MEASURING AND ESTIMATING COSTS Mohammad Aljawadi PharmD, PhD

Clinical Pharmacy Department

King Saud University

PHCL 431

Sep, 2015

OBJECTIVESUpon completing this chapter, the pharmacy learner will be able to:

Define different costing terms.Categorize types of costs.Determine the perspective of a study based on types of

costs measured.Understand when adjusting for timing of costs is

appropriate.Calculate net present value.Compare average costs with marginal or incremental costs.List common sources for obtaining cost data.

COSTING TERMS Cost are used to estimate the resources (or inputs)

that are used in the production of a good or service. Resources used for one good or service are no longer

available to be used for another. Opportunity Cost:

Defined as the value of the best-forgone option= the value of the “next best option.”

EXAMPLES OF OPPORTUNITY COST In a private hospital New pharmacy (inpatient,

outpatient) should hire a pharmacy technician (PT) for the inpatient pharmacy instead, the director used one of the full time pharmacists in the outpatient pharmacy to cover the PT job. What is the cost to the pharmacy at the end of the day?

The cost of the outpatient pharmacist(No of hours worked * cost per hour)

+the cost of the forgone Rxs that the

pharmacist would have filled had he/she was in the outpatient pharmacy.

EXAMPLES OF OPPORTUNITY COST Due to limitation in budget, a PT committee decided to

purchase a new medication for treating hypertension over a new medication for treating DM? What is the cost to the hospital?

The cost of new medication +

Health care costs associated with not providing the new treatment for DM

EXAMPLES OF OPPORTUNITY COST A female clinical pharmacist covering an

anticoagulation clinic is going for two months maternity leave.What is the cost to the hospital?

Cost for two months salary+

Cost of the forgone savings due to suspension of services provided by the

clinical pharmacist

COST OF PRODUCTION VS. PRICE VS. REIMBURSED AMOUNT Cost of production: Cost of the resources (or inputs)

that are used in the production of a good or service.

Price or charge: The monterey value that is asked by the seller for a good or a service

Reimbursed amount =allowabale charge: the amount that a payer “allows” to be charged for a specific product or service; the monetary amount the payer agrees to reimburse (pay).

RANK FROM HIGHEST TO LOWEST:

Price or Charge

Reimbursed amount

Cost of Production

The highest

The lowest

COMPLEMENTS VS. SUBSTITUTES: Complements Two goods for which an increase in the

price of one leads to an decrease in the quantity demanded of the other.

Substitutes Two goods for which an increase in the price of one leads to an increase in the quantity demanded of the other.

EXAMPLES OF COMPLEMENTS AND SUBSTITUTES: Inslulins and subQ injections

Two ACEIs

A lab test that is essential to guide a treatment dose adjustment in patients with a chronic disease

Sulfonylureas and metformin

COST CATEGORIZATION: TWO WAYS OF CLASSIFYING COST Direct medical costs Direct non-medical

costs Indirect medical costs Intangible costs

Patients and family direct costs

Health care sectors costs

Other sectors costs Productivity costs.

COST CATEGORIZATION

TWO WAYS OF CLASSIFYING COST Direct medical costs Direct non-medical

costs Indirect medical costs Intangible costs

Patients and family direct costs

Health care sectors costs

Other sectors costs Productivity costs.

DIRECT MEDICAL COSTS These are medically related inputs used directly to

provide the treatment.PharmaceuticalsDiagnostic tests Physician visitsPharmacist visitsEmergency department visitsHospitalizations

DIRECT NON-MEDICAL COSTS Costs to patients and their families that are directly

associated with treatment but are not medical in nature.Cost of traveling to and from the physician’s office, clinic, or

the hospitalChild care services for the children of a patientFood and housing required for the patients and their families

during out-of-town treatment.

INDIRECT COSTS AND INTANGIBLE COST

Indirect Cost Intangible Cost

Costs that result from the loss of productivity because of illness or death Cost of closing the shop to

receive treatment Absence from work

Cost of suffering, pain, anxiety or fatigue associated with an illness Willingness to Pay Utility

TWO WAYS OF CLASSIFYING COST Direct medical costs Direct non-medical

costs Indirect medical costs Intangible costs

Patients and family direct costs

Health care sectors costs

Other sectors costs Productivity costs.

TWO WAYS OF CLASSIFYING COST Direct medical costs Direct non-medical

costs Indirect medical costs Intangible costs

Patients and family direct costs

Health care sectors costs

Other sectors costs Productivity costs.

