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SCRA (2003) 8

Research on Additional Costs of Teaching in NHS Scotland

Report for Standing Committee on Resource AllocationAct Sub-Group

Final Report

October 2003

Martin Spollen Alasdair MunroPaul Dixon Uzma KhanGiles Hindle Peter Wallace

Secta Consulting AnalyticalServices

DivisionScottish

Executive

Research on the Additional Costs of undergraduate medical Teaching in NHSScotlandA Joint Report for the Standing Committee of Resource Allocation in NHSScotland by SectaConsulting & Analytical Services Division, SEHD

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CONTENTS

1) INTRODUCTION

2) METHODS OF ANALYSIS AND EVIDENCE OF COSTDIFFERENCES FROM THE LITERATURE

3) AN OVERVIEW OF THE PROJECT METHODOLOGY

4) MODELLING DIRECT COSTS

5) THE METHODS FOR ESTIMATING OVERALL COSTDIFFERENCES AND DIFFERENCES IN INDIRECT COSTS

6) STATISTICAL ANALYSIS OF ADDITIONAL AND INDIRECTCOSTS

7) CONCLUSIONS

REFERENCES

Annex 1

Annex 2


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SECTION 1: INTRODUCTION AND CONTEXT

1.1 Introduction

This report sets out the findings of a research project commissioned to inform theStanding Committee of Resource Allocation in NHSScotland on the quantum offunding required by NHS Boards to support the costs of providing undergraduatemedical teaching (and the medical teaching of dental students) undertaken inNHSScotland.

The research has involved two parallel research strands. Firstly, a detailed costingexercise has been undertaken in conjunction with the four medical schools to capturethose costs directly identifiable with teaching delivery by NHSScotland. A parallelresearch strand has tested the hypothesis that teaching hospitals in Scotland also incurcosts that are an indirect consequence of teaching.

Both studies are intended to inform a new mechanism to distribute revenue supportfor teaching across Scotland�s teaching NHS Boards on a transparent and equitablebasis. If accepted, the new mechanism would replace the current �Additional Costs ofTeaching� (ACT) revenue adjustment system currently in use.

1.2 Terms of Reference

The research has examined:

♦ the factors that influence the relative costs of teaching and non-teaching hospitals.The aim of this aspect of the research has been to identify the range of factors thateffect these costs, and to establish an evidence base to support an assessment of:

(a) the relative level of these costs;

(b) the extent to which cost differences reflect teaching responsibilities asdistinct from other factors related to the specialist role of teachinghospitals;

(c) the impact of these costs on the overall cost structure of different HealthBoards; and

(d) the key drivers that influence these costs (e.g. the number of medicalstudents and other factors).

♦ the influence of changing patterns of medical training on the additional cost ofteaching medical students.

♦ an analysis of the merits of alternative methods of distributing resources for theadditional costs of teaching.


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1.3 Teaching context

1.3.1 Medical Schools

The research has focussed on NHSScotland�s input to teaching the undergraduates inScotland�s four Medical Schools � at the universities of Glasgow (252 students peryear), Edinburgh (244 students per year), Dundee (162 students per year) andAberdeen (184 students per year). There is a fifth Medical School in Scotland at St.Andrew�s University, which has not historically been involved in ACT fundingbecause its students transfer to England for the practical NHS-based elements of theirtraining.

A medical degree is a five-year course, with an optional 6th year (normally squeezedbetween the 3rd and 4th years) which concentrates on scientific research training.Students spend the early years of their programme based at the university, butincreasingly move into hospital, primary care and community settings as theirprogramme progresses.

Medical Schools use a variety of methods for the delivery of their programmes. Theseinclude traditional lectures and seminars, as well as clinical skills sessions andproblem based learning (facilitated problem solving in small groups of around 10students). Students also spend considerable amounts of time �on site� in hospitals, GPpractices and community settings. Special Study Modules (SSMs) allow students topursue particular areas of interest � some non-medical.

1.3.2 Tomorrow�s Doctors

The curricula at Scotland�s four major Medical Schools have been significantlyredesigned in the past 7 years based upon a report by the General Medical Councilentitled �Tomorrow�s Doctors�. First published in 1993, the report signalled asignificant change in the form of guidance from the GMC. The emphasis for medicaleducation moved from gaining knowledge to a learning process that includes theability to evaluate data as well as to develop skills to interact with patients andcolleagues.

Key aspects of this new approach to medical education include:! Competence in key clinical skills and procedures;! Competence in patient examination and decision making;! Competence at managing a patient�s healthcare needs;! Competence at communicating with patients and colleagues;! Competence at retrieving and processing information;! Appreciating the behavioural, ethical and legal aspects of healthcare;! Appreciation of the role of the doctor within the health care system;! A move away from memorising facts.


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1.3.3 New Curricula

All four of the Medical Schools have responded to this report, although in differentways. All curricula still concentrate on university based teaching in the early years ofthe degree programme and move to clinical attachment approaches in the later years,but a range of extra teaching styles and subjects have been introduced. Glasgow, forexample, have made a significant move to problem based learning and significantlyreduced the amount of lecture style delivery, thus freeing up a significant amount ofself-study time for students. All schools have developed a combination of clinicalskills, professional development, vocational studies and various GP-led activities. Allschools now have SSMs to give students the opportunity to specialise and OSCEs(Objective Structured Clinical Exams) which examine the practice of being aneffective doctor through simulated patient examination.

1.3.4 NHS Input

The Medical Schools are closely linked with the NHS, especially the teaching NHStrusts. NHS staff are involved in the delivery of medical undergraduate degrees in arange of ways � from delivering classes, both on-site and at the university, to beinginvolved in student recruitment, course administration and development and studentexamination. NHS trusts (both �teaching� and �non-teaching�) also provide thefacilities and staff for clinical attachment weeks, which form the dominant element ofthe later years of the curricula. Students on clinical attachment will spend the wholeweek on-site � at hospitals, GP practices and possibly community settings. Duringthese periods students will receive some formal education sessions, but will alsospend time observing and being shown the practice of being a doctor.

1.4 Curricula at the Four Medical Schools

This section will give a brief overview of the curricula at the four Medical Schools:

1.4.1 Glasgow University

The Glasgow curriculum is split into 3 sections. The first section (years 1 and 2) isuniversity based and consists of (a) university lectures (few compared to othercurricula) and problem based learning (PBL) sessions, (b) vocational study activitiesand visits (GP led), (c) clinical skills training, (d) Fixed Resource Sessions (lab-basedactivity), and 1 SSM.

The second section (year 3) is similar to years 1 and 2, but introduces NHS-baseddelivery. PBLs are delivered on-site and Clinical Practice modules are delivered atboth hospital and GP practices. There are 2 SSMs. The third section (years 4 and 5)concentrates on clinical attachment on-site at hospital, with 5 weeks at a GP practice.There is also a period of intensive lectures in year 5 and 4 SSMs.


