Costing Health Interventions

Teresa GuthrieCentre for Economic Governance and

AIDS in Africa March 2007

Sources of slides: Health Economic Unit, UCT and INSP, Mexico.

Concepts and Definitions • Adequacy – are the inputs sufficient to achieve intended

goals – implies knowledge of how much is needed.• Efficacy / Effective – achieves its intended outputs or

outcomes – implies programme plan.• Efficient – achieves its outputs with the best use of inputs/

resources – most cost-efficient.• Allocative efficiency – best choice of type of intervention

between different types of intervention (eg. Prevention activities vs treatment activities.

• Technical efficiency – best choice of intervention from same type of interventions (eg. Within treatment options, best and cheapest ARVs).

• Operational efficiency – intervention is run/ implemented as efficiently as possible.

Costing and Budgeting

• Costing - determining the expenditure required to purchase the resources needed to achieve an activity or strategy.

• Budgeting - the allocation of resources to match requirements.

• Once the cost of an activity is determined, the total number of desired activities will then determine the desired funding. The number of activities will be adjusted to fit the amount of funds allocated, which will become the budget.

What is costing useful for?• Assessing efficiency in two “equivalent”

programs – Which one yields the greatest benefit with a

given amount of resources

• Identifying important cost issues for potential savings

• Strategic planning and budgeting for programmes

• Together, costing and budgeting helps the planning process by ensuring that the goals are financially affordable.

Cost concepts• Economics is about choosing how to use scarce

resources that have alternative uses (Samuelson adapted)

• Cost in economics includes all the financial costs, costs of donated goods or in-kind services, and all opportunity costs

• Opportunity cost: potential benefit sacrificed or forgone from using resources in one program. If usage in one program precludes usage in another program, there is an opportunity cost.

– For instance, deciding where to allocate one extra nurse among one of the following programmes in a PHC center: Hypertension control, Immunizations or Antenatal care

– Other examples: the OC of your attending this lecture

Cost Definitions (1)• In costing we identify and measure all the inputs and all the

outputs. • Costs are always related to the outcomes they produce.

Outcomes can also be called benefits or output. There are intermediate and final outcomes.

• Some examples:– HIV treatment programmes: cost per life year gained– HIV prevention programmes: cost per HIV case prevented– Immunisations: cost per Fully Immunised Child (FIC)– Immunisations: cost per measles case prevented/death

prevented – Malaria ACT treatment: cost per cured case

• At a more basic level, we often relate costs to certain activities, such as the cost of an inpatient day or the cost per outpatient visit

Cost Definitions (2)• Total cost:

– All the costs incurred to produce a given level of output/final health outcome (e.g. R8 000 over 8 years of life-expectancy; also known as LIFE YEARS)

• Average cost: – The cost per outcome gained. Total cost /

Quantity of output or final health care outcome (e.g. R8000 / 8 Life Years is an average cost of R1000 per Life Year)

• Marginal cost: – The extra cost of producing an additional unit of

health care outcome or the change in costs associated with small changes in outputs (e.g. the additional cost from each additional Life Year) within the same programme

• Incremental cost:– The additional cost of moving from one

programme to another in order to increase outputs. (e.g. R4000 for 2 additional years with Programme2)

Should a full or incremental costing be done?

• Incremental costing:– Considers only the new resources required by the ART clinic

• E.g. medicines, laboratory investigations, imaging and additional clinical staff

– Assumes that excess capacity is available within the Health Facility

• Full costing:– Includes incremental resources and a share of existent resources

• E.g. electricity, water, security staff, buildings and equipment

– Assumes the Health Facility is operating at full capacity and that adding the ART service will have resource implications

• For budgeting purposes you may need full costing (if starting service from scratch), or incremental (if only an add-on service)

Identifying Costs: some criteria to consider

• Perspective

• Time horizon – adjusting for inflation and time preferences

• Availability of the data

• Micro-costing vs gross-costing

Estimations

How many people have been infected by HIV?

How many people infected with HIV (PLHIV) are still

alive?

What % of PLHIV has access to health

services?

Public Services

Government

Social Security

Private Services

Private insurance

Non –Profit

Private Providers

Services Costs Cases Total expenditure by sector, provider and type of service

What % of PLHIV does not have access

to health services?

Basic costing equation

Tc = Q x P

Types of Costs to be considered• Direct – all the expenses incurred in

delivering the health service, including shared costs

• Indirect costs – those additional costs, usually from the perspective of the patient, in accessing treatment, eg. Transport, loss of productivity, etc

• Intangible costs – those difficult to identify and measure eg. The drawbacks due to illness, depression, loss of quality of life

Perspective of Costing• From whose point of view is the costing being

undertaken?– Societal Perspective (the patient and the health

system and any other relevant individuals); also known as societal costs

– Health-system Perspective (the health system only); also known as provider costs or health system costs

– 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

Time horizon

• The suitable and adequate time frame to capture all the cost and effects related to the intervention

• All the potential costs and benefits must be measured

• Need to adjust for inflation and present value

Availability of data

• Information sources– Literature review of published reports– Expert opinion (Delphi panel)– Data bases– Prospective collection of the data– Medical records– Information of prices from the market– Unit costs of as many ingredients as possible– Programme budgets and expenditure records– Clinical trials which provide outcomes

Direct Cost Categories

• Recurrent costs: resource costs which may vary from year to year or costs that are consistently incurred on a regular/yearly basis (staff time, supplies including medicines and diagnostic tests, general operating costs); also known as variable costs

• Capital costs: costs associated with inputs that last for more than one year (buildings, equipment, staff training); also known as fixed costs

Measuring recurrent costs

• Types of recurrent costs:– Patient-related– Personnel– Overheads (shared)

• Methods:– Step-down approach (useful for shared

overhead costs)– Ingredient costing

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

• Determine the full cost of each input (e.g. not just basic salary, but all costs of employment including fringe benefits, overtime etc.)

