Case Study: Cost Analysis of Tuberculosis Control Composite page for printing

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Background
In state X, tuberculosis control (TB-control) activities are conducted by a division of the Bureau of Disease Control, in the State Department of Health and Environmental Control. The system is centralized. The TB Control Program's central office develops policies and procedures and provides consultation, training, and funding to county programs. TB-control services are provided at the county level. The state's 46 counties are divided into 13 public health districts. Each district fulfills a management and coordination role.
The majority of funding for TB-control activities comes from federal and state allocations. Counties provide funding indirectly: county funds allocated to health districts are redistributed to local disease-control programs. Counties also provide in-kind contributions (e.g., clinic space). The American Lung Association provides funding earmarked for incentives to secure patient compliance and to facilitate access to services for TB patients.
In 1999, State X had the 9th highest TB case rate in the United States. However, the state's TB Control Program strives to meet national standards and guidelines and is considered very effective. During 1996–1998, the number of cases decreased from 348 to 286. In 1999 however, the number of TB cases diagnosed increased to 315, as a result of an outbreak that occurred in a state prison.
The TB Control Program currently has a different type of challenge: the state legislature has announced that because of a decrease in state revenues, funding allocations for all disease-control programs for 2002 would decrease by 15%.
State TB-control officials are worried. Current levels of funding only permit them to work on limiting the spread of TB, not to eliminate TB as a public health problem in the state. The 1999 prison outbreak highlighted the fact that in disease control, constant vigilance is necessary. In the short term, a decrease in state funding might jeopardize the program's current level of effectiveness. As a result, TB incidence might soon increase, especially because funding for the control of such co-morbidities as HIV/AIDS will also decrease. In the long term, a reduction in funding would also undermine the program's ability to undertake actions aimed not only at controlling TB but also at eliminating it as a public health problem in the state.
The Problem
Assume that you are the director of the State TB Control Program. You are concerned about the ability of your program not only to maintain its current level of operation and effectiveness but also to make progress in eliminating TB as a public health problem in the state.
The State Department of Health and Environmental Control has asked you to assess the implications of an overall 15% budget cut on TB-control activities in the state. You realize that there currently exists no assessment of program costs. To determine how best to respond to the situation, you consider conducting a cost analysis of State X's TB Control Program.
First, you must frame the study.
Step 1: Framing the Study
The framing issues are below. (Please enter your answer to each question before you look at "Our Answer".)
About the Study Problem
Based on the BackgroundJump to another place on this page. Use the Back command to return. information above, answer the questions below.
  1. What is the problem that should be addressed?
    Our Answer
    The study problem should be stated in a manner that clearly targets the ultimate questions that should be answered.
    State X's TB Control Program must respond to the decision by the state legislature to decrease funding. This concern is two-pronged:
    • First, program staff must assess the impact of the decision on their current level of achievement.
    • Second, they must evaluate the impact of the decision on their long-term goal of eliminating TB.
    It is essential for all decisionmakers involved (program officials and state legislators) to have the information about costs to understand the impact of the legislature's decision.
  2. Why is the problem important?
    Our Answer
    The importance of the problem can be presented from two angles:
    1. Proposed funding cuts would undermine the program's efforts and effectiveness in controlling the spread of TB in the state. TB incidence might increase as a result, which would have human, medical, social, and economic consequences. The impact of the decrease in TB funding might be compounded by a concomitant decrease in funding for HIV, because immunocompromised persons are at a greater risk for contracting TB infection and, once infected, of developing active TB disease.
    2. The state and county TB-control programs are legally responsible for controlling the spread of TB. Changes in funding levels would directly affect their ability to fulfill their mandate. Their ability to achieve their long-term goal (i.e. the elimination of TB as a public health problem) would also be jeopardized.
  3. What questions need to be answered?
    Our Answer
    Examples of some questions that need to be answered are below.
    • What is the cost of implementing State X's Control Program in its current form?
    • What is the cost of implementing a control program that would eliminate TB over a period of X years?
    • How do the costs of different strategies for controlling the spread of TB compare with each other?
The Audience for the Study
In conducting and reporting a cost analysis, different audiences might have different information needs that can impact the way the study is conducted. In addressing these questions, remember that the study's audience can include more than one person, group, or institution.
  1. Who will be the audience or users of the study results?
    Our Answer
    The study might include the audience below.
    • State X's Control Program staff
    • State X's Health Department officials
    • State/District Board(s) of Health
    • State X's Health Commissioner
    • State X's legislators
    • Public health districts
    • County health departments
    • Federal funding agencies (CDC, in particular)
    • Public health officials in other states
    • General public/taxpayers
    • Press
  2. How will the study results be used?
    Our Answer
    Policy decisionmakers at the state and federal levels might use the results for a variety of state-level decisions. For example:
    • Funding allocation
    • Policy changes (national/statewide guidelines and recommendations)
    Program decisionmakers might use the results for a variety of program-level decisions:
    • Program changes (program priorities and management and operational decisions)
    • Funding requests (to state and federal agencies)
The Perspective for the Study
The perspective of a cost analysis reflects who pays the costs being analyzed. Costs might be paid by a person, an employer, a government agency, the health sector, or society as a whole.
