Cost Analysis Dr Rakesh Kumar Moderator- Dr PR Deshmukh

Framework  Introduction  What is cost analysis and economics analysis  Uses of Cost- Analysis  Steps in Cost- Analysis ◦ Planning a cost analysis study ◦ Calculating costs ◦ Measuring effectiveness/ Impact ◦ Applying cost analysis methods ◦ Analysis, interpretation & presentation  Strengths and limitations of cost- analysis  References

Some Questions ??? How much amount has been spent on a project, and the revenue that has been received? How the does expenditure compares with the budget? What is the distribution of costs by various input category like personnel, travel, supplies, etc.? What is the distribution of costs by facility or location (like each health centre or district)? What is the distribution of costs by service type or activity (like antenatal care, immunization, training, etc.)? What is the average cost of providing a service (e.g., the cost of immunizing a child)? What is the trends in costs and revenues over time?

Introduction A cost analysis can be the critical process needed to solve management problems Cost analysis can helps to understand how funds have been used, and why expenses are so high (or low) It can help in identifying where their primary support comes from, and whether each source is increasing or decreasing In a setting with diminishing resources, it can provide the information necessary for sensibly cutting a budget

What is Cost Analysis Definition:- It is the element-by-element examination of the expenditure to determine how resources have been spent. Objective: To form an opinion on whether the proposed costs are in line with what reasonably economical and efficient performance should cost.

Economical And Financial Cost Analysis VariableFinancial analysisEconomic analysis CostsAll financial outlays, present or future, which have a monetary cost. All uses of resources, present or future, which have an economic (“opportunity”) cost. Examples include actual monetary payments for human resources, materials, or infrastructure. Examples include volunteer workers and donated goods that has alternative uses Valuation of future expenditures is at present value using market interest rates. Valuation of future expenditures is at present value using a discount rate that reflects social time preference. Consequence or outcomes Income; expenditure; cash flow; profit; end-of-period balance; internal financial rate of return; net present financial value. Benefit–cost ratio; internal economic rate of return; net present value. All financial consequences including further associated expenditures, cost savings or revenues. All resource consequences including the freeing up of spare capacity for alternative uses, and economic value of resource savings.

Uses of Cost Analysis Accountability- Keeping track Assessing Efficiency Assessing Equity Assessing Priorities Making cost projections Considering cost recovery

Who can use cost analysis: Government departments, such as ministries Non- Government Organization (NGO) Institutional decision-makers, such as hospitals and other budget holders Private enterprises Individuals or consumers External donors like bilateral government agencies, multilateral agencies, and international NGOs.

Steps for Cost-Analysis Research Question Plan Cost- Analysis study Setting scope of study Deciding on time trend Selecting sample Drawing iternary & checklist Cost estimation Identification and choice of costs Quantification of costs Valuation of costs Adjustment for differential timing Appropriate cost analysis methods Analysis, Interpretation and Presentation Assessment of Impact of uncertainty Impact estimation Identification and choice of impacts Quantification of impacts Valuation of impacts Adjustment for differential timing

Planning Cost- Analysis Study  Setting scope of study Geographic area, PHC programme overall, or by breaking it by project; by subproject; by outreach and clinical services; by specific PHC component (immunization, ORT, growth monitoring, training, supervision, etc.)  Deciding on time trend Past year, past five years, the next six months, the next three years? Will this analysis be retrospective, or prospective?  Selecting sample  Drawing iternary & checklist

Cost- Estimation  Identification of main costs and their sources  Quantification of costs  Valuation of costs and discounting.

Identification of costs and their sources Intervention Direct Cost Indirect Costs Wider cost implications to society eg. lost production. Time receiving medical care Wider cost implications to society eg. lost production. Time receiving medical care Non-health services Eg. Patient transportation, Administration Research & Development Non-health services Eg. Patient transportation, Administration Research & Development Health services resource use. Eg. Inpatient, outpatient, tests, drugs Costs to family and friends. Costs to family and friends. ◦ Perspective is important ◦ Range of costs justified by perspective

Sources of cost data Routine Information Survey : ◦ Market prices & Labor statistics Periodic information sources- ◦ contracted company, ◦ government ministry or ◦ NGO Specialist surveys or studies ◦ Household surveys ◦ scientific studies Expert opinion

Quantification of cost data Need to quantify resource use in appropriate physical and natural units ◦ hours, days, miles etc Direct costs are mostly assessed, and categorised as: ◦ Capital costs (buildings, equipment) ◦ Overheads (jointly used resources, such as heating and lighting, administration and catering) ◦ Labour (medical and non-medical staff) ◦ Consumables (disposable items, such as drugs, bandages etc) Need to distinguish between fixed, variable and total cost, and average, marginal costs and incremental cost

Fixed, variable and total cost Total cost: all costs incurred while producing a service Fixed cost - do not vary with quantity in short run e.g. Capital costs Cost Quantity Variable cost : vary with level of service. E.g. consumables

