization Analysis  Determine if a drug is more costly but more effective = cost-
B. Cost-Effectiveness Analysis effectiveness
C. Cost Utility Analysis
D. Cost Benefit Analysis B. The Impact of Medicines on the Patient’s Health
LEARNING OBJECTIVES
1. Define terminologies used in health economics
2. Identify different cost categories and examples
3. Identify perspectives used in economic evaluation
4. Differentiate 4 types of economic analyses
5. Explain Cost-effectiveness threshold
6. Describe how ACER, ICER and QALY is computed

I. HEALTH ECONOMICS
 The quantification of direct and indirect medical costs and health
care utilization incurred in the treatment of condition or disease
 Analyzing the cost to treat when a person in the community gets
sick
 Applies economic concepts and principles in the field of health
and health care utilization
 Aids decision making so that limited resources can be allocated
rationally to meet the increasing demand for healthcare Figure 1. A drug both as intended effects (effect) and unintended effects
 Answer the question: "What is the value of an intervention (a (adverse effect). Therefore we look at the efficacy of a drug in terms of 2
health service, a program, a drug or a procedure)?” things. First is how it affects the patient’s life expectancy. Second is how it
affects the quality of life.
*Although the intended effects seek to prolong life expectancy and cure the
Traditionally…
illness to improve quality of life, the unintended effects of a drug may also
 Understanding and acceptance of a drug, a procedure or a health affect life expectancy and quality of life in a negative way due to the adverse
program based on: effect may be serious and debilitating.
o Safety *There are measures to determine the quality of life such as mobility, pain,
o Efficacy self-care, mental status, consciousness.
*Every time we medicine to a patient, we need to look at both the intended
Increasingly… and unintended effects. There is going to be a trade-off.
 Drugs, procedures, services and programs being evaluated based
on: C. Importance of Trade-Offs: Within a Clinical Area
o Safety
o Efficacy
o Effectiveness
 Efficacy vs Effectiveness
 Effectiveness – relates how well a treatment works in
the practice of medicine
 Efficacy – measures how well a treatment works in
clinical trials or laboratory studies
 Effectiveness is efficacy on a bigger scale
o Cost-effectiveness

II. PHARMACOECONOMICS
 Description and analysis of the cost of drug therapy to healthcare
systems and society
 A subset of health economics that deals with drug assessment of it
being valuable

Figure 2. Weigh which of the 2 treatments is better.

A. Pharmacoeconomic Research  Pharmacoeconomics will always center on the concept of trade-off
 A process of identifying, measuring, and comparing the costs,  Putting my resources in one, there is one thing we need to let go

Trans Group: 2 – Lua, Lugtu, Lumban, Luy Page 1 of 7

Edited By: Alex
 D. Importance of Trade-Offs Between Clinical Areas

Figure 4. Cost categories and examples

IV. PERSPECTIVES
A. Patient
 Costs of what patients pay for a product or service
o Insurance co-payments
Figure 3. Shows the comparison between fundings and disinvestments which o Out of pocket drug costs
will be important to the health care system o Indirect costs
*We look at these in the light of limited resources. Hence, in investing or  Lost wages
putting additional funding in a particular area there will be disinvestment on  Consequences are the clinical effects, both positive and negative,
other areas since there will be less funds. So we compare the health effects of a program or treatment alternative
over-all population to help decide as managers.
 TAKEN WHEN: assessing the impact of drug therapy on quality of
life or if a patient will pay out of pocket expenses for a healthcare
E. The Need for Economic Evaluation service
 Scarcity of resources; opportunity cost
o When you cannot fund a service because you are looking at B. Provider
other costs
 Costs from the provider’s perspective are the actual expense of
 Every country has a health care ‘crisis’ providing a product or service, regardless of what the provider
o Every country has a different health care crisis actually charges
o Epidemiology varies and the behaviour of disease is different o Compute for the average. Put the actual cost regardless if
from country to country the provider provides a discount or not.
 Decisions need to be based on comparisons of costs and benefits  Include:
 Efficiency is not the same as cost cutting o Cost of drugs
o Because of limited resources we would get the cheapest of the o Hospitalization
generics, however, in the end it may not always be cost- o Laboratory tests
effective o Supplies
o Salaries of healthcare professionals
III. TERMINOLOGIES  Providers can be:
 Cost – the value of the resources consumed by a program of a o Hospitals
drug therapy of interest o Managed-care organizations (MCOs)
o Overall value of the resources o Private-practice physicians
 Consequence – effects, outputs, or outcomes of the program or  TAKEN WHEN: making formulary management or drug use
drug therapy of interest policy decisions
o Direct medical costs are what we look into or what we are Examples:
after for o Applied the Hospital Formulary Committee in deciding what
o Direct non-medical costs – enablers; we need this to avail of brand of drugs the Pharmacy should buy. There should be
the service of the doctor good reason in choosing one drug over the other.
o Indirect costs – things that are not given most attention to o Applied by the Philippine National Drug Formulary
o Intangible costs – difficult to quantify Committee in deciding what drugs to put in the Philippine
o Opportunity costs – the resources that cannot be funded due to National Drug Formulary (PNDF).
the trade off in funding other areas in light of limited resources
C. Payer
 Payers include insurance companies, employers, or the
government
o (if we are in the reimbursed market such as in Canada,
Australia where people don’t pay for anything where the
government serves as the payer)
o In the Philippines, we 65% of health expenditure is out of
pocket.

