cost-benefit analysis in mental health services: a review of the literature

Administration in Mental Health Vol. 8 No. 3, Spring 1981

COST-BENEFIT ANALYSIS IN MENTAL HEALTH SERVICES: A Review of the Literature

Richard Frank

A B S T R A C T : Cost-benefit/cost-effectiveness analysis is a tool that can be used by public policy analysts to make social resouree allocations when the private market fails to do so. A definition and discussion of the technique and its applications and limitations are presented along with case studies of cost-benefit analysis applied in the menta l heahh field. The author also provides a brief, annota ted bibl iography of recent articles and papers on cost-benefit/cost-effectiveness analysis.

INTRODUCTION

Cost-benefit analysis is a tool used by public policy analysts to make social resource allocation decisions when the private market fails to allocate resources adequately. The method provides a systematic approach to estimate society's willingness to pay for a particular allocation of resources (e.g., a service delivery project) and the relevant costs associated with it. Thus, the public authority attempts to arrive at a solution that simulates what would have occurred had the market been funetioning properly.

In use since the late 1950's, cost-benefit analysis has yet to be applied in a broad manner to the general health/mental heahh field. Within the mental health sphere, most cost-benefit studies have been limited to comparing some form of community outpatient treatment to the conventional inpatient approach. Rarely are cost-benefit analyses addressed to other major mental health policy issues. Given increasing public intervention into the private marketplace for mental health services, it is likely that cost-benefit analysis, along with other analytic techniques, will be called upon with growing frequency to guide public administrative decisionmaking concerning resource allocation. A clear understanding of the technique and its applications and limitations is necessary.

Richard Frank is an economist for the Division of Biometry and Epidemiology, National Institute of Mental Health. Reprint requests should be addressed to hirn at the Department of Psychiatry, University of Pittsburgh, PA 15261.

161 0090-1180/81/1300-0161500.95 @1981 H uman Sciences Press

162 Administration in Mental Health

The review of cost-benefit studies in mental health that follows will emphasize the overall rationale and logic of cost-benefit analysis, and the particular problems and issues related to cost-benefit analysis applied to mental health service programs. As background to this discussion, some basic economic terms and concepts should be understood.

In the United States most resource allocation is done by means of the market; prices adjust so that the market just clears--that is, demand equals supply. The demand curve represents society's willingness to pay for a given product when consumers are fully informed and rational. The supply curve represents producer costs and, therefore, the ability to provide goods at various prices. Thus, when demand equals supply, the ideal market allocates resources using price until the amount society is willing to pay for a unit of goods is equal to the cost of producing that unit. Real markets often do not live up to such an ideal, and inefficient allocation of resources occurs. Public intervention in the marketplace may be called for when supply and demand curves do not accurately represent society's co sts of production and/or society's willingness to pay. A quantifiable definition of benefits can be put forth from the notion of demand as a willingness-to-pay schedule. Benefits are the amount of money society would be willing to pay for a particular good or service rather than forego the opportunity to have it. And the idea of foregone opportunities can also be used to obtain a definition of cost. The cost of a productive activity is defined as the alternative outputs that a society must give up in order to produce the benefits associated with that activity.

The preconditions for efficient operations of markets are absent in the health and mental health care spheres.

The preconditions for efficient operations of markets are absent in the health and mental health care spheres; for example, in the market for mental health, as in the health services, the consumer orten does not know what care he should seek and relies in large part on the provider to act as buying agent. The widespread use of third party payers (i.e., private insurance, Medicare or Medicaid) drives away incentives for providers to deliver services at minimum cost and makes an already ignorant consumer less likely to choose treatment based upon cost. These characteristics among others of the health/mental health marketplace can lead to inappropriate treatment.

With this in mind, public authorities at various levels have intervened in the marketplace, further weakening already tenuous market incentives. With the expansion of programs such as community mental health centers ( C M H C ' s ) and the likelihood that national health insurance will be implemented in the near future, administrative decisions are likely to replace consumer and producer choice. It is in this context that cost-benefit analysis should be scrutinized as a policy tool.

Richard Frank 163

COSTS AND BENEFITS

Cost Estimation In the mental health policy sphere, the goal of cost-benefit analysis is to

estimate, in monetary units, the value of benefits and costs associated with implementing a certain mental health service project. The relevant costs in making such an estimate are the total expenditures to be made, including both the direct service delivery expenditures (e.g., professional services and medication) as well as less obvious costs (e.g., time foregone by the patient/client while in treatment).* Thus, costs may be viewed as the value of resources withdrawn from the econorny to implement a particular program and this value is represented by the market prices of various resources (e.g., wages of labor, rental value of equipment and office space).

