Cost effectiveness and cost containment

Presenter
Saumya
Msc.Nsg 2nd year
AIIMSCON

INTRODUCTION
 The cost of health care delivery is growing at an
outstanding rate as a result of availability of more
health care facilities, increase in number of health care
providers, as well as application of expensive new
technology in the care domain.
 These changes in the health care delivery impose a
financial pressure on hospital services specially
nursing services.
 Consequently health care facilities are now compelled
to re-examine their methods of care delivery and
develop creative approaches to contain (control or
restrain) cost while providing the expected high level of
quality.

What is a Cost?
 A cost is an expenditure required to produce or sell a
product or get an asset ready for normal use. In other
words, it’s the amount paid to manufacture a product,
purchase inventory, sell merchandise, or get equipment
ready to use in a business process.
 The cost is the money expanded for all resources used,
including personnel, supplies and equipment.

What is Cost?
An amount that has to be paid or given up in order to get
something.
In business, cost is usually a monetary valuation of
 Effort
 Material
 Resources
 time and utilities consumed
 risks incurred
 opportunity forgone in production and delivery of a good or
service.
All expenses are costs, but not all costs (such as those
incurred in acquisition of an income-generating asset) are
expenses.
(Business dictionary)

What escalates healthcare costs?
Total healthcare costs are a function of the prices and the
utilization rates of healthcare services (Costs = Price ×
Utilization).
 Growing and ageing population
 Induced demands
 High-tech specialities and medical service utilization
 Repetitive tests and over-treatment
 Chronic illnesses- inflated medical spending
 Expansion of health insurance schemes

The levels of cost hierarchy
Unit-level costs Batch-level costs
Business-level
costs
Enterprise
related costs

The levels of cost hierarchy
 Unit-level costs: are directly assignable to predetermined
cost objectives based on characteristics associated with the
patient. Examples include per unit visit for labor, patient
identifiable supplies and equipment.
 Batch-level costs: include all the supporting services that are
performed from admission through discharge. Examples are
billing, records management, scheduling and nurse management.
 Business-level cost: it is the category that has no direct
relationship to the patient care. Example include accounting
activities, recruitment, interest expense and marketing.
 Enterprise-related cost: it is usually has no relation to cost
objectives such as utilities and taxes.

Types of nursing costs
Direct nursing cost
 It is the cost used by the
hospital in providing services
to the patient.
 It includes the cost of nurse
labor and the supplies that a
hospital uses in caring for the
patients.
Indirect nursing cost
 Indirect cost is the cost that cannot
be directly attributed to the
production .
 These costs include: building and
capital equipment use, occupancy
services, office expenses, faculty
and central administration, library
operations and technical services.

 Fixed cost: Fixed costs are those that remain the same regardless
of the amount of production output. In a hospital setting, these
include costs associated with running the physical plant and
equipment.
 Variable cost: Variable costs are those that do tend to change in the
short term with the changes in production output, such as costs of
having to increase the number of nursing staff because of a
temporary surge in ICU volume.
 Sunk costs: Sunk costs are fixed expenses that cannot be
recovered even if program is canceled.
 Average costs: Full cost divided by the number of units of service
or patients.

 Economic cost: The amount of money required to obtain the use of
a resource.
 Joint cost: Costs that is required for the treatment of several or
more types of patients.

Theories of cost
Demand Pull Theory of Inflation
This theory suggests that increase in the cost of health care
occurs from excess demand and spending on health care with
an insufficient supply of goods and services to accommodate
the demand.
Cost –push theory of inflation
This theory suggests that higher prices result from the rising
costs within the health care business(production cost).

Types of Product costing
• Job order costing system: It is used in the industries that
produce goods that consume different amounts of input. For
example, a custom furniture manufacturer uses different amount of
labor, materials and overhead for each job.
• Process costing system: It is a system in which all units
produced within a given time period are assigned to the same cost.
For example, a soft-drink manufacturer uses virtually the same inputs
for each can of cola produced.
• Standard costing system: Standard costs are pre-determined
estimates of what it is expected to cost or what it should cost to
produce one unit of product. It is estimated by using historical results,
time and motion observations and theoretical calculations.

