The Scottish Highlands and Islands Remote
Dental Care Program
A Report to the National Health Service, Scottish Division
A Social Benefit Cost Analysis
Prepared By: Allison Mew
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The Scottish Highlands and Islands Remote Dental Care Program
Table of Contents
Executive Summary……………………………………………………………………………. 3
1. Introduction…………………………………………………………………………………... 4
2. Methodology…………………………………………………………………………………. 4
2.1
Social Benefit Cost Analysis……………………………………………………….4
2.2
Decision Criteria……………………………………………………………………. 5
2.3
Key Variables………………………………………………………………………..6
2.4
Assumptions…………………………………………………………………………6
Capital and Operating Costs………………………………………………….. 6
Production Capacity…………………………………………………………….6
Financing………………………………………………………………………... 7
Salvage Values………………………………………………………………….7
Taxes, Duties, and Depreciation………………………………………………7
Travel Costs…………………………………………………………………….. 7
NHS Opportunity Costs………………………………………………………...8
Shadow Prices…………………………………………………………………..8
3. Analysis……………………………………………………………………………………… 9
3.1
Project Analysis…………………………………………………………………….. 9
3.2
Private Analysis…………………………………………………………................ 9
3.3
Referent Group Analysis…………………………………………………..............9
3.4
Sensitivity Analysis…………………………………………………………………10
Value of Patient Time………………………………………………………... ..11
Patient Fees…………………………………………………………………... ..11
3.5
Risk Analysis……………………………………………………………………… ..13
4. Conclusion…………………………………………………………………………………..13
Appendix………………………………………………………………………………………...14
References……………………………………………………………………………………. ..15
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Executive Summary
This report is designed to evaluate the efficiency of two proposals to improve the existing Dental
system in remote areas of Scotland. The Teledentistry proposal has been suggested by a
Canadian-based company Telemedicine Services Incorporated (TSI), in which videoconferencing
equipment is used to provide a link between local doctors and specialists doctors in Aberdeen.
They propose that doctors could perform the complex procedures locally while being guided by
the specialists in Aberdeen. The Outreach proposal, developed by the Scottish Division of the
National Health Service (NHS), suggests a venture in which specialists travel to 8 regional
centers, so limit the distances patients would have to travel to get specialist treatment. Both
projects are intended to begin in 2007 and continue through until 2021.
The Social Benefit Cost Analysis performed considers the advantages of each project to the
government, and the NHS, to the patients, and in the case of Teledentistry, to the financial
institutions and to TSI. Results are analyzed at both market prices, and more importantly for the
purpose of this report, efficiency prices to determine the project with the greatest net benefits.
The sensitivity of the variables and the risks involved in either project are also considered.
The analysis performed shows that the Teledentistry proposal has the greatest net benefits when it
comes to the government and the patients. It is however, also the project that has the greatest
amount of variability in relation to the sensitivity of the variables, and the project with the
greatest amount of risk. The project is also likely to be rejected by TSI in the base case form as
their internal rate of return is below their estimated cost of capital.
The Outreach proposal, although showing lower net benefits than Teledentistry, still provides an
improvement when compared to the existing system, and may be preferred if the level of
sensitivity and risk is considered an issue with the Teledentistry proposal.
The analysis was performed using variables derived from the best information available. It is
recommended that if any of the variables change significantly that they are also altered in the
analysis. This is especially the case for the fee that NHS would pay TSI per patient under the
Teledentistry proposal, the value of which has yet to be agreed upon by both parties.
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1. Introduction
This report presents an analysis for the National Health Service (NHS) Scottish Division of two
proposals intended to reduce the number of hospital visits required to treat specialist dental cases.
There are currently 40 GDP’s servicing a population of approximately 250,000 people in the
Scottish highlands and Islands, and any complex dental procedures have to be performed some
distance away in Aberdeen (see Appendix 8 for a map of Scotland).
The Teledentistry Project, as proposed by a Canadian company – Telemedicine Services
Incorporated (TSI), would use video-conferencing equipment to provide a link between
specialists and local doctors so that the procedures could be performed in the local GDP with the
assistance of a specialist. The Outreach Project, as proposed by the NHS, suggests a system
where specialists travel to select GDP’s located in regional centers. Each project is designed to
reduce traveling time and costs of dental treatment to patients in remote areas.
The report presents a social benefit cost analysis to determine the costs and benefits of both
projects to the government; including the NHS, to TSI and to the patients.
