CHAPTER 1: Introduction to Pharmacoeconomics and the Course

Learning Objectives
After reading this chapter, you should be able to:

1. Describe what pharmacoeconomics is and how it differs from health economics.
2. State the purpose of using pharmacoeconomics in health care.
3. Describe what is meant by “value for money”.
4. Describe what a health technology assessment is.

Introduction
Currently; world-wide, the vast majority of health care delivery and health outcomes are dependent on many interconnected economies. Likewise in many nations, these may be linked to one or many jurisdictions. Positive health outcomes for World; and, indeed national citizens requires that good resource decisions are consistently being made by well-informed decision-makers. This makes the study of Health Economics and Pharmacoeconomics very important disciplines for individual nation and the Globe’s modern age. A significant number of countries are currently faced with an increased amount of pressure to ensure healthcare resources use proper economic evaluations to guide them on how they reimburse bio/pharmaceuticals.

This current cost-sensitive healthcare environment has resulted in clinicians, government agencies, third party payers and patients needing to seriously and realistically consider the economic impact of various health care decisions. The steep increase (acceleration) in healthcare related costs over the last couple decades and the limited resources to fund novel health care innovations have resulted in a surge of interest in the study of Health Economics. No longer are the primary determinants of a treatment solely focused on safety and efficacy*; but rather, the costs and outcomes of different treatment options now take center stage through informed evidence-based decision-making.

This basic course has been designed to orient someone new to its study to the world of Pharmacoeconomics. Armed with the knowledge gathered from this course, one should be able to better understand how pharmacoeconomic decisions are made in common clinical situations that might occur between clinicians and patients; and, how jurisdictions utilize related pharmacoeconomic research, clinical data, and total-costs when making decisions about listing or not listing a medication on a formulary*. One should be better able to have discussions with health care professionals about the outcomes of various treatment options; helping anyone interested to determine whether a certain medication is “cost-effective*” for any various different perspectives of interest.

Global Health Expenditures – A Changing Environment

Overview
Unmatched disruptions in health care delivery caused by the COVID-19 pandemic, followed by geopolitical, social, economic, and environmental challenges have, and continue to place complicated interdependent threats on the world’s health. These dynamics have particularly impacted vulnerable populations and have increased the strain on healthcare systems; especially, on health care workers; as well as, the distribution of many important health related products including bio/pharmaceuticals.³

Globally speaking, in 2018; for the first time in twenty years, spending growth on health had become slower than world economic growth. However, the effect of the COVID-19 pandemic has yet to be completely factored into this trend. It is assumed that health expenditures increased dramatically-briefly during the pandemic (2019-2020); however, in most cases, had returned to more closely the approximate prepandemic levels in 2021. This may be attributed to a strong economic recovery; especially, in many OECD countries.

(Search on-line: OECD Health Statistics)
Suffice it to say, that health care expenditures continue to consume an increasing proportion of the Gross National Product* (GNP) of most developed nations.

The Gross World Product* (GWP) is the gross national incomes (combined) of every country in the world.

A Global “snapshot”

Before the pandemic, in 2018, according to the World Health Organization’s Global spending on health: Weathering the storm (2020)¹:

• Total health care spending Globally was estimated at US$8.3 trillion or 10% of GWP. Total health care expenditure would represent a cross-country average of US$1 099 per person. (Range – for low-income countries: US$40 per person; for high-income countries: US$3 313 per person).
• Greater than three quarters of global health spending was in the Americas and Europe with countries of the Western Pacific consuming close to an additional 20%.
• France, Germany, Japan, the United Kingdom and the United States (9% of the global population) consumed more than 60% of world-wide health spending; with the US by itself, accounting for 42% of this consumption.
• The spending share devoted to primary health care varied widely around the globe.

The health care spending to Gross Domestic Product* (GDP – the value of all goods and services produced in a given country) ratio
is an indicator of the extent to which a nation’s resources are used in health care-related activities.

“What in the World” goes where?