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 Costs represent the charges for healthcare products and COST EFFECTIVENESS UNITS
services allowed or reimbursed by the payer  Units of health outcomes can be divided into either intermediate
 Indirect costs can contribute to the total cost of the payer: or final health outcomes
o Lost workdays (holidays) absenteeism o Intermediate health outcome examples:
o Being at work but not feeling well  Cases of hypertension successfully controlled
o Lower productivity (presenteeism – present at work but not  Cases of successful smoking cessation
doing well)  Cases of CVD patients wherein MI was averted
 TAKEN WHEN: selecting healthcare benefits for employees o Final health outcome examples:
 Life-years saved or gained
D. Societal  Cases detected or cases cured
 Broadest of all perspectives – only one that considers the
benefit of the society as a whole QUADRANTS OF COST EFFECTIVENESS
 Theoretically, all direct and indirect costs are included in an
economic evaluation performed from a societal perspective
 Costs from this perspective include:
o Patient morbidity
o Patient mortality
o Overall costs of giving and receiving medical care
 Includes all the important consequences an individual could
experience
 TAKEN WHEN: making decisions regarding nationalized
medicine in reimbursed setting
Examples:
o Expanded Program of Immunization – where parents will
not spend anything since the government pays for the Figure 5. Cost effectiveness quadrant. X-axis represents effectiveness and Y-
immunization (with pneumococcal vaccine now included) axis represents cost
 It is very ideal that a treatment that would have a low cost (low
V. FULL ECONOMIC ANALYSES on the y-axis) and good effectiveness (right on the x-axis), and
A. Cost Minimization Analysis these drugs/therapeutic interventions should be adopted
 Used when the efficacy and/or effectiveness of two or more  A treatment that is very costly and ineffective should be
alternative therapies have been shown to be equal rejected
 Differences may be seen in safety profiles or other factors  The diagonal broken line represents a threshold, and treatments
associated with patient tolerability that fall near that line (areas with “ADOPT?” and “REJECT?”) are
 Compare two drugs only when you can assure yourself that the usually compared and decided upon
effectiveness is the same o The country decides their own threshold
o Above diagonal broken line, REJECT
B. Cost Effectiveness Analysis o Below diagonal broken line, ADOPT
 Used when 2 or more therapeutic approaches have differential  Decision point: Really very effective but comes with some cost
effectiveness → weigh and decide → reject or adopt if the computation falls
 NUMERATOR – costs of all direct medical utilization for the somewhere in Quadrant 2
treatment of the condition and the indirect costs (work impact)  Treatments that fall under the “REJECT?” area still need to be
 DENOMINATOR – patient level unit of benefit measured in decided upon, because sometimes in rare diseases, there are no
temporal units (life-years saved or healthy days) alternative treatments
 Time horizon (length of time included in the analysis) depends
on the natural history of the disease
 Incremental cost-effectiveness analysis assess the difference
between the two therapies
 ACER – Average Cost Effectiveness Ratio
o ACER = healthcare costs
clinical outcomes
o Represents the total cost of a program or treatment
alternative divided by its clinical outcome to yield a ratio
representing the cost per specific clinical outcome gained,
independent of comparators
 ICER – Incremental Cost Effectiveness Ratio
o ICER = Cost A – Cost B
Effect A – Effect B
o Here, we compute for additional cost that a treatment
alternative imposes over another treatment is compared
with the additional effect, benefit or outcome it provides Figure 6. Another way of looking at the cost effectiveness quadrant

