Principles of Pharmacoeconomics

Cost Determination
Lecture 2

Objectives
Compare and contrast direct, indirect, and intangible costs
Describe the relationship between marginal and average costs
Describe the five steps involved in determining the cost of therapy or service

Objectives
Given a specific perspective, identify all relevant costs that should be included in an analysis
Identify at least five sources of cost data
Discuss the differences between costs and charges
Explain why discounting is necessary and perform the discounting calculation

Cost
Data
Measurement of resource use

Direct Medical Costs
Cost
Data
Components of Cost
expenditures on tangible health care products or services, which contribute to the gross national product

Direct Medical Costs
(Medications, hospital days,
tests, procedures, etc.)
Cost
Data
Components of Cost

Other Direct (non-medical) Costs
Cost
Data
Components of Cost
expenditures on tangible products or services, which contribute to the gross national product. They are needed to obtain care, but they do not directly contribute to health care.

Cost
Data
Components of Cost
Other Direct (non-medical) Costs
(transportation to the doctor’s office, hiring a
baby sitter so a parent can visit the doctor, etc.)

Cost
Data
Components of Cost
Indirect Costs
Unpaid resource commitment. Cost of morbidity and mortality.

Cost
Data
Components of Cost
Indirect Costs
(Unpaid assistance, days lost
from work, decreased
productivity, etc.)

Intangible Costs
(Pain, suffering, etc.)
Cost
Data
Components of Cost

Direct Medical Costs
(Medications, hospital days,
tests, procedures, etc.)
Intangible Costs
(Pain, suffering, etc.)
Cost
Data
Measurement of resource use
Indirect Costs
(Unpaid assistance, days lost
from work, decreased
productivity, etc.)
Other Direct (non-medical) Costs
(transportation to the doctor’s office, hiring a
baby sitter so a parent can visit the doctor, etc.)

Cost Terminology
Variable costs vs. fixed costs
Total Cost: Sum of all health care expenditures for entire population
Marginal Costs: The cost to produce one more unit of outcome (i.e. the cost to successfully treat one additional patient)
Average Cost:
(total cost of treatment)
(total # of patients treated)
Link to avg cost worksheet

AC
MC
Treatment
Costs
Average Vs. Marginal Costs
Proportion of Patients Treated
0.01 0.99

Specifying the Inputs
Develop comprehensive list of ALL relevant inputs (i.e. resources consumed) to produce a given output or consequence
The list will be determined by the perspective of the analysis
Common to all forms of economic evaluation

Payer Perspective
Direct
Indirect
Asthma management service

Hospitalizations
Laboratory costs
Medications
Medical devises
Physician / pharmacist fees
Payer Perspective
Direct
Indirect
Asthma management service
?

Direct
Indirect (overhead / accounting costs)
Provider Perspective
Community pharmacy providing
asthma management services
Note: Cost categories were taken from
Brad Stoltz’s 2001 Pharm.D. project

Direct
Indirect (overhead / accounting costs)
Maintenance
Utilities
Mortgage / rent
Business licenses
Office supplies
laundry, haz. waste disposal, etc.
Equipment / leases
Fees
Education
Marketing
Dedicated personnel
Provider Perspective
Community pharmacy providing
asthma management services
Note: Cost categories were taken from
Brad Stoltz’s 2001 Pharm.D. project

Patient Perspective
Direct
Indirect
Asthma management service

Co-pays,
education,
insurance premium,
transportation,
prescriptions,
sitters
missed work,
sitters
Patient Perspective
Direct
Indirect
Asthma management service

Societal Perspective
Direct
Indirect
Asthma management service

healthcare costs,
e.g. premiums,
Medicare & Medicaid,
Taxes,
Medication R&D,
Healthcare workforce,
lost productivity,
lost wages
Societal Perspective
Direct
Indirect
Asthma cost of illness

Counting Units
Determine the unit of use for a given resource (e.g., hospital day, single lab test, 30-day supply of medication)
Determine how many units will be consumed over the study period

Assigning Dollar Values
Opportunity costs Vs. market price
Personnel time / costs
Medication costs
Physician and other services
Hospital / emergency department costs
Based upon cost accounting system

Example of Hospital Costs and Charges

Sources of Cost Data
Primary data collection methods
Clinical trials
Naturalistic trial / observation cost / accounting system
Secondary data collection methods
Administrative / claims databases
Literature / published AWP
Expert opinion
Model
Decision analytical
Statistical

Adjusting for Differences in
the Timing of Costs
A cost or benefit today is not equivalent in value to the same cost or benefit in the future
Consider amount of money that would have to be set aside today to get predetermined amount in the future
What rate do you use?

Discounting
Now
Past
Future
Account for Inflation
Discount future costs

Taken from: http://www.orst.edu/dept/pol_sci/fac/sahr/mill00.htm without permission

Net Present Value
(Amount equivalent to $1000 in 2000)
Go to DiscountingGo to Discounting Worksheet

Discounting
What rate do you use?
HH Bonds
4% (fixed rate)
EE Bonds
5.73% (based on 90% of 5 yr avg Treasury securities yield)
I Bonds:
3.6% (fixed rate +
3.89% variable (inflation-based) rate)
= 7.49%
Source: Federal Reserve Bank of New York http://www.publicdebt.treas.gov/sav/sav.htm (accessed 8/29/00)

Allowing for Uncertainty
What if the type and number of resources included in the analysis change?
What if a different discount rate is used?
Sensitivity analysis is the technique of systematically varying key variables in an analysis to determine if the results of the analysis change. (This will be covered later).

Purchase cable
service
Do not purchase
cable service
Example
Need
a TV
Purchase a
32” TV
Purchase a
20” TV
Purchase cable
service
Do not purchase
cable service
Go to cost dGo to cost determinatGo to cost determination worksheet