2. Methodology
2.1
Social Benefit Cost Analysis
Social Benefit Cost Analysis is designed to consider all benefits or costs of a proposed
project to a group of interest in society. Traditional Benefit Cost Analysis tends to only
consider those benefits that had official market values, where as the Social Benefit Cost
approach considers those benefits or costs that have market prices as well as those that are
not defined by the market. In doing so the analysis comprises of four sections; the Project,
Private, Efficiency and Referent Group. For the purpose of this report the Private and
Referent Group analysis are the most important as they show the actual gains to the private
firm and to the government and people of Scotland.
Project Analysis ~ Cost Benefit Analysis valued at market prices.
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Private Analysis ~ Costs and Benefits to the private firm (in this case TSI), and is derived
from the project BCA minus cash flows such as taxation and financing to get the after
tax profit for the firm.
Efficiency Analysis ~ Costs and benefits valued at efficiency (opportunity cost) prices, to
determine if there is an efficient use of resources. The analysis may include variables
that where not included in the project analysis if they did not have a market value.
Referent Group Analysis ~ Cost and benefits from the point of view of the various
nominated stakeholders (in this case the Government and people of Scotland). The
referent group analysis shows a breakdown off all the benefits or costs resulting from
a projects implementation. For the purpose of this analysis the referent group shows
the benefits of implementing a specific project (Teledentistry or Outreach) as opposed
to remaining with the old system. The figures are calculated by subtracting the net
benefits of the existing project from the net benefits of the proposed project to get the
improvement from implementing a project.
2.2
Decision Criteria
Analysis is carried out by projecting the cash flow over the life of the projects (15 years
from 2007 to 2021) and then discounting the future values back to present values (2006) to
derive their net present values (NPV). A positive NPV, i.e. an NPV ≥ 0, implies that the
project is acceptable, while a negative NPV implies that the project runs at a loss and should
not be undertaken. The higher the NPV the greater are the benefits and this can be used to
indicate whether one proposal is more beneficial than another. However, the net present
values from all components of the analysis need to be considered before any
recommendations can be made.
Internal Rates of Return (IRR) are also calculated for each analysis. The IRR shows the
rate of discount at which the NPV is equal to zero. If the IRR is above the estimated cost of
capital for the project then it is considered acceptable. However, the IRR gives no
indication of how profitable the particular project will be.
Cash flow is discounted at rates of 6%, 9% and 12%. Changing the rate of discount allows
for a sensitivity analysis of all NPV’s, as there is an inverse relationship between the rate of
discount and the NPV (as the discount rate increases the NPV decreases).
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Key Variables
Appendix 1 shows the key variables used in this analysis. The variables reflect the input,
cost and revenue data as well as the existing market conditions (such as rates of interest,
depreciation and import duties) that are assumed to hold through out the duration of the
project. The variables have been developed using the best information available at the time,
and are subject to change. Because the project runs for 15 years it is impossible to
accurately forecast what the variables will be in the future. This uncertainty can have
significant impacts on the results of the analysis, and this should be considered when a final
decision is being made. Information on the assumptions of these variables is discussed in
detail in section 2.4, while an analysis on the degree of sensitivity of the most volatile
variables is carried out in section 3.3.
2.4
Assumptions
The analysis in this report has been made around certain assumptions about the key
variables. Although a sensitivity analysis has been performed to assess the reliability of the
assumptions it is recommended that if time permits the assumptions should be looked into
in more detail to ensure the accuracy of the results obtained.
Capital and Operating Costs
In the analysis costs are divided between fixed (capital) and variable (operating). Fixed
costs are constant and are incurred from 2006. Variable costs change depending on the
number of patients and are incurred from 2007 onwards.
Production Capacity
NHS estimates that there will be 400 patients in need of treatment in the first year (2007)
and that there will be an increase of 10 patients per year from 2008. Both the Teledentistry
and Outreach projects expect to be able to treat 50% of eligible patients in 2007 and the full
100% from 2008 onwards.
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Financing
The Teledentistry project is expected to be financed through a combination of grants and
bank loans. TSI expects to obtain a ₤10000 grant from the Scottish Highlands and Islands
Development Board in 2007, and intends to take out a loan of ₤80000 from Scottish
Development Bank in 2006 at a 5% concessional rate of interest repayable over 10 years.
TSI will also receive a payment from NHS of ₤140 per patient treated, although the fee rate
has not been finalized.
The Outreach project would be run by the NHS and would therefore be funded by the
Government.