The Cleverley Model of Healthcare Costing
Patient type ‘A’
Standard treatment
Protocol (STP)
Patient type ‘B’
Standard treatment
Protocol (STP)
Service unit #1
Service unit #2
Service unit #3
Service unit #1
Service unit #2
Service unit #3

Cost effectiveness
In the business: the effectiveness is the success or financial validity of
an organization.
In Nursing: the effectiveness primarily relates to quality outcomes being
achieved. Is concerned with doing the right things in providing patients
care with low cost and high quality.

Cost effectiveness
It is a state in which the inputs and methods
used to produce a product or service results
in the maximum feasible outcome.
“It is the accomplishment of objectives with
the lowest expenditure of resources”

Cost containment
Process of maintaining organizational costs within a specified
budget; restraining expenditures to meet organizational or project
financial targets.

Principles of efficiency
The principles
related to
interpersonal
relation
The principles
related to
system in
management

Principles of Efficiency
The principles related to interpersonal relation
 Goals and ideas should be clear and well defined.
 Change should be evaluated and management should not ignore.
 Competent counsel is essential.
 Management can strengthen discipline or adherence to the rules.
 Justice or equal enforcement on all.

Principles of Efficiency
The principles related to system in management
 Records, including adequate, reliable and immediate information about
the expenses of equipment and personal should be available as a basis
for decision.
 Dispatching or production scheduling is recommended.
 Standardized schedules.
 Standardized conditions.
 Standardized operations can be facilitated through the use of Written
instructions.
 Efficiency rewards should be given for successful completion of tasks.

The stages of cost effectiveness and containment
Cost awareness
Cost monitoring
Cost management
Cost incentives
Cost avoidance
Cost reduction
Cost control

 Cost awareness: It focuses the employee attention on costs.
It increase the organizational awareness of what cost are, the process
available for containing them, how they can be managed and by whom.
 Cost monitoring: It focuses on how much will be spent where, when and
why. It identifies reports and monitor costs.
 Cost management: It includes conceptual and physical acts
to curb (limit) unnecessary spending through planned and practical use
of personal, material and physical resources for maximum productivity.
It focuses on what can be done by whom to contain costs.
 Cost incentives: It motivate cost containment and reward desired
behaviour. Contests for the best money-saving ideas, perfect
attendance and nurse of the month help recognize personnel efforts.

 Cost avoidance: It means not buying supplies, technology or services, the
costs of them should be analysed carefully and the more expensive and less
effective items avoided.
 Cost Reduction: Cost Reduction is a process, which aims to lower the unit
cost of a product manufactured or service rendered without affecting its
quality. It can be done by using new and improved methods and techniques.
It ascertains substitute ways to reduce the production cost of a unit. Cost
Reduction aims at cutting off the unnecessary expenses which occur during
the production process, storage, selling and distribution of the product.
 Cost control: Cost Control is a process in which we focus on controlling the
total cost through competitive analysis. It is a practice which works to align
the actual cost in agreement with the established norms. It ensures that the
cost incurred on production should not go beyond the pre-determined cost.

Economic evaluation
cost consequence
Alternative 1
Alternative 2
cost consequence
Economic
evaluation
Decision

Steps in Economic evaluation
Deciding upon the study question
Assessment of costs and benefit
Adjustment of timing
Adjustment of uncertainity
Making a decision

Types of Economic Evaluation
Cost minimization Analysis(CMA)
Cost-effectiveness Analysis(CEA)
Cost -utility Analyis (CUA)
Cost-benefit Analysis(CBA)

Cost Analysis
Cost analysis is a resource tool for financial management in hospital or
department. It is an economic evaluation technique that involves the
systematic collection, categorization, and analysis of program or
intervention costs and cost of illness.

