Introduction to Cost Concepts and Approaches Using Costing Techniques where no Expenditure Data Available Urbanus Kioko March 2009

Learning Objectives By the end of this unit you will be able to:  Discuss the uses (and importance) of costing and different ways of looking at costs  Discuss use of costing techniques where you cannot access expenditure data for your project

Discussion  In your country teams, discuss how would you calculate how much it costs to:  Treat one IDU within the public rehab centre.  Provide home-based palliative care to 1 person.  Provide full immunisation for 1 Roma child.  Provide rehabilitation for 1 person with mental disabilities.  What are the difficulties in calculating the cost?  Do you think it is important to know this cost? Why or why not?

Why Examine Costs?  For routine budgeting.  We need to estimate the costs required in order to secure funds and hence the resources needed for our plans to be implemented.  Costing : Calculate the different resources needed to achieve your implementation plans.  Note that some of the resources will be shared across several programmes, rather than specific to your issue (eg hospital overhead costs)

Cont…  2 nd reason for costing is to develop plans and strategies for scaling up or expanding specific intervention activities e.g. preparing an application to the Gates Foundation  Or if the govt is committed to expanding coverage to people in need of services, we need to be able to cost what will be required to reach these groups.  Then we can look at whether it is affordable and sustainable.

Cont…  3 rd reason-deciding on how best to allocate resources, by looking at costs and results of different activities or interventions.  The issue is efficiency in terms of whether we are doing the right things.  4 th reason: look into the efficiency of services. It can be useful to compare for example, what it costs to run services in different districts (e.g. costs of drugs per case).  If there are differences it will be a starting point to find out why

Cont…  Finally, we need to know what resources are available and what more is available for current and future health care activities.  We need to understand if costs are changing over time and why.  NB: Keeping track of costs is good management.

Terminology in Costing Financial cost  In budgeting the costs calculated are the financial cost required to acquire the resources.  Normally the budget only looks at those costs we pay for (e.g. from public funds) and the prices we pay (e.g. for travel).  This may not be the same as the full cost because, for example, the patient may pay for some of the resources.

Opportunity Cost Plenary discussion  List of district activities or needs each costing about $100  a. Pay staff travel allowance owed from previous quarter or two  b. Buy out-patient drugs for health centres  c. Replace 4 worn out tyres for the only district vehicle  d. Organise one-day workshop to explain drug substitution therapy to rehab team and prepare an action plan  Each need is important but the available funds – about $100  Can pay for only one of these. Which one would you choose?

Opportunity cost…  Opportunity foregone for using these resources in some other way.  This is what economists call the ‘opportunity cost’.  Every time resources are used for one health care programme, the opportunity to use those resources in another programme is forgone or is sacrificed.  i.e. a sacrifice is made every time resources are used in one particular way and this sacrifice is called the opportunity cost and it refers to the value of the benefit foregone.  In the example above, paying for staff allowance means you have lost the opportunity to treat the sick patients.

Costing a programme and looking at its funding  One worthwhile exercise is looking at the longer-term costs and funding of a prevention/treatment programme under different assumptions.  Steps for costing: 1. What are the programme policies and plans?  Which interventions are required and what coverage targets do we have currently and what do we want to achieve by when? 2. What will it cost to implement those plans for the next 5 or 15 years?  Estimate the costs for each year to meet the various targets

Cont…  What funding can we expect to receive from various sources?  Discuss with Government likely commitment from Government and budgets  Review with partners funding they are willing to provide and look at trends  Because levels of Government and donor funding are uncertain in the future, some funds are certain and some are less certain

Cont…  What is the funding gap and what can we do about it?  estimate the gap between expected funds and expected spending  develop a strategy on what to do about it  There are several approaches to tackle the funding gap:  increase funding  make services more efficient so costs go down without cutting activity  better financial management  balance by cutting back the plans and targets

Once you know which ingredients to include, how much of them, and their unit costs, then you apply....