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1.4.2 Edinburgh University

The Edinburgh curriculum is split into 2 sections. Section 1 covers years 1 and 2 andis university-based. It involves lectures, various types of tutorials and practicals(including case-based learning (CBL)) and Clinical Skills and Personal ProfessionalDevelopment (CSPPD).

Section 2 covers years 3 to 5 and concentrates on clinical attachment on-site. Thereare some lectures, tutorials and CSPPD sessions in years 3 and 4, and one of the 8week modules in year 5 may be outside the UK. There is only 1 SSM.

1.4.3 Dundee University

The Dundee curriculum is split into 3 sections. Section 1 covers the first year andcentres around lectures and practical anatomy / physiology sessions delivered at theuniversity. There are also GP led sessions / visits, clinical demonstrations, emergencycare, behavioural sciences and 1 SSM.

The second section covers years 2 and 3 and delivery is based on-site. There arelectures, PBLs, labs, clinical skills and ward teaching. There are also GP led sessionsand visits, and 2 SSMs. The final section covers years 4 and 5 and is predominantlyclinical attachment, especially year 4. Year 5 concentrates on preparation for a JuniorHouse Officer (JHO) post (shadowing and a short course) and 5 of the 6 SSMs forthis section occur in the 5th year.

1.4.4 Aberdeen University

The Aberdeen curriculum is split into 4 sections. The first section covers year 1 and isuniversity based. Lectures take most of the time, although there are also a GP ledCommunity Course, Practical Anatomy sessions, Communication Skills and 1 SSM.The second section runs up to Easter in year 3 and is similar to the first section, butincludes more site-based activities � for example ward based teaching (WBT) and anIntroduction to Clinical Skills course. There are 2 SSMs.

The third section covers the end of year 3 and year 4 and is site-based � 9 five-weekrotations including 5 weeks in a GP practice. There is 1 SSM. The final section coversyear 5 and takes place in a range of locations including clinical, GP or Mental Health,medical and non-medical electives. [NOTE: All curricula include at least 3 OSCEs]


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1.5 Costs associated with undergraduate teaching in NHS settings

1.5.1 What are the main cost drivers

Undergraduate medical students are placed in a variety of NHS contexts including thecommunity and general hospitals as well as the more traditional setting of teachinghospitals. Supervising and accommodating students will incur costs in all thesesettings and an increasing body of research is examining both the scale of these costsand the types of resources needed to support student placements. In the most widelyresearched of settings, the major teaching hospital, the following three sets of factors(not all associated with teaching) are thought to contribute to increased costs of care.

There are some aspects of teaching hospitals, such as the ability to benefit fromeconomies of scale, that may enable some forms of care to be delivered more cheaply.

(1) Cost drivers directly associated with teaching, including

� staff time with students (contributing to increased staff to patient ratios)� staff time spent on preparation and curriculum development� a greater level of laboratory tests and facilities associated with demonstrating

tests� more medical illustrations and teaching aids� larger offices and dedicated teaching space� wider corridors and generally larger public spaces� additional library facilities� increased portering and security� additional hotel facilities for students, catering, accommodation etc.

The focus in much of the literature, and this project, is on revenue funding, so capitalcosts and depreciation tend to be excluded. However, they will include maintenanceand utilities costs associated with the extra space used for students and teaching.

Most of these costs will be related to student numbers, but the relation may not besimple. The OR modelling that forms part of this project can be used to explore thenature of the relationship between these direct costs and student numbers.

(2) Factors that may be closely linked to undergraduate medical training, including

� funded research;� personal research;� tendency to develop and use innovative treatments� higher staff skill mix, from nursing grades to prestigious consultant

appointments� training of nurses; and� training of other staff - such as technical occupations and paramedics.


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(3) Factors that are less obviously linked to teaching, but which frequently, if notinevitably characterise teaching hospitals.

� higher staff, buildings and maintenance costs due to metropolitan locations� more complex case mix due to their role as centres for tertiary referrals� higher than average morbidity in their catchment areas (due to inner city

deprivation) resulting in greater and more complex demand for generalhospital services and A&E

� maintaining expensive specialties that are not often found outside teachingcentres

� a wider range of patient support services� above average quality of care� superior grade accommodation

A literature review circulated earlier in this project summarises estimates of therelative costs of these different factors, though the evidence is very incomplete anddifficult to synthesise. However it is possible to say that some of the non-teachinginfluences can have a major impact of costs and that it is important to control for theireffects if one is to establish what additional costs are due to teaching.

1.5.2 Direct versus indirect costs

For the purposes of this project we have drawn a distinction between those costs ofplacements that can be directly observed and recorded, such as staff time and obvioususe of physical resources and those that may be integral to a teaching environment butnot so easily or directly measurable, such as personal research. We have labelled thecosts associated with the former set of factors the direct costs of teaching and thoseassociated with the latter the indirect costs. Separate strands of the project addresseach of these costs. It is worth noting that in our analysis of the indirect costs we tryto exclude other types of costs such as those due to case-mix or metropolitan locationthat are often present in teaching hospitals but are arguably not an inevitableconsequence of their teaching status.


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SECTION 2: METHODS OF ANALYSIS AND EVIDENCE OF COSTDIFFERENCES FROM THE LITERATURE

2.1 Cost differences reported in the literature

There is a limited literature on the costs of both undergraduate and postgraduatetraining of doctors in hospitals and how these contribute to the revenue costs ofteaching hospitals. As a review of this material was presented earlier in the projectonly key points that bear directly on the analyses are presented here.

Most empirical studies of the cost of medical training provide some estimate of theoverall difference in gross cost per case between teaching and non-teaching hospitals- and in a few cases (summarised in Linna et al - 1998) also compare these differenceswith the funds made available for teaching.

Table 1 presents a representative selection of estimates of overall cost differences.Most of these report excess costs per case of between 5 and 25% in teaching andcompared to non-teaching hospitals. When interpreting these results it is important toremember that the systems for funding medical training can very greatly between thecountries studied, and that variations in methods of measurement and analysis mayalso influence the results.

Table 1 Estimates of additional costs in teaching hospitals(Adapted and expanded from Linna et al - 1998)

Country Additional cost SourceUSA 10-25% Sloan et al 1983USA 8-15% Zuckerman et al 1994USA 0-15% Granneman et al 1986USA 1.4% Gaynor M and Anderson GF (1995)Spain 3-11 Lopez-Casanovas and Wagstaff

(1996)Spain 3.1% Gonzalez-Lopez Valcarcel B and

Barber P (1996)Spain 11.1% Wagstaff A and Lopez-Casasnovas

(1996Finland 15% Linnakko and Linna (1995)England 15% Culyer et alEngland 4-43% Foote et al (1988)

Relatively few studies provide similar estimates for the additional costs of individualdepartments or services. The lack of available data and the difficulty of controlling forconfounders are largely to blame for the limited evidence at this level. Results from asmall numbers of studies are shown in Table 2, covering many of the services anddepartments that are generally reckoned to cost more in teaching settings. The rangeamongst even this small set of results suggests there is little consensus on how muchextra each of these costs.


