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Research Methods | Pharmacoeconomic Research

Pharmacoeconomic Research:
Getting the Biggest Bang for the Buck

Martin Stephens
Chief Pharmacist, Southampton University Hospitals NHS Trust

The Techniques:
. Cost-effectiveness Analysis
Cost-utility Analysis
       3. Cost-benefit Analysis
Further Reading


Economics has been described as the study of how society ends up making choices – so pharmacoeconomics is all about how choices are made regarding drugs.

Understanding how to use pharmacoeconomic techniques, how to interpret and critically appraise pharmacoeconomic literature are important parts of pharmacy research.

There are two key concepts that form the basis of economics:

The principle that there are not sufficient resources to buy or do everything that you might want to do. For health this means not every possible intervention can be made – what can be done is limited by money or time or availability of staff. Choices need to be made, for example there may be competing demands to fund the introduction of new drugs which cannot all be afforded.

Opportunity Cost
If you choose to do A you cannot do B; more properly the benefits foregone by taking one course of action rather than another.

The Techniques top of page

Pharmacoeconomic analysis helps us answer questions: which technique we use depends on the question we need to ask. Each technique seeks to explore – in the words of the firework cliché – how big a bang do you get for your buck?
There are three techniques – though variations in one are sometimes identified separately. They each look at inputs (costs in financial terms) and outputs (what you get for your money). It is the way outputs are valued that differentiate the techniques.

1. Cost-effectiveness Analysis top of page

Inputs = costs.

Measured financially

Outputs = effect.

Measured in a straightforward uni-dimensional way (eg: cures, lives saved, events avoided, days of illness avoided).


Antibiotic A:
Antibiotic B:

£10 per course:
£15 per course:

60% cure
91% cure

A: £16.67 per cure

B: £16.48 per cure

Moving from A to B gives a 31% improvement in cure rate but also a 1.1% improvement in cost-effectiveness.

NB Costs are not just those of acquisition – administration time, costs of dealing with side-effects and so forth may be included, although for simple analyses these are sometimes assumed to be equal.

There are two variations on cost-effectiveness analysis:

Cost-minimisation Analysis:

Here the outputs (“effects”) are assumed to be identical and merely the costs are explored.

Cost-consequence Analysis:

Here a variety of effects may be used to compare products. This enables a broader position to be explored than merely cost per cure. The SOJA method has been developed to systematise this approach (see reference 3).

2. Cost-utility Analysis top of page

Cost effectiveness is good at looking at questions to decide between treatments for a given condition. It does not help us answer questions like these:

Should we invest in (a) statins or in (b) palliative care?
Should we purchase extra physiotherapy or more renal dialysis?

Cost-utility analysis attempts to do this – in other words to compare different health interventions by converting their outputs into a “common currency”.

Inputs = costs

Measured financially.

Outputs = health gain

Measured using a constructed “index” that brings in more than one dimension of health.

The most commonly used index is the Quality Adjusted Life Year or “QALY”.
The QALY seeks to combine the impact an intervention has on length of life with changes in the health-related quality of life. A scale is used where 0="death," 1="perfect" health. (Negative scores can exist). This is used to assess the value (utility) of the health state before and after the intervention.

An intervention giving 3 years extra life of “perfect quality” will give 3 x 1 = 3 QALY. Three years extra life at an index score of 0.5 would give 3 x 0.5 = 1.5 QALY. Cost-utility is then stated at cost per QALY.
An example of how these principles might be applied in practice:

Intervention A

Prevents certain death and gives 2 years of perfect health.

Costs £5000.

Intervention B

Improves the quality of life significantly (scored as a move from 0.7 on a scale to 0.99) for the last 10 years of life.

Costs £10,000 over 10 years.

2 x 1 = 2 QALY
£2500 per QALY

B: 10 x 0.29 = 2.9 QALY
B: £3450 per QALY

As well as the QALY, other measures such as “healthy years equivalent” are also used.

Deriving the “utility” of the health state is a crucial step – various methods have been developed, some generic, some condition specific – the “EroQuol 5” questionnaire (EQ-5D) is a generic example (see: http://www.euroqol.org/). Normally only the health gains and health costs are included in analyses.

3. Cost-benefit Analysis top of page

Inputs     =  cost Measured financially
Outputs  =  all the benefits Measured financially

This is the most comprehensive form of analysis with all the costs and benefits measured and valued in financial terms. Converting health gain into financial value, not surprisingly, is difficult and controversial. A classic technique being willingness to pay – estimating the impact of an intervention by asking people to state how much they would pay for it – confounded by how rich they are, of course.
It enables an answer to the question: ‘Which investment gives greatest benefit?’. It also enables you to look at issues such as: ‘Do the benefits of interventions outweigh the costs?’

Further Reading  top of page

  1. Department of Health and Drummond M. Economic analysis alongside controlled trials. London: Stationery Office; 1994.
  2. Drummond M, O’Brien, B. Methods for the Economic Evaluation of Health Care Programmes. 2nd Ed. Oxford; Oxford Medical Publications; 1997.
  3. Jantreght R et al. ACE Inhibitors and angiotensin II inhibitors for the treatment of hypertension: drugs selected by means of the SOJA method. European Hospital Pharmacy 1997; 3: 47-58.
  4. National Prescribing Centre. An Introduction to health economics. MeReC Briefings No. 13 and No 14, 2000.
  5. Stephens M. Can health economics help healthcare decision makers? Pharmacy Management April 2001: 26-30.
  6. Stephens M. Economic analyses to assist drug entry decision making. Pharmacy Management.July 2001: 36-40.
  7. Elliott R, Payne K. Essentials of Economic Evaluation in:  Healthcare. UK, Pharmaceutical Press; 2005. (http://www.pharmpress.com/shop/default.asp)
  8. Chapter 5 – Health Economics in: Stephens, M. Strategic Medicines Management. UK, Pharmaceutical Press; 2005. (http://www.pharmpress.com/shop/default.asp)
  9. Health Economics: the journal (www.interscience.wiley.com).
  10. Pharmacoeconomics: the journal (www.adis.com).

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