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Types of cost dataTypes of cost data

Lecture 4Lecture 4

Damian WalkerDamian Walker

Aim of lectureAim of lecture

To provide conceptual and practical insight into To provide conceptual and practical insight into how to do how to do costingcosting in an economic evaluationin an economic evaluation

Structure of lectureStructure of lecture

What do we mean by What do we mean by costcost??IdentifyIdentify which costs to includewhich costs to includeHow to How to measuremeasure resource use?resource use?How to How to valuevalue resource use?resource use?How to How to analyse/presentanalyse/present cost data?cost data?

Why consider costs? Why consider costs?

There are not, never have been and never will be There are not, never have been and never will be enough resources to meet all of societyenough resources to meet all of society’’s needs s needs or wants or wants Scarcity implies choice between alternativesScarcity implies choice between alternativesCost is one factor which enables choiceCost is one factor which enables choice

What do we mean by What do we mean by cost?cost?

Opportunity costsOpportunity costsOpportunity cost = economic costOpportunity cost = economic costCost is foregone benefit of a resource in itCost is foregone benefit of a resource in it’’s best s best alternative usealternative useCost = market price Cost = market price onlyonly when price reflects value of when price reflects value of marginal product (perfect competition)marginal product (perfect competition)Need to estimate shadow prices / social value of Need to estimate shadow prices / social value of resources:resources:

no market price: donated goods, volunteer timeno market price: donated goods, volunteer timedistorted price: MP of labour distorted price: MP of labour ≠≠ wagewageunstable prices: inflated / deflated exchange ratesunstable prices: inflated / deflated exchange rateswhere goods have a yield over a period of time: capital where goods have a yield over a period of time: capital goods (Wednesdaygoods (Wednesday’’s lecture)s lecture)

OOpportunity costpportunity cost

As simple as the opportunity cost concept is, it As simple as the opportunity cost concept is, it is one of the most important in microeconomics is one of the most important in microeconomics and economic evaluationand economic evaluationThe art in applying the concept correctly lies in The art in applying the concept correctly lies in being able to recognize the most valuable being able to recognize the most valuable alternative that is sacrificed by the pursuit of a alternative that is sacrificed by the pursuit of a given activitygiven activity

Pop quizPop quiz

You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next-best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton?a) $0, (b) $10, (c) $40, or (d) $50. a) $0, (b) $10, (c) $40, or (d) $50.

RememberRemember

The opportunity cost of an activity is the value The opportunity cost of an activity is the value of everything you must sacrifice to pursue itof everything you must sacrifice to pursue itSo if you are willing to pay as much as $50 to see So if you are willing to pay as much as $50 to see Dylan and the cost of a ticket to see Dylan is Dylan and the cost of a ticket to see Dylan is $40, what is the opportunity cost of seeing $40, what is the opportunity cost of seeing Clapton? Clapton?

ReferenceReference

FarraroFarraro PJ, Taylor LO. Do economists PJ, Taylor LO. Do economists recognise an opportunity cost when they see recognise an opportunity cost when they see one? A dismal performance from the dismal one? A dismal performance from the dismal science. science. Contributions to Economic Analysis & PolicyContributions to Economic Analysis & Policy2005; 4(1)2005; 4(1)

Which costs to Which costs to include?include?

Julien Harneis andyinsouthamerica

The Crownless Kingfreedryk

How can we categorise How can we categorise these costs?these costs?

Classification of costsClassification of costs

Capital items: those that last longer than a year Capital items: those that last longer than a year or have a unit price > $100or have a unit price > $100

Recurrent items: those that are used up in the Recurrent items: those that are used up in the course of a year and are usually purchased course of a year and are usually purchased regularlyregularly

Examples?Examples?

Classification of costsClassification of costs

Fixed costsFixed costsdo not change when the quantity of output produced do not change when the quantity of output produced changeschanges

SemiSemi--fixed costsfixed costsVariable costsVariable costs

change according to how much output producedchange according to how much output produced

Examples?Examples?In the longIn the long--run it is assumed that all costs are run it is assumed that all costs are variablevariable

Activities as inputsActivities as inputs

If one activity is clearly separate from the others, If one activity is clearly separate from the others, both financially and administratively, it may be both financially and administratively, it may be easier to record the total costeasier to record the total costE.g. startE.g. start--up, training and social mobilisation up, training and social mobilisation activities are treated as categories of inputs and activities are treated as categories of inputs and included along with personnel, vehicles etc.included along with personnel, vehicles etc.it is assumed that all the resources required for it is assumed that all the resources required for the activity are included in that category and not the activity are included in that category and not under the separate categoriesunder the separate categories