For the most part, it is easy to estimate these costs if the quantity of resources necessary to meet program goals is known; estimates become more difficult, however, if resource needs are uncertain. For example, the costs of a service program to " c u r e " schizophrenia would be extremely difficult to estimate, due to uncertainty concerning which resources are necessary to fulfill the objective.

Some costs, such as those associated with building and operating a mental health facility, can be estimated in a fairly straightforward manner . However, since one of the goals of cost-benefit analysis is to estimate total cost, other less tangible costs taust also be considered. For example, the cost of a visit to a psychiatrist is more than merely the cost of the psychiatrist's time plus the cost of his/her office space. The total figure should also include the value of the time the patient taust forego in order to be treated (Ginsberg and Marks 1977; Glass and Goldberg 1977; McCaffree 1969).

Benefit Estimation

Benefits have proven difficult to estimate. Placing values on all benefits is a very elusive task, since the direct estimation technique associated with costs usually is not appropriate for benefit calculation. Estimating the costs averted (e.g., indirect costs~) of implementing a mental health program has become the most popular calculation technique (Murphy and Datei 1976; Ginsberg and Marks 1977; McCaffree 1969; Johnson 1977). Mental illness often means diminished productivity, a major cost for the patient. This can be measured by the wage rate that would have been paid to the individual had he or she been well. The difference between this wage and the patient's actual wage represents

*It is important, however, not to confuse the cost of a specific treatment program with the cost of illness. The former includes treatment manpower and resources, and the client's/patient's foregone time while in treatment. The latter includes these two, as well as the client's/patient's foregone earnings due to illness.

~"Indirect costs are those resulting from losses in output as tirne is lost from work and keeping house because of morbidity and premature mortality. The measure of output loss is earnings and the imputed market value of unperformed housekeeping services. Illness may also adversely affect .productivity in addition to causing tirne lost from work. Adverse effects on productivity can occur if ülness lessens productivity of persons while on the job, and absenteeisrn may increase costs of production with the end result that the value of output per unit of input declines." U.S. Public Health Service Guidelinesfor Cost of Illness Studies in the PHS~ May 1979.


both the loss of income to the individual and the value of lost productivity to society.

Emphasis on foregone earnings in estimation of benefits introduces an important bias into the analysis. Programs benefiting groups such as prime age (28-55) white males will inherently appear more desirable than those aimed at other target populations because as a demographic group, these individuals earn higher wages than do other segments of society. The foregone earnings measure places low value on programs benefiting the very young, the very old, women, and minorities.

A critical problem for cost-benefit analysis of mental health programs is that many involve treating diseases that cause psychological pain but no disability. Benefits of those programs--such as happiness and relief of suffering--are essentially unquantifiable and are omitted from the usual benefit calculations. This is particularly important if one thinks of the benefit calculation as a study of society's willingness to pay. Thus, it is likely that cost-benefit analysis will systematically undervalue mental health programs. This complication is aggravated in the market for mental health services, where there is large variation in how benefits are viewed and substantial uncertainty as tQ the extent of benefits (May 1970; Johnson 1977; McCaffree 1969; Murphy and Datel 1976).

Flow of Costs Time Horizon The time horizon for the flow of costs and benefits is an important element of

the analysis. Dollars today realistically cannot be compared to dollars ten years down the road. Thus, the stream of benefits and costs of a program must be converted into today's dollars and evaluated on that basis. In general, given discounting, benefits that occur in the distant future are less likely to exceed costs, which tend to be more immediate. Furthermore, the higher the discount rate chosen by the analyst, the more likely the policymaker is to pick projects with quick payoffs.

Distribution Problems in Cost-Benefit Analysis Cost-benefit assessments do not distinguish among recipients of benefits.

This is extremely problematic in applying cost-benefit analysis to mental health programs. Public intervention in the mental health care marketplace occurs largely for equity reasons-- that is, providing access to groups of individuals who are excluded from the mental health care sector. If benefits gained by serving those formerly untreated individuals cannot be compared with the losses taken by individuals who pay for those services, an accurate appraisal of the net benefit to society will not occur.

Cost-Benefit Analysis and Economic Decisionmaking Unless all costs and benefits of a particular program are fixed and cannot be

varied, simply weighing its costs against its benefits will not provide a sufficient

Richard Frank 165

basis for deciding how much should be invested in that program. If a program has discretionary outlay, the alternate costs taust be studied against the alternate benefits to assure that net benefits are maximized. This is known as marginal analysis.

