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Pharmacoeconomics refers to the scientific discipline that compares the value of one pharmaceutical drug or drug therapy to another.[1] It is a sub-discipline of Health economics. A pharmacoeconomic study evaluates the cost (expressed in monetary terms) and effects (expressed in terms of monetary value, efficacy or enhanced quality of life) of a pharmaceutical product. We can distinguish several types of pharmacoeconomic evaluation:cost-minimization analysis, cost-benefit analysis, cost-effectiveness analysis and cost-utility analysis. Pharmacoeconomic studies serve to guide optimal healthcare resource allocation, in a standardized and scientifically grounded manner.

One important consideration in a pharmacoeconomic evaluation is to decide the perspective from which the analysis should be conducted (such as institutional or societal).

Heading: Importance of Cost Effectiveness Analysis

Cost Benefit Analysis (CBA) is based on the economic standard of efficiency. CBA requires the measuring of all benefits and costs which are either directly or indirectly attributable to the outcome under investigation. CBA is important to healthcare economists and policy makers because it identifies inefficiency, and inefficiency equates to welfare loss (ideally, we want to minimize welfare loss). CBA has become the standard of modern welfare economics. When examining the standard of welfare economics, marginal analysis is applied to CBA so we can view the marginal social benefits and the marginal social costs. The net benefit for society will be maximized where marginal social benefits equal marginal social costs in an assessment of cost benefit analysis .

Cost Effectiveness Analysis (CEA) ratio can be more practical to decision making than CBA in that one can compare costs of achieving a particular non-monetary objectives; such as lives saved, health improvement, or quality of life. CEA ratios can be applied when the costs are expressed in money (i.e., dollars) and the benefits are in specific health outcomes. Benefits can be expressed in any unit of measure (asthma free days, hospitalizations, etc.) but can only be reliable and meaningful when the output units are consistent across projects or models. The goal of applying CEA is to allow for comparison of a variety of interventions in terms of non-monetary (health) gains at a given cost, keeping the comparators in the same terms or units of measure. In essence, we can only compare different entities once we establish a common measure of outcome, and a common cost as a means of assigning relative effectiveness to different modes of treatment or intervention.

The Cost Effectiveness Ratio (CER) is the mathematical representation of this analysis. The CER therefore consists of the change in societal costs (e.g., resources, money) as the numerator, and the change in health (e.g., disability or functionality, shortened or prolonged life) as the denominator. Variations on methods of output measurements and discounting techniques lead to CEA being useful in cost-utility analysis (ex. QALY, Quality Adjusted Life Years) but the investigator or evaluator must ensure that the units being compared are standard or identical across a given analysis. When good progress is discovered in developing a cost-effective analysis (CEA) it can help determine if extending it to a cost-benefit analysis (CBA) study is possible (essentially, asking if the cost-utility analysis attains the welfare economic standard).

Professor Michael Drummond has spent many years developing methods and refining his expertise on the topic. In his publication 'Introduction to Pharmacoeconomics'6 he emphasizes the importance in evaluating a treatment or drug in terms of its impact on health status (i.e., survival, quality of life, specific outcomes) and impact on health care costs (i.e., costs per QALY, hospitalizations, medications, procedures). Essentially there are two methods of performing this evaluation: trial-based studies or modeling studies. Trial-based studies refer to clinical trials which coincide with economic evaluations concurrently. Modeling studies use techniques of epidemiology or decision analysis to review, assess, and analyze prior studies. Drug development frequently utilizes trial-based studies. These have developed mostly in response to international influences. In 1993, Australia became the first nation to use pharmacoeconomic analysis as part of deciding coverage for new drugs. The Pharmaceutical Benefits Advisory Committee (PBAC) advices ministers on whether new drugs should go on the national formulary for reimbursement. Now, this approach to evaluating costs and benefits can be found in Canada, Finland, New Zealand, Norway, Sweden, and the UK (to name a few!).

