Cost Analysis Page 2    HHS    CDC
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 IntroductionJump to page 1.
Cost of the Intervention or Program
The cost of intervention is a measure of the value of all resources used in the intervention. The cost of intervention is an important part of the decision to use one intervention over another. Knowing about the costs provides clues as to whether there is too much spending on less desirable programs or too little spending on highly desirable programs.
The cost of intervention can be used:
  • by both internal and external reviewers as a tool to monitor the level of performance of programs, and
  • for manifold purposes, as described in the previous chapter.
An estimation of the cost of intervention is conducted by framing the cost analysis, developing a cost inventory, evaluating resource use, and calculating cost analysis results.
Framing the Cost Analysis
The steps involved in framing cost analysis have been covered in an earlier section. Please see Framing a Cost AnalysisOpen this in a new window for a detailed discussion.
Developing a Cost Inventory
The next step involves developing an inventory of the resources required for the intervention. The cost inventory comprises a comprehensive list of resources with unit and total cost of each resource. Costs are generally classified as direct, indirect, and intangible costs.
Direct costs are defined as the values of all resources expended on design and implementation of the health intervention (e.g., personnel, lab tests, and facilities [rent and utilities]). By definition, direct costs can be either medical or nonmedical. The costs related directly to providing a treatment are categorized direct medical costs.
For instance, the costs of vaccines, syringes, and nurses' salaries will be included in direct medical costs of a vaccination program. Patients' expenses for transportation to vaccination clinics will be included as part of direct nonmedical costs.
Indirect costs or productivity losses are the income forgone because of changes in productivity as a result of health intervention or illness (e.g., time lost from work or decreased productivity because of health problems).
Intangible costs are the nonmaterial costs (e.g., emotional anxiety, fear, pain, and stigmatization). Intangible costs impose a major burden on a patient. Quantifying intangible costs is difficult, and these costs are not included in the majority of studies. However, we must not forget to account for intangible costs, because they might be a major factor that affects patients' decisions.
Example: Cost Inventory
Cost inventory example.
Classification Systems
Major Classification Systems
Below are examples of the list of resources in cost inventory, which is usually categorized and presented in a classification system.
  • Line item or functional system: costs are classified according to use or function of resources. For example:
    • Personnel costs
    • Facilities and equipment costs
    • Drug costs
    • Transportation costs and travel expenses
  • Level of responsibility
    • Federal
    • State
    • Local
  • Sources of funding
    • Federal
    • State
    • Local
    or
    • Private for profit
    • Private not-for-profit
    • Public
  • Activity areas:
    • Training costs
    • Curriculum development costs
    • Marketing costs
Classification by Cost Type
Depending on the perspective of our analysis, we can also classify and present all the costs as components of program costs, costs to participants, and costs to others.
Program Costs
Program costs list the value of all the resources expended on implementation and maintenance of the intervention. The diagram below illustrates the types of costs/resources that need to be considered in the majority of health-care programs.
Program costs.
Costs to Participants
Costs incurred by participants are either
  • out-of-pocket expenses (expenses incurred by participants that are not accounted for in the program costs), or
  • productivity losses.
Costs to participants.
Costs to Others
A health intervention can cause adverse events in persons who are not directly participating in the program. If our study has a societal perspective, we must include the resulting costs incurred by others. The chart below illustrates how a typical list will look.
Costs to others.
Combining Classification Systems
It is possible to use two classification systems simultaneously. For instance, costs can first be classified by source of funding and then by line item. The use of multiple classification schemes is helpful when an intervention or program is complex or multitiered. Below is an example.
Multitiered costs.
Cost Inventory Summary
To develop a cost inventory, we prepare a comprehensive list of all resources and present them in a classification system that is most suitable for our study. We make sure that we include resources obtained without monetary exchange:
  • volunteer time
  • caregivers' time
  • patient's time
  • in-kind contributions/donated materials, and
  • resources previously purchased.
We also make sure to include
  • resources that are hard to measure or value, and
  • resources used in small amounts.
Evaluating Resource Use
Having developed the cost inventory, we can measure the quantity of the resources used in the delivery of the intervention and assign values to them. We characterize costs as either fixed or variable, depending on their variation with changes in program activity level.
Fixed Program Costs
The fixed costs of a program or intervention are those that, in short run, do not vary with the level of activity. Costs associated with the facility (e.g., rent and utilities) and personnel costs for support staff (e.g., receptionists and information services staff) are the most common fixed costs. These costs are often incurred at the beginning of program implementation and are frequently referred to as start-up costs.
We can account for facilities cost by adding the cost of space, maintenance costs, and the costs of utilities. Costs for facilities are usually recorded as either the cost per unit (e.g., cost per square foot) or the total cost for the facility. The equations below can be used to determine the facility's costs for programs sharing space in an existing facility.
Facilities costs = Additional facility space used by the program x Cost per square foot for space and utilities
or
Facilities costs = Total facility cost for space and utilities x ( Facility time used by program / Facility time used by all programs )
We can calculate the costs for administrative and staff support as a proportion of the staff time spent on this particular intervention. The equation below is used to determine the cost of administrative and staff support associated with a program.