List the pros and cons of adopting the perspectives below.
Patient Perspective
  1. List pros and cons from the patient perspective
    Pros Cons
    Our Answer
    Pros Cons
    • TB patients will be affected by a decrease in funds allocated to TB-control, if it results in a decrease in the availability of diagnosis and treatment services.
      For example, services might become less easily accessible and cases might remain undiagnosed.
    • Because TB services are free, patients incur little of the direct medical and nonmedical costs associated with TB-control.
      The impact of funding cuts on patients is more likely to be experienced in deteriorating outcomes rather than in costs.
    • Changes in state funding levels will affect patients indirectly. Patients will only be affected to the degree that the program modifies the level of services provided.
      Therefore to assess the impact of the budget cuts on patients, we first need to assess their impact on the program.
    • The Control Program is interested in determining how the budget cuts will affect its own operations, not those of its clients.
Provider Perspective of the TB-Control Program
  1. The pros and cons from the provider perspective of the TB-control program are
    Pros Cons
    Our Answer
    Pros Cons
    • The perspective of the program makes it possible to include resources provided by all contributors.
    • A cost analysis conducted from this perspective directly answers the questions concerning program costs formulated earlier in Question 1Jump to Question 1 in the section "About the study problem"..
    • The study is conducted by the program staff, and they are interested in finding out how funding cuts affects them.
    • The implementation of State X's control program depends on certain resources that are not directly provided by the program.
      For example, some public health nurses are paid by the counties. A program perspective will not include these resources, even though they are critical to the program's operation.
Health System Perspective
  1. The pros and cons from the health system perspective are
    Pros Cons
    Our Answer
    Pros Cons
    • Public and private providers in the State collaborate with the control program, by referring patients suspected to have TB or by providing services that cannot be provided by county health departments.
      This perspective would include public and private providers as part of the TB-control network in State X.
    • The goal of the study is to assess the cost of operating the control program. Providers outside of the State Health Department are involved only in fulfilling contracts to provide services (e.g., X-rays). These providers are not considered part of the program.
    • The control program perspective will include a measure of the resources contributed by other providers (i.e., charges).
    • The health system perspective would be more relevant if the goal of the study was to assess the cost of controlling TB or the impact of budget cuts on TB-control in general.
State X Perspective of the State Budget
  1. The pros and cons from the State X perspective of the state budget are
    Pros Cons
    Our Answer
    Pros Cons
    • This perspective would be of interest to state legislators, because it would estimate the impact of the control program on state budgets.
    • This perspective would provide incomplete information, because the federal and local government levels provide substantial resources. The true cost of implementing the program would be underestimated.
      The results of the analysis would answer the question "How much does it cost State X to operate its control program?", not "What is the cost of operating State X's Control Program?"
Societal Perspective
  1. The pros and cons from the societal perspective are
    Pros Cons
    Our Answer
    Pros Cons
    • The inclusion of a societal perspective is typically recommended. This perspective would include all costs, no matter who incurs them.
    • The societal perspective might be included along with another narrower perspective.
    • The study question can be formulated so that not all societal costs are included (patient and employer costs can be excluded, for instance) so that focus is targeted on the costs associated with implementing the control program.
    • The societal perspective might be more time-consuming because it requires collecting a broader array of costs.
The Alternative Strategies/Options That Will Be Considered
  1. A cost analysis often involves analyzing the costs of more than one policy, program, or intervention for comparison purposes.
    What are the options that might be considered for comparison in this cost analysis?
    Our Answer
    • Do nothing: This option is not feasible, because the state is required to engage in TB-control activities.
    • The current program: Not only should the current strategy always be included, in this case, it is the focus of the study.
The Study Time Frame/Analytic Horizon
  1. The time frame of a cost analysis is the period over which the costs of a policy, program, or intervention are tracked.
    What might be an appropriate time frame for this cost analysis?
    Our Answer
    The time frame is the specified period in which the program strategies are actually applied. The time frame should be long enough to account for seasonal variations in the disease targeted by the program and to obtain stable cost estimates in the case of new interventions.
    An appropriate time frame to evaluate the current TB Control Program might be 1 year (12 months), which would correspond to the length of the fiscal year used both by the state to allocate funds and by the program to manage its budget.
    A shorter time frame might yield inaccurate results. The number of cases diagnosed or patients treated might vary from one month to the next or on a seasonal basis.
    A shorter time frame might also be impractical. If relevant cost data is available on a yearly basis (e.g., salaries), more calculations would be required to estimate costs on a monthly or quarterly basis.
    A time frame longer than one year might be appropriate if program costs are known to fluctuate substantially from one year to the next, depending on the caseload (the number of outbreaks might be exceptionally high or low).
    A longer time frame (e.g., 5 years) might also be appropriate to evaluate the cost of the "perfect" program, if this program includes the implementation of activities that are not currently conducted. A longer time frame would allow the inclusion of a "start-up" and "maintenance" period for these activities to obtain more stable cost estimates.
    A longer time frame would also allow for the possibility that costs might vary with changes in incidence/prevalence levels linked to the progress made toward eliminating TB.