When to use cost analysis?
Cost analysis can be used as an evaluation method when
• Only one program is being assessed
• Information about program effectiveness is not available, or the
interventions being assessed and compared are equally effective.
Cost analysis can also be used together with effectiveness
assessment techniques within the framework of three type of
economic evaluation:
• Cost-effectiveness analysis
• Cost-benefit analysis
• Cost-utility analysis

Purposes of Cost Analysis
 A tool for planning and cost projection
 To assess the efficiency of a programme
 Provides information on health resource allocation
 Helps in knowing how funds are spent and whether they are
spent as planned
 Helps to assess how health resources are distributed
among various population groups

Basic steps in Cost Analysis
Define program, treatment and technology to be
analysed
Develop a framework for cost analysis of program
Describe objectives of analysis
Select type of cost analysis
Design methodology of cost analysis (retrospective,
prospective)
Apply principles of cost analysis

Basic steps in Cost Analysis
Describe study outcomes
Development of cost inventory
Preparation of cost summary
Measurement/evaluation of resources used
Calculate cost analysis results: total cost, average cost and
marginal costs
Sensitivity analysis and discounting to rule out any
measurement errors, biased estimations

Type of Cost Analysis
 Cost-of-illness Analysis: Cost of illness analysis is a type of analysis
which is done to determine the economic impact of an illness or a
condition on a given population, region or country. For example the impact
of communicable disease on country.
 Cost-benefit Analysis (CBA): Cost benefit analysis is a method of
analysis to compare costs and benefits of intervention, both of which are
quantified in common monetary units and are valued in cash terms
 Cost- effectiveness analysis (CEA): Cost effectiveness analysis is a
comparison of costs of intervention in monetary units with outcomes in
qualitative non-monetary units i.e. in natural unit eg. Reduced mortality or
morbidity.

Type of Cost Analysis
 Cost-utility analysis ( CUA)
Cost-utility analysis is a form of analysis that compares the costs of
intervention in monetary units with outcomes in terms of their utility in a
composite metric of both length and quality of life, the quality-adjusted life
year (QALY)
 Cost-minimization analysis
This is the analysis carried out to determine the least costly intervention
among alternatives that are assumed to produce equivalent outcomes. The
effectiveness of the comparators must be equivalent.
 Cost consequence analysis
Cost consequence analysis presents cost of intervention and its outcomes
in discrete categories, without aggregating or weighting them.

Cost effectiveness analysis
Definition: Cost effectiveness analysis is a tool decision- makers can
use to assess and potentially improve the performance of their health
systems. It indicates which interventions provide the ‘highest value for
money’ and helps them choose the interventions and programmes
which maximize health for the available resources (WHO).
It aims at maximizing the level of benefits-health effects relative to the
level of resources available.

Cost effectiveness analysis
Objectives of Cost Effectiveness Analysis
• To compare alternative programs with a common health outcome
• To assess the consequences of expanding an existing program.

Purpose of Cost Effectiveness Analysis
 To identify the most cost effective intervention from a group
of alternatives
 To provide empirical justification for a program
 To identify and exclude programs that is wasting resources
 To provide general information on the relative costs and
health benefits of different alternatives
 To evaluate the interventions in terms of efficacy (cost
effective ratio), absolute health gain and affordability
(absolute cost)

Drawbacks of Cost Effectiveness Analysis
 The data regarding direct costs such as doctors or nurses time and
supplies used; indirect costs such as a portion of administrative costs,
the cost of equipment are usually not readily available.
 It does not facilitate comparisons across different diseases when
different outcomes have been used.
 Cost-effectiveness is the only one criterion for judging whether an
intervention is effective or not

Benefits of Cost Effectiveness Analysis
 This method is easy to understand and more readily suited to
decision making
 It provides empirical results for the decision makers to compare
the costs and consequences associated with alternative
programmes.

Measures of cost effectiveness
• Average cost effectiveness ratio (ACER)
It applies to a single intervention and evaluates it against its baseline option
( eg, no program or current practice). It is calculated by dividing the net cost
of the intervention by the total number of health outcomes prevented by the
intervention.
ACER= Net cost of the intervention
Total number of health outcomes
Prevented by the intervention
• Marginal cost effectiveness ratio (MCER)
The MCER assess the specific changes in cost and effect when a program
is expanded or contracted. It is usually used in conjunction with the ACER
as a tool to determine the most efficient level of program implementation.

