A Quick Guide to Pharmacoeconomics

Steph’s Note: Anthony Hudzik is a P4 student at the University of Texas at Austin College of Pharmacy. Anthony’s career goals involve market access and HEOR, and he will be doing a fellowship after graduation. Anthony had a 6 week APPE rotation with Brandon and had the time of his life... Outside of pharmacy, Anthony is a world class rock climber (and by world class, I mean average) and has traveled to every country in the world except for 185 of them.

You, when you get your first “real” paycheck. (Image)

You’ve probably heard the term pharmacoeconomics before, or maybe you even leveled up by taking a class about this in pharmacy school.  It’s kind of a big deal in pharmacy these days when everybody wants to know where the money at, so don’t get left behind. How? Read this post, for starters!

So what is pharmacoeconomics (PE)? 

Picture this: after yearrrrs in school, you finally graduated, you have a salary, and you want to treat yourself to a new car (mostly so that you can retire your poor junker).  Car 1 is a standard car, modest, nothing fancy.  It’ll get you from point A to point B.  Car 2 is a 2021 model with backup camera, #alltheairbagseverywhere, and roadside assistance.  You name it, this sweet ride has it.  But of course, Car 2 is a heck of a lot more expensive than Car 1.  So you have to decide - is Car 2 worth shelling out the extra cash out of your precious paycheck every month? 

(Btw, before you go too crazy with that new paycheck, maybe check out this tl;dr post on money management…)

Anyways, this question of worth is exactly what PE sets out to answer, except as pertains to medications rather than cars. Is the new medication worth its cost?

So, to put it nice and succinctly, PE is the analysis of the costs of drug therapy to society, as well as to the people, institutions, and resources that deliver healthcare.

PE analyzes this whole process to determine the value of a new product or service. Bless the people who do this work!

Ok now imagine you’re CEO of a big pharma company.  You have a great new drug that is coming out called tldrpharmumab.  (Everybody else just throws a bunch of letters together. Why can’t we?) Your new drug cleared the first hurdle of safety.  Then it cleared the second hurdle of efficacy and the third hurdle of tolerability.  Now time for the fourth hurdle of cost-effectiveness.

tldrpharmumab clearing the fourth hurdle of cost effectiveness (Image)

So why is cost effectiveness so important? 

Look at our friends at Novartis and their new CAR-T cancer therapy Kymriah.  In 2017, when the drug was approved, it cost the equivalent of 20 Toyota Camrys, or about $475,000.  It’s a one and done treatment and has good efficacy, soooooo is it worth it?

For a more extreme example, look at Zolgensma.  For the petty cash price of $2,125,000, this therapy could be yours.

While these are extreme examples, it’s important to realize that developing a new drug is a HUGE investment, and companies try to recoup that upfront investment with drug pricing after approval. So the cost transfers to the patient and the insurer. This is why cost-effectiveness matters. 

Should insurance cover a specific medication? Is an immunization worth the cost in the long term?  These are the questions that PE seeks to answer!

To first understand cost-effectiveness, it is important to understand who is paying for healthcare in the US.  In the US, your insurance can either be through the government (e.g., Medicare or Medicaid) or through a private insurance (e.g., Blue Cross Blue Shield, Anthem, and the 1000 other different private insurances).  There could be a whole post about insurances, but for now, just know that it’s either the government or private insurances paying for drugs.

Okay now that we know what PE is and why it is the most important area in big pharma (only partially kidding), it’s time to look at how it’s done.

Just like there are different types of clinical studies to show the effectiveness of drugs, there are different types of PE studies.  In this post, we are going to focus on the big four.  (There are other types of PE studies, but these are the most used.)

But before we dig into these study types, we have to talk about the first half of all of their names - cost.

A Brief Detour into Pharmacy-Related Costs

One thing common to all 4 PE study types is that they all involve cost.  When you first think about cost, it doesn’t seem that complicated.  But as you are about to see, there are multiple different costs to investigate:

• Direct Medical Costs

  • This one is pretty self-explanatory.  This is what is paid for specific health care services, e.g., X-rays, prescriptions, provider services. These are things that directly affect patients’ health and for which there is tangible evidence.