Marginal analysis treats the direct costs of mental illness (e.g., treatment program costs) and the indirect costs (e.g., foregone earnings of the mentally ill) as the result of social choice. Many individual decisions are made in the mental health sector that combine to determine the levels of direct and indirect costs. For example, the decision to train more mental health manpower presumably will increase the direct cost of mental health services while probably reducing the indirect tost of mental illness (McGuire 1978). In order to demonstrate the nature of choices and the determination of direct and indirect cost, all the choice dimensions can be collapsed into two 2-dimensional schedules; dollar costs can be measured on the vertical axis and the percent of mentally healthy people in society can be shown on the horizontal axis. Thus,

( - Indirect Cosl) Benelits

Direct Cost

\

50% 80% % Healthy

F I G U R E 1. Indirect and Direct Costs of Menta l Illness. Source: McGui re (1978).


in Figure 1, when 50 percent of the population is mentally healthy, society has chosen to spend 0 dollars on the treatment of mental illness, expressed by the intersection of the direct cost curve with the horizontal axis.

Having a population that is 100 percent mentally healthy has both very large benefits and very large direct costs. Thus, society faces a tradeoff: incurring direct costs of treatment or incurring indirect costs of illness. Whatever the decision, the goal is to maximize net benefits--that is, the total benefits (the vertical distance from the horizontal axis to the indirect cost line) minus the direct costs (the vertical distance from the horizontal axis to the direct cost line).

ù . society faces a tradeoff: incurring direct costs of treatment or incurring indirect costs of illness.

With this in mind, a description of the maximization decision and the "optimal level" of mental illness can be developed. From an economic perspective, elimination of mental illness is not necessarily the optimal choice. The direct cost may be so great that the benefits to society may not be large enough to maximize the net benefit. If the net benefit is to be maximized, the point at which the distance between the two curves is greatest will designate the optimum. At points E and F (Figure 1), or at the 80 percent level of mental health, the net benefits are maximized. If a tangent line is drawn to point F, it runs parallel to the indirect costline and provides the decision rule: net benefit will be maximized when the extra direct cost of a unit of treatrnent is equal to the benefits from that extra unit of treatment. In this case, an 80-percent level of mental health is optimal, illustrating the decision-making nexus that cost- benefit analysis offers the policymaker.

Cost-Effectiveness Analysis In some cases the problems of estimating benefits seem overwhelming, and

no effort is made to make such estimates. Instead, a benefit or service target that can be quantified is chosen. This target, expressed in nonmonetary units, is assumed to be desirable within an expected cost range. The process of undertaking such an evaluation is known as cost-effectiveness analysis (Romans 1973).

The traditional procedure for performing a cost-effectiveness study is to: (1) specify homogeneous units of output; (2) compare alternate projects for achieving this output; (3) pick the plan with lowest average (per unit) cost (Sorenson and Grove 1977; Cassell et al. 1972; Fishman 1977; Yates 1975, 1977, 1979). This approach is supported by a number of strong assumptions, but it may not be reasonable to accept them totally. Romans (1973) puts it as follows:

If the alternative methods of achieving the output are perfect substitutes for each other (i.e., one method is not subject to diminishing returns relative to another method), the

Richard Frank 167

decision problem comes down to simply choosing the method with least costs per unit of output. However, most production processes are not of this type. Typically, there are numerous methods of production, each subject to diminishing returns, so that least-cost production is a combination of many methods. For example, in the production of mental health services there are many treatment options--individual and group psychiatric counseling of many types, drugs, electro-shock treatment, rest, milieu, etc. The chances are that the cost-effective treatment is going to be a unique combination of several of these.

The implication is clear: all plans being compared must combine treatment modes optimally and use the best technologies, or cost-effectiveness analysis will not lead to choosing a program that minimizes costs. Romans suggests using the methodology of production economics in which techniques of constrained optimization (Baumol 1972) are employed to find the cost- minimizing combination of treatments. This approach eliminates the prevalent either/or nature of cost-effectiveness analysis, producing instead methods of combining resources in the most efficient manner.

Eren though cost-effectiveness analysis eliminates the problems associated with assigning dollar values to benefit, many of the problems of cost-benefit analysis remain. The target output level is an indirect measure of benefit; the directness of the connection between output and benefits remains to be established. (For example, does a high turnover rate of patients imply improved mental health for the individuals involved?)

A second source of problems is related to the discounting problem found in cost-benefit analysis. How can a flow of services be discounted, and what is the meaning of doing so (Glass and Goldberg 1977)?

These questions remain problematic to the analyst using cost-effectiveness analysis. In fact, analysts such as Yates (1976, 1977, 1979) continually ask the production economics question but cannot use cost-effectiveness results to answer it. Cost-effectiveness analysis remains a special case of cost-benefit analysis and is subject to many of the same difficulties.