The Study Format
  1. Should this cost analysis be framed as a prospective study, a retrospective study, or a model? What are the pros and cons of each format in this particular situation?
    Our Answer
    A prospective study would have the advantage of allowing for complete cost information (including costs that are not routinely tracked) to be collected. The drawback is that to do so, the data collection would take 1 year to complete (if a 1-year time frame is chosen).
    Because of the urgency of the situation, the analysis of the TB-Control Program might need to be completed sooner. A prospective study might therefore be impractical, given the circumstances.
    Conducting a retrospective study has the advantage of speeding up the data-collection phase. The drawback is that the availability and the validity of the data depend on the record-keeping practices of the program.
    In this example, since the goal of the study is to assess program costs, we should determine whether sufficient and accurate data can be obtained from program accounting and personnel records. If so, a retrospective study might be the most appropriate to evaluate the cost of the current control program.
    Models are tools that are useful in situations
    • when cost information is not directly available and assumptions need to be made, or
    • when there is a need to generalize.
    In this situation, the goal is not to generalize. The analysis is conducted to evaluate the cost of State X's TB-Control Program, not the cost of "a" TB-Control Program. Also, information concerning costs is directly available. Therefore there is no need to create a model to evaluate the cost of State X's TB-Control Program.
    Note:
    When conducting a retrospective study, some prospective data collection might need to be conducted to fill in information gaps.
    For example, if distances traveled by TB staff are not included in program records, a quick prospective study can be conducted (by asking staff members to record this information over a 2-week period, for example) to generate data regarding travel costs.
An Outcome/Output Measure
  1. What units of intermediate and final outcomes can be used to measure the TB-Control Program's output? Which ones would be most easily obtainable?
    Our Answer
    Examples of intermediate outcomes include the number of clients served, the number of skin tests administered and read, the number of infected persons identified, the number of persons started on preventive therapy, the number of persons completing preventive therapy, the number of TB cases identified, and the number of TB cases successfully treated.
    Examples of final outcomes include the number of deaths from TB prevented and the number of years of life lost to TB.
    Information regarding intermediate outcomes should be easier to obtain, because it can be extracted from patients records. Final outcomes would have to be estimated indirectly, on the basis of assumptions about the links between intermediate and final outcomes.
    For example, according to program records, XX persons completed treatment for active TB disease. If we assume that 3% of all persons who develop active TB die from the disease, the number of TB deaths prevented is XX multiplied by 0.03. The validity of outcome assessments based on this kind of assumption depends on the accuracy of the assumptions.
Summary: Step 1
You have now completed framing the cost analysis. You have
  • identified the problem,
  • determined the audience for the analysis,
  • selected to evaluate the cost of State X's current TB Control Program from the program's perspective,
  • determined that the number of TB cases treated will be used to measure the output level of this strategy,
  • defined the time frame for the analysis (1 year), and
  • decided on a retrospective study format
Next, you will explore the types of costs that will be considered in the cost analysis of State X's current TB Control Program.
Step 2: Evaluating Resource Use
More Background
Priority activities for State X's TB Control Program include
  • identifying and treating cases of active TB disease,
  • identifying, testing, and applying preventive treatment for the contacts of active cases, and
  • conducting screenings among groups that are at high risk.
TB-control staff is also involved in public education efforts to inform health-care providers, public officials and the general public about TB.
The TB Control Program operates at the county, health district, and state levels
  • County health departments are the direct providers of TB services. Eighteen full-time nurses (17 RNs and 1 LPN) as well as a number of part-time RNs and LPNs are employed directly by the program.
    Other nursing positions are funded directly by districts and counties. In some counties, nurses responsible for TB-control are also responsible for other disease-control activities (e.g., HIV and STDs).
  • The district level structure is responsible for overseeing and coordinating the work of the counties in all matters related to disease control. This level includes a health director, a physician, a nursing administrator, an administrator, professional office directors (health education, social work, and nutrition), and county supervisors.
  • At the state level, the program operates within the parameters listed below.
    • The program's central office provides consultation, training, and funding, and develops policies and procedures.
    • Nurses, assisted by administrative staff, manage the program.
    • A physician has been contracted on a part-time basis to supervise state-level activities.
At all levels, TB-control staff members spend a substantial amount of time in the field. Certain staff rely on fleet vehicles for transportation, but many use their personal vehicles and are reimbursed for mileage. Because of liability issues, the program does not directly provide transportation to clients. Medicaid-eligible patients can use Medicaid transportation. Funds from the Lung Association are also used to reimburse qualified patients for their transportation costs.
Basic items and standard medical equipment and supplies necessary to provide TB services are listed in the table below.
Basic Items Standard Medical Equipment
and Supplies
Tuberculin syringes Disposable surgical masks
PPD antigen (for skin testing) Blood-collection equipment
Rulers (to measure the size of skin reactions) Latex and vinyl gloves
Sputum collection/mailing kits 1 centrifuge
Hypertonic saline for sputum induction 1 audiometer
Sputum induction machines and nebulizers (one per district) 1 weight scale
Tissues and paper bags for sputum disposal 1 sphygmomanometer and stethoscope
Particulate respirators Skin preparation solutions
Visual acuity charts Cotton balls
Diagnosis and clinical laboratory services are provided by the state's public health laboratories, or if necessary, by CDC or the National Jewish Medical and Research Center in Colorado.