Administrative costs = Proportion of administrator's time spent on intervention x Administrator (salary + benefits)
Support costs = Proportion of support staff time spent on intervention x Support (salary + benefits)
Administrative and staff support costs = Administrative costs + Support costs
Variable Program Costs
The variable costs of a program are those that change as the level of activity changes. Examples of variable costs include provider time, medications, tests, material, and supply costs. The typical approach to measuring variable costs is to identify the quantity of the relevant resource and multiplying it with per unit price.
Provider cost is determined for each provider type and service by using the equation below.
Provider cost = Provider (salary + benefits) x Average duration of service x Number of services provided in period
Material and supply costs can be determined by the equation below.
Material and supply costs = Specific resource x Cost per unit x Number of units used in period
Sources
We can use information from various sources to assess the resources used. And we might eventually use more than one method. The main sources of information are listed below.
  • Primary data collection
    • Questionnaire surveys (require large numbers of survey participants to calculate unit costs)
    • Observational surveys (require large numbers of observations to calculate unit costs)
    • Medical records
    • Accounting and payroll systems
  • Published literature
  • Professional guidelines/practice
Calculating Cost Analysis Results
The first series of calculations computed on the basis of the cost information previously collected is referred to as the base-case scenario. It is based on the assumptions about resource use and value that the researcher believes most closely reflect the policy/program/intervention's true level of resource use (best estimate). These calculations include
  • total costs,
  • average costs, and
  • marginal costs.
Total Cost
The total cost (TC) of a program or an intervention is derived by adding all the costs incurred in producing a given level of output. So it includes the cost of all the personnel, the supplies, and the equipment that were identified in the cost inventory.
This measure of cost is simple to calculate. Mathematically, total costs are expressed as
TC = (Q1 x P1) + (Q2 x P2) +...+ (Qn x Pn)
where
Q1 = Quantity of Resource 1 P1 = Value of Resource 1
Q2 = Quantity of Resource 2 P2 = Value of Resource 2
Qn = Quantity of Resource n Pn = Value of Resource n
Total costs can be used to
  • rank diseases by economic burden
  • measure the cost of treating a disease, and
  • measure the cost of a program relative to its budget.
Although it is a useful and simple measure of costs, TC has the following limitations:
  • As an aggregate measure, TC is difficult to interpret
  • It difficult to use TC to compare programs or interventions whose outcomes differ.
Average Cost
The average cost (AC) is the cost per unit of output (e.g., cost per patient treated or cost per child immunized). AC is computed by dividing the total cost by the number of participants or other relevant intervention units. The formula is
AC = TC / Q
where
AC = Average cost
TC = Total cost
Q = Units of output
Example: Calculating Average Cost for the Antigua HECD Program
Total field costs for the Antigua HECD Program were $2,259 per month. On average, 4,805 condoms were distributed each month.
In this situation, the average cost per condom distributed was
$2,259 / 4,805 = $0.47 per condom distributed
When Can Average Cost Be Used?
The average cost can be used:
  1. To Compare Subgroups
    In the Antigua example, the cost analysis reported an average cost per condom distributed for two different settings: one for an STD clinic, and one for the outreach program. The cost at the STD clinic was higher, because when people come to the clinic, they receive additional services (beside condoms).
  2. To Compare Efficiencies of Various Programs and Interventions
    Higher average cost might indicate that the resource utilization is less efficient and further study is warranted to find out the reason. It might turn out that the reason for higher average cost is less favorable conditions for treatment (e.g., harmful agents with higher resistance to drug treatment or difficulty in reaching the target population).
  3. To Determine Economies of Scale
    Economies of scale occur when the average cost per unit produced decreases as the level of activity increases because, in the short term, fixed costs can be spread over a larger number of units. Potential economies of scale can be identified by calculating and comparing the average cost for several output levels.
    An Example: Clinic Costs
    For a clinic, let us assume that for each output level included in the table below, a program incurs the corresponding variable and fixed costs. Total and average costs are also given in the table.
    Symbol Quantity Data
    A Number of patients 10 20 30 40 50 60 70
    B Variable cost 10 10 10 10 10 10 10
    C Fixed cost 150 150 150 150 150 400 400
    D Total cost [(A x B) + C] 250 350 450 550 650 1000 1100
    E Average cost [D / A] 25 17.5 15 13.75 13 16.6 15.71
    If the program treats between 10–50 patients per day, a potential for economies of scale exists: adding more patients would lead to a decrease in the average cost per patient. For example, increasing output level from 40 to 50 patients per day would decrease the average cost from $13.75 to $13 per patient.
    After the program treats 50 patients per day, the average cost per patient rises again. In this example, diseconomies of scale set in.
Marginal Cost
The marginal cost (MC) is the resource cost associated with producing one additional or one less unit within the same intervention/program. Because MC is an indication of the amount of additional resources that must be expended to serve additional patients, it is useful in making program expansion decisions. Usually, MC is calculated from data on the basis of the cost of a larger increase in outputs.
The formula for calculating MC is
MC = Change in total costs / Change in quantity produced
or
MC = (TC' – TC) / (Q' – Q)
where
Q = Lower level of output
Q' = Higher level of output
TC = Total costs at lower output level
TC' = Total costs at higher output level
Example: Marginal Cost
Problem
A public health nurse can screen 25 patients per day. Her salary is $160 per day. Screening and lab costs are $25 per patient. If >25 patients are scheduled, the nurse must call and ask that a nurse's aide help her. The nurse's aide salary is $100 per day.