COST-BENEFIT STUDIES

Ginsberg and Marks (1977) did a full cost-benefit analysis on the provision of behavioral psychotherapy by nurse therapists in England. The nurses operated in a hospital setting seeing patients in a short-term (less than 25 sessions), outpatient-care mode of treatment. The analysis was based on four basic assumptions: (a) most patients who could benefit from brief psychotherapy cannot get it; (b) untreated patients do not improve; (c) benefits of treatment last for four years; (d) housework is valued at the lowest decile of industrial workers.

Benefits were identified and divided into two groups: tangible and intangible. Tangible benefits estimated from the patient sample were: reduction in inpatient psychiatric days; reduction in general health care sector visits, specialist visits, and national health service visits; patients' reduced expenditures seeking help for their problems (taxis, household help, etc.); and improved productivity (reduced absenteeism, reduced relatives' absenteeism,


increased earnings). The intangible benefits were identified but not measured. They included: improvement on scales of psychopathology and mood, and increases in leisure activities.

The costs of the program involved: travel expenses, work and leisure missed while in treatment, capital costs, and numerous variable costs associated with labor and material required for treatment.

An internal rate of return measure was used to assess the benefits:

"~ (B t - e t ) ( l + i ) - t = 0 t= l

i - - the rate of return that makes the equality true; B =actual benefits; and C = actual costs.

For a benefit lasting four years, internal rates of return of 17% and 10% were found, and average corporate rates of return fall between 11% and 14%. The project, therefore, would appear attractive. However, it should be noted that when the assumption of four years' duration of benefits is relaxed to two years, the internal rates drop to 6% and 2%.

Murphy and Datel (1976) have done a cost-benefit analysis of community versus institutional living designed to assess the State of Virginia Service Integration for Deinstitutionalization (SID) project. The study was based on observing the costs and benefits of maintaining successfully deinstitutionalized individuals within a community over a time frame of ten years. (The sample excluded all unsuccessful cases of deinstitutionalization.) After stratifying the sample by housing type, employability and primary source of funds (these were thought to be variables with critical influences on costs and benefits), cost- benefit ratios were calculated by strata. The cost elements included in the study were: community support services (physical, psychological and educational needs); clients maintenance (housing and subsistence costs); service integration costs (SID personnel costs); deinstitutionalization costs; cost in economic productivity (e.g., labor lost should a relative or guardian of a client quit his job to care for the client); and community cost (fear, uncertainty associated with having a client in the neighborhood), not calculated in a dollar figure. The benefit elements were: savings of institutional costs; increased economic productivity; psychological (client) alleviation of alienation, pain and suffering (not quantified in dollar figures); and psychologically raised consciousness (in the community) vis-a-vis the mentally ill (not quantified in dollar figures).

Both costs and benefits were evaluated very carefully. Factors such as fringe benefits, inflation, the discount rate (8%), and projections were included in final calculations. The ten-year savings resulting from deinstitutionalization was $20,800. These numbers were based on concerted attempts to overestimate costs and underestimate benefits. Possible problems, however, could arise from the small sample size and the reliance on long-term (nine- year) projections.

McCaffree (1969) undertook a cost-effectiveness study comparing custodial care to intensive treatment care in the Washington State mental hospital

Richard Frank 169

system, using length of stay as a proxy for health care output. He justified this by the fact that length of stay responds to method of production (treatment). Average cost per patient was used as the efficiency measure.

The economic costs to be considered were divided into four categories: 1) subsistence costs (room and board); 2) treatment costs; 3) costs of lost productivity; and 4) costs of transfer payments. McCaffree then analyzed these cost categories in terms of both direct and indirect effects, and made estimates (Table 1) of each category's cost by type of treatment. The average cost of custodial care is $14,028, while the average cost of the intensive treatment mode is $9,757. This is largely attributable to differences in lost income and occurred because of shortened hospital stays. Even though the cost per day of intensive treatment was high, the shortened stay and quicker return to work make the intensive treatment mode an attractive alternative to custodial care.

Table 1

Comparative Costs of Mental l l lness

and Alternative Treatment Methods in

Three Washington State Mental Hospitals, 1954-64

Average per Patient

Custodial Care 1954-1956 Actual

Experience

Intensive Therapy 1962-64

Experience in Term of 1954-1956 Prices

I. Length of hospital izat ion for admission cohort (in months) 42

2. Daily maintenance and treatment costs $ 2.97

3. Direct budgeted costs of maintenance and treatment 3,825.00

4. Impl ic i t state capital carrying and decpreciation costs 2,887.00

5. Total State (Public) Costs $ 6,712.00 6. Loss of income (private) $ 6,906.00 7. Emergency family expenditures 410.00

8. Total Private Costs $ 7,316,00

9. Grand Total State and Private Costs $ 14,028.00

I0. Transfer payments: Public Welfare and Assistance $ 410.00 Loss in tax revenue from loss

in personal income 690.00

Total Transfer Payments $ I,I00.00

22

$ 5.55

3,714.00

1,682.00

$ 5,396.00 4,146.00

$ 215.00

4,361.00

$ 9,757.00

$ 215.00

361.00

$ 576.00

Source: McCaffree, K. "The Cost of Mental Health Care Under Changing Treatment Methods." In: Schulberg et a l . , eds. Pro9ram Evaluation in the Health Fields. New York: Behavior--r-ä~--Publications, 1969. pp, 452-471.