Salvage Values
Salvage values for the Teledentistry project is assumed to be 10% of the initial equipment
cost minus the ISDN connection. The Outreach project also expects to have a 10% salvage
value on the initial cost of equipment.
Taxes, Duties and Depreciation
It is assumed that Teledentistry equipment and software can be depreciated at 20% of initial
cost per annum over 5 years for tax purposes. The company tax rate is assumed to be 30%
of profits.
A 20% import tariff is included in the market prices for Outreach specialist equipment,
Teledentistry software and equipment, as well as the NHS equipment used in the
Teledentistry upgrade.
Travel Costs
Under the existing system travel costs for patients are valued at the cost of travel tickets
from the patient’s homes to the hospital in Aberdeen. The costs are taken for one person
traveling alone and do not include costs of minors needing to be accompanied by parents, or
elderly unable to travel alone. Travel costs of patients and specialists under the existing and
proposed systems are also assumed to be constant, and do not allow for increases in the cost
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of travel. This may need further investigation considering the recent volatility in oil prices
which could have the potential to increase the travel costs by a significant amount.
Specialists time and travel costs are values at the specialists wage and the cost of return
transport and accommodation respectively. Both time and travel costs are taken as constant
and do not allow for increases in wage rates or the cost of transport, presenting the same
problems as with patient travel costs.
NHS Hospital Capital Cost
Under either the Teledentistry or Outreach projects the number of patients requiring
treatment in Aberdeen will decrease by at least 400. This frees up a consulting facility in
2008 that can be put to other use. The benefit of choosing one of the proposals versus the
existing system is therefore assumed to be the value of the consulting facilities at
3500/square meter at 2006 prices with a life of 20 years. Uses the equivalent annual cost
method to work out an annual cost to estimate any long-run cost saving.
Shadow Prices
Shadow pricing involves adjusting the observed market prices to reflect social benefit or
social cost. In this analysis efficiency prices are calculated by taking the market prices and
subtracting any import duties or taxes that have been added to them. For this project this
applies to the 20% import tariff charged on any equipment and software used.
The values of time and travel costs are also included in the efficiency analysis. Patient
travel time is assumed to be valued at the market wage and taken as constant. However, no
information was supplied as the type of market wage i.e. minimum wage, average wage. To
accurately value patient time there would need to be some research into the demographic of
patients so as to determine what wage is most likely to represent the group. If mostly older
people where requiring specialist dental treatment then the market wage would likely be
lower than if middle aged people where seeking treatment.
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3. Analysis
The full analysis of the Project, Private, Efficiency and Referent Group components can be seen
in Appendices 2-5 respectively. It should be noted that the result discussed in sections 3.1 – 3.3
are subject to change, as is discussed in section 3.4 and 3.5.
For this report the Efficiency Analysis will not be discussed in depth as it is only needed to obtain
the Referent Group results.
3.1
Project Analysis
The net benefits of each project are derived from subtracting the NPV of the proposal from
the NPV of the existing system were it to continue. The resulting values show that both
projects are preferred to the existing system at all discount levels.
3.2
Private Analysis
TSI has positive NPV in the base case at discount levels of 6% and 9%, but a negative NPV
at 12%. TSI’s IRR in the base case is 11.5% which is less than their estimated cost of
capital at 12%, suggesting they may avoid the project.
TSI Net Benefit
6%
9%
12%
NPV =
62,367
24,004
-3,984
IRR =
11.5%
Table: 3.2
Cases where TSI may choose to undertake the project are discussed more in the sensitivity
analysis (Section 3.4).
3.3
Referent Group Analysis
The referent group net benefits show that both projects offer a better alternative to the
existing system (see Table 3.3). In the base case Teledentistry has higher net present values
than Outreach; however TSI may not be willing to undertake the project as their IRR is less
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than their expected cost of capital. If this was the case then the Teledentistry project is no
longer an option, and the Outreach project would have the most benefits.
Teledentistry
Government
NHS
Duties and Taxes
Financial Institutions
Patients
Total RG Benefits
6%
9%
12%
356,969
271,684
207,517
289,306
228,229
182,306
80,843
66,141
55,601
-13,181
-22,685
-30,390
2,910,653
2,370,389
1,965,736
3,267,622
2,642,074
2,173,253
548,701
440,659
359,829
543,866
436,267
355,789
Outreach
Government
NHS
Duties
4,836
4,392
4,040
Patients
2,684,976
2,186,601
1,813,323
3,233,677
2,627,261
2,173,152
Total RG Benefits
Table: 3.3
As far as the distribution of referent group benefits goes, Outreach provides a greater
benefit to NHS and the Government in general, while Teledentistry provides a greater
benefit to patients. The Teledentistry proposal relies on financial institutions to provide
significant funding, but the analysis shows that to finance the project the financial
institutions would run at a significant loss. As a result the government may need to provide
incentives for the institutions to provide the loan at the concessional rate of interest. Any
incentives would then need to be factored into the analysis.