Average and marginal cost curves Cost Quantity Average cost cost per unit of output Influenced by fixed cost Marginal cost cost of producing an extra unit Influenced by variable cost

Marginal versus incremental cost Cost Q* MC B, Q* MC A, Q* IC A-B, Q* TC of Prog A TC of Prog B Quantity

Discounting To allow for differential timing of costs (and benefits) between programmes all future costs (and benefits) should be stated in terms of their present value using discount rate Prefer to have benefits now and bear costs in the future – ‘time preference’ ‘Rate’ of time preference is termed ‘discount rate’

Discounting example

Valuation Valuation Method of valuation needs justification (incl. market prices) Resources should be valued according to their opportunity cost In most markets price is a good reflection of opportunity cost but health care provision is rarely subject to market valuations Use of prices predominates but should be justified, and alternative ‘shadow’ prices may need to be used Price does not necessarily equate with cost May need to adjust for inflation or currencies

Adjustments Unit cost data may need to be adjusted for Price inflation (costs from different years) ◦ weighted average of Pay Cost Index (PCI) and Health Service Cost Index (HSCI) International currencies (costs from different countries)- ◦ Purchasing Power Parities (PPPs) and exchange rates are two methods that are used to convert different currencies into a common denominator ◦ PPPs are more appropriate than exchange rates as these eliminate the difference in price levels between countries

Measuring Outcome/ consequences Identification Measurement Valuation

Identification Depends upon viewpoint (govt., societal ) Main issues are: ◦ Measurement of value (gross wage, friction cost) ◦ Double-counting, especially with CUA/CBA ◦ Comparability with other studies Which outcome measure is employed depends on the objective of the evaluation ◦ Comparing within treatment area/disease ◦ Compare across health service (system) ◦ Societal evaluation - health care set against other alternative uses for the resources Net cost = positive cost and negative cost ◦ Negative cost = cost saving Net benefit = positive benefit and negative benefit ◦ Negative benefit = reduced health (eg side-effect)

Sources of Effectiveness Data Routine Information Survey : ◦ Health information systems ◦ National wage data ◦ Market data on sales ◦ Agricultural statistics Periodic information sources: ◦ National health accounts ◦ Household questionnaires Specialist surveys or studies ◦ Sentinel surveillance ◦ Special household surveys ◦ Company surveys ◦ Focus group discussions ◦ Epidemological studies ◦ Expert opinion

Measurement Measure (count) in natural physical units ◦ Number of lives/life years ◦ Change in blood pressure ◦ Change in cholesterol levels Measure final not intermediate outcomes ◦ Intermediate outcomes reflect change in clinical parameters ◦ Final outcomes reflect change in health status Limitation: ◦ Ambiguity in assessing overall improvement or decrement in health (addressed by CUA/CBA) ◦ Cannot address the issue of allocative efficiency (addressed only by CBA)

Valuation Valuation Value is determined by benefits sacrificed elsewhere Valuation requires a trade-off between benefits - measurement does not Valuation either in terms of ◦ Utility (eg QALY) ◦ Money (eg WTP)

Quality-adjusted life years (QALYs) Adjust quantity of life years saved to reflect a valuation of the quality of life ◦ If healthy QALY = 1 ◦ If unhealthy QALY < 1 ◦ QALY can be <0 Procedure ◦ Identify possible health states - cover all important/relevant dimensions of QoL ◦ Derive utility ‘weights’ for each state ◦ Multiply life years (spent in each state) by ‘weight’ for that state. Utility “Weights” ◦ Utility = satisfaction/value/preference ◦ Utility weights are necessarily subjective  Represent individual’s preferences for, or value of, one or more health states. ◦ Must  Have interval properties  Be “anchored” at death (0) and good health (1) [can be negative]

Techniques to ‘weight’ utility

Monetary Valuation Methods Assess individual ‘willingness-to-pay’ for (the benefits of) a good through either: Observed wealth-risk trade-off (revealed preference) ◦ Advantage – ‘real’ preferences/values ◦ Disadvantage – difficult control for confounders Direct survey (stated preference) ◦ Advantage – direct valuation of good ◦ Disadvantage – hypothetical/survey problems Vast majority of CBA use direct survey

Cost Analysis Methods 1.Cost-effectiveness analysis (CEA): 2.Cost-utility analysis (CUA) 3.Cost-benefit analysis (CBA): 4.Cost-of-illness analysis: 5.Cost-minimization analysis: 6.Cost-consequence analysis:

Cost-Effectiveness Analysis A comparison of costs in monetary units with outcomes in quantitative non-monetary units, e.g., reduced mortality or morbidity Compare costs of at least two alternatives Compare difference in costs with difference in effects Outcomes can remain as clinical or even intermediate outcomes Disadvantage Only compare programs with similar outcomes There is not enough information to assign a value to the outcome e.g, Difficulty of asking nursing home residents about the quality of their own lives Cost- Effectiveness Ratio: CE Ratio = ($ Cost Int - $ Cost Comp ) / ($ Effect Int - $ Effect Comp ) For example: “$45,000 per life- year saved” or $10,000 per lung cancer case averted”