Shared costsShared costs

The resources that you are costing may not be The resources that you are costing may not be fully used in the specific cost centre that is being fully used in the specific cost centre that is being examinedexaminedIn this case, a decision needs to be made about In this case, a decision needs to be made about what proportion of the resources should be what proportion of the resources should be allocated to the specific cost centre that is being allocated to the specific cost centre that is being costed and the way it should be allocatedcosted and the way it should be allocated

Shared costsShared costs

What are some examples of typical shared costs?What are some examples of typical shared costs?What allocation rules might be used to distribute What allocation rules might be used to distribute these costs to specific cost centres? E.g. in a these costs to specific cost centres? E.g. in a hospital, how might we allocate the costs of the hospital, how might we allocate the costs of the kitchen to different wards?kitchen to different wards?Methods for allocating shared costs:Methods for allocating shared costs:

direct allocationdirect allocationstepstep--down allocationdown allocation

Other costs?Other costs?

So far focussed on programme costsSo far focussed on programme costsWhat other costs might we consider in, for What other costs might we consider in, for example, an economic evaluation of vaccines example, an economic evaluation of vaccines against rotavirus?against rotavirus?

Classification of costsClassification of costs

DirectDirectIndirectIndirectIntangibleIntangible

Health sectorHealth sectorOther sectorsOther sectorsPatient / familyPatient / familyProductivity lossesProductivity lossesFutureFuture

Which costs to include?Which costs to include?Perspective of analysisPerspective of analysis

Societal

Other agencies

Health service

Patient

broad

narrow

Which costs to include?Which costs to include?Perspective of analysisPerspective of analysis

Range of costsRange of costs

✔✔✔✔✔✔SocietalSocietal

✖✖✔✔✔✔Health service & Health service & other agenciesother agencies

✖✖✖✖✔✔Health serviceHealth service

Days off workDays off workSpecial educationSpecial educationInpatient days & Inpatient days & outpatient visitsoutpatient visits

PerspectivePerspective

Which costs to include?Which costs to include?TimeTime--frame of analysisframe of analysis

Suitable for disease and intervention in questionSuitable for disease and intervention in questiondays: prophylactic drugs for diarrhoea days: prophylactic drugs for diarrhoea months: chemomonths: chemo--prophylactic drugs for malariaprophylactic drugs for malarialifelife--time: drugs for HIV/AIDStime: drugs for HIV/AIDS

Which costs to include?Which costs to include?Future costsFuture costs

May be incorporated May be incorporated at analystat analyst’’s discretion s discretion in a sensitivity in a sensitivity analysisanalysis

Leave out of the Leave out of the analysisanalysis

Unrelated medical Unrelated medical and nonand non--medical medical costscosts

IncorporateIncorporateIncorporateIncorporateRelated medical and Related medical and nonnon--medical costsmedical costs

Gained lifeGained life--yearsyearsLifeLife--years normally years normally livedlived

Which costs to include?Which costs to include?

Quantitative importanceQuantitative importancebigbig--ticket items firstticket items firstwill inclusion of additional costs affect the will inclusion of additional costs affect the conclusions?conclusions?

AttributionAttributiondoes the resource use consumed relate to the disease does the resource use consumed relate to the disease (intervention)?(intervention)?

How to measureHow to measureresource use?resource use?

How to measure resource use?How to measure resource use?Different study designsDifferent study designs

Possible vehicles for resource use data:Possible vehicles for resource use data:RCTsRCTsobservational studiesobservational studiesliteratureliteratureadministrative databasesadministrative databasesexpert opinionexpert opinion

Best source of data depends on:Best source of data depends on:study questionstudy questionresearch resourcesresearch resources

Economic evaluations usually use a Economic evaluations usually use a range of methodsrange of methods

Most reliable

Least reliable

How to measure resource use data?How to measure resource use data?Advantages of RCTsAdvantages of RCTs

‘‘Economic analyses Economic analyses …… are likely to be most are likely to be most helpful when undertaken as part of large, helpful when undertaken as part of large, unblinded, pragmatically designed, randomised unblinded, pragmatically designed, randomised trials based as closely as possible on regular trials based as closely as possible on regular clinical practiceclinical practice’’(Freemantle & Drummond 1997)(Freemantle & Drummond 1997)

How to measure resource use data?How to measure resource use data?Advantages of RCTsAdvantages of RCTs

Randomisation ensures internal validityRandomisation ensures internal validityFacilitates prospective data collectionFacilitates prospective data collection

accurateaccurateunbiasedunbiased

Can link with measurement of health outcomeCan link with measurement of health outcomeUses individual patient dataUses individual patient data

can use standard tests of significancecan use standard tests of significance

How to measure resource use?How to measure resource use?Disadvantages of Disadvantages of RCTsRCTs