Measures of cost effectiveness
• Incremental cost effectiveness ratio (ICER)
It compares the differences between the costs and health
outcomes of two alternative interventions that compete for the
same resources and is generally described as the additional
cost per additional health outcome.
• Net Health Benefits(NHB): It is the difference between the
health outcome and cost divided by rate of substitution of
money for health. NHB=E-C/λ, Where λ= a rate of substitution
of money for health

Incremental cost-effectiveness Plane

Procedural steps in Cost-Effectiveness Analysis
 Defining the problem
 Adopting a research strategy
 Specify Audience
 Define Perspective
 Specify the time frame work
 Prepare the analytic horizon
 Decide the type of study design
 Identify the Outcome Measures or Variables
 Search for available alternatives
 Identify the type of costs to be included in CEA
 Analysis

Implication of cost effectiveness in nursing service administration
 Promoting the role of nursing as a core resource in cost
effective care and as a critical contributor to decision
making on health care spending.
 Offering nurses educational opportunities to gain
knowledge of political skills, economic principles budgeting
and resource use and cost effectiveness in health.
 Supporting leadership and management development that
include the role of nurses in resource management,
decision making and policy development.

Implication of cost effectiveness in nursing service administration
 Promoting and supporting research and evaluation that
links and validates costing methodology to nursing and
health outcome.
 Facilitate information dissemination and interactive
networking on cost effectiveness research.
 Establishing professional networks with relevant
stakeholder for promoting quality and cost effectiveness.

Cost-Volume Profit analysis
• Profits consists of revenue minus expenses, if the revenue is greater than
the cost, a profit will result.
• The total cost of any volume can be determined by combining the fixed and
the variable costs for that volume.
• Average cost is found by taking the total cost at any volume and dividing it
by the number of patients represented by that volume.
• Average cost per patient decreases as volume increases because of
spreading of the fixed costs over over a large number of patients.

Cost-Volume Profit analysis example
Volume(A) Fixed cost
(B)
Variable
cost per
patient (C)
Total variable
cost (D) =
(A)×(C)
Full cost
(E)=
(B)+(D)
Average
cost
(F)= E/A
200 100,000 100 20,000 120,000 600
400 100,000 100 40,000 140,000 350

Breakeven analysis
Revenues = Fixed costs + Total variable costs

Breakeven analysis
Revenues = Fixed costs + Total variable costs
• Revenue consists of the price per patient (P) multiplied by
the number of patients (Q).
• P×Q= FC + VC×Q, where FC= fixed cost and VC=
variable cost.
• Q=FC/P-VC
Using breakeven analysis for decision making
• Aid in deciding whether or not to offer a service
• Cost cutting
• Marketing

Cost accounting
Cost Accounting is a business practice in which we record,
examine, summarize, and study the company’s cost spent on
any process, service, product or anything else in the
organization. This helps the organization in cost controlling and
making strategic planning and decision on improving cost
efficiency.
Management gets the idea where they have to control
the cost and where they have to increase more, which helps in
creating a vision and future plan. There are different types of
cost accounting such as marginal costing, activity-based
costing, standard cost accounting, lean accounting

Advantages of cost accounting
 Measuring and Improving Efficiency
 Identification of Unprofitable Activities
 Fixing Prices
 Price Reduction
 Control over Stock
 Evaluates the Reasons for Losses
 Aids Future Planning

Costing – An Aid to Management
A good cost account system helps the management in the following ways
 Classification of Costs
 Control of Costs
 Budgeting
 Price Determination
 Expansion Plans

Cost containment in Hospitals
Cost Containment
A detailed plan and process of maintaining organizational cost and purchased
prices within certain specified target limits over a period of time.

Need for cost containment
 Rising material cost.
 Increments for staff.
 Less availability of manpower.
 Quality : Accreditation.
 Reduction of income:
- Poor reimbursement rates.
- Hospital only source of revenue is patients

Challenges
All hospitals are faced with challenges in today’s economic climate. These
include:
 Containing spend and reducing costs are the highest priorities.
 Accomplish this containment and reduction with less help.
 Achieve results without jeopardizing on quality.
 Targets need to be achieved in a timely manner.

