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Pharmacoeconomics & Health Outcomes

Costs and Perspectives

Leon E. Cosler, R.Ph., Ph.D.


Associate Professor of Pharmacoeconomics
Albany College of Pharmacy
Road Map

1. ECHO Model for evaluations

2. Costs – Categorizations

3. Perspective

4. Applications
ECHO Conceptual Model
Disease Humanistic Humanistic
Mediators Outcomes

Clinical Endpoints Clinical Outcomes


(Pt biomedical status) (medical events from Dx or Tx)

Treatment Modifiers Economic Costs


(alter outcomes
(cost: all types)
of Tx alternatives)

Economic
External Controls Treatment Outcomes
Alternatives (cost of care against outcomes)
COSTS: A measure of “value”
COSTS: A measure of “value”

• Costs ARE:
• The magnitude of resources consumed
• Categorized into several types
• Time sensitive
• Dependent on one’s point of view

• Costs are NOT:


• The same as ‘price’
• The same as what’s ‘charged’ for a service
• Not always a flow of cash
What does this car cost?
COSTS: categories

Direct vs Indirect
A transfer of money occurs Unpaid resources committed

Fixed vs Variable
Not affected by output Varies with output

Average vs Marginal
Σ (costs) Cost 1 – Cost 2
Σ (units) Units 1 – Units 2
Average vs Marginal Example
Average vs Marginal Example
COSTS:

Opportunity Costs:
- the value of the next best alternative

= “price” only in a purely competitive market


• caution with services like inpatient care

- Some services have no “price”…


• Volunteer time
- How to measure that ‘opportunity cost’ ?
COSTS of a medical illness

1. “Medical Resources”
“Direct Medical Costs”:
• costs paid directly for the medical products
• hospitalization(s), MD visits, Rxs

2. “Non-Medical Resources”
“Personal non-medical costs”
- transportation, child care

“System non-medical costs”


- Special education programs
COSTS of a medical illness

3. Indirect Costs:
- costs of “morbidity” & “mortality”
- lost wages or productivity
- premature death

4. Intangible Costs:
- cost of non-financial “humanistic” outcomes
- cost associated with pain & suffering
- associated with measuring quality of life
Direct vs Indirect Costs of Illnesses
Billions
0 50 100 150 200 250 300 350 400

Heart Diseases

Cancer

Cerebrovascular Diseases

Pneumonia / Flu

Injuries

Diabetes

Kidney Disease

Chronic Liver Disease

Direct Costs Indirect Costs

Dept. of Health and Human Services; National Institutes of Health. Disease – Specific Estimates of Direct and Indirect Costs of Illness and NIH Support; Fiscal Year 2000
Update [online]. Available from: URL: http://ospp.od.nih.gov/ecostudies/COIreportweb.htm <accessed 2005 Feb 09>
Direct vs Indirect Costs of Illnesses
Billions
0% 20% 40% 60% 80% 100%

Heart Diseases

Cancer

Cerebrovascular Diseases

Pneumonia / Flu

Injuries

Diabetes

Kidney Disease

Chronic Liver Disease

Direct Costs Indirect Costs

Dept. of Health and Human Services; National Institutes of Health. Disease – Specific Estimates of Direct and Indirect Costs of Illness and NIH Support; Fiscal Year 2000
Update [online]. Available from: URL: http://ospp.od.nih.gov/ecostudies/COIreportweb.htm <accessed 2005 Feb 09>
COSTS of Treatment

1. (direct) Resources needed to acquire / apply Tx

Costs as a result of treatment


1. Costs of adverse events
2. Costs (Savings) of avoiding / preventing disease
or sequelae
3. Costs of “new information” for treatment
4. Costs of extending life (*)
An Example:

45+ y/o wm presents to MD Dx Bronchitis

• 1 MD Office Visit ($8 copay)


• 3 Rxs written:
- Zithromax 250 mg Z-PAK (g) ($20 copay)
- Entex - LA (generic) ($14.36)
- Vicodin Syrup 120 ml ($2.18)
• Missed 2 days of work
• No other sequelae

• What did this encounter ‘cost’ ???


Perspective: who’s point of view?
Costs will differ depending on who pays…

Government

HMO’s
Patient

Perspective
Hospital
Insurer

Society
Health Professional
From the Patient's Perspective
Direct Medical Costs
Office Visit: $ 8.00 Co-pay
Rxs: $ 20.00 Co-pay
$ 2.18 Co-pay
$ 14.36 Co-pay
Total: $ 44.54

Direct non-medical $ 20.00 Taxi ? / Babysitter ?

Indirect Costs ??? 2 days wages

Opportunity Costs ??? Reschedule meetings or vacation?


From the Insurer's Perspective
Direct Medical Costs
Office Visit: $ 50.00 bill to CDPHP
Rxs: $ 60.00 bill to CDPHP $56.50 + $3.50
$ 6.50 bill to CDPHP $2.00 + $4.50
$ 12.50 bill to CDPHP $8.00 + $4.50
Total: $ 129.00

Direct non-medical ??? Administration ?

Indirect Costs n/a


(“cost” + dispensing fees…)

• AWP = Average Wholesale Price


• AAC = Actual acquisition cost
• EAC = Estimated “ “
• ASP = Average Sales Price

• Typical re-imbursement formula:


- lower of: (AWP - x%) or ASP + 6%
- plus a dispensing fee
• higher for generics to encourage use
From Society’s Perspective...
Direct Medical Costs
Office Visit: $ 58.00 Everything
Rxs: $ 80.00 Everything
$ 8.68 Everything
$ 26.86 Everything
Total: $ 173.54

Direct non-medical ??? Everything

Indirect Costs $ 528.00 Cost of missed work

Opportunity Costs ??? $$$ Value of lost opportunities


Compare Direct Medical Costs:
Perspective: Patient Insurer Society

Direct Medical Costs for this Episode: $ 44.54 $ 129.00 $ 173.54

Perspectives
- Determined by the research question(s)
- Must be stated or obvious in any manuscript
- Society: “overall” costs of medical care

- Indirect Costs often the largest category


- includes patient morbidity and mortality
- most government perspectives use this one
Framework for Determining Costs

1. Specifying the inputs


• All relevant costs (not just the easy ones)
• Perspective!
2. Counting the units for each input
3. Assigning dollar values appropriately
• Often not easy
• Devote appropriate time to each category
• = “Price” sometimes
• Marginal costs better than average costs
Framework for Determining Costs

1. Adjust for timing


• (e.g. discounting)

3. Adjusting for uncertainty


• Sensitivity analyses
Cost estimation applications

• Personnel time
• Work sampling
• Time-motion studies (stopwatch time studies)
• Does not always require “new” labor

• Drug Products
• Rxs will have multiple prices
• AWPs as a standard (but inflated)
• ASP a better choice, not always available
Applications

• Physician Services
• Market prices
• Insurers ‘allowable’ charges
• Hospital Charges
• True costs never equal charges
• Cost-shifting between Depts.
• Options:
- Average “per diem” costs (bad idea)
- Separate routine costs from Pt. specific costs
- DRGs (sometimes a good De scriptiv e Statistics

choice) totchge
N
5086
Mean
8301.19
totcost
- DRG 97 (asthma): Valid N (listwise)
5067
5067
3452.14
Next week: Discounting

• Bring calculators and / or PC’s

• Discounting will also use MS Excel


software as a demo
That’s all for today… !