To facilitate access to services for non-English speaking patients, a contract for translation services has been signed with the state university. A hotline is also available for persons who speak Spanish and for disabled patients. In some counties, programs rely on the foreign language skills of staff members to communicate with patients, or the programs have developed relationships with local ethnic organizations that help with translating.
All services, including drug treatment for active TB disease and for latent TB infection, are provided to patients free-of-charge. The program does not bill any third-party payers.
Costs To Be Considered
  1. What types of costs should generally be considered in a cost analysis of a health program (e.g., State X's TB Control Program)?
    Our Answer
    The cost analysis should include all the resources needed to implement the program or related to its implementation. The types of costs in this case are listed below.
    • Direct medical and nonmedical costs: Described as resources expended.
      Medical costs include costs associated with the provision of medical care, including the costs of physician/nurse services, laboratory services, medical supplies, medical equipment, and pharmaceuticals.
      Nonmedical costs include travel and other nonmedical direct costs (clinic space, maintenance, and insurance) incurred in the course of providing/receiving medical care.
    • Productivity losses (indirect costs): Described as resources foregone, (e.g., the lost productivity of a person who stays at home as a result of illness).
    • Intangible costs: Other nonmonetary costs such as grief, pain, and suffering. Assigning a monetary value to intangible costs can be difficult.
Should You Include Patient Costs?
  1. Should patient costs (e.g., transportation) be included in this analysis? Why or why not?
    Our Answer
    Whether patient costs are included or not depends on the study question and the study perspective.
    Patient costs may be included if we choose to conduct the study from the perspective of society or of the patient. If the study is conducted from any other perspective, (e.g., State X's budget or the control program), patient costs will not be included.
List the Direct Costs
  1. Variable costs are costs that vary with a program's level of activity, whereas fixed costs remain the same for all program activity levels.
    On the basis of the background information provided, use the tables below to list the direct medical and nonmedical costs that should be considered in this cost analysis, given the perspective determined in Questions 6–10. Please indicate which costs are fixed and which are variable.
    Medical costs Nonmedical costs
    Our Answer
    Medical costs F/V Nonmedical costs F/V
    Nurses F/V Administrative personnel F
    Physicians F/V Fleet vehicle F
    Other personnel F/V Vehicle maintenance V
    County-level clinic space F Gas V
    Medical supplies V Insurance F
    Medical equipment F Private vehicles V
    Pharmaceuticals V Central office space F
    Lab procedures V Building maintenance F
    X-ray equipment F Telephone V
      Office equipment F
    Office supplies V
    Translation services V

    Note:
    • This list is not exhaustive. Certain items (e.g., medical supplies or medical equipment) could be disaggregated further if more information was available about TB diagnosis and treatment.
    • Sufficient information from the description might not be available to evaluate whether some costs are fixed or variable (e.g., translation services costs).
Provide Examples of Indirect Costs
  1. Provide examples of indirect costs (productivity losses) that could be included in a cost analysis of a TB-Control Program. Should they be included in this analysis? Why or why not?
    Our Answer
    Examples of productivity losses are listed below
    • Time off from work taken by patients to receive care (e.g., when they receive Directly Observed Therapy).
    • Time off from work taken by family members to accompany a patient to the health department.
    • Time off from work taken by patients suffering from side effects from treatment.
    • Time away from work for persons participating in targeted screenings.
    • Time away from work for (infected and noninfected) contacts being interviewed and medically evaluated.
    • Cost to employers for the absence of patients/relatives/contacts (e.g., cost of hiring a temporary employee and loss of production).
    Should these costs be included in the analysis? These productivity losses are incurred by patients or their families and should be included in the analysis, if it is conducted from the patient or the societal perspective. If the study is conducted from any other perspective (e.g., the Control Program), these costs should not be included.
Intangible Costs
  1. What intangible costs might be included in a cost analysis of a TB Control Program? Are they relevant to this analysis?
    Our Answer
    Examples of intangible costs associated with the program are listed below.
    • Pain caused by medication side effects.
    • Fear and trauma of seeking care at the county health department (fear of being in contact with infectious persons).
    Should these costs be included in the analysis?
    • Intangible costs will be included if the study question and the study perspective warrant it.
    • Because the perspective of the cost analysis is that of the control program, the intangible costs associated solely with being infected with TB or having active TB disease (e.g., the trauma or the stigma associated with having TB) should NOT be included.
    • In theory, intangible costs incurred by program staff (e.g., fear of infection) should be included if the study is conducted from the program, health-care system, or societal perspective. In practice, it might be difficult to estimate these costs. Occupational risks (e.g., nurses' risk of becoming infected with TB) are assumed by economists to be reflected in wages and salaries (i.e., the nurse's salary is considered to be the remuneration he or she requires in exchange for accepting the risk level associated with his or her duties). It is also possible to qualitatively discuss the risk as a cost to be considered but not quantify it.
Cost Classification Systems
  1. Classification systems are used in cost inventories to ensure that no relevant cost is left out or double-counted.
    Which classification system(s) can be used to organize the cost inventory for this analysis? What categories would you include? Would using more than one classification system simultaneously be appropriate?