 This quadrant is basically the same as the previous one, it only

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 uses terminologies like new treatment or old treatment DECISION TREE STRUCTURE
dominates
 One treatment would dominate over the other if it is more
effective and less costly

REGION OF COST EFFECTIVENESS

Figure 9. Decision Tree Structure. This is just to emphasize the basis for
computation

 Choice Node (blue box) – the choice of the physician (to give
Figure 7. Region of cost-effectiveness as shown by the gray area, and either drug A or drug B) which will be based on clinical
maximum willingness to pay as shown by the red diagonal broken line experience
 Chance Node (green circle) – probability of cure or no cure
o Each drug will have a certain performance, and even if the
drug is good some will get well and some will not. Other than
that you also have to consider adverse reactions
o Based on the figure, Drug B is better than Drug A because it
has higher probability of cure
 Terminal Node (red triangle) – same as the outcome
o All with cure is marked with 1 – treatment success
o All without cure is marked by 0 – treatment failure without
cure

COMPUTATION
(Step 1) Path Probabilities

Figure 8. Cost-effectiveness threshold and opportunity cost. An example of

region of cost effectiveness in the UK

 In certain countries, there is a maximum willingness to pay,

which is a limit or threshold wherein a treatment above it would
most likely be rejected
o An example of maximum willingness to pay in the image
above is £20,000 in the UK. This means that a treatment
that costs £20,000 and gains 1 unit of health would be
funded/adopted, and more so if a treatment that costs
£20,000 would gain 2 units of health (priced at £10,000 per Figure 10. Multiply probability of Cure with the probability of drug
unit of health) reaction