• If the monetary value is not on routine records, use market value (e.g. donated drugs, free housing)

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– Staff time X full cost of employment (including benefits,

pension, housing allowance etc)

• Overheads – Extract as monetary value from expenditure records

What should the denominator be?

In order to estimate the utilization by HIV+ persons:• The cost needs to be related to a denominator –

cost per X• Common denominators are patient-months and

visits• You might choose to use both in your analysis• For instance, you could relate some costs to visits

(e.g. staff cost per visit) and some to patient-months (e.g. ARV cost per patient-month)

What if resources are shared?

• Often resources will be used jointly by the ART programme and other programmes in the CHC– Overhead expenditure from routine records

• Split equally between patient visits during same time period (attribution to HIV by utilization)

– Vehicle• Allocated to the ART programme based on %

of time vehicle is used by the programme

Allocating shared costsItem Basis for cost allocation

Vehicles Distance travelled (Capital [overall value of car] and operation [petrol] and maintenance [annual service]

Equipment Units/relative amount consumed/time used

Building space Space used (m2)/ time used (capital, operation and maintenance)

Personnel Time worked

Supplies  Units/quantity used/patient number

 Administration Patient numbers/ staff numbers

Out-of-Pocket Expenses and indirect costs

• The range of OOPE and societal costs considered when costing from the perspective of the patient, may include:– Cost of transportation to health provider (direct cost)– Cost of waiting time for service (indirect cost)– Cost of absenteeism from work or daily activities owing to

illness (opportunity cost)– Costs associated with use of service (user fees, dispensing

fees)

• Why and when are these costs relevant? For example, when deciding the delivery mechanism of a health programme such as immunizations. (facility base vs outreach activities)

• OOPE can be more difficult to assess - Usually assessed in patient interviews / exit surveys

Calculating capital costs

• Identify all capital items used• Determine current replacement cost• Estimate total years of “working life”• Estimate opportunity cost of using capital• Calculate annual cost:

– Straight-line depreciation:Replacement cost / number of working life years

– Or include the interest rate to take account of the opportunity cost of capital (use discount tables or PMT formula in Excel)

Calculating annual costs

• So far, the cost analysis has produced items such as:– Cost per visit for medicines, laboratory investigations,

clinical staff, overheads and capital– Cost per patient-month for ARVs

• These elements need to be multiplied by utilisation to calculate annual costs– Utilisation is defined as the frequency of use of resources

• Estimating utilisation:– Estimate from data on >100 patients who have been

followed on ART for >1 year– Estimate from national treatment protocol– Interview manager of the ART clinic and medical officers

Annuitisation• Even though capital costs are incurred only once, the

program yields benefits throughout its duration and it is therefore necessary to annualize the capital costs, that is calculated using the Annual Equivalent Cost (AEC)

• Adjusts for depreciation• Represents investment at single point in time• Allows for future costs to be captured• Allows for differential timing of capital assets (eg when

the programmes being studied have capital purchases at different times)

• Equivalent Annual Cost (EAC) = replacement value / annuitisation factor

Discounting

• Human behaviour tends to value spending in the future more than spending in the present

• Generally the information available regarding cost and benefits corresponds to a flow occurring throughout several years and thus it is necessary to express it in terms of a value for a specific year

• Generally in terms of its present value using a discount rate

• Using a discounting rate is the way of adjusting for time preference

•The Positive Rate of Time Preference is used to consider time preferences in economic analysis.•This is implemented by using a discounting rate •Discount rate is used ideally to represent the opportunity cost of money in relation to the time preferences of the society

– Usually the interest rate of government long-terms bonds is used as a proxy

– Discounting rate is conceptually different than market interest rate.

Positive Rate of Time Preference

NB: Assumptions - Limitations

Whenever you need to use assumptions, or whatever limitations you know your estimation has: clearly state these in your report.

Always explain your estimations. Explain how, “the way”, you reached them.

Always check the logic of the results!

Key Messages

• Costing gives information about how much a programme would cost for a given level of output

• A useful tool for planning and prioritisation• Often combined with an evaluation of the

benefits from the programme • Remember the following concepts:

– Opportunity cost– Average cost– Marginal cost– Incremental cost– Discounting future costs

• How to use costing methods to estimate actual expenditures….

Thanks

Teresa Guthrie (CEGAA) with thanks to Susan Cleary (Health Economics Unit, UCT) and Atanacio Mendoza (INSP, Mexico)

teresa@cegaa.orgguthrieteresa@yahoo.comTel: +27-82-872-4694Fax: +27-88-021-425-2852