    Our Answer
    Possible classification systems and categories are
    • Cost category: Direct medical, direct nonmedical, indirect, and intangible
    • Line item: Personnel, medical supplies, office supplies, medical equipment, office equipment, transportation, lab supplies and procedures, pharmaceuticals, incentives, building/space, etc.
    • Funding source: Federal, state, county, nonprofit, and patient
    • Site: Central office, district offices, county clinics (alternatively, each clinic can be considered separately)
    Could more than one classification scheme be used simultaneously?
    Yes
    Examples: By funding source, then by line item (if funds are allocated for specific purposes), by cost category then by line item, by site then by line item.
    Note:
    The goal of the categorization is to simplify and clarify the cost assessment. It should be helpful, not complicate matters further. Also, different categorizations present the cost information in a different manner.
    For example, the classification by funding source would highlight the contribution of each party. The classification by line item would highlight the type of resources that are used. The classification by site would highlight the level in the program at which resources are used.
Sources for Quantifying Direct Costs
  1. You listed program resources in your answer to Question 17Jump to Question 17 in section "List the direct costs"..
    For each resource in that answer, please list the sources for information on quantities used in the implementation of State X's TB Control Program.
    Our Answer
    Resource Possible
    information sources
    Personnel time Timesheets, payroll records, employment contracts, employee interviews, and time diaries
    Clinic/Office space Leasing/purchasing records and measurements
    Medical supplies Purchasing orders, accounting records, and staff survey
    Medical equipment Clinic inventory, patient records, and staff survey
    Pharmaceuticals Purchasing orders, patient records, and treatment guidelines for latent TB infection and active TB disease.
    Lab procedures Shipping records, billing/accounting records, public health lab records, and patient records
    Fleet vehicle Purchasing/Leasing records (size of fleet), odometer (mileage), and staff survey
    Gas Accounting records, and reimbursement records
    Insurance Insurance contracts
    Private vehicles Accounting records and reimbursement records
    Telephone Telephone bills and accounting records
    Office equipment Clinic inventory and accounting records
    Office supplies Purchasing orders and accounting records
    Translation services Contracts with hotline and university, patient records, and staff survey
Getting Values of Direct Cost Resources
  1. What methods could be used to assign values to each of the resources listed in the answer to Question 17Jump to Question 17 in section "List the direct costs".?
    Our Answer
    Resource Possible
    valuation methods
    Personnel Annual salary plus fringe benefits or
    hourly wage x number of hours worked, + benefits
    Clinic/Office space Leasing cost for the area (per square foot) or monthly mortgage
    Medical supplies Purchase price (e.g., from catalogue and billing), including shipping
    Medical equipment Replacement costs (including shipping, installation and maintenance)
    Pharmaceuticals Purchase price (including shipping)
    Lab supplies
    and procedures
    Provider charges (including shipping)
    Fleet vehicle Replacement cost of a vehicle
    Vehicle maintenance Maintenance records and estimates
    Gasoline Average price per gallon
    Insurance Premiums
    Private vehicle Reimbursement rate per mile
    Telephone Total amount of phone bills over the period chosen as the time frame for the study
    and replacement costs of cell phones
    Office equipment Replacement costs (plus shipping, installation and maintenance)
    Office supplies Purchase costs
    Translation services Depends on contract (e.g., flat fee and per minute rate)
    Incentives In-kind incentives: Market value for similar items
    Cash incentives: Actual cash value
Summary: Step 2
Your evaluation of resources used to implement State X's TB Control Program is now complete. You have
  • compiled a cost inventory in which you categorized costs by line item,
  • gathered information regarding resource use from various sources, and
  • collected data that should allow you to assign a value to each resource.
Before you calculate final analysis results, you must consider
  • whether any costs need to be adjusted for inflation, or discounted, and
  • whether capital costs need to be annuitized during the useful life of the item.
Step 3: Adjusting Costs and Calculating Results
After all of the necessary adjustments are made, total, average, marginal, or incremental costs can be calculated. Finally, a sensitivity analysis might need to be conducted.
Adjusting Costs
You have collected information regarding the value of the contract for the translation hotline the program uses to communicate with patients who speak Spanish.
The cost data you have is from 1996. The contract has been renewed since, but no one can find a copy, and the translation agency is not responding to your requests for the information.
All other costs for the analysis are in 2000 U.S. dollars.
  1. What alternative is available to you?
    Our Answer
    If the cost of the current contract is not available, the alternative is to use the 1996 cost and to update it to 2000 U.S. dollars by using the Consumer Price Index.
  2. In 1996, the value of the translation contract was $15,000. Adjust this cost accordingly so that the value of translation services is accounted for correctly in the cost analysis.