Questions
What is the MC of screening one additional patient
  1. if 24 patients are already scheduled?
  2. if 25 patients are already scheduled?
Answers
Situation A: 24 Patients Scheduled
By using the formula, the marginal cost of adding one patient is
MC = (TC' – TC) / (Q' – Q)
where
TC' = Total costs, higher output level = ($160 + ($25 x 25)) = ($160 + $625) = $785
TC = Total costs, lower output level = ($160 + ($25 x 24)) = ($160 + $600) = $760
Q' = Higher output level = 25
Q = Lower output level = 24
therefore
MC = (($785 – $760) / (25 – 24)) = ($25 / 1) = $25 per additional patient
In this situation, the program can admit one additional patient without exceeding its operating capacity. No additional fixed costs are required, because help from the nurse's aide is not needed. The marginal cost will therefore comprise only the variable costs associated with treating the additional patient (i.e., the screening and lab costs [$25]).
Situation B: 25 Patients Scheduled
By using the formula, the marginal cost of adding one patient is
MC = (TC' – TC) / (Q' – Q)
where
TC' = Total costs, higher output level = (($160 + 100) + ($25 x 26)) = ($260 + $650) = $910
TC = Total costs, lower output level = ($160 + ($25 x 25)) = ($160 + $625) = $785
Q' = Higher output level = 26
Q = Lower output level = 25
therefore
MC = (($910 – $785) / (26 – 25)) = ($125 / 1) = $125 per additional patient
For the 26th patient, the variable cost associated with the additional patient is $125. It includes not only the original variable cost of $25, but also the salary of the nurse's aide, $100.
For the 27th and higher patients, the variable cost reverts to $25 per patient.
Conclusion
This example reveals that the cost of marginally increasing a program's level of output varies, depending on whether or not the program is operating at full capacity. In Situation A, a patient can be added for a cost of $25 dollars (or the sum of variable costs), whereas in Situation B, the marginal cost increases to $125 (or the sum of variable costs plus additional fixed costs).
When Can Marginal Costs Be Used?
The marginal cost measures the effect of making an additional investment in the intervention, and can be used to
  • evaluate the change in total costs that will result from a change in program activity level,
  • evaluate the change in total costs that is needed to produce change in outcomes, or
  • determine the optimal activity level of a program or intervention.
As a rule, programs should target their activity level so that average and marginal costs are equal.
As long as the marginal cost is lower than the average cost, economies of scale are possible, and increasing output decreases average cost.
When average cost equals marginal cost, no additional economies of scale can be achieved (i.e., expanding output increases average cost). At that level, the program
  • operates at its maximum technical efficiency (i.e., it is taking maximum advantage of the resources being used in its implementation), and
  • represents the least costly method (in terms of total costs) to produce that level of output.
Calculating MC and average cost for a series of capacities enables the decisionmaker to
  • identify any potential for economies of scale, and
  • take maximum advantage of the resources invested while minimizing total costs.
Sensitivity Analysis
The information obtained in developing the cost inventory and calculations of various cost measures provides what we call our base-case scenario. Cost analysis, like other types of economic evaluation, almost always involves uncertainty about certain or all of the parameter estimates that are used in the study. Typical sources of uncertainty include
  • measurement errors,
  • conflicting or biased estimations from the literature,
  • omission of important cost components, and
  • an inappropriate time frame/analytical horizon.
We take the uncertainty into account by conducting a sensitivity analysis (SA) and examining how "sensitive" the analysis results are to a change in base-case parameters. A sensitivity analysis should always be conducted.
An Example: The Role and Importance of Sensitivity Analysis
A state tuberculosis-control program has decided to implement a targeted screening program to identify children infected with tuberculosis at a local public school where 52% of students are newly arrived immigrants. The program will be implemented once a year during a 10-day period. All 400 children in the school will be tested. Children who test positive will be administered treatment for latent tuberculosis infection to decrease the likelihood that the condition will evolve into active tuberculosis disease. A cost analysis is conducted to estimate the resources needed to implement this targeted screening program.
Program planners have been unable to obtain detailed information from school officials regarding the children's countries of origin. Therefore, estimating the prevalence of latent tuberculosis infection among the children might be difficult. This challenge causes difficulty in assessing how many children will require treatment and how much the program will ultimately cost.
In their base-case scenario, program planners assume a 15% infection rate among foreignborn children, which reflects the "background" infection rate in the local community as measured by the local public health department. Because we know the number of children in the school and the proportion that are foreignborn, we can calculate the number of infected children the program can expect to identify and treat, based on the base-case assumptions:
400 x 0.52 x 0.15 = 31
The cost analysis results for the base-case scenario are as follows:
Cost Amount
RN (2) $4,000
LPN (1) $1,000
Skin test/medical supplies ($20 * 400) $8,000
LTBI treatment ($500 * 31) $15,500
Total intervention costs $28,500
Because program planners are uncertain about the prevalence of tuberculosis infection in the school, they decide to conduct a sensitivity analysis around the rate of latent tuberculosis infection. They decide to vary the rate by 5-point increments between 0 and 30%. Here are the results of their sensitivity analysis:
Prevalence among
foreignborn students		 Expected number
of infected students		 LTBI treatment costs Total costs
0% 0 0 $13,000
5% 400 x 0.52 x 0.05 = 11 11 x 500 = $5,500 $18,500
10% 400 x 0.52 x 0.10 = 21 21 x 500 = $10,500 $23,500
15% 400 x 0.52 x 0.15 = 31 31 x 500 = $15,500 $28,500
20% 400 x 0.52 x 0.20 = 42 42 x 500 = $21,000 $34,000
25% 400 x 0.52 x 0.25 = 52 52 x 500 = $26,000 $39,000
30% 400 x 0.52 x 0.30 = 63 63 x 500 = $31,500 $44,500
These results indicate that total costs of the intervention vary substantially with the estimated prevalence. Program planners might need to invest more effort into estimating the actual prevalence of latent tuberculosis infection among foreignborn students at the school to plan and budget for the intervention more effectively.