PATIENT AND FAMILY DIRECT COSTS Costs to the patient and his or her family without

regard to whether they are medical or nonmedical in nature.

HEALTH CARE SECTOR COSTS Medical resources consumed by health care entities;

these do not include direct medical costs paid for by the patient or other sectors.

OTHERS SECTOR COSTS Costs related to a disease but not medical in nature,

such as housing, homemaking services, and educational services.

PRODUCTIVITY LOSS: Costs related to missing work or being less productive

because of health conditions.

WHICH COST TO MEASURE? It depends on the perspective Perspective:

An economic term that describes whose costs are relevant (being measured) based on the purpose of the study

Types of perspectives: Patient Hospital or provider Payer (insurance company or employer) Society

TYPES OF PERSPECTIVES Societal:

The most comprehensive but the most difficult and the most time consuming.

Hospital or provider/Payer (insurance or employer):The most common Usually interested in the differences between two

alternatives

WHICH COST TO USE?

Price or Charge

Reimbursed amount

Actual cost of a service

Hospital Patient Insurance company Societal

TIMING ADJUSTMENTS FOR COSTS

BRINGING PAST COSTS TO THE PRESENT: STANDARDIZATION OF COSTS Standardization of Costs:

A method used to value costs that are collected over 1 year to one point in time. 

2013

2014

2017

2016

2013 2017

2015

BRINGING PAST COSTS TO THE PRESENT: STANDARDIZATION OF COSTS Standardization of Costs:

A method used to value costs that are collected over 1 year to one point in time. 

2013

20142015

2013 2017

1 1

BRINGING PAST COST TO PRESENT:FIRST METHOD:

BRINGING PAST COST TO PRESENT:SECOND METHOD:

2013

2014

2015

2014 2015

2015 ]

2015 ]

2014 ] X

2015

BRINGING PAST COSTS TO THE PRESENT: STANDARDIZATION OF COSTS Standardization of Costs:

A method used to value costs that are collected over 1 year to one point in time. 

2013

2014

2017

20162015

2013 2017

BRINGING PAST COSTS TO THE PRESENT: STANDARDIZATION OF COSTS Standardization of Costs:

A method used to value costs that are collected over 1 year to one point in time. 

2017

20162015

2013 2017

BRINGING FUTURE COSTS (BENEFITS) TO THE PRESENT: DISCOUNTING What Do you prefer?

SR1000 after a year or SR950 today Future Money worth less than todays money. Why?

I can take the money and enjoy it i.e. maximize my utility I can take the money and invest it in a projectThere is no guarantee that I will live to next year to get the

moneyThere is no guarantee that the company will give me the

money after a year. I will not lend a person 1000 and take it 1000 after a whole

year i.e. I have to benefit from the deal I should get more than 1000 because of the inflation and to give up the 1000 today.

Not in Islam

BRINGING FUTURE COSTS TO THE PRESENT: DISCOUNTING Discounting: The process of determining the present

value of a payment or a stream of payments that is to be received in the future (investtopia.com)

The discount rate: the percent reduction used to bring future cost to current present time. Usually 3%-5%Present value= cost X ∑ 1/(1+r)t

r= discount rate t= number years in the future that the cost or savings occur

EXAMPLE OF DISCOUNTING Assuming that cost incurred at the beginning of the

yearNet value=5000 X 1/(1+0.05)0+ 3000 X 1/(1+0.05)1+ 4000 X 1/(1+0.05)2+= 5000+2,857+3,628=11,485

201520162017

201520162017

EXAMPLE OF DISCOUNTING Assuming that cost incurred at the end of the yearNet value=5000 X 1/(1+0.05)1+ 3000 X 1/(1+0.05)2+ 4000 X 1/(1+0.05)3+= 5,762+2,721+3,455=10,938

201520162017

201520162017

RESOURCES FOR COST ESTIMATION

RESOURCES FOR COST ESTIMATION Medications:

Saudi Food and Drug Authority (SFDA) Price to the public

Wholesale price Discounted price to retail pharmacies

Claims Data Reimbursed amount

RESOURCES FOR COST ESTIMATION Hospitalizations:

Per Diem An overall estimate of costs for a day in the hospital without regard to the reason

for the hospitalization. This is the least precise method of estimating hospital costs.

Disease specific per diem Uses an overall estimate of costs for a day in the hospital for a specific disease or

condition.

Diagnosis related disease The method used to classify clinically cohesive diagnoses and procedures that use

similar resources.

Micro-costing Collecting information on resource use for each component of an intervention.

QUESTIONS