    Our Answer
    In this case, we need to inflate the 1996 cost to reflect 2000 price levels. This calculation is based on the assumption that the cost of translation services increased at approximately the same rate as did the basket of goods and services that is used to compute the Consumer Price Index. To calculate the value of the translation contract in 2000 U.S. dollars, we need to know
    • Average CPI for 1996 (156.9),
    • Average CPI for 2000 (172.2), and
    • Value of the translation contract in 1996 ($15,000)
    Using the mathematical formula provided in "How Do We Adjust for Inflation?"Open this in a new window section of the Cost Analysis Tutorial
    YB = YP ( CPIB / CPIP )
    Which in our case is
    Translation Contract2000 = Translation Contract1996 ( CPI2000 / CPI1996 )
    Substituting our values
    Translation Contract2000 = $15,000 ( 172.2 / 156.9 )
    = $15,000 ( 1.0975 )
    = $16,463
  3. Assume that the cost analysis will be conducted over a 5-year time frame to account for variations in annual costs caused by fluctuations in the incidence of TB. Total annual costs (TAC) projected for each one of the 5 years are provided in the table below (in constant dollars).
    Year 2001 2002 2003 2004 2005
    TAC $5,500,000 $6,300,000 $5,100,000 $7,100,000 6,500,000
    1. Assuming a discount rate of 3%, what is the total present value of the program at the START of the first year?
      Year Present value (PV)
      2001
      2002
      2003
      2004
      2005
      Total PV
      Our Answer
      If total program costs are calculated at the START of the first year (during early 2001, for example), program costs for all 5 years must be discounted. The year 2000 is considered to be Year 0. Year 2001 is Year 1, and so forth.
      The formula for calculating the present value of a future cost is
      Present Value = FV / (1+r)n
      This formula must be applied to each year to obtain the present value for each year in the time frame. Then the net present values for each year can be added to calculate the program's total present value.
      The two available methods are below.
      • Method 1: Use the formula "as is" (i.e., divide the future value by (1+r)n)
        or
      • Method 2: Use the discount factor table, and multiply the future value by the discount factor. The discount factor is 1 / (1+r)n.
      The results should be identical (except for rounding errors) regardless of which of the two strategies is used. Limited differences in results are the result of rounding. Both sets of results are presented below.
      Year PVMethod 1 PVMethod 2
      2001 $5,500,000 / (1+0.03)1
      = $5,500,000 / 1.03
      = $5,339,806
      $5,500,000 x 0.9709
      = $5,339,950
      2002 $6,300,000 / (1+0.03)2
      = $6,300,000 / (1.03)2
      = $6,300,000 / 1.0609
      = $5,938,354
      $6,300,000 x 0.9426
      = $5,938,380
      2003 $5,100,000 / (1+0.03)3
      = $5,100,000 / (1.03)3
      = $5,100,000 / 1.0927
      = $4,667,338
      $5,100,000 x 0.9151
      = $4,667,010
      2004 $7,100,000 / (1+0.03)4
      = $7,100,000 / (1.03)4
      = $7,100,000 / 1.1255
      = $6,308,307
      $7,100,000 x 0.8885
      = $6,308,350
      2005 $6,500,000 / (1+0.03)5
      = $6,500,000 / (1.03)5
      = $6,500,000 / 1.1593
      = $5,606,832
      $6,500,000 x 0.8626
      = $5,606,900
      Total PV $27,860,637 $27,860,590
    2. What is the total present value of the program at the END of the first year?
      Year Present value
      2001
      2002
      2003
      2004
      2005
      Total PV
      Our Answer
      When total program costs are calculated at the end of the first year (December 2001, for example), program costs for 2001 do not need to be discounted. Moreover, 2001 is now Year 0, 2002 is Year 1, etc. Results obtained by using both calculation methods are listed below.
      Year PVMethod 1 PVMethod 1
      2001 $5,500,000 $5,500,000
      2002 $6,300,000 / (1+0.03)1
      = $6,300,000 / 1.03
      = $6,116,505
      $6,300,000 x 0.9709
      = $6,116,670
      2003 $5,100,000 / (1+0.03)2
      = $5,100,000 / (1.03)2
      = $5,100,000 / 1.0609
      = $4,807,239
      $5,100,000 x 0.9426
      = $4,807,260
      2004 $7,100,000 / (1+0.03)3
      = $7,100,000 / (1.03)3
      = $7,100,000 / 1.0927
      = $6,497,666
      $7,100,000 x 0.9151
      = $6,497,210
      2005 = $6,500,000 / (1+0.03)4
      = $6,500,000 / (1.03)4
      = $6,500,000 / 1.1255
      = $5,775,211
      = $6,500,000 x 0.8885
      = $5,775,250
      Total PV $28,696,621 $28,696,390
  4. The majority of counties in State X refer TB patients who need chest X-rays to private providers. A limited number of counties however are still equipped to provide these services.
    For this cost analysis, what value should be assigned to the X-ray machines in use in these counties? Should they be valued at their costs at purchase or at the current cost for new machines?
    Our Answer
    Each X-ray machine should be assessed at its replacement cost (i.e., at the current cost for a new machine).
  5. An X-ray machine has the data shown in the table below. Use a discount rate of 3% to calculate the annual (annuitized) value that can be assigned to the machine in this cost analysis.
    Description Value
    Purchase cost $30,000
    Useful life 20 years
    Scrap value $5,000
    Our Answers
    The X-ray machine is capital equipment, because it meets all of the criteria listed in the course to define a capital or nonrecurrent cost.