Cassell and his colleagues (1972) undertook a cost-effectiveness study comparing the costs ofhospital versus community care. The study took place in Saskatchewan and focused on comparing the costs of maintaining chronic psychiatric patients in the community as opposed to within a mental hospital. (This may be considered the output target.) The study followed patients, who had been hospitalized for two years, for two years after their release. The cost of hospitalization was the average cost of custodial care in the hospital set t ing--about $11 per day. The community care costs included those associated with readmission, use of health insurance services, money spent by the government on the patients and the cost of follow-up psychiatric care. (Indirect costs and inflation rates were not seriously considered in this study, nor were there any controls imposed on the level of care. The authors quite correctly pointed out that this made comparing the two programs extremely hazardous.) Tables 2 and 3 display the results of the costing exercises.

Weisbrod et al. (1978), in their study " A n Alternative to the Mental Hospital--Benefits and Cost ," performed what is, to this date, a prototypical cost-benefit analysis in mental health. In this study, patients seeking admission to the Mendota Mental Health Institute were randomly divided into two groups. One group was treated using the Training in Communi ty Living (TCL) approach, a community-based outpatient method. The other group of patients was treated using a traditional inpatient mode. The goal of cost- benefit analysis was to determine whether the TCL method was more or less costly than the traditional mode of treatment.

The first step in the analysis was a painstaking identification of all forms of costs and benefits; this was followed by an assignment of monetary estimates. Since in some cases this was not possible, Weisbrod and his colleagues assigned quantitative scales to costs and benefits.

The study found that, although in one year the costs of the TCL program were greater than those of the traditional program (about 11 percent), the benefits were also greater. For instance, TCL patients earned twice as rauch as patients in traditional inpatient settings. Nonmonetary indicators of success in

Table 2

Average Per-Pat ient Cost of Hospital Care

Based on 1964-65 Rate of $II A Day

Average Stay in Years Total Cost

Men 65 and over Men under 65 Women 65 and over Women under 65

23.5 14.3 22.8 15

$ 94,353 58,218 91,542 60,225

Richard Frank 1 71

Table 3

Total Cost Per Patient of Community Care

Durin9 The Two Years

Men65 Men un- Women 65 Women and over der 65 and over under 65

Support by government agencies $1074 $1767 $1399 $1902

Psychiatric follow-up 127 233 200 280 Drugs 200 200 200 200 Rehospitalization 967 1991 408 1450

Total $2368 $4191 $2207 $3832

the work world also suggested far greater benefits associated with T C L treatment than with the traditional mode (e.g., number of days employed, promotions, percent of work days missed). In addition, benefits such as increased ability to play the role of consumer were measured; again, the T C L program was the frontrunner. In sum, this study provides the decision-maker with an abundance of important data and is an example of what cost-benefit analysis at its best can offer.

CONCLUSION To date, cost benefit-analysis has had limited use in the health and mental

health fields. A number of economists would suggest that such restrained application is appropriate, since cost-benefit ana]ysis has limited utility to either field. The principal problem sterns from the fact that even the most conscientious and dedicated analyst is incapable of measuring all the relevant costs and particularly, all the relevant benefits associated with a health or mental health project. Since outcomes in both health and mental health are uncertain and difficult to quantify, costing is subject to substantial error and researchers remain skeptical of their own results.

Health and mental health programs concern themselves to a large extent with quesdons of distribution. Public programs are oriented towards issues of redistribution: from the non-ill to the i11, from the well-to-do to the poor, etc. In order to evaluate such programs properly, assignment of a set of weights associated with individual gains and losses must be possible if the net benefits to society are to be studied. Since this weighting remains a major stumbling block, the applicability of cost-benefit analysis at present is limited.

The remaining usefulness of cost-benefit analysis is twofold. First, it is useful for comparing programs with identical or similar benefits and, second, it is a useful heuristic device that encourages systematic thought.


BIBLIOGRAPHY

F o l l o w i n g is a n a n n o t a t e d b i b l i o g r a p h y d e v e l o p e d by the a u t h o r ; i n c l u d e d

are r ecen t case s tud ies , ar t ic les , a n d p a p e r s on the t heo ry of cos t -benef i t / cos t -

ef fect iveness ana lys i s .