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Table 2 Estimates of additional costs in specific departments and services inteaching hospitalsStaff costsMedical pay 7% higher in teachinginstitutions

(Culyer et al 1978)

Cost of nursing higher - Busby et al 1972Nursing costs 9.5% (Culyer et al 1978)

Pathology/Lab tests8% increase in dept cost Culyer et al 1978Twice as high Busby et al 1972Increased tests account for 56% ofdifferences in costs

Scroeder & O�Leray

Operating theatre11% (unit cost) (Culyer et al 1978)25%? AUC (1965)

X-ray/Radiology

Twice as high Busby et al 19725% (dept cost) (Culyer et al 1978)5% AUC (1965)

Medical records(dept cost- proportion unspecified) (Culyer et al 1978)25% AUC (1965)

Library50-70% AUC (1965)

Catering12% (dept cost) (Culyer et al 1978)

Cleaning4.5% increase in �domestic� service costs (Culyer et al 1978)


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2.3. Approaches to estimating costs and cost differences

Studies to estimate cost differences and their causes fall into two broad groups.Bottom-up approaches that study the processes of teaching and the resources requiredand top-down studies that focus on the differences in the costs of patient care betweenteaching and non-teaching institutions.

2.3.1 Bottom-up approaches

Bottom-up approaches are so described because they aim to build-up a picture of theactivities and costs associated with teaching. This can be done in two rather differentways, by observing the processes and collecting data on activities by other means, orby simulation.

Observational methods for estimating the inputs to teaching

In this group of studies the main aim is to study the actual processes of teaching andrecord factors such as the amount of staff time involved and the use of facilities.Research may be based on observation, but also use other methods such as surveysand activity diaries. Examples of the latter include surveying students on the theircontact time with clinicians in various teaching settings (e.g. Sheldon, 1990, 1991aand 1991b; and Weinberg et al 1994). Examples of studies that observe the activitypatterns of both medical and non-medical staff in teaching institutions to establishproportions of time spent on tasks directly or indirectly related to teaching includeSnijders et al. (1987). Other examples of these approaches include Institute ofMedicine (1974); Perrin (1987); Perrin and Magee (1982), and Rayner (1985).

Although there are relatively few examples of this type of work, its potential strengthis in supplying everyday detail on the process of teaching in hospitals; hence it shouldhelp measure the relative effort spent on teaching and other activities.

It has three main weaknesses. First, detailed observation in hospitals is very costly.Secondly, there is the problem of deciding what activities, or more often, what part ofan activity, should be associated with undergraduate teaching. This is a particularproblem in teaching hospitals. When one considers the range of functions that aretypically carried out in such hospitals it is clear that any single task could becontributing to several if not all of the following:

� providing health care directly� supporting other institutions providing health care� undergraduate medical education;� postgraduate studies and training;� funded research;� personal research;� training of nurses; and� training of other staff - such as technical occupations and paramedics.


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Although it is theoretically possible to apportion parts of each activity to differentfunctions, the practical difficulties are obvious and results would be open to question.For these reasons, some authors (e.g. Perrin 1987) have doubted whether anobservational approach can ever arrive at accurate estimates of teaching costs.

A third and related problem, is that observation may overlook some activities becausethey do not appear to be directly contributing to teaching when, in fact, they areindirectly supporting teaching or more generally contributing to the culture of ateaching hospital.

Simulation modelling

Simulation modelling provides a cheaper and quicker alternative to observation forestimating the costs directly involved in teaching. As adopted in this project, themethod considers what activities and resource are necessary to deliver that part ofundergraduate medical training that takes place in the NHS. It uses a combination ofsyllabus information, student and medical sub-dean reports, and accounts from othersinvolved in undergraduate teaching to construct an operational model of the inputs tothe training. Both national and local sources are then used to attach costs to theseinputs.

The resulting model can estimate the costs of providing the existing syllabi to currentnumbers of students, or it can be used to explore the cost consequences of varying,syllabus, training methods and student numbers. The model can be used to predictcosts at different levels, such as medical school, trust and hospital, provided there issufficient detail to populate the model at each of these levels.

The main advantages of this approach, as for much simulation, is that it relativelycheap and can be used to explore hypothetical scenarios. However, there are severaldisadvantages. There will be costs associated with data collection, as the model needsto be grounded in the details of how teaching is carried-out and the costs of its variouscomponents. It is potentially open to the main criticism of observational methods, thatit may not adequately address the problem of multi-functional activities. It will alsobe very limited in its coverage indirect cost drivers.

2.3.2 Top-down approaches

A second class of methods for investigating teaching costs has a very differentstarting point. It examines the differences in costs between teaching and non-teachinginstitutions using data on the costs of care and hospital services. Again, such studiescan be crudely grouped into two types:those that simply compare the costs of teaching and other hospitals, albeit with socontrols for confounders such as case mix and those that try to model costs at all typesof hospitals with teaching status or teaching load as one of the independent variables.


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Cost comparisons

The principle of comparing the costs per case in a teaching hospital with a non-teaching hospital is straightforward., but the practice is more complicated as studiesneed to control for confounding factors such as case mix. The methodological issuesassociated with these comparisons include those listed below. They are discussed inmore detail in relation to the present exercise in Section .

What are teaching hospitals - can they be easily distinguished from other hospitals by,say, teaching load

� How to control for case-mix - both at the level of specialty and HRG withinspecialty

� How to control for economies of scale� How to control for market forces factors.� How to control for other external factors that may influence costs� How to find suitable data and deal with high levels of variation between small

numbers of hospitals

Regression modelling of hospital costs

Simple (OLS) multiple regression techniques are still used to identify the excess costsof teaching. Typically, such modelling attempts to predict the overall cost per case byusing variables associated with teaching and those associated with case-mix andenvironmental factors. There is an increasing interest in replacing simple OLS withmore sophisticated methodologies, but all these approaches share the commonproblem of how to obtain adequate data on costs and more especially on potential costdrivers. The problem is compounded by the relatively small number of institutionsavailable for analyses and over-time variations in costs and organisation of teaching.That most existing studies are cross-sectional (i.e. based on a single point in time) hasprompted some criticism (e.g. . Foster, 1987). Other well-known difficulties are howto control for supply side effects and deal with extensive collinearity amongst the costdrivers.

The problem of the potential endogeneity of supply factors has led to the use of twostage least squares methods - as for example by Milne et al (1989).