    When you are calculating annual costs, you should annuitize the cost of capital items (i.e., you should spread the cost over the useful life of the item).
    Step 1. Calculate the Net Present Value of the Scrap Value of the X-ray Machine.
    PV of scrap value(t, r) = Scrap value x [1 / (1 + r)t]
    PV of scrap value(20, 0.03) = $5,000 x [1 / (1 + 0.03)20]
      = $5,000 x [1 / 1.8061]
      = $5,000 x 0.5537
      = $2,768
    Step 2. Calculate the Annuity Factor A
    A (t, r) = (1 / r) - 1 / [r(1 + r)t]
    A (20, 0.03) = (1 / 0.03) - 1 / [0.03 x (1 + 0.03)20]
      = (1 / 0.03) - 1 / [0.03 x (1.03)20]
      = (1 / 0.03) - 1 / [0.03 x 1.8061]
      = (1 / 0.03) - 1 / 0.0542
      = 33.3333 - 18.4501
      = 14.8832
    Note:
    You can use the formula to calculate the annuity factor or use the Table of Annuity FactorsShow the annuity factor table in a new window in Appendix D of the Cost Analysis Tutorial. (This window will stay open.). The value of the annuity factor that is indicated in the table for a discount rate of 3% and a useful life of 20 years is 14.8775.
    Step 3. Calculate the Equivalent Annual Cost
    Annual cost = ( Purchase cost - PV of scrap value ) / A (t, r)
    Annual cost = ($30,000–$2,768.5) / 14.8775
      = $27,231.5 / 14.8775
      = $1,830
Calculating Results
  1. Use the cost worksheets provided below and calculate the total annual costs for Site A in State X's TB Control Program. Please enter your answers into the boxes in the worksheets.
    In these worksheets
    • Capital costs have already been annuitized and all costs are presented in 2000 U.S. dollars.
    • You will need only the data provided in the worksheets. You do not need to refer to the background information regarding the program for additional information.
    Personnel Costs: Site A
    Type of
    personnel
    Number Average annual
    salary / earnings
    (with benefits)
    % Time spent
    on program
    and project
    activities
    Annual
    cost
    of
    personnel
    Salaried
    Physician 1 $120,000 25%
    RN 1 $60,000 100%
    RN 1 $60,000 30%
    LPN 1 $45,000 20%
    Social worker 1 $45,000 20%
    Nutritionist 1 $45,000 10%
    Subtotal
    Hourly
    Admin. assistant 1 $26,000 100%
    Receptionist 1 $20,000 25%
    LPN 1 $20 / hr 200
    Subtotal
    Volunteers
    Translator 1 $70,000 20%
    Subtotal
    Total
    Transportation Costs: Site A
    Capital / Start-up Purchase
    Price(A)
    Annualized
    Cost(B)
    % of Time
    used for
    Program(C)
    Total
    Vehicle 1 $15,000 $1,300 30%
    Vehicle 2 $17,000 $1,500 100%
    Subtotal
    Recurrent / Maintenance Variable Fixed(F) Total
    Units
    (gal., mile, etc.)
    (D)
    $/Unit
    (E)
    Operation V1 10,000 miles $0.25  
    Operation V2       $1,500
    Maintenance V1     $500
    Maintenance V2     $600
    Insurance     $3,000
    Parking       $190
    Mileage reimbursed 12,000 miles $0.36  
    Subtotal
    Total annual transportation costs
    Supply Costs: Site A
    Supplies Amounts
    (A)
    Costs
    (C)
    Total
    Subcategory 1: Office supplies
    Supplier invoices – 1st Quarter     $530
    Supplier invoices – 2nd Quarter     $620
    Supplier invoices – 3rd Quarter     $750
    Supplier invoices – 4th Quarter     $700
    Subtotal
    Subcategory 2: Medical supplies
    Skin-test kits 1100 $18
    Disposable masks 1,000 $0.20
    Gloves (pairs) 2,000 $0.15
    TB-infection drug supply 1,000 $20 / patient
    Active TB drug supply 315 $1,500 / patient
    Subtotal
    Subcategory 3: Patient incentives
    Transportation     $1,500
    Food vouchers 125 $5.00
    Toys     $250
    Subtotal
    Total
    Total Program Costs by Resource Category
    Resource
    category
    Annual
    donated/in kind
    Annual
    expenditures
    Total
    Capital
    Vehicles  
    Equipment   $3,000
    Building/Space $25,000  
    Training
    (Nonrecurrent)
      $5,000
    Other $2,000  
    Subtotal
    Recurrent
    Personnel
    Supplies
    Vehicles
    (Operation and Maintenance)
     
    Buildings
    (Operation and Maintenance)
      $3,000
    Training
    (Recurrent)
    $15,000 $5,000
    Media $1,000 $2,000
    Lab Services $15,000 $35,000
    Subtotal
    Total $74,375 $748,400
    Our Answers
    On these worksheets,  our answers  are shown in the cells with light cyan backgrounds.