I. Theory of Cost-Benefit/Cost-Effectiveness Analysis Fox, P.D., and Kuldau, J.M. Expanding the framework for mental health program

evaluation. Archives of General Psychiatry , Vol. 19, November 1968. Introduces cost-effectiveness analysis as a tool for program evaluation of mental health projects

and suggests application of a model similar to that used by the Defense Department--that is, setting various outcome targets and choosing the one which meets the target for the lowest tost.

Goodwin, I., and Rosenblum, A. A method of measuring and comparing cost in mental health clinics. Hospital and Community Psychiatry, February 1972.

Develops a method of uniformly measuring costs across mental health clinics. The measure is based on separating the various types of services offered by a clinic, assigning an index number based on service units received, and using these to determine relative cost. A major weakness of the measure is the exclusion of administrative and supervisory costs, based on an assumption that they do not vary across clinics.

Johnson, W.G. A model for the economic evaluation of mental health care. Paper presented at 85th Annual Convention of the American Psychological Association, August 26-30, 1977.

The author carefully and systematically takes up the major problems facing the application of cost-effectiveness and cost-benefit analysis to the market for mental health services. He uses a production function definition of output and creates a novel index that may contribute to eliminating the problems of achieving output homogeneity in cost-effectiveness studies. He then presents an eclectic approach to specification of costs and finally integrates these components into the overall cost-benefit model.

Mishan, E.J. Cost-Beneßt Analysis. New York: Praeger, 1971. The classic text on cost-benefit analysis.

Panzetta, A.F. Cost benefit studies in psychiatry. Comprehensive Psychiatry, Vol. 14, No. 5, September/October 1973.

This paper defines outcome studies and their theoretical applications and potential pitfalls; it then clearly points out three means of evaluating the efficiency of a delivery system: cost accounting, cost effectiveness, and cost-benefit analysis.

Romans, J. T. The economic evaluation of mental health programs. International Journal of Mental Health, Vol. 2, No. 2, 1973. pp. 38-50.

Romans gives a concise and relatively rigorous defnition of cost-benefit analysis and its role as an evaluation tool. He points out a number of dangers in applying the analysis, and then discusses cost-effectiveness analysis and the problems that it attempts to deal with. Using a hypothetical example, he shows that the cost minimization problem found in the economics of production may be the most flexible and suitable approach to answering questions usually posed for cost-effectiveness analysis.

Watts, C., et al. Cost effectiveness analysis: some problems of implementation. Medical Care, Vol. 17, No. 4, April 1979.

Discusses in detail the weaknesses of cost-benefit analysis. The advantages of cost-effectiveness analysis are put forth, but major difficulties common to both types of analysis, such as discounting of intertemporal flows, are not discussed.

Richard Frank 173

Weinstein, M.C. , and Stason, W.B. Foundations of cost effectiveness analysis for health medical practices. New England Journal of Medicine, 296:732-739, 1977.

A clear, concise surnrnary of what cost-benefit and cost-effectiveness analyses are and how they should be applied. The article focuses on cost effectiveness and due to uncertainties experienced in projecting various costs and benefits, sensitivity analysis establishes a range of possible outcornes.

II. Cost-Benefit Studies

Binner, Potter, and Halpern. Workload levels and program benefits: An output value analysis. Administration in Mental Health, Vol. 3, No. 2, Spring 1976.

This study establishes maximization of average product as an efficiency criteria while another norrnative notion is the percentage of a project's goal that has been reached. The findings describe a hill-shaped, average product-of-labor curve.

Fein, R. Economics ofMental Health. New York: Basic Books/Joint Comrnission on Mental Illness and Health Monograph No. 2, 1958.

Forerunner of all rnental health econornics; introduces basic techniques of cost-benefit analysis.

Ginsberg, G., and Marks, I. Costs and benefits of behavioral psychotherapy: A pilot study of neurotics treated by nurse therapists. Psychological Medicine, 685-700, November 1977.

A pilot study reporting costs and benefits associated with behavioral psychotherapy provided by nurse therapists in a hospital setting. Cost-benefit analysis was done using both internal rate of return and present discounted value techniques. (For further discussion, see text.)

Glass, N.J., and Goldberg, S. Cost-benefit analysis and the evaluation of psychiatric service. Psychological Medicine, 7:701-707, November 1977.

This article introduces the major concepts and ideas involved in actually perforrning cost- benefit analysis. Problems encountered in analyzing rnental health markets are discussed in sorne detail.

Murphy, J .G. , and Datel, W.E. A cost-benefit analysis of cornrnunity versus institutional living. HospitaI and Community Psychiat~y, Vol. 27, No. 3, 165-170, March 1976.