3.4
Sensitivity Analysis
Because the variables used in the base case scenario are predicted rather than observed
values, it is impossible to know with certainty what value the projects costs and benefits
will take. To assure that the project will not be especially sensitive to changes in any of
these predicted variables a sensitivity analysis is conducted. This involves looking at
variables both internal and external to the project and allowing the variables to take a range
of possible values, and then assessing the ensuing change in any of the net benefits.
Variables analysed included the NPV at different discount rates, patient fees, value of
patient time, patient growth per annum, NHS capital costs (cost/m2 of consulting facility),
import duties, interest rate, tax rate, and the rate of depreciation. Of these, the only
significant variables where found to be patient fees and the value of patient time.
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Value of Patient Time
The Teledentistry project has higher benefits than the Outreach project when patient time is
valued at the market wage. If the value of patient time increases beyond 2 times the
assumed market wage the preferred project switches to Outreach. Because the market was
valued as a constant then if the rate that the value increases is different to the rate of
inflation the assumed wage would be incorrect.
% of mkt
wage
Referent Group NPV (6%)
Teledentistry
Prefer
Outreach
0%
32,785
367,151
T
50%
1,560,496
1,800,414
T
100%
3,088,208
3,233,677
T
150%
4,315,920
4,666,940
T
200%
6,143,631
6,100,203
O
250%
7,671,343
7,533,466
O
300%
9,199,054
8,966,728
O
Table: 3.4.1
Patient Fees
In the base case the fee that NHS pays to TSI is assumed to be ₤140 per patient, and it is
noted that TSI hopes to negotiate a higher fee. At ₤140 TSI’s IRR is below 12% which
would suggest it would not undertake the project unless the fee was raised. If the fee was
increased to ₤150 per patient then TSI’s IRR increases to 13.9%, suggesting that it would
undertake the project. At this fee rate the Teledentistry project still results in greater net
benefits than can be achieved from Outreach. However, if the fee was increased further to
₤160 per patient, the benefits of Teledentistry are no longer greater than Outreach, and a
switching of preferences would occur (See table: 3.4.2).
Overall, the Teledentistry project has the greatest benefits with fee rates of ₤140 through to
₤151. At any fee rate greater than ₤151 Outreach will be preferred over Teledentistry, so it
would therefore be impractical to set a fee rate above ₤151. Since TSI will not accept a fee
rate of less than ₤142 as that is the first fee rate where their estimated cost of capital is equal
to their IRR. Therefore, the fee rate should be set somewhere between ₤142 and ₤151, with
the final fee rate dependent on the negotiating abilities of the individual parties. The only
time that the Teledentistry project will be beneficial is at a fee rate of ₤150.
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Referent Group NPV (6%)
Fee
Prefer
TSI IRR
3,233,677
T but O
11.5%
3,233,677
T but O
11.8%
3,261,642
3,233,677
T
12.0%
£143
3,258,651
3,233,677
T
12.3%
£144
3,255,661
3,233,677
T
12.5%
£145
3,252,671
3,233,677
T
12.7%
£146
3,249,681
3,233,677
T
13.0%
£147
3,246,690
3,233,677
T
13.2%
£148
3,243,700
3,233,677
T
13.5%
£149
3,240,710
3,233,677
T
13.7%
£150
3,237,720
3,233,677
T
13.9%
£151
3,234,730
3,233,677
T
14.2%
£152
3,231,739
3,233,677
O
14.4%
£153
3,228,749
3,233,677
O
14.6%
Teledentistry
Outreach
£140
3,267,622
£141
3,264,632
£142
Table: 3.4.2
It is also to be noted that provided everything in the base case scenario remains the same,
and only the fee changes, that the preferences will remain the same and only depend on the
results from the change of fees. However, if any other variables change (for example, the
interest rate, rate of depreciation, or import tariff) then changing the fees could have
different effects on preferences than those represented in Table: 3.4.3, 3.4.4 and 3.4.5.