Quadrants of Cost-Effectiveness

Cost-Utility Analysis A type of cost-effectiveness analysis It compares costs in monetary units with outcomes in terms of their utility, usually to the patient, measured, e.g., in QALYs Outcome is combines both morbidity and mortality Example; Quality adjusted life year (QALY), Disablity adjusted life years (DALYs) Suitability of Cost-Utility Studies There are morbidity and mortality effects There are multiple types of morbidity effects Health related quality of life is the primary outcome of interest in the first place Cost- Utilty Ratio: CU Ratio = ($ Cost Int - $ Cost Comp ) / ($ Utile Int - $ Utile Comp ) For example: “$10,000 per QALY gained”

Cost-Benefit Analysis It compares costs and benefits, both of which are quantified in common monetary units. Value both cost and outcome in monetary units Net benefit (difference between valuation of benefits and costs) is final product Unique feature that can indicate explicitly whether benefits outweigh costs Ratio of net benefit to dollars spent (rather than benefit to dollars spent) is sometimes used to rank programs Cost- Benefit Ratio: (Ratio Approach) CB Ratio = ($ Cost Int - $ Cost Comp ) / ($ Benefit Int - $ Benefit Comp ) For example: “Cost Benefit ratio of 1.5” Cost- Benefit Ratio: (Net Benefit Approach) CB Ratio = ($ Cost Int - $ Cost Comp ) - ($ Effect Int - $ Effect Comp ) For example: “Net cost of $15,00”

Cost of Illness Analysis A determination of the economic impact of an illness or condition. Cost of Illness includes: Medical care for prevention, treatment & Social services for rehabilitation Productivity loss o Prevention, Treatment, During rehabilitation o From decreased workplace productivity as a result of the disease and death Examples o What does cancer cost the United States? o What does blindness cost the world? Just because something has the highest cost of illness does not imply that it necessarily should have the most resources directed toward research or cure Depends on how much it will cost to do something about it

Cost - Minimization Analysis A determination of the least costly among alternative interventions Calculate the cost of the different methods of achieving the objective Needs at least two ways of achieving the objective Example Rabies vaccination: Intramuscular or Intradermal schedule? Which is least costly? If so, should we continue Intramuscular schedule or use intradermal schedule? These studies are difficult because they don’t focus on partial outcomes Need a high degree of certainty that outcome can be obtained or else these studies are not particularly helpful

Summary of Cost- Analysis Methods Valuation of costs (in Monetary units) Valuation of outcomes Comments Cost Effectiveness $÷Natural units It can only compare technologies whose outcomes are measured in the same units Cost Benefit$ ÷ or – i.e, Ratio Approach or Net Benefit Approach $ It enables comparison of disparate technologies Difficult to assign monetary values to all pertinent outcomes Cost Utility$÷ Utilities (e.g., QALYs) It enables comparisons of disparate technologies Cost of Illness$vs.None A determination of the economic impact of an illness or condition. Cost Minimization $vs. Assume same outcome A determination of the least costly among alternative interventions

Dealing with uncertainty Sensitivity analysis ◦ Systematically examining the influence of uncertainties in the variables and assumptions employed on the estimated results Steps: 1. Identifying the (uncertain) variables ◦ All variables in the analysis are potential candidates ◦ Give reasons for exclusion rather than inclusion 2. Specifying the plausible range over which they should vary ◦ Reviewing the literature ◦ Consulting expert opinion ◦ Using a specified confidence interval around the mean 3. Recalculating results based on combinations of the best guesses, most and least conservative, usually based on… ◦ One-way analysis (each variable separately) ◦ Multi-way analysis (number of variables together) ◦ Threshold analysis (amount of variance needed to achieve specified result)

Analysis, interpretation & presentation Set up "dummy tables" and graphs at initial phase Analysis should include interpretation- i.e. What do the data mean? Finally, Report the result ◦ Stick to objective ◦ Keep presentation simple and use tables & graphs ◦ Write an executive summary

Strengths & Limitations Strengths o a very useful tool for the manager and policy maker for keeping track of costs o In the absence of certainty, even approximations can help improve decision-making Limitations o It's difficult to estimate "true costs" or opportunity cost o Allocation of costs; often very difficult

References Creese A, Parker D. Cost Analysis in Primary Health Care. A training manual for programme managers. Geneva: World Health Organization; Torres T, Baltussen R, Adam T, Hutubessy R, Acharya A, EvansD, Murray C. WHO Guide to cost effectiveness analysis. Geneva: World Health Organization; Hutton G, Rehfuess E. Guidelines for conducting cost– benefit analysis of household energy and health interventions. Geneva: World Health Organization; Module E Cost and Sustainability analysis. Aga Khan Foundation Cost Analysis Methods. Available from URL:

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