A thoughtful analysis although many issues are not fully addressed. The final rnodel is relatively well specified. For the purposes of interpretation, a rate-of-return figure might have been rnore convenient than the benefit-cost ratio. (For a fuller discussion, see text,)

Weisbrod, B.A., et al. An Alternative to the Mental Hospitah Benefits and Costs. Working Paper 776, Institution for Social Policy and Studies, Yale University. 17 pp, 1978.

This is an extrernely cornplete and rigorous attempt to do a full cost-benefit analysis on a cornrnunity outpatient treatment prograrn. It cornpares this program with a traditional inpatient care setting, and tremendous eare is taken to assign quantitative scales to benefits and costs that do not ordinarily lend thernselves to money valuation.

III. Cost Effectiveness Studies Cassell et al. Cornparing costs of hospital and cornmunity care. Hospital and Community

Psychiatry, Vol. 23, No. 7, 17-20, Ju ly 1972. This study takes up an interesting and irnportant question. It sets out to cornpare the costs of

rnaintaining chronic psychiatric patients in rnental health hospitals and rnaintaining them in the comrnunity. Only direct costs were calculated--direct expenditures before and after. No atternpt was made to either control for level of care or to calculate costs to the household and cornmunity of providing care.


Clairborn, W., and Kayton, R. Analysis of mental health service delivery: Profession, patient, treatment. Journal of Community Psychology , 2:18-20, 1974.

As part of a cost-effectiveness study of a CMHC, patient sessions are analyzed by type of staff, patien t age, and type of service offered. Psyehiatrists are the major providers, and individual therapy is the dominant type of treatment. The data are very rough, but the cost estimates show psychiatrists to be cost-competitive with other providers.

Fishman, D.B. A Cost Effectiveness Methodology for Community Mental Health Centers: Development and Pilot Test. Unpublished paper, NIMH, 1977.

The author describes the steps needed to make cost-effectiveness analysis operational in CMHCs.

May, P. Cost effieiency of treatments for the schizophrenie patient. American Journal of Psychiatry, 127(10):1382-1385, April 1971.

A controlled experiment was performed in whieh five treatment models were studied for both efficacy and cost effectiveness. Milieu eare was found to be both expensive and ineffective (2-part article).

May, P. "Cost effectiveness of mental health care, Part II" AmericanJournalofPublic Health, 60 (12):2269-2272, December 1970.

McCaffree, K. The Cost of Mental Health Care Under Changing Treatment Methods. In: Schulberg et al., eds. Program Evaluation in the Health Fields. New York: Behavioral Publications, 1969, pp. 452-471.

This study deals carefully with all the fundamental issues of cost-effectiveness analysis. Although it does run into two kinds of problems--data limitations and estirnation of wage losses--the overall approaeh is strong and orten novel.

Sharfstein, S., and Nafziger, J.C. Community care: Costs and benefits for a chronic patient. Hospital and Community PsychiaOy, 27:170-173, March 1976.

A fairly straightforward cost-effectiveness study. The size of the sample, however, limits the applicability of the results.

Sorenson, J., and Grove, H. Using Cost-Outcome and Cost Effectiveness Analyses for Improved Program Management and Accountability. Evaluating Community Mental Health Services, NIMH/DHEW ADM 77-465/1977, pp. 371-410.

This study combines an indepth look at cost analysis and cost-effectiveness analysis, with a "how to do it" approach. The origins and steps necessary to make cost-effectiveness analysis operational are given, and examples of mental health cases are given to highlight the theoretical discussion.

Yates, B.T. Cost-Effectiveness Analysis of Psychological Service Systems. Unpublished paper, June 1975.

This article deals with a number of models of cost-effectiveness analysis. The study poses a number of important questions that go beyond the scope of the eost-effectiveness methodology, e.g., how does one arrive at a minimum cost input combination?

Yates, B.T. Cost-Effectiveness Analysis of a Residential Program for Problem Children. In: Stumphauser, ed. Progress in Behavior Therapy with Delinquents. Vol. 2, Human Behavior Publications, 1977.

In this study Yates is attempting to arrive at a eost-minimization answer while using a limited methodology: cost effectiveness. The author asks an important question but is constrained by bis. choice of techniques.

Richard Frank 175

IV. Other References

Foreyt, J.P., et. aL Benefit cost anaflysis in a token economy. Professional Psychology, 17, 1975-6, pp. 26-33.

This study explores the costs and benefits of a token economy program. It uses some cost- benefit methodology, but little of it is made explicit. Thus, it is rather difficult to understand what has actually taken place.

Guillette, W., et al. Day Hospitalization as a Cost-Effective Alternative to Inpatient Care: A Pilot Study. 29 (8): 525-527, August 1978.

