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 outcomes
◦ Applying cost analysis methods
◦ Analysis, interpretation & presentation
 Strengths and limitations of cost- analysis
 References
Some Questions ???
1. What has been expenditure and revenues on a
project ?
What is the averageDistribution
cost of providing a service?
2. What are the trend? of costs
3. Does expenditure compares with the budget?
Input
category
Facility or
location
Service
type or
activity
What is Cost Analysis
Definition:• It is the element-by-element examination of the expenditure to
determine how resources have been spent.

A critical process needed to solve management problems

Helps to understand how funds have been used

Guides in optimal utilization of scarce resources
Uses of Cost Analysis
1.
Accountability- Keeping track
2.
Assessing Efficiency
3.
Assessing Equity
4.
Assessing Priorities
5.
Making cost projections
6.
Considering cost recovery
Economical And Financial Cost Analysis
Variable
Costs
Financial analysis
Monetary cost.
Economic analysis
Economic (“opportunity”) cost.
e.g, actual monetary payments e.g, volunteer workers and donated
for human resources, materials, goods
or infrastructure
Outcomes
Valuation using market interest
rates.
Valuation using a discount rate
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.
Financial consequences
Resource consequences
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
Deciding on time trend
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
Average cost  TC
Q
cost per unit of output
Quantity
Marginal versus incremental cost
Cost
TC of Prog A
ICA-B, Q
MCA, 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

Resources should be valued according to their opportunity cost

Method of valuation needs justification
(Market prices or ‘Shadow’ price )

Health care provision is rarely subject to market valuations

Alternative ‘shadow’ prices may need to be used
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)

1.
2.
International currencies (costs from different countries)◦ Purchasing Power Parities (PPPs) and exchange rates
◦ PPPs are more appropriate
Measuring Outcome/ consequences
Identification

◦
◦
Depends upon viewpoint (govt., societal )
Depends on the objective of the evaluation

Measurement-

Valuation- in terms of:
◦ Measure outcome in natural physical units
◦ Utility (eg QALY)
◦ Money (eg WTP)
Cost Analysis Methods
1.
2.
3.
4.
5.
6.
Cost-effectiveness analysis (CEA):
Cost-utility analysis (CUA)
Cost-benefit analysis (CBA):
Cost-of-illness analysis:
Cost-minimization analysis:
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
Target and output indicators pre-decided
Most appropriate if the important outcome is uni- dimensional
Compare costs of at least two alternatives
Cost- Effectiveness Ratio:
CE Ratio = ($ Cost Int - $ Cost Comp) / ($ Effect Int - $ Effect Comp)
For example: “$45,000 per life- year saved” or $10,000 per lung
cancer case averted”
Cost-Effectiveness Analysis cont…
Advantages
1. Useful to know the cause of failure to attend the objective and the
unmet demand.
2. Adequacy of corrective action taken, can be reviewed
Disadvantage
1. Only compare programs with similar outcomes
2. There is not enough information to assign a value to the outcome
3. Methodological inconsistency
4. Ambiguity in assessing overall improvement or decrement in health
5. Cannot address the issue of allocative efficiency
Cost-Utility Analysis
A type of cost-effectiveness analysis
 It compares costs in monetary units with outcomes in terms of their utility,
usually to the patient, measured, e.g., in QALYs


Measures of different effects are consolidated into a common abstract
scale
Example; Quality adjusted life year (QALY), Disablity adjusted life years
(DALYs)

Most appropriate if the important outcome is multidimensional
Disadvantage
 Difficult to assign utility weights
Cost- Utilty Ratio:
CU Ratio = ($ Cost Int - $ Cost Comp) / ($ Utile Int - $ Utile Comp)
For example: “$10,000 per QALY gained”
Quality-adjusted life years (QALYs)



Adjust quantity of life years saved to reflect a valuation of the quality of life
◦ If healthy QALY = 1
◦ If unhealthy QALY < 1
◦ QALY can be <0
Procedure
◦ Identify possible health states - cover all important/relevant dimensions of
QoL
◦ Derive utility ‘weights’ for each state
◦ Multiply life years (spent in each state) by ‘weight’ for that state.
Quality adjustment utility “weights” should
(1) be preference-based
(2) be interval-scaled
(3) contain both perfect health and death on the same scale
Techniques to ‘weight’ utility
Direct methods ◦ Measure the preferences of individuals directly using general
instruments like the visual analogue scale, the time trade-off
method, and the standard gamble technique
◦ Widely applied
◦ Costly & time consuming
 Indirect methods
◦ Simpler to use (though difficult to develop)
◦ Based on multi-attribute health status classification
systems.(consist of a set of attributes of health status (e.g.,
pain and discomfort, visual acuity, ambulation, cognitive
function, etc.), and levels of function associated with each
attribute from full function to impaired function (e.g. perfect
vision — totally blind)

Cost-Benefit Analysis
It compares costs and benefits, both of which are quantified in
common monetary units
 Unique feature that can indicate explicitly whether benefits outweigh
costs

Advantage:
◦ Can address allocative efficiency
◦ Can compare disaperate technologies
Disadvantage:
◦ Difficult to assign monetary value to outcomes
Cost-Benefit Analysis cont…
Two approaches:
Cost- Benefit Ratio: (Ratio Approach)
CB Ratio = ($ 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”

Monetary Valuation

Earlier “Human Capital’ method were used
Willingness To Pay Method
 Done by Contingency valuation method
 Assess individual ‘willingness-to-pay’ for (the benefits of) a
good through either:
1. Observed wealth-risk trade-off (revealed preference)
◦ Advantage – ‘real’ preferences/values
◦ Disadvantage – difficult control for confounders
2. Direct survey (stated preference)
◦ Advantage – direct valuation of good
◦ Disadvantage – hypothetical/survey problems
 Vast majority of CBA use direct survey
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

Examples
o What does cancer cost the India?
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
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
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