• Direct Non-Medical Costs

  • These costs are incurred when patients receive medical care but aren’t necessarily part of paying for the care itself. For example, this could be the cost associated with transportation to healthcare appointments.

• Indirect Costs

  • When you decide to play just “one” more game or go to happy hour when you have a pharmacotherapy exam looming, there are consequences (you don’t say!). You have the indirect cost of losing a day of studying. Same thing when your patient has the flu. They will need time off from work, which could translate to lost productivity - which is a cost.

• Intangible Costs

  • To continue with the fun theme of pharmacotherapy tests…  The intangible costs of waiting until the last minute to study for an exam include anxiety and loss of sleep. Not superbly easy to quantify, but you know they’re there. Similarly, it can be very hard to measure intangible costs that deal with a patient’s pain and suffering. 

Let’s combine everything together now and put all the pieces together with a timely COVID-19 example:

Naturally, if you’re a pharmacist or pharmacy student, your first thought when you see medication cost is cost to whom? The cost for the patient? The cost for the pharmacy? The cost for the insurance?

The answer to this question is that it depends (of course, sigh). There are many ways to quantify drug costs, but we will talk about the following three big methods:

Geeez…who thought up all these kinds of costs?? (Image)

• Average Wholesale Price (AWP)

  This is the “sticker price” of a medication - pretty much like the sticker price of a car.  More than likely, you aren’t going to pay the sticker price for a car (haggle time), and the same goes for medications. Most companies don’t pay the sticker price for medications.

• Wholesale Acquisition Cost (WAC)

  This is the “catalog” price of the drug. It’s the estimate of what wholesalers (like McKesson) pay to the manufacturer of the drug.  This is only an estimate since it doesn’t account for discounts that some manufacturers give for their drugs.

• Average Manufacturer’s Price (AMP)

  This is the most accurate estimate of what pharmacies pay for a drug. AMP is the average amount wholesalers (like McKesson) or pharmacies pay to manufacturers.  What makes this different from WAC is that AMP does include discounts that manufacturers might have for their drugs.

Now that we’ve hit costs pretty hard, we can return to discussing the different studies mentioned before.

The Four Types of Pharmacoeconomic Analyses

Cost-Minimization Analysis (CMA)

This type of study isn’t used very often.  In a CMA, the costs are measured in dollars, and the outcomes are assumed to be equivalent.  One setting that this may be used for is comparing generic versus brand name medications.  Theoretically, they’ll both provide the same clinical outcomes, but the costs between the two are different.

CMAs aren’t just useful for looking at generics vs brands though.  For instance, the VEGF inhibitor bevacizumab can be administered either in a physician’s office or in a hospital outpatient setting. The outcome will be the same since it’s the same drug, but the costs will be different.

 So now you may be wondering what is the point of this study if the outcomes for patients are the same?  The reason is in the title of the study type - cost-MINIMIZATION analysis.  The goal is to minimize costs; it doesn’t look at outcomes.

There is a major weakness with this type of study.  Say you are doing a CMA on two oncology checkpoint inhibitors. They both are equally effective, so you think, “Great! I can do a CMA.”  But a CMA doesn’t capture that these two checkpoint inhibitors might have very different adverse events associated with it, which could lead to some of those other types of costs being incurred that aren’t captured by a CMA’s dollars assessment.

So a CMA isn’t great at accounting for the whole clinical picture, which is why it isn’t used that much these days.

Cost-Effectiveness Analysis (CEA)

Now time for the king of PE!  CEA is the most common type of PE study.  Like CMA, CEA the costs are measured in dollars. But unlike CMA, for CEA the outcomes are different.  The outcomes in these studies are also in what are called “natural units.”  Think treatment success rate, cholesterol reduction, stroke reduction, etc.