The study was undertaken to determine whether day hospitalization is cost-effective from the point of view of an insurance company. A group of 31 patients was studied, and the effects of treatment were noted along with insurance savings. The magnitude of savings were debatable, but partial hospitalization appeared to be cheaper and just as effective.

Halpern, J., and Binner, P. A model for an output value analysis of mental health programs. Administration in Mental Health, 1:40-51, 1972.

Halpern and Binner take great care in developing a reasonable set of estimates of direct costs and direct benefits in order to circumvent a number of complexities involved in doing a rigorous cost-benefit analysis.

Hason, M. A California Five County Cost Effectiveness Study. In: Zusman, J., and Wurster, C., eds. Program Evaluation. Lexington, Mass: Lexington Books, July 1978.

A guide to implementing cost-effectiveness analysis.

May, P.A. Cost efficiency of mental health delivery systems. AmericanJournal ofPublic Health, 60 (11): 2060-2067, November 1970.

A review article that highlights difficulties in assessing economic efficiency in mental health systems. Discusses use of both cost-benefit and cost-effectiveness frameworks.

Primrose, D.A. Differential costs of care in a mental deficiency hospital in Scotland. British Journal of Psychiat(y, 121:623-626, 1972.

This study compares the direct costs associated with maintaining different types of psychiatric patients in an inpatient setting.

Sharfstein, S.; Taube, C.; and Goldberg, I. Problems in analyzing the comparative costs of private versus public psychiatric care. American Journal of Psychiatry, 134, 1073-1082, January 1977.

This study discusses the differences between fee-for-service, private psychiatric care, and various forrns of organized care. At the core of the discussion is the difficulty in comparing costs due to differences in practice, organization, clientele, outcomes, method of treatment, and populations served. These elements vary so greatly that cost-effectiveness studies may be the most sensible approach for the purpose of comparing programs.

Sheehan, Daniel M., and Atkinson, J.A. Gomparative costs of state hospital and community base inpatient care in Texas: Who benefits most? Hospital and Community Psychiatry, 25 (4): 242-244, April 1974.

Discusses and compares direct costs of maintenance and treatment of patients in community- based inpatient care and state hospital care.

REFERENCES

Baumol, W. J. Microeconomic Theory and Operations Research. New York: Academic Press, 1972. Cassell, W., Smith, C., Grundberg, F., Boan, J., and Thomas, R. Comparing costs of hospital and com-

munity care. Hospital and Community Psychiatry, 23(7): p 17-20, 1972.


Ginsberg, G. and Marks, I. Costs and benefits of behavioral psychotherapy: A pilot study of neurotics treated by nurse-therapists. Psychological Medidne, 7:685-700, 1977.

Glass, N., and Goldberg, S. Cost benefit analysis and the evaluation of psychiatric service. Psychological Medicine, 7:701-707, 1977.

Fishman, D. B. A Cost Effectiveness Methodology for Community Mental Health Centers Development and Pilot Test. Unpublished manuscript, 1977.

Johnson, W. G. A Model for the Evaluation of Mental Health Care. Paper presented at 85th annual convention of the American Psychological Association, August 26-30, 1977.

McGuire, T. Notes on the Costs of Mental Illness. Unpublished manuscript, 1978. McCaffree, K. The cost of mental health care under changing treatment methods. In Schulberg et al.

eds. Program Evaluation in the Health Fields, New York: Behavioral Publications, 1969. May, P. Cost effectiveness analysis of mental healtla care, Part II. AmericanJournal ofPublic Health, 60(12):

2269-2272, 1970. Murphy, J., and Datel, W. A cost benefit analysis of community versus institutional living. Hospital and

Community Psychiatry , 27(3):165-170, 1976. Romans, J. The economic evaluation of mental health programs. InternationalJournal ofMental Health, 2(2):

38-50, 1973. Sorenson, J. and Grove, H., "Using Cost Outcome and Cost Effectiveness Analysis for Improved Pro-

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U. S. Public Health Service. Health U.S.A., USGPO, 1979. Weisbrod, B. A., Stein, L., and Test, M. An Alternative to the Mental Hospital Benefits and Costs. Working Pa-

per 776, Institute for Social and Policy Studies, Yale University, 1978. Yates, B. Cost Effectiveness Analysis of Psychological Service Systems. Unpublished Manuscript, 1975. Yates, B. Cost effectiveness analysis of a residential program for problem children. In Stumphause, ed. Pro-

gress in Behavior Therapy with Delinquents (Vol. 2). Human Behavioral Publications, 1977. Yates, B. The theory and practice of cost utility cost effectivness and cost benefit analysis. In Ferguson and

Taylor, eds. A Comprehensive Handbook of BehavioralMedicine, Englewood Cliffs: Spectrum, 1979.

cost-benefit analysis in mental health services: a review of the literature

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