    Personnel Costs: Site A
    Type of
    personnel
    Number Average annual
    salary / earnings
    (with benefits)
    % Time spent
    on program
    and project
    activities
    Annual
    cost
    of
    personnel
    Salaried
    Physician 1 $120,000 25% $30,000
    RN 1 $60,000 100% $60,000
    RN 1 $60,000 30% $18,000
    LPN 1 $45,000 20% $9,000
    Social worker 1 $45,000 20% $9,000
    Nutritionist 1 $45,000 10% $4,500
    Subtotal $130,500
    Hourly
    Admin. assistant 1 $26,000 100% $26,000
    Receptionist 1 $20,000 25% $5,000
    LPN 1 $20 / hr 200 $4,000
    Subtotal $35,000
    Volunteers
    Translator 1 $70,000 20% $14,000
    Subtotal $14,000
    Total $179,500
    Transportation Costs: Site A
    Capital / Start-up Purchase
    Price(A)
    Annualized
    Cost(B)
    % of Time
    used for
    Program(C)
    Total
    (B x C)
    Vehicle 1 $15,000 $1,300 30% $390
    Vehicle 2 $17,000 $1,500 100% $1,500
    Subtotal $1,890
    Recurrent / Maintenance Variable Fixed(F) Total
    ((D x E) + F)
    Units
    (gal., mile, etc.)
    (D)
    $/Unit
    (E)
    Operation V1 10,000 miles $0.25   $2,500
    Operation V2       $1,500
    Maintenance V1     $500 $500
    Maintenance V2     $600 $600
    Insurance     $3,000 $3,000
    Parking       $190
    Mileage reimbursed 12,000 miles $0.36   $4,320
    Subtotal $12,610
    Total annual transportation costs $14,500
    Supply Costs: Site A
    Supplies Amounts
    (A)
    Costs
    (C)
    Total
    (A x C)
    Subcategory 1: Office supplies
    Supplier invoices – 1st Quarter     $530
    Supplier invoices – 2nd Quarter     $620
    Supplier invoices – 3rd Quarter     $750
    Supplier invoices – 4th Quarter     $700
    Subtotal $2,600
    Subcategory 2: Medical supplies
    Skin-test kits 1100 $18 $19,800
    Disposable masks 1,000 $0.20 $200
    Gloves (pairs) 2,000 $0.15 $300
    TB-infection drug supply 1,000 $20 / patient $20,000
    Active TB drug supply 315 $1,500 / patient $472,500
    Subtotal $512,800
    Subcategory 3: Patient incentives
    Transportation     $1,500
    Food vouchers 125 $5.00 $625
    Toys     $250
    Subtotal $2,375
    Total $517,775
    Total Program Costs by Resource Category
    Resource
    category
    Annual
    donated/in kind
    Annual
    expenditures
    Total
    Capital
    Vehicles   $1,890 $1,890
    Equipment   $3,000 $3,000
    Building/Space $25,000   $25,000
    Training
    (Nonrecurrent)
      $5,000 $5,000
    Other $2,000   $2,000
    Subtotals $27,000 $9,890 $36,890
    Recurrent
    Personnel $14,000 $165,500 $179,500
    Supplies $2,375 $515,400 $517,775
    Vehicles
    (Operation and Maintenance)
      $12,610 $12,610
    Buildings
    (Operation and Maintenance)
      $3,000 $3,000
    Training
    (Recurrent)
    $15,000 $5,000 $20,000
    Media $1,000 $2,000 $3,000
    Lab services $15,000 $35,000 $50,000
    Subtotals $47,375 $738,510 $785,885
    Totals $74,375 $748,400 $822,775
  2. What is the average cost per TB case treated if 315 patients completed treatment for active TB disease?
    Our Answer
    To calculate the average cost per TB case treated, the total annual program costs (calculated to be $822,775 in the preceding question) must be divided by 315, the number of TB patients that completed treatment for TB.
    Average cost per TB case treated = Total costs / Number of TB cases treated
    Average cost per TB case treated = $822,775 / 315
      = $2,612
  3. Assume that the program is functioning within its capacity limits. Which costs should be considered to estimate the marginal cost of treating one additional TB case?
    Our Answer
    In this instance, calculating the exact marginal cost of an additional TB patient would be difficult because the worksheets and the information provided are not detailed enough. However, adding one more patient would require additional
    • drugs, diagnosis supplies (e.g., x-ray film), and medical supplies (e.g., masks and gloves),
    • office supplies,
    • patient incentives, and
    • transportation costs
  4. Which cost parameters can or should be varied in a sensitivity analysis? What kind of information can a sensitivity analysis provide in this situation?
    Our Answer
    In this situation, you might consider conducting sensitivity analyses for the three reasons below.
    • Certain data was not directly available (e.g., the cost of the translation contract).
    • Cost parameters for which information was directly available might also be varied to estimate the impact that future changes in cost levels for these parameters might have on program costs.
    • This cost analysis can also be used as a model by other TB-control programs, for example. All parameters can be varied (some costs could even be omitted and others added) to reflect the structure and situation of other programs.
    Examples of possible sensitivity analyses are
    • increase in drug costs,
    • increase or decrease in personnel costs,
    • increase in the number of persons receiving a skin test (to reflect a more aggressive screening policy),
    • decrease/increase in infection rate, and
    • elimination of all fleet vehicles (shift to reimbursed mileage for all transportation needs).
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