Notes:
  • The sensitivity analysis around latent tuberculosis infection prevalence could have been conducted using only one or two alternative values (best-case and worst-case scenarios, for example).
  • Prevalence of latent tuberculosis infection among foreignborn children is not the only parameter that could be varied in a sensitivity analysis in this situation.
    For example, program planners appear to assume that only foreignborn children are at risk for latent tuberculosis infection. A sensitivity analysis around the rate of infection among U.S.-born students could also be conducted to challenge this assumption.
Types of Sensitivity Analysis
The three types of sensitivity analysis below are commonly conducted, depending on the objective and the number of parameters that are changed to derive the results.
One-way SA: One parameter is changed at a time and the results are recalculated.
Multiway SA: Two or more parameters are changed simultaneously.
Threshold analysis: For each parameter or for a set of parameters, we determine the critical values beyond which the conclusions of the analysis change.
The strengths and weaknesses of one-way and multiway sensitivity analyses are summarized in the table below.
  One-way Multiway
Pros straightforward, intuitive, easy to do takes into account the possibility that parameters are interdependent
Cons assumes parameters are independent more complex
Threshold Analysis
Threshold analyses should be conducted only around continuous variables (i.e., variables that can take on any fractional or integer value). Height, weight, prevalence, and incidence are examples of continuous variables that are infinitely divisible and that can take on an infinite number of values between two integers.
Variables that represent counts (e.g., 1, 2, 3, and 4) are discrete variables. (Examples of discrete variables are the number of patients or the number of test kits used.) Threshold analyses should not be conducted around discrete variables.
A threshold analysis can be conducted as a one-way or as a multiway analysis. In the multiway analysis, two or more values are varied simultaneously.
For example, a threshold analysis conducted around the prevalence rate of a genetic disorder can help determine the point at which implementing a universal screening program becomes less costly than a targeted screening strategy. The figure below illustrates the results of the corresponding threshold analysis.
Threshold analysis.
For each strategy in this example, the average testing cost per patient was calculated for all disease prevalence rates between 5% and 30%. The results were used to create this graph.
The intersection between the two curves indicates the disease prevalence at which the average testing cost is the same for both strategies. When disease prevalence is 22.5%, the average cost of testing a patient through targeted screening or through universal screening is approximately $23.50.
When prevalence is less than 22.5%, the targeted screening strategy is less costly.
When prevalence is higher than 22.5%, universal screening is less costly (in terms of average cost per patient screened).
Case Study: Hepatitis B Vaccination Program — Denver, CO, 1996–1997
Context
In 1996, the Colorado State Board of Health mandated that all students complete a 3-dose hepatitis B vaccination series before entering the 7th grade. Consequently, the Denver Public School (DPS) System offered a free, voluntary, school-based, hepatitis B vaccination program to students in the 6th grade during the 1996–97 school year.
This case study estimates and compares the program costs of the vaccine delivery programs for the school-based system and for the network HMOs.
Source of This Study
Deuson, RR, Hoekstra, EJ, et al. Denver School-Based Adolescent Hepatitis B Vaccination Program: a cost analysis with risk simulation. American Public Health 1999: 89:1722–27
Methods
Study population: A total of 4,665 6th-grade students enrolled in 18 Denver Public School (DPS) middle schools at the beginning of the 1996–97 school year.
Study design: Retrospective direct and indirect cost analysis to estimate cost per dose for
  • A school-based program, and
  • PacifiCare, a network HMO.
Study perspective: Societal.
Calculating Societal Costs
All costs were classified into startup costs and ongoing costs.
School-Based Program
The three cost components of the school-based program are estimated as follows:
Educational and Outreach Costs
Educational presentations regarding the hepatitis B vaccine were made to the parents, guardians, and students. Information packets with a consent form for the vaccine series were mailed to parents or guardians. If the consent form was not returned, an additional follow-up packet was mailed.
Program costs included the items below.
  • Personnel time devoted to the development of educational material and training.
    Costs of personnel time are calculated by multiplying the salaries and benefits of relevant personnel by the amount of personnel time devoted to the particular project (i.e., development, training, and administration).
  • Educational materials.
  • Costs of supplies, including consent forms.
  • Postage, copying, and their miscellaneous supplies.
  • Calling costs.
Vaccination Costs
The vaccination costs at each of the school clinics were tallied. These costs comprise
  • Personnel time, which consists of
    • Staff time: The estimated cost of staff salaries and benefits multiplied by the time devoted to the project.