Let’s check out an example.  Say there is a new inhaler on the market, and you want to do a CEA to compare the costs of Breo versus this new medication. The natural unit outcome for this CEA would be the occurrence of exacerbations while on the inhalers. So essentially, you need to weigh the difference in costs for the two inhalers with the difference in exacerbations. So you want to determine the cost-effectiveness.

Now, curveball. If you ask 5 people what “cost-effective” means to them, you will likely get 5 different answers.  Some will say something is cost-effective if it’s cheaper. Others will say cost-effective refers to the medication that is more clinically effective. 

But really the point here is it’s important that you interpret cost-effectiveness in a PE mindset.

So what is that? 

In PE, being “cost-effective” means:

• Having a lower cost and being at least as effective as the comparator, OR

• Having a higher cost but also a larger benefit that makes the cost worth it, OR

• Having a lower cost and decreased benefits (urgh), but the added benefits simply aren’t worth the added cost.

Time for another PE term that comes up a lot in CEA - Dominant/Dominated. 

ICER = Incremental Cost Effectiveness Ratio = determined by dividing the difference in total costs by the difference in the chosen measure of effect. Keep reading for more on this teaser. (Image)

A drug is dominant if it is more effective compared with another AND either the same or lower cost. (Basically the Covey equivalent of win/win!). It is also dominant if it is the same effectiveness AND lower cost than the comparator.

Now that we have the important terms described we can now do some calculations.

Say you are looking at a new diabetic drug and how much it reduces A1c compared to a diabetic drug already on the market:

As you can see, Drug B is better than Drug A at reducing the A1c, but it is also more expensive.  But is it worth it??

You really can’t tell anything from just this table.  You’re going to have to do some calculations!

The first way you can do this is with an average cost-effectiveness ratio.  This is done by dividing your natural unit outcome by the medication cost per year:

So for those of you children of math teachers who grew up with the “no work, no credit” rule, the math behind this is all proportions. If it costs $100 to get a 0.3 point A1c reduction in a year, then proportionally speaking, it will be $333 to get a whole 1 point reduction in A1c.

Another way to look at this problem is through an incremental cost-effectiveness ratio (ICER).  This is calculated by dividing the difference in cost by difference in the outcomes.  For the above example:

ICER equation is ICER = (Cost B - Cost A)/(Effect B - Effect A)

ICER = ($200-$100)/(0.5-0.3)

Calculating this, you see that each additional 1-point reduction in A1c costs an additional $500.  Now the question remains… is the additional 1-point A1c reduction with Drug B worth the extra $500 compared to Drug A? 

In an ideal world, the natural unit in a CEA would be a final outcome - something that has a direct relationship to morbidity and mortality.  Perhaps these could be outcomes like mortality rate, survival rate, or strokes, etc.

Unfortunately, these final types of outcomes aren’t always possible to include due to either time or money. So instead, intermediate outcomes are used.  Intermediate outcomes are surrogate endpoints or biomarkers.  (More info on surrogate outcomes coming soon to tl;dr!)

CEA definitely has its advantages, but it also has its limitations…

The biggest advantage of CEA is that it isn’t required to place a dollar value on clinical outcomes.  You don’t have to try to quantify a reduction in A1c in terms of dollars - because that’s a whole other beast! Rather, the reduction in A1c serves as the natural outcome in and of itself.

One of the main disadvantages is that only drugs with the same outcome can be compared. For example, a CEA couldn’t be used to compare a diabetic drug with a blood pressure drug since they have different outcome measures (A1c versus BP values).

Cost-Utility Analysis (CUA)

This study is probably the most complex of the four. Like the other 2, the costs are measured in dollars. But where it gets tricky is the outcomes are measured in Quality-Adjusted Life Years (QALY).

QALY, WALL-E’s less famous cousin (Image)

The first thing to mention about QALY is that it is pronounce QALL-E.  Don’t be making a fool of yourself calling it Q-A-L-Y.  (But who am I to judge, I still say “BUN” like cinnamon bun rather than the correct B-U-N.)