Often too short in durationOften too short in durationMay lack external validityMay lack external validityMay include protocol driven costsMay include protocol driven costsWill need to extend study to measure others Will need to extend study to measure others costscosts

How to measure resource use data?How to measure resource use data?Data collection techniquesData collection techniques

Case report forms Case report forms Medical recordsMedical recordsQuestionnairesQuestionnairesPatient diariesPatient diaries

DeMTAPDeMTAP pictorial diariespictorial diaries

Consumption and Consumption and expenditure dataexpenditure dataHealth and nonHealth and non--health health 1212--month periodmonth periodIncludes homeIncludes home--produced produced consumptionconsumptionPrompts in the form of a Prompts in the form of a checklist and aide checklist and aide mméémoiremoire

Lesong Conteh

Source: Wiseman V, et al. Using diaries to collect data in resource-poor settings: questions on design and implementation. Health Policy Plan 2005;20:394-404. Used with permission. Copyright 2005 Oxford University Press. All Rights Reserved.

Source: Wiseman V, et al. Using diaries to collect data in resource-poor settings: questions on design and implementation. Health Policy Plan 2005;20:394-404. Used with permission. Copyright 2005 Oxford University Press. All Rights Reserved.

How to measure resource use?How to measure resource use?How detailed to go?How detailed to go?

Micro costing vs. gross costing (Gold et al. Micro costing vs. gross costing (Gold et al. 1996)1996)TopTop--down vs. bottomdown vs. bottom--up (Drummond et al. up (Drummond et al. 2005)2005)Choice depends on need for specific estimation Choice depends on need for specific estimation vs. research costsvs. research costsPrecision vs. pragmatismPrecision vs. pragmatism

How to value resource How to value resource use?use?

How to value resource use?How to value resource use?Principles involved Principles involved

Opportunity costOpportunity costvalue of next best use of resourcesvalue of next best use of resourcesperfectly competitive market, price = opportunity costperfectly competitive market, price = opportunity costprices in health care often unavailable or distortedprices in health care often unavailable or distortedcaution in using prices derived from health care caution in using prices derived from health care ‘‘marketsmarkets’’need to use shadow pricesneed to use shadow prices

Well, thatWell, that’’s the theory at least s the theory at least ……In practice, most studies use unadjusted market In practice, most studies use unadjusted market prices and / or use costprices and / or use cost--toto--charge ratioscharge ratios

Costs vs. chargesCosts vs. charges

In the USA, a common method for estimating In the USA, a common method for estimating the economic cost of medical services is to the economic cost of medical services is to adjust the charges through the use of costadjust the charges through the use of cost--toto--charge ratioscharge ratiosCostCost--toto--charge ratios are coefficients developed charge ratios are coefficients developed by expert panels to convert charges for medical by expert panels to convert charges for medical services to their true economic costsservices to their true economic costsApplying costApplying cost--toto--charge ratios to medical service charge ratios to medical service charges produces average estimates of true costs charges produces average estimates of true costs

How to value resource use?How to value resource use?Principles involvedPrinciples involved

Average vs. marginal cost?Average vs. marginal cost?Marginal costs only cover the costs of producing Marginal costs only cover the costs of producing one additional unit of outputone additional unit of outputChoice depends on timeChoice depends on time--frame of analysisframe of analysis

shortshort--term, few items are variable, e.g. drugs, teststerm, few items are variable, e.g. drugs, testslonglong--term, all items are variable including labour and term, all items are variable including labour and capitalcapital

Economists often take longEconomists often take long--run perspectiverun perspectiveIn longIn long--run can use average cost = marginal costrun can use average cost = marginal cost

DefinitionsDefinitions

Average cost = TC / Q, the average cost per Average cost = TC / Q, the average cost per unit of outputunit of outputMarginal cost = (TC of Marginal cost = (TC of xx + 1 units) + 1 units) –– (TC of (TC of xxunits), the extra cost of producing one extra unit units), the extra cost of producing one extra unit of outputof outputAverage marginal cost = (TC of Average marginal cost = (TC of xx units units –– TC of TC of yy units) / (units) / (xx units units –– yy units), where units), where xx > > yyIncremental cost = extra cost incurred by one Incremental cost = extra cost incurred by one programme over anotherprogramme over another

ExampleExample

Say, for example, 60% of children in Nepal are Say, for example, 60% of children in Nepal are fully vaccinated at a cost per child of $15fully vaccinated at a cost per child of $15The National Immunisation Programme in Nepal The National Immunisation Programme in Nepal aims to fully vaccinate 85% of children: do you aims to fully vaccinate 85% of children: do you think the average marginal cost per additional think the average marginal cost per additional child fully vaccinated will be <, = or > than $15?child fully vaccinated will be <, = or > than $15?Why?Why?