    • Volunteer time: The cost of volunteer time is imputed on the basis of the cost of hiring a paid worker with appropriate skills to do the job.
  • Cost of supplies.
  • Cost of vaccine.
Management Costs
Program management costs included all labor costs associated with the design of school-based clinics' vaccination, hiring, and supervision of staff.
PacifiCare HMO Vaccination Delivery Program
The societal cost for the PacifiCare program includes the cost to the PacifiCare network HMO, cost to the patient.
Cost to the PacifiCare Network HMO
The cost to HMO includes the items below.
  • Vaccine costs: PacifiCare reimburses network physicians for the average wholesale price of the vaccine, $68.06 per dose, plus a 10% markup.
  • Administration costs: A total of $7.50, which covers
    • administering the injection,
    • supplies other than the vaccine (alcohol, swab, cotton, syringe and needle, and bandage), and
    • documentation.
Cost to the Patient
The cost to the patient includes
  • Patients' out-of-pocket expense: copayment ($10).
  • Cost of work lost by the parents: The cost of work loss is calculated as the work income forgone by a parent when taking his or her child to have the vaccine administered.
    The estimated time for administration of the vaccination series is 9 hours (three clinic visits of 3 hours each). For working parents, this time had to be taken either as sick leave, vacation time, or leave without pay, each therefore carrying an opportunity cost.
    Because no information was available regarding the parents' employment status or income, estimates of work loss costs are determined based on 1996 US Bureau of the Census data for incomes of married-couple families with children aged 6–17 years.
    Estimates were calculated for all combinations of employment status for husband and wife (full-time work, work, or no-work). Researchers assumed that on average, women earned 74% as much as men in 1996.
Total Costs
Costs of providing 8,886 doses of hepatitis B vaccine to 3,359 6th-grade students in school-based vaccination clinics — Denver, CO, September 1996–May 1997
  Education/
Outreach		 Vaccine
delivery		 Program
management		 Total
Start-up costs  
Development
 4,196  
Supplies
 245 340  
Personnel
   20,497  
Total start-up costs
 4,441   20,497 25,278
Ongoing costs  
Training
 27,266  
Supplies
 17,520 2,441  
Vaccine
   77,308  
Personnel
   46,808 75,252  
Gift certificates
   425  
Total ongoing costs
 44,786 126,557 75,677 247,020
Total costs 49,227 126,897 96,174 272,298
Unit (Per Dose and Per Series) Costs
Cost-Effectiveness Ratios of the School-Based Hepatitis B Vaccination Program — Denver, CO, September 1996–May 1997
  Mean (SD) 95% Confidence
interval
Including all costs  
Per dose
 30.64 (0.94) (28.80, 32.48)
Per completed series
 95.29 (2.94) (89.53, 101.05)
Excluding start-up costs  
Per dose
 27.79 (0.93) (25.97, 29.61)
Per completed series
 86.45 (2.90) (80.77, 92.13)
Parents' Productivity Loss Per Visit
Parents' work status $ Cost
Mean (SD)
Both worked full-time 42.31 (2.63)
Wife worked full-time, husband worked 41.14 (2.59)
Wife worked full-time, husband did not work 46.69 (4.07)
Wife worked, husband worked full-time 40.36 (2.53)
Both worked 39.10 (2.44)
Wife worked, husband did not work 34.52 (3.48)
Wife did not work, husband worked full-time 10.17 (1.58)
Wife did not work, husband worked 9.25 (1.43)
Neither worked 9.06 (0.94)
Test Your Understanding
Please answer the questions before you look at the "Our Answers" section.
  1. The director of a childhood vaccination program wants to evaluate the cost of one of the program's interventions targeting hard-to-reach populations. He asks the program accountant for a list of direct costs. The accountant provides a list of expenses related to the intervention for the previous 6 months and comments
    "Because you asked for direct costs only, I did not include overhead expenses."
    Should the director be satisfied with the list of costs provided by the accountant? Why or why not?
  2. What could be some of the direct costs associated with implementing an early-detection program for breast cancer that includes free mammograms, counseling sessions, and the distribution of educational material?
  3. What could be some of the indirect costs associated with implementing an on-the-job weight management program at a manufacturing plant?
  4. Nurse Betty is responsible for tuberculosis-control activities at the county health department. Her clinic is located in a building leased by the county from the city. For transportation, Nurse Betty uses her personal vehicle and is reimbursed for mileage.
    The clinic is equipped with a portable isolation unit for infectious patients. Patients who need chest x-rays are referred to the local hospital.
    Nurse Betty spends the majority of her time in the field, administering tuberculin skin tests to patients suspected of being infected with tuberculosis, collecting sputum samples for smears and cultures with her portable nebulizer, and administering drug treatment.
    Nurse Betty uses a laptop and a database software program to keep track of her patients.
    From this brief description, identify fixed and variable costs associated with this tuberculosis-control program.
    Fixed costs Variable costs
  5. The following cost inventory has been compiled (assume that necessary adjustments for inflation and capital costs annuitization have been made):
    Resource 1996 1997 1998 1999 2000
    Personnel $300,000 $400,000 $300,000 $350,000 $400,000
    Supplies $5,000 $5,000 $6,000 $7,000 $5,000
    Equipment $5,000 $5,000 $5,000 $5,000 $5,000
    Travel $3,000 $2,000 $5,000 $4,000 $6,000
    Equipment $2,000 $7,000 $3,000 $2,000 $4,000
    Calculate the total program costs for 1999.