Tax Rate
Fee Rate
£140
£142
£151
20%
T
T
T
25%
T
T
T
30%
T but O
T
T
35%
T but O
T
T
40%
T but O
T but O
T
Table: 3.4.3
Depreciation
Fee Rate
£140
£142
£151
10%
T but O
T but O
T
15%
T but O
T but O
T
20%
T but O
T
T
25%
T
T
O
30%
T
T
O
Table: 3.4.4
Fee Rate
Import Duties
£140
£142
£151
10%
T but O
T
O
15%
T but O
T
O
20%
T but O
T
T
25%
T but O
T
T
30%
T but O
T
T
Table: 3.4.5
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Tables show the changes in optimum outcomes at three different fee rates. A T referrers to
the Teledentistry proposal being preferred, an O to the Outreach proposal being preferred,
and T but O implies that Teledentistry is preferred but the IRR for TSI is below 12% so
Outreach must be chosen as a next best alternative. The tables show that the outcomes are
highly sensitive to any change in external factors, and are different depending on which fee
rate is selected. Because the final fee rate is dependent on negotiations and the analysis is
highly sensitive to the rate, it is recommended that another analysis be conducted after the
fee rate has been set, to ensure accurate results for each of the proposals.
3.5
Risk Analysis
With any proposal there is a level of risk involved that something unplanned may occur
which yields unplanned and unwanted results. The Teledentistry project relies heavily on
the use of videoconferencing equipment, which could be seen to have a high risk of
malfunction or breakdown. There is also a risk from the point of view of the patient to
allow an unqualified doctor perform the duties of a specialist. Patients may feel
uncomfortable with this idea and would rather travel the further distance, and pay the
respective transport costs, to get what they feel is a higher quality of care.
The Outreach Proposal, although not providing as many benefits to the patients, is
significantly less risky.
4. Conclusion
From analysis of the base case scenario the Teledentistry proposal is shown to have the greatest
Referent Group net benefits. However, the 11.5% IRR for TSI is below its estimated cost of
capital of 12%, suggesting it may not undertake the project. If TSI chose not to accept the project
then the next best option is to select the Outreach proposal, as even though the Teledentistry
proposal is preferred, the Outreach proposal still offers significant benefits in comparison to the
existing system.
Assuming all variables remain the same the patient fee rate paid by the NHS to TSI should be
somewhere in between ₤142 and ₤151 if Teledentistry is to be preferred. At fee rate over ₤151
the Outreach proposal will have greater benefits.
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Despite the Teledentistry proposal emerging as the option with the greater benefits, the sensitivity
of the variables should be taken into consideration, and if any of the variables used in the base
case change it is recommended that the BCA also be altered accordingly and analyzed to assure
no significant change in outcome results. This is particularly important in the case of patient fees
paid by the NHS to TSI. It would be recommended that this analysis only be taken as a guide
until the fee rate is officially set, due to the sensitive nature of the results to changes in the fee
rate.
It is also recommended that the distributions of benefits be taken into account, as well as any
risks involved in the proposal. The Teledentistry proposal offers greater benefits to Patients but
the financial institutions run at a loss, implying there may be need for incentives. The
Teledentistry proposal also comes with a higher risk than that of the Outreach proposal. The
Outreach proposal shows most of the gains are attributed to the government, or more specifically
to the NHS. If the gains to patients are deemed more important, then the Teledentistry proposal
may be favored even if its overall net benefits are less than that of the Outreach proposal, and
conversely if the risk involved is considered significant, Outreach may be the preferred option as
it still runs at a benefit (even if not as great) but involves little risk.
The report has not considered certain factors such as waiting times of patients under either
scheme, or the attitudes of patients to the preferred form of treatment. If time and funding permit
it is suggested that further investigation in these areas would be beneficial.
Appendix
Appendix 1:
Variables
Appendix 2:
Project Analysis
Appendix 3:
Private Analysis
Appendix 4:
Efficiency Analysis
Appendix 5:
Referent Group Analysis
Appendix 6:
Sensitivity Analysis (non-significant variables)
Appendix 7:
Sensitivity of Patient Fees
Appendix 8:
Map of Scotland
Appendices 1-8 are in MS Excel spreadsheet form.
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References
AboutScotland (2005). Touring Map of Scotland. Available at: www.aboutscotland.com.
Retrieved: 25 October, 2005.
Campbell, H.F. and Brown R.P.C. (2003). Benefit-Cost Analysis: financial and economic
appraisal using spreadsheets. Melbourne: Cambridge University Press.
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