Introduction to Pharmacoeconomics

Medications are the most widely used clinical intervention. The U.S. spends more on medications per capita than any other country but hasn’t been able to show better outcomes. Pharmacoeconomics refers to the scientific discipline that compares the value of one pharmaceutical drug or drug therapy to another. It is a sub-discipline of health economics.

To understand pharmacoeconomics in the United States, it is important to understand the history of major drug policies and regulations that have resulted in the current situation.

A History of Major US Drug Policies

Introduction to Pharmacoeconomics

1. 1906

Companies flood the market with patent medicines which were sold freely and did not need to state what they contained. Many of these medicines had opiates or alcohols. The progressive movement called for disclosure of content. Congress created the FDA to monitor medicines. Initially, medicines only needed labeling and did not to require it to be safe or effective.

2. 1938

Heavy toxicity in antibiotics led to the death of over 100 people, mostly children. This incident led to government regulation –  the FDA had to regulate that drugs weren’t toxic but did not test for effectiveness.

3. 1961

The FDA was now required to test that the drug being sold were effective.

4. 2004

Vioxx, an anti-inflammatory drug, was introduced by Merck & Co. doubled the risk of a stroke. The FDA was tasked with real-time surveillance to detect side effects created with drugs using Veterans Administration and Medicare data.

The U.S. Drug Industry

The U.S. Drug industry takes in revenues of nearly $350 billion a year. 12% of total healthcare spending in the U.S. is spent on drugs. Even though 80% of prescriptions are now generics, generic drugs only account for 20% of the spend. It is the only country in which the government does not negotiate drug pricing.

Ten companies have 1/3 of the market share.

Pharmaceutical companies spend more on research than the National Institute of Health spends on research. The companies spend only 15% of their revenue on R&D. The rest goes towards administration, marketing, profit etc. Most breakthrough drugs are now coming from small biotech firms.

Drug Approval & Post-Marketing Safety Surveillance Policy

Clinical trial for effectiveness can be interpreted as lab success versus actual patient outcomes. The drug industry pays user fees to cover salaries for drug testing, so there are concerns about conflict of interest. Drugs can be approved for one use but used for another. The FDA doesn’t evaluate whether the drug is better than current therapies, it doesn’t look at cost effectiveness and doesn’t look at the kinds of patients who use it.


Drug costs are going up and drugs are being over prescribed. The prescribers don’t know what drugs cost and can’t differentiate between promotion and evidence. Physicians also don’t know patients coverage. Sometimes facilities prescribe drugs because they get some revenue from the markup. There is also a tendency to overprescribe when there is no benefit or increased risk. The consequences for bad prescribing is rare and there is no incentive for good prescribing.

  • Only New Zealand and the U.S. allow direct advertising to consumers.
  • The U.S. does not negotiate for drug prices.

The decision of drug choice is not made by the consumer and the consumer doesn’t experience drug cost (since it is partly covered by insurance). Often the information on cost and value of drugs is difficult to find.

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