The problem of having relatively few teaching institutions to include in the analysis iscompounded by the tendency of some authors to include large numbers of variables intheir model - drastically reducing the degrees of freedom. The resulting models,especially when packed with supply and activity variables, have very high values forr-squared (typically in excess of 97% as in Milne et al), but it is arguable whether theyhelp us understand the sources of variation between hospitals.

In the English context this has been of particular interest because critics such asBevan (1999) and Sheldon (1999) have argued that, in particular, the facilitiescomponent of SIFT may be supporting historical inefficiencies in teaching hospitals.Hence the related concern that regression analyses will not be able to identify


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inefficiency and that other methods should be used. Two current contenders includedata envelope analysis (recommended by Bevan 1999 and applied by, amongst others,Morey et al 1995) and a modification of OLS - frontier cost functions as used again,amongst others, by Linna et al (1998).


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SECTION 3 AN OVERVIEW OF THE PROJECT METHODOLOGY

3.1 Overview of main methods used

The approach finally adopted by this study has two main components

Operational research models of the costs of delivering the syllabi of the four ScottishMedical Schools.

These models provide an estimate of what we describe as the "Direct Costs ofteaching undergraduate in NHS settings". They are designed to compute estimates foreach of the medical schools, but with suitable data can provide cost estimates at healthboard, trust of even hospital levels.

Comparisons of the costs of care at teaching and non-teaching hospitals in Scotland

The first stage of these comparisons involves estimating the overall difference in costbetween the two types of hospitals having controlled for potential confounders suchas case-mix and economies of scale. The direct costs of teaching (as estimated by theOR models) are then subtracted from the cost differences to provide estimates of whatwe describe as the "indirect costs of teaching". These estimates are both computedfor Scotland as a whole and for each of the major teaching hospitals.

The next stage of the work tries to account for these indirect costs in two ways.Firstly, by comparing them with the sources of income that are largely limited toteaching hospitals, such as research funding. Secondly, we examine whether the costsratios between teaching and other hospitals in respect of staff, nursing, theatre andother identifiable budget heads are similar to the overall cost ratios between the twotypes of institution, or whether certain of these activities seem to account for adisproportionate amount of the cost differences.

Finally, we use the results from the above and information on relative teaching loadsto investigate the differences between the cost bases of the major teaching hospitals.


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Schematically the main components of the methods are as follows

♦ Construct OR models of the DIRECT costs of delivering the medical schoolssyllabi

♦ Compare the overall costs of care at Major teaching Hospitals (MTH) with thoseat other hospitals

♦ Control for potential confounders (incl case-nix, economies of scale and MFF)

♦ Produce corrected estimates of the gross cost differences

♦ Subtract the estimates from the direct cost modelling to give an estimate onindirect costs

♦ Try to identify the main contributors to these indirect costs (e.g. staff costs,research etc)

♦ Try to explain the differences between Teaching Hospitals in these indirect costs


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SECTION 4 THE DIRECT COST MODELS

4.1 Introduction

This chapter describes the direct cost modelling of input by NHSScotland to thecurricula at the four main Medical Schools in Scotland � Glasgow, Edinburgh,Dundee and Aberdeen. An Excel-based model has been developed to capture directcosts of teaching support for each Medical School, which gives a cost quantum foreach academic year (including the optional science year and the medical education ofdental students).

The models have been populated using a Delphi approach involving documentaryevidence, interviews with stakeholders, a workshop and direct input by the MedicalSchools over a three-month period.

The term �direct costs� refers to those costs incurred by NHSScotland that can bedirectly attributed to the curriculum of a particular medical school. This has generallybeen reflected in the direct cost models by activities undertaken by students � forexample, lectures, seminars, clinical / vocational skills sessions, clinical attachments(both in primary and secondary care), evaluation, recruitment, etc. However, anumber of overheads have been included � for example, administration, hospital sub-deans.

4.2. The Direct Cost Model

4.2.1 Overview of the Modelling Process

The direct costing uses a cost model for each medical school, which has beenpopulated using a Delphi type approach, vis:

1. Examine the curriculum at each of the four Medical Schools in order to identifythe types and volume of teaching activity that comprises each academic year. Forexample, �1 hour university lecture� would be one such activity type. Informationrequired would be the number of lectures delivered per year and the size of thelecture delivery group. An important part of this process is to apportion costsbetween the NHS and the Medical School, as the model will ultimately only countNHS incurred costs. For example, a university lecture delivered at the MedicalSchool by an NHS member of staff would incur costs to both the Medical Schooland the NHS;

2. For each activity type, quantify the amount of resources used to deliver aninstance of each activity. Types of resources might be staffing, facilities, travel,etc. Resources are costed at Scotland-wide unit costs (Blue Book). Initially, thisinformation was generated from documentary evidence of curricula and meetingswith ACT officers and Medical School administrators;

3. In order to validate user input at (2), above, engage in a Delphi process by directliaison and interviews with key informants, and a workshop for stakeholders (9th


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of May 2003). Final population of the models has been co-ordinated by ACTOfficers and Medical Schools over the summer of 2003. All four medical schoolshave confirmed significant progress has been made populating the models,however, it is clear that work will continue to increase the accuracy andtransparency of the models;

4. Finally, record the output of each Board�s model and thus determine an overallScotland direct cost quantum, which could, in principle, be distributed betweenthe four Boards.

4.2.2 Structure of the Direct Cost Model

There are four cost models, one for each of the Medical Schools at Glasgow,Edinburgh, Dundee and Aberdeen. The models essentially link the curricula at aparticular Medical School to Scotland-wide unit costs (see figure below).

DCM - shape of the model

Resource 1 Resource 3Resource 2 Resource 4

Activity 1 Activity 2 Activity 3

Year 1 Curriculum

Level 1

Level 2

Level 3

* Model feeds explicitly from resources to activities to curriculum

The models are based in Microsoft Excel and each have 48 worksheets. The structureof the worksheets is as follows:

! Sheet 1 � Title Page! Sheet 2 � Cost Summary Page � total direct cost of teaching for NHS! Sheets 3-8 � Summary Pages for each academic year (the curricula)! Sheet 9 � Administration Costs (overhead costs)! Sheets 10-43 � Definition of Activity Types (A1 to A33)! Sheets 44-48 � Resource Unit Costs (staffing, facilities, etc.)

Each academic year has a well-defined curriculum. The sheets 3-8 record the activitytypes and quantum for each of the five compulsory years of the degree, plus theoptional science year (labelled Year 6 in the model). These sheets are linked to thesheets A1 to A33 which give a cost for each instance of a particular activity type (by


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year). For example, the cost of a lecture delivered at the Medical School by an NHSconsultant might be £300. The worksheet relating to university lectures will outlinehow this £300 is made up � for example, 3 hours time (preparation, delivery, travel)and 30 miles travelling. The activity sheets are linked to Scotland-wide unit costs forstaffing, facilities, consumables, etc.

