July 19, 2024

Pharmacoeconomics An Introduction

Pharmacoeconomics An Introduction

The word Pharmacoeconomics might be new but economics is older which means the study of how society uses its limited resources and since pharma, it deals with the production, distribution, and consumption of goods and services from pharma.

Pharmacoeconomics adopts and applies the principles and methodology of health economics to the field of pharmaceutical policy. Pharmacoeconomic evaluation makes use of the broad range of techniques used in health economics evaluation to the specific context of medicines management.

 In pharmacoeconomics, economic analysis is applied to the use of pharmaceutical products, services, and programs, with a focus on the costs (inputs) and consequences (outcomes) of such use”.

Who coined the term Pharmacoeconomics?

The term Pharmacoeconomics was coined by Townsend in 1986.

What is Pharmacoeconomics?

Pharmacoeconomics can be defined as “the branch of health economics that addresses the optimal use of resources by examining the cost-benefit and effectiveness of drugs.

What is the definition of Pharmacoeconomics?

Pharmacoeconomics can be defined as the branch of economics that uses cost-benefit, cost-effectiveness, cost-minimization, cost-of-illness and cost-utility analyses to compare pharmaceutical products and treatment strategies”. 

What is Pharmacoeconomics according to the International Society for Pharmacoeconomics and Outcomes Research (ISPOR)

According to the International Society for Pharmacoeconomics and Outcomes Research (ISPOR), pharmacoeconomics is “the study of individuals, firms, and markets with respect to the use of pharmaceutical products, services, and programs, and that focuses on the costs (inputs) and consequences (outcomes) of such use”.


Evidence-based research is used in this field, which overlaps with the fields of economics, medicine, and humanities.

Clinical development and market access decisions of new innovative medicines over the past several decades which have not only contributed to the health of the population but also significantly reduced the mortality rates are increasingly influenced by pharmacoeconomics and health outcomes research. Basically, it deals with health economics, specifically with the costs and benefits of drug therapy. A pharmacoeconomics discipline deals with how to allocate resources to maximize a population’s health benefits from the use of medicines. So, as discussed earlier, Cost is the first fundamental component of pharmacoeconomic studies and Costs involved in pharmaco-economic evaluation can be divided into:

  1. Direct cost a) Direct medical and b) Direct Non medical 
  2. Indirect cost
  3. Intangible cost 
  4. Financial cost (mandatory cost), 
  5. Economic cost (resources for which no mandatory payment is made), 
  6. Opportunity cost (benefit foregone when selecting one therapy alternative over the next best alternative). 
  7. Incremental cost

Several costs can be measured while calculating the cost of invention. The cost may be direct or indirect.

Direct cost

Direct cost involves staff cost ( Physician visit, Emergency room visits), capital cost and drug acquisition cost (hospitalization). It includes fixed and variable costs: 

a) Fixed cost: it is the cost that does not vary immediately with the number of patients treated.

Example: Capital costs of hospital building or equipment

b) Variable Cost: The cost that varies immediately with the number of patients treated.

Example: Cost of medicine, syringes, needle.

B) Direct Non-medical cost:

Direct nonmedical costs are costs directly associated with treatment but are not medical in nature. Examples include the cost of travelling to and from the physician’s office or hospital, babysitting for the children of a patient, and food and lodging required for patients and their families during out-of-town treatment. The cost incurred by the patient is receiving medical care.

2) Indirect: Income lost because of absenteeism, loss of productivity. 

Indirect costs

 It involves costs that result from the loss of productivity due to illness lost because of absenteeism, loss of productivity. or death. Please note that the accounting term indirect costs, which is used to assign overhead, is different from the economic term, which refers to a loss of productivity of the patient or the patient’s family due to illness. 

3) Intangible: Cost of pain, worry and another suffering which a patient or his family might suffer.

Intangible costs

It includes the costs of pain, suffering, anxiety, or fatigue that occur because of an illness or the treatment of an illness. It is difficult to measure or assign values to intangible costs.

Opportunity cost

The amount lost by not using economic resources in its best alternative use like labour, capital, building, management. Resources invested in one area will be at expense of loss of another opportunity

Incremental Cost

The extra cost required to purchase an additional unit of effect.

Direct Cost = Direct medical cost + Direct Non medical cost

Indirect Cost = Morbidity cost + Mortality cost 

Total Cost = Direct Cost + Indirect Cost + Intangible Cost

Indirect cost involves the cost experienced by the patient/family/friends.

The cost can be measured in the following ways:

Cost/Unit (cost/tablet, cost/capsule)

Cost/Treatment

Cost/Person

Cost/Person/Year

Cost/Case prevented

Cost/Life saved

Cost/DALY (disability adjusted-life-years) 


Notes Chapter 6 Pharmacoeconomics

6.1  Introduction

6.2 Basic terminologies

6.3 importance of pharmacoeconomics


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