Ok back to the important stuff.

QALYs = Number of years of life saved x utility for each year

So 1 QALY = 1 year in perfect health, and 0 QALY = dead.  The cool thing about QALYs are they incorporate mortality and morbidity.  So they capture both the quantity and quality of life.

Now what you’re probably wondering is what is utility?

Utility is measured on a scale of 0-1 with 1 being perfect health and death being 0.  If a patient is suffering from a disease or undergoing treatment, his utility is designated somewhere between 0 and 1. So it’s kind of a measure of the quality of life piece.

But how do you measure health on an arbitrary scale?

PE has developed 3 instruments to help with this question:

Kinda how you can think of a rating scale for determining utility. (Image)

• Rating Scale (RS)

  • Think of a rating scale as a thermometer. For example, if a researcher asked you where on the scale of 0-1 would you put having diabetes, you would choose a number that reflects your impression of the disease burden. 

  • The utility on a rating scale is the average point on the “thermometer.”

• Time trade-off (TTO)

  • In this instrument, subjects are given two alternatives, and they have to choose a trade-off between the two alternatives. 

  • For example, you can be deaf for 50 years or have x years of life with hearing.  Subjects have to decide how many years of life they would be willing to give up to have their hearing intact.

  • Let’s say a subject responds that she would give up 5 years of life to be able to hear. She is willing to have 45 years of hearing instead of 50 years of deafness.  So how do you calculate utility from this answer? It's simply the number of years in choice 1 divided by the number of years in choice 2. In this instance, it would be 45 / 50 or a utility of 0.9.

• Standard Gamble (SG)

  • This one is the most complex of the three instruments for estimating utility.  With standard gamble, subjects have two choices:

    • Choice 1: receive treatment with 2 possible outcomes - live a healthy life for x years OR die immediately. 

    • Choice 2: live with chronic disease for the rest of the subject’s natural life.

  • So the subject can gamble and go for the potentially curative (or fatal) treatment, or he can play it safe and deal with the disease chronically.

The choices for the standard gamble. P is the probability of a patient staying healthy during the kidney transplantation.  The value of p changes until you reach a point where you are indifferent between kidney transplantation and dialysis.  When that happens the value of p is your utility. (Image)

Excellent.

Now since you know how to calculate utility and QALYs, let’s look at an example comparing two new oncology drugs:

If you are looking at years of life saved and the cost of the two drugs, it is clear that Drug B is a ton better.  But that doesn’t capture the whole picture. Is the patient going to be able to perform his activities of daily living? Will he be able to spend time with family? Or is he going to be nauseated every day, unable to eat, in pain, and going to doctors’ appointments 5 days a week?

This is why we have QALYs:

After doing the CUA, you see that Drug A actually produces more QALYs compared to Drug B.  Again, you are probably wondering how much a QALY is actually worth…

The rule of thumb for value of a QALY is $50,000 dollars per QALY.  But there is a trend for increasing QALY values with more recent studies valuing a QALY at $100,000. So then this value can be weighed with treatment costs.

Now let’s wrap up with advantages and limitations of CUA.

A big advantage of CUA is that it includes patients’ preferences.  As we saw by the instruments used to measure utility, patient preference plays a large role in this type of study.  Also, QALYs provide a way to incorporate morbidity and mortality into one value.  Finally, it allows comparisons between different treatment options.

Just like the other studies, CUA also has disadvantages.  Given this post section is quite a bit longer than the others, you can probably tell that a CUA is more time consuming to conduct. Also, since CUA incorporates patient preference, results may vary depending on the instrument used. The biggest weakness for this study, though, is the fact that there is no definitive answer about how much a QALY is actually worth.

Cost-Benefit Analysis

Final study!  The main purpose of this analysis is to determine if the value of the resources consumed is worth the value of the outcome from the program or intervention.  Again, costs are in dollars, but for the first-time benefits are in dollars too.