Because the model is linked, any input can be changed at any time and the model willautomatically update. For example, if the amount of time needed to prepare a lecturechanges from 1hr to 2hrs, the activity sheet can be updated and the cost totals will beadjusted automatically. Similarly, if the hourly rate for an NHS consultant changes,this can be altered on the staffing resource sheet and the cost totals will be adjustedautomatically.

4.2.3 Populating the Model � Delphi Approach

The curricula for each academic year at each Medical School is complex, butgenerally well understood, and therefore can be regarded as an objective input to themodel. Similarly, the Scotland-wide resource unit costs are taken from the ScottishBlue Book, although consensus estimations of has also been used.

However, definitions of each activity type in terms of the resources used in aparticular instance of the activity � i.e. the resources used to deliver a universitylecture, or the resources used on a typical clinical attachment week � required carefulestimations by key stakeholders. In order to populate the models with these activitydefinitions, a Delphi process was implemented. A Delphi process enables a document� in this case an Excel Model � to be developed by a group of stakeholders until it hasreached an agree final state.

The first stage in this process involved a series of meetings (with ACT Officers,Medical School staff, General Practitioners, trusts, finance staff, the BMA, NES) togenerate an initial population for each of the models. The second stage involved amail shot and a workshop (9th May 2003) where key stakeholders were allowed toevaluate the initial assumptions of the models, suggest alternative (or additional)activity definitions and interact �live� with the four models. This enabled the initialestimations to be developed and the costings fine-tuned. The final stage of the Delphiprocess involved the Medical Schools taking ownership of the models � co-ordinatedby the ACT officers � to reach an agree final costing (August 2003). To date themedical schools have confirmed significant progress has been made towards a finalcosting, although it is clearly an ongoing process.


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4.3 Results of the Direct Cost Model

There is a direct cost model for each of the Medical Schools for Glasgow, Aberdeen,Edinburgh and Dundee. Each model gives the total direct costs of the NHS input tothe Medical School curricula.

The results reveal that the aggregate direct cost quantum for the four medical schoolsis £57.6 million, based on work to date.

The breakdown of this total between the schools is shown in the table below.

Total Cost of NHS Input to Medical School Curricula by yearYear Glasgow

(£000s)Edinburgh

(£000s)Dundee(£000s)

Aberdeen(£000s)

Year 1 564 578 258 216Year 2 763 757 669 423Year 3 3,802 5,196 4,557 2,823Year 4 6,953 4,802 2,505 3,811Year 5 7,346 6,136 2,096 3,005Year 6 276 61 0 6Total 19,704 17,530 10,084 10,285

4.4 Current ACT Allocations

The table below gives the allocation of ACT funding between the four NHS Boardsfor 2001/2002. The total figure was £86.2 million. It can be seen that the funding splitbetween the four NHS Boards is roughly proportional to student numbers, althoughtwo Boards receive proportionally more money (Glasgow and Tayside) and tworeceive proportionally less (Lothian and Grampian).

Comparison of ACT shares in 2001-02 to proportion of student body in eachSchoolBoard Allocation (01/02)

(£ millions)% of ACT total % of total student

bodyGlasgow 27.2 31.6 29.9Lothian 24.3 28.2 29.0Tayside 17.4 20.2 19.2Grampian 17.3 20.0 21.9Total 86.2 100.0 100


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4.5 Options for using results for resource allocation

There are four basic methods available, which are discussed below.

Option 1: Make allocations to Boards on the basis of the number of studentssupported in the local NHS at a single Scotland-wide average cost per student acrossall years

1. Derive a Scotland-wide average cost per student (for all activities together) basedon the aggregated DC Model returns from each of the four Schools.

2. Collect information for the medical Schools on the number of student weeksplaced per Board (or allocate to the Medical School�s host Board for onwarddistribution).

3. Total up each Board�s allocation from the no. of student supported.4. Top-slice the DC quantum (sum of 3 across the four Schools) � and allocate per

relative shares determined at 3, above.

Option 2: Similar to option 1 � except that a different Scotland-wide cost isapplicable to students in each year of the curriculum.

1. As per Option 1, except the calculation would be undertaken for each yearindividually to reflect differential cost of support by year of study.

Option 3: Delivery Unit costing

1. Derive a Scotland-wide average cost per student for each activity type2. Collect information from the Medical Schools on the volume of teaching activity

delivered by each institution (teaching and non-teaching hospital) including thatdelivered in primary care settings

3. Apply the average unit from 1, to determine a �budget� for each institution4. Aggregate across institutions in each Board to arrive at a Board level total.

Either teaching Boards or the Medical Schools could run the models to make suchcost estimates.

Option 4: Allocations by student week

1. Use the direct cost models to derive the cost of a student week � differentiatingsettings where difference teaching activities are typically carried out (e.g. PrimaryCare, Major Teaching Hospitals, Non-Teaching Hospitals);

2. Allocate funding to all NHS Boards where teaching is being delivered � based onthe number of weeks supported in each setting;

3. Funds to be allocated through a central body � such as NHS Education forScotland.

All options require top-slicing of the aggregate quantum of funding identified.


22

All options envisage a separate compensation mechanism for the indirect costconsequences of having a teaching status.

4.6 Example of Allocation using Direct Cost Model Results

This section shows the outworking of Option 1, and compares funding shares betweenthe four Schools with that to host NHS Boards under ACT in 2001/02.

It can be seen that, using this approach to allocation, two Boards would receiveproportionally more money (Grampian and Lothian) and two boards would receiveproportionally less (Glasgow and Tayside).

Allocation of Direct Cost Model Total between Boards by Number of StudentsBoard Allocation

(01/02)(£ millions)

% of total DCMAllocation(£ millions)

% oftotal

change(%)

Glasgow 27.2 31.6 17.2 29.9 -1.7Lothian 24.3 28.2 16.7 29.0 +0.8Tayside 17.4 20.2 11.1 19.2 -1.0Grampian 17.3 20.0 12.6 21.9 +1.9Total 86.2 100 57.6 100

Although the quantum of funding has significantly reduced, the share of resourcesunder the proposed mechanism is, for each teaching Board, within 2% points of theACT shares.

Final comment

The direct costing exercise has collated together � for the first time � a vast databaseof comparable information on activities and costs across all four Medical Schools.This is a significant achievement given the complexity of the curricula and the varietyin delivery between Schools.

This information now makes possible much more detailed analysis of individual coststructures, NHS inputs and overhead recharges that has hereto been possible.