Future CEA applications in formulating health policy are highly controversial. Recent legislation by the PPACA (Patient Protection and Affordable Care Act) both explicitly and widely prohibits the use of cost-utility analysis, specifically QALY, in directing recommendations about healthcare technologies, treatment and services . Antipathy to the cost-effectiveness information, as noted in Neumann , may be due to the fact that it "reveals uncomfortable choices" about cost of treatments and benefits. Societal perspectives may vary across generations, religions, ethnicities, geographies, and so on, and these varying societal perspectives may influence the value or measure of QALY's simply by variance in perspective and not by differences in the actual treatment or outcome under investigation . For this reason, it is important to clearly identify all factors which may participate in defining the costs and benefits. These should incorporate more than monetary costs and should attempt to assign measurable value on functional status and the ability to be a productive member of society. This will allow for a more comprehensive and accurate summation of societal perspectives as functional status is highly valued amongst all people. The study of cost-effective analysis will continue to gain importance and credibility as we gain comfort with applying measures to such intangible, albeit real, consequences or outcomes; such as functional status and feelings of health. Growing consensus continues in healthcare-related literature emphasizing the benefits of cost-effectiveness analysis and other methods of determining incremental cost effectiveness ratios. Medical literature, both nationally and internationally support the role of CEA and CER in ability to identify and rank treatments in terms of their social welfare effects . Furthermore, the reliability of cost-effectiveness research can be greatly improved in time as data continues to grow and long-term data are generated correlating to efficacy (some of which is beginning to emerge in observational studies and trials found in the UK biological registry) .

In June, 2011 , the Center for Medicare and Medicaid Services (CMS) made decisions on two very expensive cancer treatment drugs. The Food and Drug Administration withdrew approval for the use of Avastin (Bevacizumab) for breast cancer, but CMS indicated that it would continue to cover the medication for breast cancer treatment. At the same time, CMS approved another expensive biological drug, Provenge (Sipuleucel-T), but only for the FDA approved indications in prostate cancer, and not for "off label" uses.

A complete compilation of cost-utility analyses in the peer reviewed medical literature is available at the The CEA Registry Website.

See also

Academic resources

  • PharmacoEconomics, ISSN 1170-7690, Adis, a Wolters Kluwer business
  • Value in Health, ISSN: 1524-4733 (internet), 1098-3015 (print), Blackwell Publishing


  1. Arnold RJG and Ekins S, Time for cooperation in health economics among the modeling community, PharmacoEconomics, 28(8):609-613, 2010
 Kenkel, D. (2009). Valuation in Health Economics. Presented at Valuation of Outcomes and Resources/Costs, Workshop on Strengthening Benefit-Cost Methodology for the Evaluation of Early Childhood Interventions, NRC/IOM Board on Children, Youth and Families, March 4-5 2009 Retrieved June, 6, 2011,  from
 Neumann, P.J., Weinstein, M.C. (2010).  Legislating Against use of Cost-effectiveness Information.  NEJM 363(16):1495-1497.
 Neumann, P.J. (2011).  What Next for QALYs? JAMA 305(17):1806-1807.
 Nord, E., Pinto, J.L., Richardson, J., Menzel, P., Ubel, P. (1999).  Incorporating Societal Concerns for Fairness in Numerical Valuations of Health Programmes.  Health Economics 8(1):25-39.
 Folland, S., Goodman, A. C., Stano, M. (2010).  The Economics of Health and Health Care.  Upper Saddle River, NJ: Pearson Education, Inc. 
 Drummond, M. (2006). Pharmacoeconomics: Friend or foe? Annals of the Rheumatic Diseases, 65 Suppl 3, iii44-7. doi:10.1136/ard.2006.058602 
 Pollack, A. (2011, June 30) Medicare Will Continue to Cover 2 Expensive Cancer Drugs. The New York Times. Retrieved July 1, 2011, from:

Academic resources

  • PharmacoEconomics, ISSN 1170-7690, Adis International
  • Value in Health, ISSN: 1524-4733 (internet), 1098-3015 (print), Blackwell Publishing

External links

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