As a share of GDP, health spending has increased over the past twenty years for most countries around the world; however, this increase occurred at different rates for countries in different income groups. From 2000 until 2018:

• For high-income countries, this increase averaged 1.4 percentage points in all but three countries of this category.
• For countries with an upper-middle income, this average increase was 0.7 percentage points. The variation amongst countries in this category was much larger than among high-income countries.
• In lower-middle-income countries, the increase was the slowest at 0.3 percentage points, with share decreasing in 12 countries; whilst, increasing in 16 others.
• In low-income countries, the share-average increased 1.4 percentage points; but, with a wide variation amongst this group of nations.

Across various countries and income categories, the sources and ratios of health spending differ significantly. These sources may include:

• Public/government expenditures (e.g., government budget contributions, public/social health insurance contributions).
• Individual/household out-of-pocket payments.
• Other sources (e.g., private enterprise health services that directly provide health coverage to employees).
• External aid (e.g., foreign contributions).

Low-income countries generally depend on donor funding for their total health spending which accounts for 30%. 41% comes from out-of-pocket; with government spending being 21%. Among lower-middle-income countries, 42% is made up out-ofpocket; with government transfers contributing greater than one-third of total health spending. Social health insurance may also contribute an additional 7%. In countries of this same income group, external aid contributes 10% of health funding. In uppermiddle-income countries, public spending is the largest source of total health spending, with government transfers providing 38% and social health insurance contributions providing 17%. Out-of-pocket is the second largest share at 35% of total health spend. Upper-middle-income countries also have significant spending funded through health insurance contributions in the order of 7% on average. In countries with high-incomes, more than two thirds of the total health expenditure is accounted for from government sources with transfers making up 48%; and, 22% being contributed by social health insurance contributions. Out-of pocket payments in this group fund 21%.

Public/government Expenditures

The total amount a government spends on healthcare as a share of total government expenditure is indicative of how it the prioritizes the health for its citizens. Higher income countries typically have a larger share of public financing directed for health.

World-wide, spending by governments for health per person grew between 2000 and 2018. Overall, the share of health spending out of general government expenditures increased over time in the upper-middle and high-income countries. Whereas, for lower-middle income countries, this share fell slightly; yet, has trended fairly flat over the period from 2000 to 2018.

According to the WHO; in 2018, the average government spending share on health were:

• 5.6% in lowest income countries.
• 7.3% in lower-middle-income countries.
• 11.6% in upper-middle-income countries.
• 14.3% in countries with high-incomes.

These averages; however, conceal a wide range between countries within each income group where upper-middle-income country and the highest income country groups had the greatest variations. For example, the share of government contribution ranged between 3% and 28% in the upper-middle-income group of countries. In 2018, in the lowest income countries, spending on health was ~4% to 8% of total government spending.

Contributions by social health insurance programs may exist in many countries around the world; but, occur least often in low-income countries and most often in high-income countries. These are typically comprised of revenues raised by a tax on payroll as a percentage on wages or salaries. A few countries organize health financing through compulsory insurance; and are funded by a fixed payment of a mandatory premium or a combination of taxation and a fixed premium.

Social insurance program spending on health per country income group are:

• 1% in lowest income countries.
• 7% in lower-middle-income countries.
• 17% in upper-middle-income countries.
• 22% in countries with high-incomes.

Individual/household Out-of-pocket Spending

In most countries, over the last two decades; per person, both governments and individuals/households spent more on health; but, the speed with which this increase occurred varied greatly. In some countries, government spending increased; whilest, out-of-pocket spending declined. In a small number of mainly low-income countries, both forms of spending fell. In a few countries, government spending fell while what was spent by out-of-pocket means, increased. Apparently, country income is not strongly correlated with any proportional trend; and, is not a function solely of the level of its GDP.

In 2018, in 105 countries, what governments spent on health grew faster than what individuals “shelled” out-of-pocket. In the same year, 32 countries funded greater than 50% of their health expenditure from out-of-pocket revenues; among these, 7 funded more than 75%. The amount of money spent by individuals and households in 2018 around the world was above 40%; and, mostly in countries of low and lower-middle income.

In absolute terms; as it relates to total health expenditure, while both government and out-of-pocket spending have been increasing, the average share of out-of-pocket spending has fallen slowly in all country groups. However, out-of-pocket spending persistently represents greater than one-third of health spending in every group except the high-income group of countries.