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(Step 2) Path Costs
Figure 11. Path Costs. Costs of the Probabilities
 Sum relevant costs across each pathway
 For example in the given figure, Drug A is cheaper which costs
$100, while Drug B costs $150.
 $25 is added to manage the Adversed Drug Reaction
 Additional cost is added if the drug failed; in the given example
$200 is added to the drug with no cure
(Step 3) Average Costs
Figure 12. Average Costs. Multiply ‘Path Probabilities’ by ‘Path Costs’
and sum to yield ‘Average Cost’ for each pathway
 For Drug A = $165.00
 For Drug B = $172.50
(Step 4) Average Effectiveness
Figure 13. Average Effectiveness. For average outcomes, multiply outcome
“payoff” by ‘Path Probabilities’ and sum. (Note: Given Treatment Failure = 0.
Then all other “average” outcomes are = 0 when multiplied by path
probabilities. Hence omitted)
 Average Cost-effectiveness Ratio (Drug A)
= Avg Cost Drug A/ Avg Effect Drug A
= ($165.00 / 0.56)
= $294.64 per “Treatment Success” (i.e., cure without adverse
drug event)
 Average Cost-effectiveness Ratio (Drug B)
= Avg Cost Drug B/ Avg Effect Drug B
= ($172.50 / 0.81)
= $212.96 per “Treatment Success” (i.e., cure without adverse
drug event)
 Incremental Cost Effectiveness Ratio (ICER), Drug B versus Drug
A
= (Avg Cost Drug B – Avg Costs Drug A) / (Avg Effect Drug B – Avg
Effect Drug A)
= ($172.50 – 165.00) / (0.81 – 0.56)
= $30 per additional Treatment Success for Drug B versus Drug A
 Implication
o Overall, the cost for treatment success is higher in Drug B
even if it has a higher cost than in Drug A since the cost
effectiveness is higher in Drug B by $82.00 in 1 patient only
o If Drug B is used in a million patients, there will be greater
savings
o Without knowing how to compute for these things, you may
be questioned as to the decision that you are making
C. Cost Utility Analysis
 Used when the measure of effectiveness is different for two or
more therapies and the therapies impact both morbidity and
mortality
 Denominator: Quality adjusted life years saved (QALYs)
 QALYs = Survival time (years/month) X Utility function
o A unit of health care outcome that combines gains or losses
in length of life with quality of life
o QALYs reprepresent years of life subsequent to a health care
intervention that are weighed or adjusted for the quality of
life experienced by the patient during those years
o Needs a reliable medical prediction (evidence) of prognosis
with and without treatment
 Utility function is a number between 0 and 1 indicating social
preference for a particular state of health
o A person with perfect health will have a value of 1 while a
dead person will have a value of 0.
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HYPOTHETICAL UTILITY SCALE EXAMPLE
Figure 14. Hypothetical utility scale
 Patients are asked to answer a survey wherein they can grade
utility function, “1” is indicative of perfect health while “0”
means dead.
 Negative health state such as -0.10 describes a condition when
utility function is worse than dead.
Quality-Adjusted Life-Years Added by Treatment
Figure 16. The charts above are presenting the effect of treatment to
QALY. Prognosis with treatment (broken red line) has more years and
quality of life gained compared to those patient who did not receive
treatment (yellow line).
 If there’s a disease, the patient will eventually die in certain
number of years. Without treatment, the patient’s health
index is poor. With treatment or intervention, hopefully, we
do not just extend the life and delay death, but we also
improve the quality of life.
The QALY in numbers: See computation below.
Prognosis without treatment:
(0.7x1) + (0.6x2) + (0.4x1) + (0.3x1) + (0.2x1) + (0.1x2) = 3.0
Prognosis with treatment:
(0.5x1) + (0.6x1) + (0.7x1) + (0.8x1) + (0.9x4) = 6.2
QALYs gained = 3.2
 Prognosis without treatment: In the chart ABOVE, the yellow
line started in 0.7. Multiply 0.7 by the years the patient was in
that state, and in this case it is 1 year. Therefore, 0.7x1. Then
add it with the other values like 0.6x2 (years patient was in this
state) and so on until death.
o (0.7x1) + (0.6x2) + (0.4x1) + (0.3x1) + (0.2x1) + (0.1x2) = 3.0
 Prognosis with treatment: from 0.7, initially it will go down.
Why? Because all treatments have adverse reaction. Assuming
that this is from chemotherapy (because of hair loss, pain,
nausea and weight loss) there will be a decrease in quality of
life. But after a year or so, they’re quality of life will be back to
0.9. Broken red lines started in 0.5 value and patient was in this
state for one year so 0.5 x 1. Add to others like so,
o (0.5x1) + (0.6x1) + (0.7x1) + (0.8x1) + (0.9x4) = 6.2
 Then, subtract the two from each other to get QALYs gained. In
this case, QALY gained is 3.2 in the course of treatment.
Figure 147. This chart shows that with an addition of another
treatment (TREATMENT C), QALY increases. Therefore, life was
prolonged.
D. Cost Benefit Analysis
 Rarely used in medicine since it is concerned in giving monetary
values to the state of health (“rarely used kasi ayaw naman
nating presyuhan ang health”)
 Used when one therapy is demonstrated to be more effective
than the alternative but the numerator and denominator of the
economic ratio are expressed in monetary units (dollars, euros
and etc.)
 Numerator: Monetary benefit gained from the treatment
 Denominator: Monetary investment for treatment
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 Nature of Health System Decision Making

Figure 18. The nature of health system decision making

 New technologies (medicines, interventions and etc.) will bring

us benefits and also additional costs. By funding such technology
we are displacing services, therefore there are benefits foregone
and there are resources that are released because we funded
one over the other. And all these we do in a budget-constrained
health care system.
 2016B trans example: if there is limited budget you can only
have therapeutic, diagnostic and care services for EITHER
patients with cardiac problems or mentally ill patients. You can
only choose one patient to buy services for.

Figure 19. “Is the benefit gained from the new treatment
greater than the benefit foregone through displacement?
This is the question answered by economic evaluation.”
This question is always considered in clinical decisions,
formulary management and etc. from MICRO level
(clinician level) to MACRO (DOH secretary level)
management of health economics.

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