3. Uses of cost data
Resource requirements
and advocacy
Priority setting for new
interventions or
introducing new
technologies, drugs,
vaccines
Financial planning and
budgeting
Economic
evaluation/Improving
technical efficiency
4. Measuring costs
Type of costing you conduct depends on your goal
• Estimating intervention costs from an RCT
• Bottom-up costing (microcosting)
• Quantify and cost each input consumed in preventing or treating
disease
• Usually combined with either ingredients-based costing or activity-
based costing
• Estimating efficiency of a currently implemented
intervention
• Gross‐costing (top‐down)
• Estimate cost for a given volume of patients by dividing the total cost
by the volume of service use
• Usually combined with ingredients-based costing
• In reality you will likely use a mix of approaches
4
5. Estimating costs
• Direct Health Care Costs
• Hospital, doctor’s office
• Medications, procedures, tests, healthcare provider cost
• Direct Non‐Health Care Costs
• Transportation, childcare, out of pocket expenses
• Time Costs
• Patient time waiting for and receiving care, (lost work
time related to intervention)
• Patient recovery time, lost productivity (indirect costs)
6. Fixed vs. variable costs*
Fixed Variable
Hospital rooms HIV test kits
Computers
Supplies—gloves, alcohol
swabs
Furniture Transport and fuel
Motorcycles
Hiring / initial training
*All costs are variable in the long-term
• Fixed costs: Remain the same no matter how many
people receive the intervention
• Variable costs: increase with the number of people who
receive the intervention (e.g. supplies)
7. Perspective
• Payer perspective
• Only costs paid by the organization implementing the program
(eg Ministry of Health, private insurance company, NGO) are
included
• Societal perspective
• All costs in incurred or saved by the program are included,
regardless of who experiences them
• This perspective includes: patient time waiting and receiving care,
transport costs, and lost wages resulting from sick days related to
the intervention.
• Which perspective should you use?
• Depends who is using the cost data or CEA results. Governments
are often interested in the costs incurred by society. Private
insurers may only be interested cost incurred by the company.
8. Valuing costs
• Depending on the objective, use economic or
financial costs.
• Budget impact analyses use financial costs.
• Economic evaluations (eg cost-effectiveness analyses)
should include all economic consequences, not just
financial costs
• Eg volunteer time or donated materials or space
• Price is $0 (financial cost) but economic cost is the value of the
service that could be going to another intervention/activity, eg the
wage that a volunteer could be making or rental cost of donated
space (opportunity costs)
• What is an opportunity cost?
• The cost of the next best thing you would have done with
the time/resources
9. Opportunity costs
• Opportunity costs
• The value of the best alternative foregone
• Tradeoffs (opportunity costs) are not always explicit but
always exist.
• For example: opportunity cost of a male circumcision
intervention is an alternative health intervention you could
have implement with the resources
• What is your financial cost for attending this
lecture?
• What is you opportunity cost?
10. Discounting
• Time Preference:
• If competing programs have incur costs at different times in
the future, we need to have a method to adjust these cost
data to allow for comparison
• To account for time preference, we discount future
costs and benefits to a present value
11. Discounting
• Health benefits and costs related to an intervention
occur at different points in time. But society has a
preference for interventions where benefits occur
sooner.
• Discounting
• Adjusts future health benefits and costs to present value
• Reflect opportunity for investment (common discount rate
is 3%: standard rate of return on long-term riskless
investments)
• Costs and health outcomes are discounted at the
same rate.
12. Discounting costs: present value calculation
• What is the present value of $5,000 received 10 years
from now?
• Present value calculator: https://dqydj.com/present-
value-calculator-and-present-value-formula/
• Answer: $3,720.47
𝑃𝑟𝑒𝑠𝑒𝑛𝑡 𝑣𝑎𝑙𝑢𝑒 =
𝐹𝑢𝑡𝑢𝑟𝑒 𝑣𝑎𝑙𝑢𝑒
(1 + 𝑟)𝑛
13. Standard discount rates
• US Panel on Cost Effectiveness in Medicine
• 3% costs and benefits
• 5% and 0% in sensitivity analyses
• United Kingdom
• NICE guidance: 3.5% for costs and benefits
15. Valuing capital costs
• Vehicles, computers, buildings
• Usually purchased at the start of an
intervention/program
• Generally assumed to have 5 years of useful
life
• Annualized over their years of useful life and
discounted at 3% annually
• Implications on cost analysis:
• Should you use purchase price of equipment or
replacement price?
16. • Standard assumptions:
• Vehicles & equipment are used for 5 years before they are
replaced
• Staff hiring and training happens every 5 years b/c of staff
turn over
• Advantage of using standard assumptions:
• Your costing is comparable with other analyses in the
literature
• You can compare your program costs head-to-head with
costings of other programs
• Disadvantage:
• May not be accurate in your setting. Eg. Vehicles in
developing settings may be used for much longer than 5
years. Staff turnover may be more frequent than 5 years.
Choice of assumptions depends on goal of costing
Annualizing start up and capital costs
17. • Total motorcycle cost/#years of useful life:
10,000
5
=$2,000
• But what about discounting? In this case you’re paying
for the motorcycle now but getting benefits over 5
years.
• So we divide cost by annuity factor—which estimates
present value of a good
Example: Annualizing motorcycle cost
Annuity Present Value factor =
1− 1+𝑟 −𝑛
𝑟
𝑟 = 𝑑𝑖𝑠𝑐𝑜𝑢𝑛𝑡 𝑟𝑎𝑡𝑒
𝑛 = 𝑦𝑟𝑠 𝑜𝑓 𝑢𝑠𝑒𝑓𝑢𝑙 𝑙𝑖𝑓𝑒
Annuity for 5 yrs useful life =
1 − 1 + 0.03 − 5
0.03
= 4.58
Annual cost for $10,000 motorcycle =
10,000
4.58
=$2,183