However, further work should aim to refine the final estimate of direct costs � notingthat this was part of the agreed process with Trusts, Boards and the Medical Schoolsin order to engage them in the process in the available timescale. In particular, suchwork should focus on the comparability of Costing Models completed and returned byeach School - issues of comprehensiveness, costing bases in relation to capitalcharges, and recharging non-activity related �administration� costs.

Analytical Services Division (SEHD) are now taking forward the final developmentof proposals for a suitable formula based on the above options and information fromthe direct costing exercise completed in this work.


23

SECTION 5 THE METHODS FOR ESTIMATING OVERALL COSTDIFFERENCES AND DIFFERENCES IN INDIRECT COSTS

5.1 Alternative methods and sets of analyses

This section of the report describes the methods used to estimate overall costdifferences and indirect costs, but before describing the main approach in more detail,it is worth noting that it was chosen after other methods had been tried. Threealternatives were explored. Previous project reports have described some of this workand further details will be given in appendices to the final report.

� Predicting the indirect costs of Scottish teaching hospitals using cost data onEnglish specialties (3.2.1).

� Predicting gross Scottish TH costs using Scottish specialty level costs. (3.2.2)

� Investigating the impact of teaching load on cost (3.3.3)

5.1.1. Predicting the indirect costs of Scottish teaching hospitals using cost dataon English specialties

The first set of analyses conducted for the project used cost data on Englishspecialties to predict the additional (indirect) cost of Scottish teaching hospitals. Forour purposes, the English Reference Costs Database has three advantages over theScottish Cost Book:

1) It is based on a larger sample of teaching hospitals (28) and should thereforeprovide more robust estimates of specialty costs

2) Case-mix controls can be more rigorous because the English Reference Costdata are directly compatible with the English specialties

3) The English Reference Costs specifically exclude any direct costs of teachingthat can be specifically identified set off against SIFT income. These arenetted out by trust and hospital accountants prior to computing the HRG costs.So cost differences based on these figures should only reflect indirect costs;and using these figures eliminates the need for separate estimates of directcosts.

The main steps in these analyses were as follows:

� The costs are obtained by trust, HRG and specialty.

� These are aggregated to produce mean values for each specialty across all acuteteaching trusts and across all other acute trusts - a group of trusts that aredesignated as intermediate teaching are excluded.


24

� Figures are computed for three sets of episodes: elective and non-elective in-patients and day-cases.

� Two sets of cost ratios are computed. One for unstandardised costs per specialty,the other is case-mix standardised, by HRG within specialty. Standardisation isquite rigorous: the average costs per HRG are applied to the same nationalaverage bundle of HRGs per specialty in each institution.

� Two further sets are computed, both standardised and unstandardised, to includethe cost of I/P episodes that exceed the HRG trim points.

� Figures are computed that both do and do not take account of market forcesfactors � predominately based on labour market variations.

This approach proved to have both practical and theoretical limitations, several ofwhich are described here. It included some unjustifiable assumptions, such as settingsspecialty cost weights to 1.0 for specialties that were on average cheaper in THs.(Though this might have been corrected by an economy of scale adjustment)

Applying English cost ratios to Scottish hospitals was complicated by definitional andorganisational differences between English and Scottish specialties. Moreover, theorganisation of teaching and the infrastructure of Scottish THs may be different fromtheir English counterparts.

In all, though this work was of considerable interest and produced estimates for thecosts of teaching were broadly similar to present levels of ACT, it would be hard tojustify using these results for resource allocation in Scotland.

5.1.2 Predicting gross Scottish TH costs using Scottish specialty level costs.

Quite extensive analyses were carried out on the differences in specialty case costsbetween major teaching hospitals (MTHs) and other hospitals in Scotland. Thisapproach has several merits, not least that it provides a starting point for examiningthe differential impact of teaching on specialties, a potentially important issue asundergraduates tend to be placed in a limited number of specialties.

The difficulties with this approach almost all arise from the small number of casesavailable for specialty level comparisons. That there are only eight MTHs in Scotlandsome specialties only occur in these eight limits the potential (and robustness) ofdirect comparisons and is the principal reason why we chose to adopt an alternativemethod using hospital wide comparisons combined with indirect standardisation.


25

5.1.3 The impact of teaching load on cost

A substantial proportion of the literature on the costs of medical teaching attempts toestablish a relation between some measure of teaching load and cost. We have foundstatistically significant positive correlations between teaching load (measured asstudent weeks per in-patient admission) and cost across both the hospitals associatedwith three English medical schools and the hospitals (other than MTHS in Scotland)

Further work on these correlations was abandoned. The English analyses could not beextended due to difficulties of getting information on student placements. TheScottish analyses were discontinued as the project changed emphasis and focussed onthe MTHs rather than the teaching loads in other hospitals.

By grouping hospitals into MTHS and others, the comparisons presented in the bodyof this report treat teaching status as a binary rather than a continuous variable. Theargument for this approach is that MTHs have infrastructual features (giving rise toindirect costs) that make them qualitatively different from other hospitals. However itreduces the opportunities for exploring the impact of different levels of teaching.

5.2 The methods of the cost comparison in more detail.

The cost comparisons that form the basis of much of the rest of this report are quitestraightforward and the methodology should be obvious from the presentation ofresults in Sections. However, it may be worth making a few preliminary points onsome definitional questions and on the methods used to control for confounders in thecomparisons.

5.2.1 What is a major teaching hospital (MTH)?

A basic difficulty in trying to estimate the indirect costs of teaching is the lack of aclear distinction between teaching and non-teaching hospitals. The data in Annex 3 ofthe earlier draft report on indirect costs indicate that almost every district generalhospital in Scotland has a significant levels of teaching responsibility as measured bythe number of student weeks. Indeed, relatively small hospitals such as BordersGeneral and Roodlands have a ratio of student weeks to patient activity, which ishigher than is found in some of the �major� teaching hospitals. Non-teaching hospitalsare now confined to very small hospitals that, for various reasons, may not provide areasonable baseline for assessing the costs of providing treatment at major hospitalsEdinburgh Royal Infirmary in the absence of teaching.

Given the limitations of the available data, it is not easy to identify an alternativeapproach to classifying hospitals. One possibility might be to focus the analysis on theadditional indirect costs of providing services in those hospitals that are generallyrecognised as major teaching hospitals. Teaching responsibilities now appear to bewidely spread across different hospitals. According to the data in Annex 3 every NHS


26

Board in Scotland with the exception of the 3 island Boards now has hospitals thatprovide a significant number of student placements. Since our interest is in therelative effect of teaching status on costs, it may be reasonable to focus on thosehospitals where teaching responsibilities are more heavily concentrated and where theeffects on indirect costs are likely to be more significant. These include:

� Edinburgh Royal Infirmary� Western General� Glasgow Royal Infirmary� Western/Gartnavel� Ninewells� Aberdeen Royal Infirmary

Two hospitals which are sometimes regarded as major teaching hospitals because ofthe scale of teaching carried out are:

� Southern General� Raigmore

Specialist hospitals which are regarded as having major teaching status include thefollowing maternity and children�s hospitals:

� Aberdeen Maternity� Queen Mother�s, Yorkhill� Princess Royal Maternity Hospital� Simpsons� RHSC, Yorkhill� RHSC, Edinburgh� Royal Aberdeen Children�s

For the moment we will assume that the eight hospitals listed above can be used asthe teaching wing of the comparison (these are the MTHs in this report), but a casecould easily be made for reducing or increasing this sub-set. The number of studentplacements and the ratio of placements to caseload at these institutions are shown inTable XX.