  6. From the data in question 5, calculate the total program costs over the 5-year time frame.
  7. From the data in question 5, calculate the average annual cost over the same 5-year time frame.
  8. Let us assume that a cost analysis has determined that the fixed cost associated with a particular intervention is $50,000 per year. Variable costs are $120 per patient.
    Calculate the average cost per patient for each of the numbers of patients seen in the table below.
    Number of patients treated Average cost per patient
    1
    5
    10
    20
    50
    100
  9. On the basis of the information provided in the table below, identify the range of output levels over which economies of scale are possible.
    Output level
    (Number of units)    		 Total costs Average cost
    per unit of output
    1 $100,000
    2 $120,000
    3 $140,000
    4 $150,000
    5 $200,000
    6 $250,000
    7 $300,000
  10. Assuming that fixed costs are constant at all output levels, calculate the marginal cost on the basis of information provided regarding output level and total costs.
    Output level Total costs Marginal cost
    0 $500
    1 $510
    2 $520
    3 $530
    4 $550
    5 $560
    6 $565
  11. The coordinator of the after-school program at the local middle school is organizing a field trip for her students.
    Regulations require that one adult be present for every 10 students. The group will rent a bus, which holds 33 passengers (not including the driver), for $150. If more than 33 passengers go on the trip, an additional (smaller) bus will need to be rented for $90. The purpose of the trip is to visit a famous regional museum. The admission price to the museum is $8 per person.
    A total of 30 students have signed up by the registration deadline. What is the total cost of the trip? How much will be saved if one student decided not to go on the trip?
  12. For the trip in question 11, little Johnny's parents forgot to register their son on time, but little Johnny really wants to go to the museum!
    What is the marginal cost of adding one student to the group (assuming that all 30 students who signed up actually go on the trip)?
  13. Suppose that you are conducting a cost analysis with the purpose of estimating the cost of investigating the contact of TB patients (i.e., identifying, screening, and appropriately treating the contacts).
    A sample of contacts has been selected from public health departments' files throughout the country. Researchers have collected the information below.
    • Labor and testing costs are, on average, $115 per contact. However, sites reported costs as high as $220 and as low as $30.
    • The sample yields an average infection rate of 15% among contacts. However, a closer look at the data indicates that some contacts (e.g., foreignborn, homeless, or immunosuppressed persons) are at higher risk for tuberculosis infection (up to 30% higher).
    • The average cost of treating an infected contact is $500.
    • On average, 55% of infected contacts are placed on preventive therapy. However, national guidelines for tuberculosis-control programs include a target goal of 75%.
    Calculate the average cost per contact investigated of conducting a contact investigation for a cohort of 10,000 contacts.
  14. For question 13, how could the researchers account for the uncertainty in their data and assumptions?
  15. For question 13, which parameters could be varied in a sensitivity analysis? Which ones could be varied in a threshold analysis?
  16. For question 13, conduct a one-way sensitivity analysis around labor costs. Which alternative values could you use for labor? Do variations in labor costs have a significant impact on the cost analysis results?
  17. For question 13, conduct a multiway sensitivity analysis around infection prevalence and the probability of receiving treatment.
Our Answers
  1. The director of a childhood vaccination program wants to evaluate the cost of one of the program's interventions targeting hard-to-reach populations. He asks the program accountant for a list of direct costs. The accountant provides a list of expenses related to the intervention for the previous 6 months and comments
    "Because you asked for direct costs only, I did not include overhead expenses."
    Should the director be satisfied with the list of costs provided by the accountant? Why or why not?
    The program director should not be satisfied with the list of costs provided by the accountant. Contrary to accounting practices, economic evaluation considers overhead expenses to be a direct cost.
    The list of direct costs associated with the implementation of the intervention should have included a share of overhead costs.
  2. What could be some of the direct costs associated with implementing an early-detection program for breast cancer that includes free mammograms, counseling sessions, and the distribution of educational material?
    Potential direct costs include
    • labor costs (e.g., X-ray technician, physician, and counselor),
    • space costs (e.g., X-ray room, counseling rooms, waiting room, and office space),
    • equipment costs (e.g., X-ray machine and computer for record keeping),
    • medical supply costs (e.g., X-ray film and reagent), and
    • educational supply costs (e.g., brochures and posters).
  3. What could be some of the indirect costs associated with implementing an on-the-job weight management program at a manufacturing plant?
    The time off from work taken by employees to attend program sessions is an indirect cost. It represents a productivity loss from the company's perspective.
    Leisure time spent after work to attend sessions is also an indirect cost, incurred by program participants.
  4. Nurse Betty is responsible for tuberculosis-control activities at the county health department. Her clinic is located in a building leased by the county from the city. For transportation, Nurse Betty uses her personal vehicle and is reimbursed for mileage.
    The clinic is equipped with a portable isolation unit for infectious patients. Patients who need chest x-rays are referred to the local hospital.
    Nurse Betty spends the majority of her time in the field, administering tuberculin skin tests to patients suspected of being infected with tuberculosis, collecting sputum samples for smears and cultures with her portable nebulizer, and administering drug treatment.
