PHARMACOECONOMICS

Lecture 3

Lecturer: Enas Abu-Qudais

Time adjustments for costs

-Bringing past costs to the present

Standardization of costs

-Bringing future costs to the present

Discounting

Standardization of costs

◦ It means adjustment of costs when they are estimated from information

collected for more than one year.

◦ By using retrospective data to assess resources used over a number of years

back

◦ Example:

Costs for patients who received treatment in 2005 Vs costs for patients who

received treatment in 2010

Cannot be compared

Unless it is standardized

Costs per patients in 2005 could be less than costs per patient

who received the same treatment in 2010

Method 1: Units multiplied by costs

A pharmacoeconomic study is to be conducted in 2005.

Data were collected from a previous year

How to standardize the costs to be suitable for us in 2005

Number of units per case X Current unit cost ($)

Example

A pharmacoeconomic study to be conducted in 2005, the

objective is to estimate the difference in the costs of

Chemotherapy regimens. retrospective data were collected from

a past medical record.

calculate the total standardized cost for the current year.

Total costs in

2005 ($)

124.00

53.00

28.84

205.84

Method 2: Medical consumer price Index inflation rates

◦ Inflation :- ◦ The increase of the prices of goods or services over time.

◦ You buy something on 2011 and a year later in 2012 you come

back to purchase the same item which has increased in its price .

◦ Inflation rate: the percentage of how much the price of the item

has increased over a time period

Higher prices Purchasing

power

consumer price Index (CPI)

A measure that examines the weighted average of prices of a basket

of consumer goods and services, such as transportation, food and

medical care

MCPI: Medical Consumer price Index

Standardization by MCPI inflation rate ◦ Multiplying all the costs from the year the data were collected by

the medical inflation rate of that year .

Medical costs were collected from these years

2003 2004 2005

MCPI Inflation

rate

MCPI Inflation

rate

Cost from the year the data were collected X (1+the MCPI inflation rate for that year)

Example A pharmacoeconomic study to be conducted in 2005, the objective is to

estimate the difference in the costs of Chemotherapy regimens.

retrospective data were collected from a past medical record.

calculate the total standardized cost given that the MCPI for the year

2004 is 4.4% and for 2005 is 4.5%.

Cost adjusted

to 2005 ($)

125.46

52.25

28.84

206.55

Cost adjusted from 2004: 50x (1+0.045)

Cost adjusted from 2003: 115x(1+0.44) X (1+0.045)

Cost adjusted from 2005 is the same as there is no inflation rate at the

same year

Bringing Future costs to the present

Discounting:

◦ There is a time value associated with money

◦ Money promised in the future is valued at a lower rate than money

received Today.

◦ Example: a bank Lending a person a 1000$ and agrees to pay it

back in 3 years. There is an interest rate on this 1000 (the person will

pay more than a 1000$ at the end)

◦ Discount rate: Interest rate you need to gain on a given

amount of money today to end up with a given amount of

money on the future.

◦ Present Value (PV): How much the actual amount to have

in order to have the future amount.

PV: Future Amount/ (1+ discount rate)

A: Number of

years

2003 2004 2005 1000 $

Discount rate

Example

The expenses of cancer treatment for the next 3 years are as the

following in the table. Calculate the Total present value of the

expenses if you knew that expenses occur at the beginning of each

year given that the discount rate is 5%.

Present value ($)

5000

2,857

3,628

11,485

PV1: 5000/1

PV2: 3000/(1+0.05)

PV3: 4000/(1+0.05) 2

Example

The expenses of cancer treatment for the next 3 years are as the

following in the table. Calculate the Total present value of the

expenses if you knew that expenses occur at the end of each year

given that the discount rate is 5%.

Present value ($)

4,762

2,721

3,455

10,938

PV1: 5000/1.05

PV2: 3000/(1+0.05)

PV3: 4000/(1+0.05)

2

3

Incremental costs

◦ When deciding between medication A and B , estimated

differences in costs and outcomes should be known.

◦ Marginal or incremental costs: Differences between alternatives.

◦ Drug A Drug B

100$

30%

50$

60%

Incremental cost : 50 $

Incremental effectiveness: 30%

Incremental cost effectiveness ratio (ICER): (CostA-CostB)/ (EffectivenessA-EffectivenessB)

Cost

Effectiveness

Example