27

Table 1 : Hospitals regarded as "teaching hospitals" for the purposes ofpreliminary cost comparisons

Trust Hospital A B C D ESouth Glasgow UniversityHospitals NHS Trus

Southern General(SGH) 815

37113

1839

2.26 4.96

Highland Acute Hospitals NHSTrust Raigmore, Inverness 580

30715

2270

3.91 7.39

North Glasgow UniversityHospitals NHS Trus Western / Gartnavel 882

49021

2854

3.24 5.82

North Glasgow UniversityHospitals NHS Trus

Glasgow RoyalInfirmary 729

41141

4034

5.53 9.81

Lothian University Hospitals NHSTrust

Western General,Edinburgh 637

26401

4846

7.60

18.36

Grampian University HospitalsNHS Trust

Aberdeen RoyalInfirmary 942

56417

5372

5.70 9.52

Tayside University Hospitals NHSTrust Ninewells 832

51314

6907

8.31

13.46

Lothian University Hospitals NHSTrust

Edinburgh RoyalInfirmary 749

43910

7020

9.38

15.99

A: nos. of beds B:nos. of I/P discharges C: nos. of student week placements; D:nos. of students weeks per bed; e:100 times the no. of students week per patient discharged

5.2.2 Controlling for case-mix

There are two principal reasons why major teaching hospitals are likely to have amore complicated and costly case-mix than other hospitals. Firstly, they function astertiary referral centres and, secondly, their metropolitan and urban locations mayresult in their acting as general hospitals to a relatively deprived population withabove average levels of ill-health. Moreover, some of the most costly specialtiesinvolving high staffing and equipment levels are more likely to be found in THs thatelsewhere. For these reasons, any cost comparison needs to control for both thecombination of specialties and the case mix within specialties.

The Scottish Hospital Cost Book provides figures for average cost per case byspecialty (or rather, by budget line). The figures are separated into inpatientsoutpatients and day cases. They can be used to compute the relative costs of eachspecialty that can be used as controls in cost comparisons.

Controlling for case-mix within specialties is rather more difficult as the ScottishHospital Cost data does not provide figures for the costs of HRGs. These have to beobtained from the English Reference Costs database and combined with Scottishhospital activity data to compute a case-mix weighting for each specialty in each ofthe Scottish hospitals. Weightings were computed for inpatients and day cases in most


28

specialties, but the English Reference Cost data is too limited in its coverage ofoutpatients to include them in the analyses.

Although this method of case-mix control is widely accepted (the English weights arealso used in compiling performance summaries for Scottish hospitals) it is sometimesargued that HRG based weights inadequately represent the additional cost andcomplexity of cases seen by tertiary centres. There is little direct evidence to confirmor dispute this assertion, but the English cost data shows that the proportion of casesout with the standard HRG trim points is, on average, higher in non-teaching thanteaching hospitals. This suggests that teaching hospitals do not have to admit peoplefor longer because they may be at the more complex or severe end of an HRG.

5.2.3 Controlling for economies of scale

Of the eight Scottish hospitals with the highest caseload, only one (The RoyalAlexandria) is not a MTH. If economy of scale effects can be demonstrated amongstthe Scottish hospitals, then the observed cost differences between the MTHs and otherhospitals may understate the full cost differences due to teaching and related effects.

The method used to control for economies of scale are widely reported in laterSections of this report so only the key features are described here.

� MTHS are excluded from the analysis as their cost /volume relationship isconfounded by the costs associated with teaching

� (Hence) the analyses are based on data from 22 Medium to large hospitalswith wide case-mix

� The Scottish average cost per specialty is combined with the specialty casemix of these 22 hospitals to compute an expected average cost per case.

� The ratio of actual to expected cost id plotted against caseload.� A logarithmic curve is fitted to the plot and extrapolated to the higher

caseloads found in the MTHs.� The ratios in the extrapolated part of the plot are used to estimate the

economies of scale in the MTHs and adjust the cost differences betweenMTHs and other hospitals.

� The analyses are repeated with a control for HRG case-mix as well asspecialty.


29

5.2.4 Controlling for market forces factors.

The metropolitan locations of many MTHS may have implications for wage costs.This is certainly an issue in England and especially in London. The research testswhether wage costs have a significant influence on the costs of Scottish MTHs.

The wage cost figures used by the study are those computed by The University ofWarwick Institute for Employment Research for the DoH (NHS Labour MarketForces for Great Britain, 2002 Update) They are used in English resource allocation.The figures are smoothed estimates from the New Earnings Survey Panel Data Setand for the first time in 2002 there are estimates for each of the 21 NES areas inScotland. They report a 19% difference between the highest are lowest wage areas ofScotland.

5.3 Data availability and reliability

The cost comparisons are mostly based on information from the Scottish HospitalsCost Book, Scottish Hospital Activity Data and The English NHS Reference CostsDatabase. As has been previously mentioned in the discussion of case-mixadjustment, the English Reference Costs are not just used for the purposes ofcomparison, but also because Scottish hospital cost data does not provide costings forHRGs.

Several problems arise is merging these data sets. Principal of which are thedifferences between the English and Scottish specialties and the differences betweenboth sets of specialties and the budget lines used in the Scottish cost analyses. ISD hasprovided conversion tables to assist in the merging, but some inaccuracies and someloss of detail will result from the definitional differences.

The reliability of hospital cost data is an issue, especially for small specialities withhigh variation in case-cost. The project has carried out several sensitivity testsincluding a repeat analysis on a second year's data and noting the effect of removingindividual and groups of hospitals from the analyses.

The main problem of data availability (apart from the lack of costed HRGs inScotland) lies in the difficulties of obtaining indicators or good proxies for the variousfactors that are cited as contributing to the extra cost of teaching hospitals, such asresearch and innovation. The difficulties have been widely noted elsewhere and theypose severe limits on the practicality of multivariate modelling.

Even where measures can be found, there is the problem that they may refer tocharacteristics that are often barely present outside MTHs and, in effect, function as adummy variable that simply distinguishes MTHs from other hospitals.