    Nurse Betty uses a laptop and a database software program to keep track of her patients.
    From this brief description, identify fixed and variable costs associated with this tuberculosis-control program.
    Fixed costs Variable costs
    Nurse Betty's salary Transportation: mileage
    Clinic space Chest x-rays
    Portable isolation unit Tuberculin skin test kits
    Portable nebulizer Sputum collection kits
    Laptop/software Laboratory costs
      Drugs
    Note:
    The cost of a resource can have both a fixed and a variable component. For instance, the purchase of a portable isolation unit or a nebulizer is a fixed cost. However, the maintenance costs associated with this equipment are variable costs, if they are related to how intensively the equipment is used.
  5. The following cost inventory has been compiled (assume that necessary adjustments for inflation and capital costs annuitization have been made):
    Resource 1996 1997 1998 1999 2000
    Personnel $300,000 $400,000 $300,000 $350,000 $400,000
    Supplies $5,000 $5,000 $6,000 $7,000 $5,000
    Equipment $5,000 $5,000 $5,000 $5,000 $5,000
    Travel $3,000 $2,000 $5,000 $4,000 $6,000
    Equipment $2,000 $7,000 $3,000 $2,000 $4,000
    Calculate the total program costs for 1999.
    Total costs for 1999 are
    Costs1999 = Personnel costs + Supplies costs + Equipment costs + Travel costs + Training costs
    substituting
    Costs1999 = $350,000 + $7,000 + $5,000 + $4,000 + $2,000
    = $368,000
  6. From the data in question 5, calculate the total program costs over the 5-year time frame.
    Total costs during the 5-year time frame are
    Total costs = Costs1996 + Costs1997 + Costs1998 + Costs1999 + Costs2000
    where
    Costs1996 = $300,000 + $5,000 + $5,000 + $3,000 + $2,000
    = $315,000
    Costs1997 = $400,000 + $5,000 + $5,000 + $2,000 + $7,000
    = $419,000
    Costs1998 = $300,000 + $6,000 + $5,000 + $5,000 + $3,000
    = $319,000
    Costs1999 = $350,000 + $7,000 + $5,000 + $4,000 + $2,000
    = $368,000
    Costs2000 = $400,000 + $5,000 + $5,000 + $6,000 + $4,000
    = $420,000
    so that
    Total costs = $315,000 + $417,000 + $319,000 + $368,000 + $420,000
    = $1,841,000
  7. From the data in question 5, calculate the average annual cost over the same 5-year time frame.
    Average annual costs during the same 5-year period are
    $1,841,000 / 5 = $368,000 per year
  8. Let us assume that a cost analysis has determined that the fixed cost associated with a particular intervention is $50,000 per year. Variable costs are $120 per patient.
    Calculate the average cost per patient for each of the numbers of patients seen in the table below.
    Number of patients treated Average cost per patient
    1 (50,000 + 120) / 1 = $50,120
    5 [50,000 + (120 x 5)] / 5 = $10,120
    10 [50,000 + (120 x 10)] / 10 = $5,120
    20 [50,000 + (120 x 20)] / 20 = $2,620
    50 [50,000 + (120 x 50)] / 20 = $1,120
    100 [50,000 + (120 x 100)] / 20 = $620
  9. On the basis of the information provided in the table below, identify the range of output levels over which economies of scale are possible.
    Output level
    (Number of units)    		 Total costs Average cost
    per unit of output
    1 $100,000 $100,000
    2 $120,000 $60,000
    3 $140,000 $46,667
    4 $150,000 $37,500
    5 $200,000 $40,000
    6 $250,000 $41,667
    7 $300,000 $42,857
    Economies of scale are possible when the output level is 1–4. Over that range, the average cost decreases as output increases.
    When the output level reaches 4 units, the average cost per unit produced starts increasing. Diseconomies of scale set in.
  10. Assuming that fixed costs are constant at all output levels, calculate the marginal cost on the basis of information provided regarding output level and total costs.
    Output level Total costs Marginal cost
    0 $500 $510 – $500 / (1 – 0) = 10 / 1 = $10
    1 $510 $520 – $510 / (2 – 1) = $10 / 1 = $10
    2 $520 $530 – $520 / (3 – 2) = $10 / 1 = $10
    3 $530 $550 – $530 / (4 – 3) = $20 / 1 = $10
    4 $550 $560 – $550 / (5 – 4) = $10 / 1 = $10
    5 $560 $565 – $560 / (6 – 5) = $5 / 1 = $5
    6 $565  
  11. The coordinator of the after-school program at the local middle school is organizing a field trip for her students.
    Regulations require that one adult be present for every 10 students. The group will rent a bus, which holds 33 passengers (not including the driver), for $150. If more than 33 passengers go on the trip, an additional (smaller) bus will need to be rented for $90. The purpose of the trip is to visit a famous regional museum. The admission price to the museum is $8 per person.
    A total of 30 students have signed up by the registration deadline. What is the total cost of the trip? How much will be saved if one student decided not to go on the trip?
    If 30 students register, three adults must accompany them, for a total of 33 passengers. There is no need to rent an additional bus.
    Trip costs include the cost of the bus ($150), plus the cost of 33 admissions (33 x $8 = $264), for a total of $414.
    Cancellation by one student saves $8 (the price of the museum admission). Travel costs are unaffected.