Areas of Improvement
Infrastructure
 Building orientation and structure
 Scope for change and adaptability
 Layered hospital
 Design approaches
- Minimizing waiting and circulation space.
- Limiting the number of different room types in favour of
adaptable rooms to reduce patient transfers (which increase
delays and costs).
- Reducing the use of water and energy and using
sustainable sources of energy

Operational management
 Devolved management with flat structures.
 Strong governance with and independent knowledgeable oversight by
a properly qualified board.
 Measurement systems.
 The ability to compare performance against others so learning can be
adopted from elsewhere
 Competition helps to improve managerial standards.
 Having senior, clinically qualified managers improves results.
 Larger hospitals invest more in management and appear to be better
managed.
 Developing the right set of metrics and reporting standards.
 Willingness to prototype and pilot new ideas.
 Business intelligence models.
 Healthcare IT.

Information Technology
 It enables hospital support services such as supply chain and procurement,
facilities management, and security management.
 It enables hospital administrative functions such as finance, accounting, legal.
 Eliminates cost of overhead associated with managing paper medical records.
 Reduces manpower requirements by automating several clinical and
operational work steps.
 Provides socio economic benefits (e.g. reduces cost of care, greater access to
healthcare) within 4-10 years of the investment.
 IT also enables patient services from registration to discharge
 Enables clinical decision support
 Reduce medical errors such as adverse drug events
 Eliminates human error, thus increasing process efficiency

Material Management
 Proper inventory control:
i. Setting up of various stock levels:
- Re-ordering level.
- Maximum level.
- Minimum level.
- Average stock left.
- Economic order quantity.
i. Preparation of inventory budget
ii. Maintaining perpetual inventory system

Inventory control
• The purchasing, order, storage and costs of long and short stock must all be
considered to determine the most economical level of inventory.
TC=PD + DO/Q+ [HQ+IPQ/2] +L+S
Where, TC=Total cost, PD= purchase cost, DO/Q= order cost, HQ+IPQ/2 =
carrying cost, L= overstocked cost, S= stock-out cost.
• Economical order quantity
EOQ= 2DP/C
EOQ= Economical order quantity, D= usage in units or demand, P= order cost,
C= annual cost of carrying one unit in inventory.

Finance
 Improve the working capital management
 Maintaining efficient levels of both components of
working capital, current assets and current liabilities, in
respect to each other.
 Ensures a hospital has sufficient cash flow in order to
meet its short-term debt obligations and operating
expenses.
The two main aspects of working capital management are
ratio analysis and management of individual components
of working capital.

Human resources
 Determine how many health workers are required to cope with
actual workload in a given facility.
 Estimate staffing required to deliver expected services of a facility
based on workload.
 Calculate work load and time required to accomplish tasks of
individual categories.
 Compare staffing between health facilities and administrative
areas.
 Understand workload of staff at a given facility.
 Fair workload distribution establishment amongst staff.
 Assess the workload pressure of the health workers in the facility.
 Improve clinical staff efficiency.
 Outsourcing of non-core functions.

Marketing
 Marketing strategies
 Camps
 Display of educational materials
 Using the social media

Research Input:1
High-value, cost-conscious health care: concepts for clinicians to evaluate
the benefits, harms, and costs of medical interventions.(1)
Owens DK1, Qaseem A, Chou R et al, Ann Intern Med. 2011 Feb 1
Health care costs in the United States are increasing unsustainably, and further efforts to control
costs are inevitable and essential. Efforts to control expenditures should focus on the value, in
addition to the costs, of health care interventions. Thus, the challenge becomes determining how
to slow the rate of increase in costs while preserving high-value, high-quality care.
 A first step is to decrease or eliminate care that provides no benefit and may even be harmful.
 A second step is to provide medical interventions that provide good value: medical benefits
that are commensurate with their costs.
This article discusses 3 key concepts for understanding how to assess the value of health care
interventions. First, assessing the benefits, harms, and costs of an intervention is essential to
understand whether it provides good value. Second, assessing the cost of an intervention
should include not only the cost of the intervention itself but also any downstream costs
that occur because the intervention was performed. Third, the incremental cost-
effectiveness ratio estimates the additional cost required to obtain additional health
benefits and provides a key measure of the value of a health care intervention

