Cost Consequence Analysis Workshop

Costing

Paul Leak

Costing OverviewTime effectsWhich Costs

Cost Consequence Workshop

Opportunity Cost

…of a choice is the next best alternative foregone.

Opportunity Cost

Allocation Decisions.

Utilisation Decisions.

Economic costThe sum required to obtain use of a resource.

Accounting costCost of used to generate income.

If not Opportunity Cost…

Types of Cost

•Direct

•Indirect

Direct Cost

…is a cost that is directly caused by the particular cost object under consideration.

Indirect Cost

…is a cost that is not directly caused by the particular cost object under consideration.

Cost Object

A cost which is an indirect cost for one cost object may be a direct cost for another.

Examples

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1,000

2,000

3,000

4,000

5,000

6,000

General Medicine Geriatric Assessment

£

Medical Nursing Pharmacy AHP Other Direct Theatre Laboratory Allocated overheads

Cost Behaviour

•Variable Cost

•Fixed Cost

Variable Costs

Costs that vary Directly in proportion to the level of activity.

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Units

To

tal

Co

st

(£)

Variable Costs

Examples:Disposable glovesDental filling materialMedicines

Consider Cost Drivers

Variable Costs

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2

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Units

Un

it C

ost

(£)

Fixed Costs

Costs that do not vary with the level of activity.

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£

Fixed Costs

Examples:Building Rent/Depreciation

Network infrastructure costs

NHS Board

Finance teams

Fixed Costs

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200

400

600

800

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1,200

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Units

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ost

(£)

Fixed Costs aren’t really Fixed:Relevant Range

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Units

£

Cost Behaviour Summary

Which Cost to Use

•Study Question

•Study Perspective

Study Question

•Total Cost: Sum of costs of an activity.

•Average Cost: Total Cost/Total Activity

•Marginal Cost: Cost of change in activity

Study Perspective

•NHS

•NHS and Social Work

•Statutory, independent, third sector

•Providers and patients & carers

•Societal

Time Effects

•Current value of future costs & benefits•Delays and Learning effect

Current Value of future costs

Problem:£1 now is worth more that £1 in the future.Solution:

State future costs at current value by discounting them.

Delays and Learning effect

Problem:Effects and costs measured in the study period may be different in the future.

Solution:Projections.

Practical Constraints

• Data• Induction

Data

• Existing data: Barriers to Obtaining collected data; Quality.

• New data Consistency Quality

Data Sources

• Local Accountants;• ISD-cost book and HRG datasets;• Local Information departments;• LFR returns.

Induction

• Transferability• Analysis• Projections• Modeling