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
Variable
Costs
Financial analysis
Economic analysis
All 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 Income; expenditure; cash flow;
or outcomes 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
Impact estimation
Identification and choice of impacts
Quantification of impacts
Valuation of impacts
Adjustment for differential timing
Appropriate cost analysis methods
Assessment of Impact of uncertainty
Analysis, Interpretation and Presentation
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
Health services
resource use. Eg.
Inpatient,
outpatient, tests,
drugs
Non-health services Eg.
Patient transportation,
Administration
Research &
Development
Indirect Costs
Wider cost implications
to society
eg. lost production.
Time receiving medical
care
◦ Perspective is important
◦ Range of costs justified by perspective
Costs to family
and friends.
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
Cost
Total cost: all costs incurred while
producing a service
Variable cost : vary with level
of service. E.g. consumables
Fixed cost - do not vary with
quantity in short run e.g. Capital costs
Quantity
Average and marginal cost curves
Cost
Marginal cost  TC
Q
cost of producing an extra unit
Influenced by variable cost
Average cost  TC
Q
cost per unit of output
Influenced by fixed
cost
Quantity
Marginal versus incremental cost
Cost
TC of Prog A
MCA, Q*
ICA-B, Q*
TC of Prog B
MCB, Q*
Q*
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

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

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
Question framing
Certainty
(values)
Scaling
Rating scale
Category scale
Visual analogue scale
Ratio scale
Choice
Time trade-off
Paired comparison
Equivalence
Person trade-off
Response
method
Uncertainty
(utilities)
Standard gamble
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-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 $10,000 per lung cancer
case averted”
Cost-Utility Analysis
A type of cost-effectiveness analysis
 It compares costs in monetary units with outcomes in terms of their
utility, usually to the patient, measured, e.g., in QALYs
 Outcome is combines both morbidity and mortality
Example; Quality adjusted life year (QALY), Disablity adjusted life
years (DALYs)

Suitability of Cost-Utility Studies
 There are morbidity and mortality effects
 There are multiple types of morbidity effects
 Health related quality of life is the primary outcome of interest in
the first place
Cost- Utilty Ratio:
CU Ratio = ($ 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)
Cost
Effectiveness
$
Cost Benefit
$
Cost Utility
$
Cost of Illness
$
Cost
Minimization
$
Valuation of
outcomes
Comments
It can only compare technologies
÷
Natural units whose outcomes are measured in
the same units
÷ or –
•It enables comparison of disparate
i.e, Ratio
technologies
Approach
$
or Net
•Difficult to assign monetary
Benefit
values to all pertinent outcomes
Approach
Utilities (e.g., It enables comparisons of disparate
÷
QALYs) technologies
A determination of the economic
vs.
None
impact of an illness or condition .
Assume same A determination of the least costly
vs.
outcome among alternative interventions
Dealing with uncertainty


1.
Sensitivity analysis
◦ Systematically examining the influence of uncertainties in the variables
and assumptions employed on the estimated results
Steps:
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 interpretationi.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; 1994.
 Torres T, Baltussen R, Adam T, Hutubessy R, Acharya A,
EvansD, Murray C. WHO Guide to cost effectiveness
analysis. Geneva: World Health Organization; 2003.
 Hutton G, Rehfuess E. Guidelines for conducting cost–
benefit analysis of household energy and health
interventions. Geneva: World Health Organization; 2006.
 Module E Cost and Sustainability analysis. Aga Khan
Foundation
 Cost Analysis Methods. Available from URL:
www.nlm.nih.gov/nichsr/

Thanks