On average, in the low-income group, out-of-pocket spending made up nearly half the total spending on health. Similarly, in the next two levels of income grouped countries (lower-middle and upper-middle), individuals and households respectively spent to make up 42% and 35% of the total health spend. In the high-income group, out-ofpocket spending accounted for 20% of total health expenditure.

Other Spending Sources

Other spending sources that contribute to a country’s health expenditure include compulsory prepayments to private insurance plans, non-governmental voluntary contributions; as well as, services operated by private enterprises for the health of their employees.

These other sources per country income group are:

• 7% in lowest income countries.
• 6% in lower-middle-income countries.
• 9% in upper-middle-income countries.
• 9% in countries with high-incomes.

External Aid

In 2014, health spending from external foreign aid for health reached its peak; but, by 2018 has fallen from US$19.3 billion to US$16.2 billion (<16%). Currently, nine countries absorb 43% of total external aid; 4 are lower-middle-income countries and one is an upper-middle income country.

External aid includes official assistance through grants for health development. This may come from concessional loans from various donors (bilateral and multilateral); as well as, grants from private donors.

Global Health Delivery

• • Health care governance includes the administration of health delivery in a country and includes its financing system, delivery coordination, planning, management, delivery monitoring and evaluation.
  • Both in-patient and out-patient services are considered either curative, rehabilitative or consists of long-term interventions*. In-patient services include all goods and treatment for health care received as part of an in-service (e.g., hospitalized) offering . These may include diagnostic tests, hospital bed provision, medicines and other medical procedures. Out patient (e.g., nonhospitalized) care typically includes both medical and diagnostic services; as well as, medications provided within out-patient consultation.
  • Medical goods include medicines and medical supplies purchased outside an inpatient or from an out-patient setting. Since some medical goods may be provided as part of an in patient or out-patient situation, the term “medical goods” may not represent total spending on medications and medical supplies.
  • Services offered that are considered to be preventive care may include immunization, health checkups, health education, disease detection, epidemiological surveillance, emergency preparedness programs, etc..
  • General and home-based services may offer curative, rehabilitative or long-term care.

On average; world-wide, a larger share of health spending goes to health system governance in low-income countries than in countries of other income groups. In general, health care systems that are much more fragmented in their delivery and/or financing will likely require more resources for their governance. This may partially explain the differences among country income groups.

The proportion of total health expenditure consumed on administering a health system is:

• 10% in low-income countries.
• 9% in lower-middle-income countries.
• 7% in upper-middle-income countries.
• 3% in high income countries.

In-patient spending varies the most across country income groups that range from 15% of health spending share in low-income countries to 33% in upper-middle-income countries. This includes 24% for lower-middle and 32% for high-income countries groups. Out-patient spending ranged from 24% to 29% of total health expenditure across all country income groups.

The average for the provision of medical goods globally was typically one-fifth (18% to 20%) of health spending in all country income groups.

Spending across country income groups for preventive healthcare demonstrates great differences. In high-income countries, spending on preventive health services is only 3% of health expenditures; whilst, low-income countries utilized 20%. This is explained by the fact that higher income countries have more complex processes, technologies and procedures for treatment delivery, which substantially increase total health costs. In low-income countries; with very limited resources, health spending typically goes primarily toward basic service delivery. However, it should be well noted that any larger share going to prevention within low-income countries does not always mean theres are sufficient resources for prevention. In fact, in absolute terms this amount is very small (US$7 per person); the magnitude of preventive offering care depends on a given country’s health delivery system.

In 2018; on average, 50% of total health expenditures went to primary health care. In this regard, high-income countries typically spent greater than US$1 000 per citizen. Several countries spent less than twenty US dollars a person on primary care. Within countries of similar incomes there was much variation in spending on primary health care; country income was not the only determinant.

In low-income countries, approximately 20% of spending for primary care was provided by government. In lower-middle-income countries, about a third was provided by governments; whereas, in upper-middle-income countries, more than 40% was obtained through this source. In low and lower-middle-income country groups, about 50% of primary health care is attributed to private domestic sources showing that market forces still have in shaping primary health care delivery.

Mostly in low-income countries is 33% of spending financed through external aid for primary care. On average, in lower-middle-income countries, external aid contributes 14% on primary care. Typically, external aid is often highly “earmarked” for specific health programs; such as, immunization, maternal and child health care and infectious disease prevention.

Worldly Realities

A publication in 2022 for the International Monetary Fund (IMF) called Patterns and Drivers of Health Spending Efficiency suggests that there is a significant amount of data that has been published demonstrating significant inefficiencies in the health sector around the world. This working paper indicates a recent analysis found a mean efficiency score of 0.80 exists globally. For comparison purposes across countries, infant mortality and life expectancy rates are the most common output variables that are most often used in such analyses. What the authors suggest is, that on average, countries could improve health outcomes by 20 percent without consuming any more health resources.²

Since the COVID-19 pandemic, the demand for increasing health expenditures is at an all-time high and facing limited room for fiscal increases has caused policy makers to become very focused to ensure that limited resources are used in the most efficient way.

In countries where the majority of health care resources are consumed (Europe, the Americas and the Western Pacific), the key drivers of health care spending and increased health care costs appear to include:

• Population growth.
• Aging of the population.
• Increasing health care workforce costs.
• Technological advancement.
• Inflation.
• Increase in drug expenditures.

Although somewhat recently slowed, the increasing trend in healthcare spending over the decades illustrates the importance that most developed societies have placed on health care. Evidently, there has been major decisions along the way to allocate significant public and private sector resources into this societal expenditure. With health spending at currently high levels; it is; thus, clearly important to monitor all resource allocation into health and healthcare in order to ensure that it is properly invested.

Why Pharmacoeconomics?

It is widely accepted that the sheer number of health care treatment options far exceeds the ability of any healthcare system to afford every one of them. Therefore, healthcare decision-makers must make choices and prioritize competing treatment options through an analysis of costs versus benefits. World-wide; since, these spending outputs come from many sources; with major costs in mind, health policy and key fiscal decision-makers must use pharmacoeconomic data in order to aid their decision-making. Pharmacoeconomics is essential in that it provides the evidence that assists in wisely handling health costs. For example, a key question must be asked:

— Of the trillions at stake, how much money should be allocated for certain drugs, and are their associated outcomes worth it? —

With the possibility of total health expenditures rising every year, the repercussions of every single therapeutic cost decision must always be considered.

Health Economics and Pharmacoeconomics

Economics is the science of analyzing the production, distribution, and the consumption of goods and services.. Put more simply, economics is the science of scarcity and value achieved for money. Economics analyzes how choices are structured and prioritized in order to maximize outcomes given constrained resources. The principles of economics are used on a regular basis when making decisions about purchases. For example, when one purchases a new computer, does someone buy the cheaper one; or, pay more for one that has more functionality? From a cost or resource preservation perspective alone, the cheaper computer may be the right choice. However; not considering only the cost; one may desire a computer with more capabilities. By comparing the costs and benefits of the competing computer options, a potential computer purchaser can optimize and structure their decision making process and achieve the most optimal ‘value for their money.

Health economics* is the study of achieving maximum value for money through ensuring healthcare provision is both clinically effective and cost-effective*.

Pharmacoeconomics* is an essential component of health economics given the large volume of bio/pharmaceuticals used world-wide. For many health care professionals, most attention and training are focused on the therapeutic and clinical implications of drugs. However, pharmacoeconomics governs the entire system’s decision making and incorporates important cost and outcome considerations. This discipline of study helps rationalize decision-making and offers tools; such as, health technology assessments that help decision-makers make better decisions regarding the health-value offered for the amount of money spent on bio/pharmaceuticals.³

Achieving “value for money” within the context of pharmacoeconomics implies a need to attain from a limited amount of resources, a predetermined objective for the least cost; or, to maximize the benefit to the patient population being served . In other words, this concept requires outcomes and the costs of bio/pharmaceuticals to be evaluated for their “cost-effectiveness*”.⁴

The need for learning some key concepts of pharmacoeconomics is important for someone to gain a better understanding of the costs and outcomes of using medications in healthcare.Q

Questions that may be considered include:

• What makes a government believe a particular medication is worthwhile to bring into a given country, and subsequently pay for one medication and not another one?
• What makes patients comfortable paying for medications to achieve a particular health outcome rather than spending that same money on something else?

A sound knowledge of pharmacoeconomic principles is critical when communicating with all health care professionals,
and other health care decision-makers regarding the overall value of various bio/pharmaceuticals in health care.

What is a Health Technology Assessment?

A health technology assessment* (HTA) is essentially a pharmacoeconomic document that compiles data on the economic implications of medications and other health interventions. It allows for economists, pharmaceutical companies, government bodies, health care professionals, and patients, to make sense out of medicine-related decisions.

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CHAPTER 1 Summary

Economic constraints on health care systems around the world have led to the need to judge health care interventions based on their safety, overall efficacy, and costs. The study of achieving maximum value for money by ensuring healthcare provision both clinically and cost-effectively, is known as health economics.

Pharmacoeconomics is an important component of health economics in that it helps to articulate whether a given bio/pharmaceutical can provide good value for money when it is compared to other available health interventions.

Health technology assessments are a method of assessment that communicates pharmacoeconomic data and aids in healthcare decision-making. Gaining a sound knowledge of pharmacoeconomics is possible through the completion of both CCPE Basic and Advanced courses. These courses should help to enhance communication skills with health care professionals as they relate to pharmacoeconomic concerns and considerations.

References

1. Global spending on health: Weathering the storm; © World Health Organization; 2020.
2. Garcia-Escribano, M. et al Patterns and Drivers of Health Spending Efficiency © 2022 International Monetary Fund.
3. Global Health and Healthcare Strategic Outlook: Shaping the Future of Health and Healthcare World Economic Forum Insight Report January 2023
4. Canadian Institute for Health Information. National Health Expenditure Trends, 1975 to 2014. Ottawa, ON: CIHI; 2014.

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CHAPTER 1 Questions

1. Name the reasons why there is a recent surge in the interest in studying health economics?
   _______________________________________________________
   _______________________________________________________
2. Describe how this course will introduce you to the world of Pharmacoeconomics.
   _______________________________________________________
   _______________________________________________________
3. Name 3 examples of key drivers of health care spending and increased health care costs in Europe, the Americas and the Western Pacific.
   _______________________________________________________
   _______________________________________________________
   _______________________________________________________
4. What is health economics?
   _______________________________________________________
   _______________________________________________________
   _______________________________________________________
5. Fill in the blank:
   Achieving ‘value for money’ within the context of pharmacoeconomics requires outcomes and costs of bio/pharmaceuticals to be evaluated for ____________________________________.
6. Name one of the topics the Advanced Pharmacoeconomics course includes that the Basic Pharmacoeconomic course does not?
   _______________________________________________________
   _______________________________________________________

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CHAPTER 1 Answers

1. Name the reasons why there is a recent surge in the studying health economics?
   • Steep increase in health care related costs over the last few decades.
   • Limited resources to fund novel health care innovations.

2. Describe how this course will introduce you to the world of Pharmacoeconomics.Either 2 or more of:
   • Better understand how decisions are made in common situations between clinicians and patients.
   • How jurisdictions utilize research and clinical data and total costs when making decisions.
   • Able to have discussions with health care professionals about outcomes of various treatment options and determine if a medication is “cost-effective”.
3. Name 3 examples of key drivers of health care spending and increased health care costs in Europe, the Americas and the Western Pacific.Either 3 of:
   • Aging and increasing population.
   • Increasing health care workforce costs.
   • Technological development.
   • Inflation.
   • increase in drug expenditures.
   
4. What is health economics?
   Health economics is the study of achieving maximum value for money by ensuring health care provision is both clinically and cost-effective.

5. Fill in the blank:
   Achieving ‘value for money’ within the context of pharmacoeconomics requires outcomes and costs of bio/pharmaceuticals to be evaluated for “cost-effectiveness”

6. Name one of the topics the Advanced Pharmacoeconomics course includes that the Basic Pharmacoeconomic course does not?

   any one of:
   • Detailed description of Cost-Minimization Analysis (CMA), Cost-Effective Analysis (CEA), Cost-Utility Analysis (CUA), Cost-Benefit Analysis (CBA) and Markov Modeling.
   • How to conduct a pharmacoeconomic study.
   • Critical assessment of pharmacoeconomic studies
   • How pharmacoeconomics guides clinical practice decision-making.