Pharmacoeconomics

Previous lecture:

1) ECHO model 2) Pharmacoeconomic basic definition and some notes

3) Local view 4) Basic Methods

This lecture: Aspects of cost

Direct cost. Resources used in the design, implementation, receipt and continuation
of a health care intervention. Either Medical or Non-medical.

Indirect costs refer to resources like the patient’s time that is taken up by the hospital, rather than
working. Indirect costs are commonly measured using wages and earnings lost. i.e., loss of
productivity due to illness.

Intangible cost. The costs of discomfort, pain, anxiety or inconvenience.

Cost Vs Charges

Charges are commonly reported in PE analyses but are often referred to as “costs.” (inaccurate
reporting)

Charges are the amount a provider (e.g. hospital) bills a patient or payer for a product/service.

Charge = cost + profit; therefore, charges do not reflect the true cost of providing a product.

/
RCC = Ratio of Cost-to-Charge (Cost Charge )

RCCs are commonly used because most providers only provide charge data.

Specific ratio for the entire hospital or for each department in the hospital.

RCCs may be available for an institution or at a department level.

RCC cost is usually calculated by:

“(charge for item) x (RCC) = cost
($20.00) x (0.8) = $16.00.

Cost and time

A) Bringing Past Costs to the Present: Standardization of Costs

B) Bringing Future Costs (Benefits) to the Present: Discounting

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A) Bringing Past Costs to the Present: Standardization of Costs

If retrospective data are used to assess resources used over a number of years back, these costs
should be: adjusted or, valued at one point in time.

Example: If you compare costs for patients who received treatment in 2000 with patients who
received treatment in 2017, the comparison of resources used would not be a fair comparison.

Solution
1) use the quantity (as fixed factor) * cost at (t) time (as variable factor).
i.e., No. of units (doses) used per case x current unit cost

Cost Cost
Total cost
Medical resources used to Units of each per unit per Total cost in
in 2005
treat mild infection resource in 2005 unit in 2017
US$
US$ 2017
Office visit 2 visits 62.00 124.00 X 2X
Laboratory service One laboratory 53.00 53.00 Y 1Y
Antibiotic medication 28 capsules 1.03 28.84 Z 28Z
TOTAL 205.84 2X + 1Y + 28Z

2) Use some ready Consumer price index especially in developed countries.

A consumer price index (CPI) is a measures changes over time in the price level of market basket of
consumer goods and services, such as transportation, food and medical care.

$1000 in 2002 What is it

in 2007?

$1000 * 207.342 / 179.9 =

$1,152.54

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B) Bringing Future Costs (Benefits) to the Present:

Discounting: A method for adjusting the value of costs and outcomes which occur
in different time periods into a common time period, usually the present.

The discount rate approximates the cost of capital by taking into account the interest rates of
borrowed money. i.e., Discount = minimum interest rate (Usually 3% or 5%).

The discount factor = 1/ (1 + r) n OR = (1 + r) −n

r: discount rate
n: the no. of years in the future that the cost or savings occur.

If P = present value, Fn = future cost (OR: expenses, value) at year n, and r = annual interest
(discount) rate (e.g. 0.05 or 5%), then

Present value (adjust for one year)

= Future cost (OR: expenses, value) for one year * discount factor for one year
P = F1* discount factor
/ / /
P = F * 1 (1+r)1 = F* 1 (1.05)1 = F 1.05

For example, Present value adjusted for the 3 next years, r=0.05

Assumes that expenses

occur at the end of the
first year (12 months
later) and therefore,
they are discounted

Assumes that the

expenses occur at the
beginning of each year,
then first year costs are
not discounted

Some other basic concepts:

Total cost (TC): Cost of producing a particular quantity of output

A cost function C(q): is a function of q, which tells us what the minimum cost is for producing q
units of output.
We can also split total cost into fixed cost (FC) and variable cost (VC) as follows: C(q) = FC + VC(q).
Fixed cost is independent of quantity, while variable cost is dependent on quantity.

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Example:
if the expenses (value, cost) of cancer treatment for the next 3 years are:
$5,000 for the first year
$3,000 for year 2
$4,000 for year 3
What is the present value of cancer treatment?

Estimated Present value

Year costs are
costs without Calculation adjusted for time
incurred
discounting (discounting)

Year 1 5000 /
5000 1.05 4,762

Year 2 3000 /
3000 (1.05)2 2,721

Year 3 4000 /
4000 (1.05)3 3,455

Total 12000 10,938

*Using a 5% discount rate, assumes that expenses occur at the end of the
first year

Estimated costs
Year costs are
without Calculation Present value
incurred
discounting

Year 1 5000 /
5000 1 5000

Year 2 3000 /
3000 1.05 2857

Year 3 4000 /
4000 (1.05)2 3628

Total 12000 11485

*Using a 5% discount rate, assumes that the expenses occur at the

beginning of each year

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 Average versus Marginal or Incremental Costs

Average cost = The average cost per unit of output

Total Cost /Quantity

Marginal costs (MC) refer to the cost of producing one extra unit of outcome or product.
(Total Cost of x units + 1 units) − (Total Cost of x units)

Incremental costs (IC) refer to the difference in cost between 2 competing options