How to value resource use?How to value resource use?Sources for health service unit costsSources for health service unit costsAdministrative databases (DRGs, reference Administrative databases (DRGs, reference costs), e.g. costs), e.g. www.who.int/choice/country/en/index.htmlwww.who.int/choice/country/en/index.htmlManuals, e.g. Manuals, e.g. www.pssru.ac.uk/uc/uc2006contents.htmwww.pssru.ac.uk/uc/uc2006contents.htmPublished literaturePublished literatureSpecific estimationSpecific estimation

How to analyse and present cost How to analyse and present cost data?data?

Present resource use separately from unit costPresent resource use separately from unit costPresent distribution of costsPresent distribution of costsDespite the usual skewness in the distribution Despite the usual skewness in the distribution of costs, it is the arithmetic mean that is the of costs, it is the arithmetic mean that is the most informative measuremost informative measureMeasures other than the arithmetic mean do Measures other than the arithmetic mean do not provide information about the cost of not provide information about the cost of treating all patients, which is needed as the treating all patients, which is needed as the basis for healthcare policy decisions basis for healthcare policy decisions

Issues in analysis of costsIssues in analysis of costs

Parametric statistics assume normal distributionParametric statistics assume normal distributionCosts may not be normally distributedCosts may not be normally distributedSo either:So either:

use standard approaches such as use standard approaches such as tt teststestsOR use nonOR use non--parametric techniques (such as parametric techniques (such as bootstrapping)bootstrapping)

May not have power to detect difference in costsMay not have power to detect difference in costs

Critique of published costing studiesCritique of published costing studies

A review of 45 randomised trials that included A review of 45 randomised trials that included economic evaluations and were published in 1995 economic evaluations and were published in 1995 showed serious inadequacies in the use of showed serious inadequacies in the use of statistical methods for costs (Barber & Thompson statistical methods for costs (Barber & Thompson 1998)1998)A reA re--review of these studies found that the costing review of these studies found that the costing methods were of poor quality (Graves et al. 2002)methods were of poor quality (Graves et al. 2002)Graves et al. (2002) concluded that Graves et al. (2002) concluded that ““No amount No amount of statistical analysis can compensate for poor of statistical analysis can compensate for poor quality cost dataquality cost data””

ConclusionsConclusions

Good costing needs to:Good costing needs to:be explicit about assumptionsbe explicit about assumptionsdefine the perspective adopteddefine the perspective adoptedapply the opportunity cost principleapply the opportunity cost principlerecognise the importance of the timerecognise the importance of the time--frameframe

ConclusionsConclusions

Issues for debate includeIssues for debate includewhich perspective should be adopted?which perspective should be adopted?how long should the timehow long should the time--frame be?frame be?whether to include future costs?whether to include future costs?precision vs. pragmatism: how detailed should cost precision vs. pragmatism: how detailed should cost measurement be?measurement be?

ReferencesReferencesBarber JA, Thompson SG. Analysis and interpretation of cost Barber JA, Thompson SG. Analysis and interpretation of cost data in randomised controlled trials: review of published studiedata in randomised controlled trials: review of published studies. s. BMJ. BMJ. 1998; 317: 11951998; 317: 1195--1200 1200 Freemantle N, Drummond M.Freemantle N, Drummond M. Should clinical trials with Should clinical trials with concurrent economic analyses be blinded? concurrent economic analyses be blinded? JAMAJAMA. 1997; 277(1): . 1997; 277(1): 6363--6464Graves N, Walker D, Raine R, Hutchings A, Roberts JA. Graves N, Walker D, Raine R, Hutchings A, Roberts JA. Cost Cost data for individual patients included in clinical studies: no data for individual patients included in clinical studies: no amount of statistical analysis can compensate for inadequate amount of statistical analysis can compensate for inadequate costing methods. costing methods. Health EconHealth Econ. 2002; 11(8): 735. 2002; 11(8): 735--739. 739. Wiseman W, Conteh L, Wiseman W, Conteh L, MatovuMatovu FF. Using diaries to collect data . Using diaries to collect data in resourcein resource--poor settings: questions on design and poor settings: questions on design and implementation. implementation. Health Policy PlanHealth Policy Plan. 2005; 20(6): 394. 2005; 20(6): 394--404404