This study type is the least used of the four, but it is still important to know.  CBAs are usually more focused on health care programs rather than specific drug therapies.

There are 5 major steps to conducting CBAs:

1. Identify program or intervention

2. Identify alternatives

3. Identify and measure costs

4. Identify and measure benefits

5. Calculate results

Let’s walk through an example of creating a CBA.

To identify a program or intervention, let’s look at an arena where pharmacists can make a major impact: oncology.  Let’s say we want to create a program in which pharmacists are in charge of prescribing or determining the antiemetics for a chemotherapy regimen. Step 1, check. We have identified our program.

Step 2, we have to look at alternatives.  Alternatives for this intervention could be physicians doing all the orders for antiemetics. Or perhaps the alternative is to have pharmacists perform some other service related to oncology, just not antiemetics.

Step 3, we need to identify and measure costs.  We talked about the 4 major types of cost earlier, but for CBAs, there are really only two involved costs - direct medical and direct non-medical.

• Direct medical

  • Pharmacist time to prescribe anti-emetics

  • Antiemetic drugs

• Direct non-medical

  • Creating a system for pharmacists to be able to prescribe anti-emetic drugs

Then, the costs with and without the intervention are compared.

Step 4, we need to identify and measure benefits. Remember those 4 types of costs?  Direct medical / non-medical, indirect, and intangible? 

Spoiler alert! They can also be benefits. But here you are looking at potential benefits since it’s unknown exactly how much money the service will save.

Let’s explore the potential benefits of our antiemetic example.

• Direct medical

  • Reduction in ER visits

  • Reduction in hospitalizations

• Direct non-medical

  • Reduction in transportation needed to go to physician appointments

To calculate the indirect benefits, assumptions must be made.  Since indirect benefits deal with productivity, census estimates for an individual’s expected earnings can be obtained and then manipulated to determine the value of 1 day of work. Knowing this number, a dollar value can be assigned to the indirect benefit of reducing sick days.

As you may guess from the name, intangible benefits are the most difficult to measure. Intangible benefits are the “cost-savings” that result from a reduction in pain and suffering. How does one quantify an intangible benefit?!? (The legal system has to do this all the time - think of all those “pain and suffering” lawsuits.)

CBAs do this by determining how much people are willing to pay to reduce the chance of an adverse health outcome.

This can be done in 4 ways:

The bidding game. What’s next…a rousing game of would you rather?? (Image)

• Open-ended

  • This method is straightforward.  Going back to the anti-emetic program, the best way to use an open-ended question to determine willingness to pay would be, “How much is the highest amount you would be prepared to pay per year to reduce your chance of having chemotherapy-induced nausea and vomiting?”

• Closed-ended / take it or leave it

  • For this method, subjects are presented with a range of values, which they can either agree or disagree with. For instance, a subject would be asked, “Would you pay $2,000 dollars for your current antiemetic treatment?” Then the subject can either answer yes or no. Then the value is modified, and a different subject or group is asked.

  • After enough questionnaires are completed, it’s possible to tease out at what value the majority of subjects switched from yes to no.

• Bidding game

  • This strategy involves asking multiple questions to one subject to figure out the most accurate perceived value of the service.

• Payment card

  • This final method is similar to the bidding game. But instead of asking the questions in a process like the bidding game, you provide a range of prices for the services and see which the subject is willing to pay.

Now that you have a way to add up all the costs of the services and all the potential benefits of the service you can determine if the service is beneficial.

(Image)

It is pretty straightforward to see if a service is beneficial.  A service is deemed beneficial if the ratio of total benefits to total cost is greater than 1.  This makes sense since the program is bringing in more money than it costs to perform.

Now that we have gone through all 4 major PE study types, you will be ready for any PE study thrown your way!!

The tl;dr of Pharmacoeconomic Studies

PE is the analysis of the costs of drug therapy to society and to the people, institutions, and resources that deliver healthcare services.

Learn this. Even if you don’t remember all the formulas we’ve reviewed above, this is where the money is. Pun totally intended!