Health Cost Containment and Efficiency Strategies
 Administrative Simplification in the Health System
 Global Payments to Health Providers
 Episode-of-Care Payments
 Accountable Care Organizations
 Performance-Based Health Care Provider Payments
 Equalizing Health Provider Rates: All-Payer Rate Setting
 Pooling Public Employee Health Care
 Medical Homes
 Employer-Sponsored Health Promotion Programs
 Public Health and Cost Savings
 Health Care Provider Patient Safety

Research Input: 2
Health system efficiency: How to make measurement matter for policy and
management
Health Policy Series, No. 46.
Cylus J, Papanicolas I, Smith PC, editors.
Copenhagen (Denmark): European Observatory on Health Systems and Policies; 2016.
This chapter discusses the potential use of CEA to achieve allocative efficiency (AE) at the health
care organization (meso) and health system (macro) level
Expenditure on pharmaceuticals is the fastest growing health care cost category in high-income
countries (CIHI, 2007; Duerden et al., 2004). CEA has been used extensively in managing
expenditure on pharmaceuticals in Australia, Canada and the United Kingdom (Clement, 2009). In
Canada, the Common Drug Review provides recommendations for new drug listings for the 18
publically funded drug plans (Tierney & Manns, 2008). The recommendations are based on clinical
efficacy as well as cost–effectiveness. In a similar manner, Australia’s Pharmaceutical Benefits
Advisory Committee gives cost–effectiveness-based advice on which drugs should be funded under
the Pharmaceutical Benefits Scheme

The changing healthcare economic environment
 Managed care: Managed care is a system of care in which a designated person
determines the services that the patient uses. A major goal of managed care is to
decrease unnecessary services, thereby decreasing costs. Managed care also
works to ensure timely and appropriate care.
 Organized delivery system (ODS): are comprised of networks of health-care
organizations, providers, and payers. Typically, this means hospitals, physicians
and insurance companies.
 Competition: competition among healthcare providers increasing is based on
cost and quality indicators. Decision making regarding price and utilization of
services is shifting from physicians and hospitals to payers. Significant
contractual discounts, that are lower prices, are being demanded by payers.
Providers who are unable to compete on the basis of price, patient outcomes,
and service quality will find it difficult to survive as changes in the system
proceed

Strategies for Cost-conscious nursing practice
 Knowing costs and reimbursement practices
 Capturing all charges in a timely fashion
 Discussing the cost of care with patients
 Meeting patient rather than provider needs
 Evaluating cost-effectiveness of new technologies
 Predicting and using nursing resources efficiently
 Using research to evaluate standard nursing
practices

Research Input: 3
Differences in cost consciousness between physicians and nurses in German neonatal
intensive care units. Schmitz H et al. , Acta Paediatr. 2019 Feb.
Aim:
This study assessed the cost consciousness of nurses and physicians in German neonatal
intensive care units (NICUs) and identified factors affecting cost consciousness.
Methods:
This study on cost consciousness was part of the German Safety4NICU study, a cross-sectional
survey conducted from 2015 to 2016. All 224 German NICUs were invited to take part in the
survey, and written consent was obtained from the leading physicians and nurses. The various
professions were addressed via specific questionnaires. The cost survey tool identified the
participants' responsibility and their desired focus on cost consciousness.
Results:
Of the 1406 nurses and 496 physicians from 84 NICUs, 64.4% of the nurses and 62.5% of the
physicians agreed that they shared responsibility for controlling costs. The computed score to
define the overall cost consciousness level was 4.47. We identified a significantly positive
association between cost consciousness, longer total clinical work experience and a decreased
number of NICU intensive care beds. Increased cost consciousness was found in both men and
physicians. Other hospital characteristics did not have an effect.
Conclusion:
Neonatology is a medical speciality where the tension between economics and the benefit of
patients is extremely high. We found a moderate level of cost consciousness among NICU

Conclusion
It is important to acknowledge that many health outcomes currently observed
are the results of decisions taken in earlier time periods and that often changes
may not reflect in the outcomes for a long time. Finally, decision-making tools
such as CEA must also allow for externalities and system-wide effects in
estimating the gains and losses from changing the current mix of services or in
moving resources between sectors.

Cost effectiveness and cost containment

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