  12. For the trip in question 11, little Johnny's parents forgot to register their son on time, but little Johnny really wants to go to the museum!
    What is the marginal cost of adding one student to the group (assuming that all 30 students who signed up actually go on the trip)?
    Adding one student to the 30 increases the number of passengers to 35 (one additional student, plus one additional adult). It is now necessary to
    • rent an additional bus ($90), and
    • purchase two additional museum admissions (2 x $8).
    Therefore, the marginal cost of adding one student is $106.
  13. Suppose that you are conducting a cost analysis with the purpose of estimating the cost of investigating the contact of TB patients (i.e., identifying, screening, and appropriately treating the contacts).
    A sample of contacts has been selected from public health departments' files throughout the country. Researchers have collected the information below.
    • Labor and testing costs are, on average, $115 per contact. However, sites reported costs as high as $220 and as low as $30.
    • The sample yields an average infection rate of 15% among contacts. However, a closer look at the data indicates that some contacts (e.g., foreignborn, homeless, or immunosuppressed persons) are at higher risk for tuberculosis infection (up to 30% higher).
    • The average cost of treating an infected contact is $500.
    • On average, 55% of infected contacts are placed on preventive therapy. However, national guidelines for tuberculosis-control programs include a target goal of 75%.
    Calculate the average cost per contact investigated of conducting a contact investigation for a cohort of 10,000 contacts.
    The average cost per contact investigated is
    Average cost per contact investigated = Total costs / Number of contacts investigated
    where
    Total costs = Investigation costs + Treatment costs
    Investigation costs = Cost of investigating a contact x Number of contacts investigated
    Treatment costs = Cost of treating an infected contact x Number of treated contacts
    Number of treated contacts = Number of infected contacts x Likelihood of receiving treatment
    Number of infected contacts = Number of contacts investigated x Likelihood that a contact is infected
    substituting:
    Number of infected contacts = 10,000 x 0.15 = 1,500
    Number of treated contacts = 1,500 x 0.55 = 825
    Treatment costs = $500 x 825 = $412,500
    Investigation costs = $115 x 10,000 = $1,150,000
    Total costs = $1,150,000 + $412,500 = $1,562,500
    Average cost per contact investigated = $1,562,500 / 10,000 = $156.25
  14. For question 13, how could the researchers account for the uncertainty in their data and assumptions?
    The uncertainty in the information available can be factored into the analysis by conducting a sensitivity analysis.
  15. For question 13, which parameters could be varied in a sensitivity analysis? Which ones could be varied in a threshold analysis?
    A sensitivity analysis should be conducted around labor/testing costs, the infection rate among the contacts investigated, and the treatment rate. All three parameters could be varied in sensitivity analysis (one-way or multiway) or in threshold analyses.
    Labor/testing costs could be varied in a best-case/worst-case scenario, by using the high and low cost estimates available. Labor/testing costs could also be varied in a threshold analysis, from the low to the high value, to assess how total and average costs change as labor/testing costs increase.
    In the same way, the infection rate could be varied to a higher value (e.g., 30%). In a threshold analysis, the infection rate could be varied between 15% and the higher value to assess how total and average costs change as prevalence increases.
    If the researchers suspect the actual infection rate to be higher than 15%, they would choose to increase the infection rate in the sensitivity analysis. If they do not know whether the actual infection rate is lower or higher than 15%, the researchers would explore both a higher and lower prevalence in the sensitivity/threshold analyses.
    The treatment rate could be varied to 75% in a sensitivity analysis to assess the impact of implementing guidelines on total/average costs. Conducting a threshold analysis around treatment rates would reveal how total and average cost might change as the program progressively works toward meeting treatment standards.
  16. For question 13, conduct a one-way sensitivity analysis around labor costs. Which alternative values could you use for labor? Do variations in labor costs have a significant impact on the cost analysis results?
    In a one-way sensitivity analysis, labor costs could be increased to $220 and decreased to $30 to reflect the information available about this intervention.
    If
    Labor/testing cost = $30 per contact investigated (best-case scenario)
    then
    Total costs = ( 10,000 x $30 ) + $412,500 = $300,000 + $412,500 = $712,500
    Average cost = $712,500 / 10,000 = $71.25
    If
    Labor/testing cost = $220 per contact investigated (worst-case scenario)
    then
    Total costs = ( 10,000 x $220 ) + $412,500 = $2,200,000 + $412,500 = $2,612,500
    Average cost = $2,612,500 / 10,000 = $261.25
    Labor/testing costs do have a strong impact on the cost analysis results: the worst-case scenario results are almost 4 times as high as the best-case scenario results.
  17. For question 13, conduct a multiway sensitivity analysis around infection prevalence and the probability of receiving treatment.
    This multiway sensitivity analysis explores the impact that a higher infection rate coupled with a higher treatment rate would have on cost results.
    Total costs = ( 10,000 x $115 ) + ( 10,000 x 0.3 x 0.75 x $500 )
    = $1,150,000 + $1,125,000
    = $2,275,000
    Average cost = $2,275,000 / 10,000 = $227.50 per contact investigated
 Cost of IllnessJump to page 3.
 Adjusting CostsJump to page 4.
 AppendicesJump to page Appendices.
 Glossary — Cost AnalysisJump to page Glossary.
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