Basic costing equation Tc = Q x P Tc = total cost Q = quantity (utilisation) P = price (unit cost)

Firstly Decide from who’s Perspective are your wanting to Cost? ◦ Societal Perspective ◦ Societal Perspective (the patient and the health system and any other relevant individuals); also known as societal costs ◦ Health-system Perspective ◦ Health-system Perspective (the health system only); also known as provider costs or health system costs ◦ Patient Perspective ◦ Patient Perspective (the patient only or the patient and her caregiver); also known as patient or consumer costs  The perspective will determine which costs are to be included and will affect the methodology

Classifying, identifying and measuring costs  Costs can be classified in terms of whether they are capital or recurrent:  Capital Costs. Capital costs are the costs of items with a life of more than one year e.g. buildings, vehicles and equipment.  Recurrent Costs. refers to the running costs or operating costs, which are incurred each year e.g. personnel salaries, drugs supplies, maintenance of vehicles, fuel and electricity.

Cont…  Fixed Costs: These are costs which do not vary with the quantity of output in the short run (one year) e.g. rent, equipment lease payments, some wages and salaries.  These stay the same e.g. however busy the facility is.  Variable Costs: are costs which vary with the level of output. Drug supplies and vaccines are examples of variable costs.

Shared costs  Shared Costs relate to facilities, staff and equipment which are shared between several programmes.  When we need to analyse costs of one of the several programmes which share the staff / equipment.  we need to decide whether it is useful to include a share of these shared costs, or whether to focus only on the non-shared costs.

Types of Costs to be considered 20  Direct  Direct – all the expenses incurred in delivering the health service, including shared costs –drugs, supplies, lab. Tests, shared costs  Indirect costs  Indirect costs – those additional costs, usually from the perspective of the patient, in accessing treatment, eg. Transport, loss of productivity, etc  Intangible costs  Intangible costs – those difficult to identify and measure eg. The drawbacks due to illness, depression, loss of quality of life

What costs should be considered?  All Recurrent costs:  Resources that are used up within one year or costs that are incurred on an annual basis  Includes human resources, medicines, laboratory investigations, imaging and overheads (electricity, water, maintenance etc)

Categorisation of recurrent costs  Patient-specific resources  Resources that can be linked directly to patients  Quantities of different curative, prophylactic and ARV medicines, laboratory investigations, and imaging  Data can be extracted from patient folders (if informed consent?) or from clinic databases if available

Cont...  Capital costs - Resources that last for more than one year (buildings, medical equipment, furniture, training of staff on HIV medicine and ART etc).  You will have to calculate the share related to IDU patients (by utilization of services, e.g. number of consultations, hospital beds as a percent of the total) How??

 Human resources  Important category given shortages of personnel  Calculate quantity by timing average minutes per consultation, through interviewing staff or through asking staff to fill out time diaries  Overheads and non-clinical staff  More difficult to establish quantities of these resources – often no direct link to patient usage  Retrieve as monetary values from routine expenditure records if available  Develop innovative ways of establishing these costs if no routine records Discuss! Cont...

Costing recurrent resources  Patient-specific resources  Quantities of medicines X price paid for medicine by health system  Quantities of laboratory investigations X price of test  etc  Clinical staff resources (attribution to HIV by utilization)  Staff time X full cost of employment (including benefits, pension, housing allowance etc) (attribution to HIV by utilization) (attribution to HIV by utilization)  Overheads (attribution to HIV by utilization)  Extract as monetary value from expenditure records

Calculating recurrent costs  Identify all recurrent inputs (e.g. not only clinical staff but also administrative and support staff, all kind of supplies too)  Determine the quantities needed/used of each input  Apply formula: Tc = P x Q

Thanks and good luck Urbanus Kioko (CEGAA) with thanks to Susan Cleary (Health Economics Unit, UCT), Christaan Aran Fernadez (UNAIDS consultant), and Teresa Guthrie (CEGAA). Tel: