5-cost of healthcare.pptx

8/17/2019 5-Cost of healthcare.pptx

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Classifcation o Costs


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On the basis o

By traceability: Direct / Indirect

By cost Behaviour: Variable / Fixed / Mixed

By Controllability

By selection amon alternatives:!voidable / "un# / Incremental /

O$$ortunity


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Direct and Indirect Costs

Direct Costs: is s$ecifcally traceable to aiven cost such as $roduct% $rocess%

de$artment or activity or &hich theorani'ation &ishes to estimate the cost(

Indirect Costs: cannot be traced to a

iven cost ob)ect &ithout resortin to somearbitrary method o assinment( *hey aredistributed over all activities(


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"alaries"u$$lies

Consultation

!&areness cam$ain

+atient day

,m$loyee Benefts

!dministration

Maintenance

-ouse#ee$in

Caterin

.aundry

De$reciation


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ot all indirect costs are indirect(

.i#e% to calculate em$loyee benefts or

s$ecifc em$loyees0 these costs then couldbe chared to the de$artments in &hich theem$loyees &or# and thus become directcosts(


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Variable / Fixed / Mixed Costs

1. Variable Costs:

.It chanes as out$ut or volume chanes ina constant% $ro$ortional manner( I out$utincreases by 123% costs also shouldincrease by 123(

.

For instance% su$$lies &ere cateori'ed asvariable costs in labs0 i the $rice osu$$lies is 4s 12 $er $atient% or eachadditional $atient su$$ly costs &ill increase

by 4s 12(


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Variable cost behaviour

"u$$lies Cost

12%222

1222+atients


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2. Fixed Costs:

. *hese costs do not chane in res$onse to

chanes in volume(. *hey are a unction o the $assae o time%

not in$ut(

.I de$reciation costs &ill remain 4s 122

irres$ective o out$ut level 5i(e no o$atients6% hence it &ill be fxed cost(


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Fixed Cost Behaviour

De$reciation

Costs

122

+atients


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3. Semi-fxed Costs (called step-fxed): *hese do chane &ith res$ect to chanes in out$ut%

but they are not $ro$ortional(

It miht be considered variable or fxed% de$endin

on the si'e o the ste$s relative to the rane ovolume under consideration(

,% it is assumed that the salary cost o thelaboratory is semi7fxed( I the number o $atients5volume o out$ut6 &ere bet&een 822 and 922%

salary cost &ould be considered fxed at 4s( 82%222(In other &ords it is assumed here that additionalunits o man$o&er &orth 4s 1222 must beem$loyed or every increment o ;22 $atients(


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"emi7fxed cost behaviour

"alary

2222

1222

;22 =22 822 922 1222

+atients


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. Semi-!ariable Costs:

.It include elements o both fxed andvariable costs(

.?tility costs are ood exam$le(

. *here may be basic% fxed re@uirement $erunit o time 5month or year6 reardless o

volume(.But there is also li#ely to be a direct%

$ro$ortional relationshi$ bet&een volumeand the amount o utility cost( !s volume

increases% costs o u$(


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"emi7variable cost behaviour

costs

222

1222 +atients

1222


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Variable Fixed Semi-

fxed

"ota

l

Direct

Other =%222

Other 1%222

"alaries


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* Controllabilit*

*otal costs chared to the de$artment0 thede$artment manaer &ould vie& all costsin the $revious 8 cateories as controllable(

,(( Cost o @uality control% em$loyeebenefts etc(

?ncontrallable cost are beyond reulation

o manaement: e( $rice o ra& materialby su$$lier(


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By selection amon alternatives

!voidable Costs

"un# costs

Incremental costsO$$ortunity Costs


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1. +!oidable Costs:

. *hese can be eliminated or saved i an activity isdiscontinued0 they &ill remain only i the activitycontinues(

.For e i hos$ital &as considerin curtainin its volumeby 23 in res$onse to cost containment $ressure% &hat&ould it save A

.Variable costs are almost al&ays a subset o avoidablecosts% but avoidable costs miht include some fxed costs(

.,(( administrative stan% &hich is usually rearded asfxed costs% miht be drastically reduced in a hos$ital i23 o the beds &ere ta#en out o service(


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2. S,n Costs:

. *hese are unavoidable costs(

.

*hey are aected by the decision underconsideration(

..are $ortions o costs% li#e de$reciation%administrative salaries% insurance and

others are sun# in the $ro$osed 23 cutin volume in hos$ital(


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3. Incremental costs

. *hese re$resent the chane in cost that results rom as$ecifc manaement unction(

.For e% someone miht &ant to #no& the incremental costo addin a ne& &in to the hos$ital that &ould enerate

;22 ne& admissions in a year(.Incremental and avoidable costs% hence can be thouht o

as dierent sides o the same coin the ormer relates toincrease in volume &hile the latter is associated &ithreduction in volume(

.In above exam$le% incremental costs &ould include bothfxed and variable costs( -o&ever% or decisions involvinonly modest chanes in out$ut% incremental and variablecosts may be used interchaneably(


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. pport,nit* Costs

. *hese are values oreone by usin a resource in a$articular &ay instead o in its next best alternative &ay(

.,: ! hos$ital is considerin ex$andin its acility and&ould use land ac@uired ;2 yrs ao( I land &as$urchased at 4s 1 million but had a $resent mar#et valueo 4s 12 million% &hat is the o$$ortunity cost o land A

.!lternatively% hos$ital miht consider convertin $art oits acute care acility in a nursin trainin institutebecause o a reduction in demand in acility( I there is no&ay that the existin acility can be renovated or i theacility is not needed or the $rovision o acute care% itso$$ortunity cost may be 2(


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"otal% +!era/e and 0ar/inal

cost


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"otal Cost *C E *FC *VC

+!era/e "otal cost 5?nit Cost6 E *otal cost $er

unit!*C E *C/ G 5GE o( o out$ut units6

!*C E *FC *VC G

E *FC *VC G G

!*C E !FC !VC


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0ar/inal Cost : 4ate at &hich total costincreases(

Increase in total cost that &ould result romthe $roduction o one extra unit(

I total cost is increasin slo&ly as out$utincreases that means that marinal cost is

lo&(I total cots is increasin shar$ly as out$ut

increases% that means that marinal cost ishih(


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"otal Cost C,r!e

Hhen G is 2% total cost is $ositive because even &hen thefrm is not $roducin anythin it is incurrin fxed costs(

O! re$resents Fixed Cost

!t out$ut Gb% *C o $roducin that out$ut is GbB(

!*C o $roducin Gb E *C/Gb(

Cost *otalCost

B

*Cb

!

2

Gb Guantity oout$ut


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*he marinal cost at any $oint on the totalcost curve is iven by the stee$ness o thecurve at that $oint(

Hhere the curve has a stee$ slo$e%

marinal cost is hih0 &here the curve isatter% the marinal cost is lo&er(


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"otal Fixed Cost and 0ar/inal Cost

"u$$ose *C ell but *VC remained same(

*C curve &ould retain the same sha$e but &ould cross thevertical axis at C( *he ne& *C curve is $arallel to old *Ccurve(

*C curve ater chane in FC: o eect

Cost *otal Cost

B e& *otalCost

*Cb

!

C

Gb Guantity

o Out$ut


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Its stee$ness at any $oint re$resentinmarinal cost is unaltered(

-ence% chane in fxed cost doesnJt aectmarinal cost(

"ince MC is cost o $roducin one extra unitand &hatever the level o activity% the levelo FC can have no im$act on the cost o$roduction o one extra unit(


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+!era/e Cost C,r!e

*FC do not vary &ith out$ut level% hence !FCmust all as out$ut increases(

+!era/e Fixed Cost

Cost

!FC

Guantity oOut$ut


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+!era/e Variable CostHhen some actors o $roduction are

fxed% !VC are li#ely to all and then to

rise as out$ut increases(Kiven fxed ca$ital stoc#% as the labour

orce increases% s$eciali'ation and theecient use o ca$acity means that

out$ut may &ell increase @uite ast% andthis &ill drive !VC do&n(


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+!era/e Variable Cost and +!era/e "otal Cost

Ca$acity constraints are reached% extra unit o out$ut maybecome ex$ensive to $roduce(

For e(( more niht shit and &ee#end &or#in miht bere@uired% hence !VC may &ell bein to rise% ivin an !VCcurve(

!*C curve is calculated by addin the corres$ondin costs

on the !FC curve and the !VC curve% ivin a short7run !*Ccurve(

!*C

Cost

!VC

Guantity o out$ut


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+!era/e Cost and 0ar/inal Cost

I $roduction o an extra unit o out$ut causes averae cost toall% then it ollo&s that the cost o $roducin this extra unit%the marinal cost% must have been lo&er than $revious

averae("imilarly% i the $roduction o an extra unit o out$ut causes

averae cost to rise% then the marinal cost o $roducin thisextra unit must have been reater than the $revious averae(

I MC is reater than !C% then the !C must be increasin0&hen the MC is less than !C% then !C must be decreasin(

-ence% i !C curve has a minimum $oint &hile $lottin ra$h%then MC curve must intersect the !C curve at the minimum$oint o !C curve(


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Cost MC

!*C

Guantity o Out$ut

Over a certain rane o out$ut% !VC is constant(

-ence% VC associated &ith the $roduction o anextra unit &ill be the same over that rane oout$ut(

But another &ay o describin the variable costsassociated &ith $roducin one extra unit oout$ut is MC( -ence% i VC is constant% MC E !VC(


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0ar/inal Cost and Decision 0ain/

; hos$itals ! and B @uote same averae cost or aservice% and are o$eratin at dierent $oint on their !Ccurves(

It &ould be more ecient use o resources i $atients&ere reerred to hos$ital !% because an increase in

activity &ill lead to a all in unit costs0 rather than-os$ital B% &here an averae increase in activity &illresult in a rise in unit cost(

-o&ever% i !C are the only data available% the decisionma#ers &ill not be a&are o this(

-ence% inormation about MC &ould be hel$ul here(

"ince% !C at hos$ital ! are allin% MC is belo& !C(

"ince% !C at hos$ital B are risin% MC is above !C(

-ence% i data on MC &as available% it &ould be clear that

hos$ital ! &as better choice(


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Cost

!*C o-os$ital ! L

-os$ital B

C

G! GB Guantity o Out$ut


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Cost and ricin/

*he cost o $roduction is an im$ortantdeterminant o the $ricin decision(

I buyers are not $re$ared to buy at the

$rice necessary to cover all orani'ationJscosts in the lon run% then the orani'ation&ill leave the mar#et or that $roduct(

! common a$$roach to $ricin in $rivate

sector is to estimate the variable cost $erunit 5!VC6 and to add on a mar#7u$ tocover overheads and ive satisactory$roft(


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I VC is 4s 122 $er unit and it has beenestimated that a mar# u$ o 23 &ill coverfxed costs and $rovide a satisactory $roft%then the sellin $rice &ill be

"+ E !VC 51 m/1226

m is $ercentae mar#u$

E 4s 122 51 2/1226 E 4s 12


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Hhat the mar#u$ should be i the frm &ishes tomaximi'e its $rofts A

*he o$timum $ercentae mar#u$ on cost is ivenby:

m E 1 122 536

,$ 71

I !VC is constant over a rane o out$ut% then over

this rane !VC E MC(

"atisactory +roft E !VC 5 +,D6

+,D 71


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.on 4un Costs

In lon run the @uantities o all actors o$roduction can be varied% hence there areno fxed costs(

!ll costs are variable in lon run(In short run costs are estimated on the

basis o assum$tion that some o the in$utsare fxed 5ca$ital in$uts6( Out$ut can be

increased in the short run only byincreasin the variable in$uts &ith a ivensi'e or scale o o$eration(

.on run allo&s the entre$reneur chane

the si'e o o$eration


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Hhat should be the o$timum si'e o theorani'ation in a year $lanninrame&or# A

For a manaer% it is translated as:

-o& many beds the hos$ital should run&ith A

Hhen should &e sto$ ex$ansion A!ter a certain stae the ex$ansion o a

hos$ital becomes counter $roductive anddisadvantaeous(


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conomies and Diseconomies oScale

I out$ut increases by a larer $ro$ortion than theincrease in in$uts% there are increasin return toscale(

,(( I &e increase all in$uts o a hos$ital by 123%

and fnd the out$ut has increased by more than123% &e have increasin returns to scale(

I all in$uts are increased by 123% total cost &illalso increase by 123(

-ence% !verae Cost is li#ely to all as the scale oo$eration increases 5because out$ut hasincreased by more than 1236: "ituation is calledas ,conomies o scale% im$lyin advantaes incost &hen you ex$and(

,conomies o scale ma arise because sta are


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Conversely% i out$ut increases by a smaller $ro$ortionthan the increase in in$uts% these are decreasinreturns to scale( It means that averae costs rise asthe scale o o$erations increase 5e(( increasin all thein$uts by 123 $roduces less than 123 increase in the

out$ut% thereore the cost $er unit $roduced must behiher6: "ituation is called as Diseconomies o scale(

It usually ha$$ens &hen the orani'ation has ro&ntoo ar( Becomin larer $roduces cost disadvantaes(

*his may be because o $roblems such as increased

bureaucracy% $oorer communications and &orse labourrelations &hich are oten encountered in larerorani'ations(


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.on 4un !verae Cost Curve

Curve re$resents the unit cost o $roduction or dierent scales

o o$eration(.4!C curve is allin initially as the si'e o orani'ation increases

and it benefts rom actors $roducin economies o scale(

*hen .4!C is constant as there is no urther cost benefts romincreasin si'e(

Finally orani'ation becomes lare% $roblems &ith increasinsi'e create diseconomies o scale and .4!C bein to increase(

Cost

.4!C

,conomies Diseconomies

o scale o scale

Out$ut


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,conomies o sco$e

"u$$ose ; hos$itals are in a to&n% one $rovides only$aediatric care and other only eriatric care(

Hould total cost o $aediatric and eriatric care be lo&eri one sinle hos$ital $rovided both A

It may be chea$er to combine ; hos$itals and achieveeconomies o scale( But $oint is that it could as &ell bechea$er to combine them because the in$uts needed orboth ty$es o care interact &ell toether( ; could su$$orteach other so that the result &ould be lo&er total costs(

I so% &e say that by $roducin ; dierent out$uts )ointly&e achieve economies o sco$e(

,(( Many $hysicians &ho used to $ractice inde$endentlyare no& $rovidin services )ointly throuh $olyclinic%reducin total cost(

5-cost of healthcare.pptx

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