The small number of MTHs in Scotland means that it is difficult to do any modellingof the differences between teaching hospitals, especially as there is such a widevariation in their cost bases. The small numbers also impinge on the comparisons as


30

there are wide confidence intervals around any MTH averages and models are verysensitive to the exclusion of individual cases.

We have already noted that between hospital variations become even more extremewhen analyses are conducted at the specialty level and the sample size problem isexaggerated because only a relatively small subset of specialties are common to mostScottish hospitals and a considerable minority of specialities are largely confined tothe MTHs. The larger number of hospitals in England meant that the original SIFTanalyses could be based on specialty costs, but that work has been criticised (see e.g.Bevan) for its attempts to use average or other summary measures for cost ratios thatexhibit very high levels of variation.


31

SECTION 6 STATISTICAL ANALYSIS: MEASURING ADDITIONALCOSTS

This section of the report details the findings from the statistical analysis to estimatethe extent of additional costs in major teaching hospitals. The analysis has beencarried out at hospital level, but concentrates mainly on the results from the �majorteaching hospitals� (MTHs). While it is recognised that most hospitals undertakesignificant amounts of teaching activity, the purpose of this study is primarily todetermine whether the traditional teaching centres have cost structures that make theminherently more expensive than others.

The definition of major teaching hospitals, therefore, includes only the 8 mainteaching centres as defined in Section 5.2.1. Note that, the Sick Childrens Hospitalshave been excluded here primarily because the nature of the activity in these hospitalsmakes it difficult to compare their costs structures against those of other hospitals.

The analysis begins with measuring overall cost differences between the MTHs andthe District General Hospitals (DGHs). Given that indirect costs are not tangible, themethod used is a �top-down� approach. Once overall cost differences have beencalculated, the measurable elements can then be deducted � this includes anadjustment for direct costs, and research costs. Any remaining unexplained cost canthen be attributed to the indirect costs of the major teaching hospitals.

6.1 Finding a suitable control for measuring overall costs

The Economies of Scale Effect: The starting point for calculating additional costs forthe major teaching hospitals is to find a suitable basis against which comparisons canbe made. The size of the hospital is a critical factor in assessing costs � it is expectedthat as hospital size increases, the costs per unit will tend to fall (the economies ofscale effect). The major teaching hospitals on the whole, have significantly higherpatient volumes. This would suggest, therefore, that the cost ratios of these hospitalsneed to compared with the cost ratio of a non-teaching hospital of a similar size inorder to make an accurate estimate of any additional costs that might incur as a resultof teaching activities.

Accounting for complexity of case-mix: A key feature of teaching hospitals is thecomplexity of case-mix that arises from the greater range of activities carried out inthe larger hospitals. The effect of this will be to raise the relative costs of theteaching hospital. In determining additional costs, the impact of case-mix has to benetted out because it artificially increases the costs of a major teaching hospital whencomparing it to a non-teaching hospital of a similar size. All the results in thisanalysis have been adjusted for case-mix. Chapter 6 highlight the value of the case-mix adjustment.

Speciality Standardisation: In order to carry out a fair comparison, the analysisrequires adopting a method that allows hospital-wide comparisons to be made, bystandardising for specialty. The analysis, therefore, excludes some of the more costlyspecialties that are specific to MTHs. In doing so, the cost comparisons are


32

effectively controlling for the combination of specialties, as well as the case-mixwithin them.

Thus, in calculating overall additional costs for teaching hospitals, certain adjustmentsare made that take into account factors that might distort the figures. The resultsproduced will show the extent to which costs are greater in MTHs compared to thoseexpected from a hospital of a similar size, and with no significant teachingresponsibilities.

6.2 Methodology used for measuring overall costs

The primary data source for the analysis is the �Scottish Health Service Costs� book,for the year 2001/02. The analysis was also carried out using data for the previousyear to check for consistency in results.

Step 1: Estimating cost ratios for District General Hospitals

The sample size consisted of 19 DGHs. All hospitals with a caseload of patients(inpatients plus daycases) around 10,000 or below are excluded from the analysis dueto concerns regarding the robustness of data for the smaller hospitals. The economiesof scale effect which shows the extent of additional costs for MTHs is also verysensitive to the trend-line that is based on the DGHs. Smaller hospital outliers cansignificantly influence this trend-line and it is therefore, more appropriate to excludethese hospitals.

Costs are computed across 22 specialties that are found to be common to all DGHsand MTHs (see Annex A for a detailed list of hospitals and specialties).

Cost ratios are then obtained for each DGH, , where the cost ratio is defined by:

Actual Hospital Cost Expected Hospital Cost

Actual Cost = sum of total costs for each specialityExpected Cost* = sum of the total expected cost for each speciality

*the expected costs are derived by calculating a weighted average cost foreach activity across of all hospitals in the sample. In effect, this gives the�national average� cost for each component

The advantage of using the cost ratio method is that it allows comparisons to be madebetween hospitals by highlighting their relative differences in costs.


33

Step 2: Plotting the results, and establishing the economies of scale effect

The cost ratios for the DGHs were plotted against hospital size (measured byinpatients plus daycases). A trend-line, based only on the data points for the 19DGHs, was added to the chart. Chart 1 below indicates that there is a negativerelationship between cost ratios and caseload: that is, cost ratios are falling ashospital size increases.

By projecting forward the trend-line to account for increasing hospital size beyond55,000 patients, the result shows a further expected decline in cost ratios (albeit, at adecreasing rate). This is the economies of scale effect � theoretically, cost ratios forlarger DGHs with no significant teaching commitments can be estimated using thetrend-line. It is against these hospitals, that cost ratios for the Major TeachingHospitals can be compared.

Chart 1: Gross Cost Ratio of DGHs

Actual:Expected Gross Cost Ratios, 2001/02

The Ayr

Victoria Infirmary

St John's

Stobhill

Royal Alexandra

Perth RI

Monklands

Hairmyres

Inverclyde Royal

Stirling RIQueen Margaret

Falki8rk RIDr Grays

Victoria Kirkcaldy

D & G Royal

Crosshouse

Borders General

y = -0.0234Ln(x) + 1.231

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

Caseload

A:E

DGHs Log. (DGHs)

Wishaw

Step 3: Calculating cost ratios for Major Teaching Hospitals

MTHs were excluded from the above calculation of expected costs. Cost ratios arenow calculated in a similar fashion, by using the national average expected costs andapplying these to activity in the Major Teaching Hospitals. Chart 2 shows the plotof cost ratios for MTHs.


34

Chart 2: Gross Cost Ratio for All Hospitals

Actual:Expected Gross Cost Ratios, 2001/02

The Ayr

Victoria Infirmary

St John's

Stobhill

Royal Alexandra

Perth RI

Monklands

Hairmyres

Inverclyde Royal

Stirling RIQueen Margaret

Falki8rk RIDr Grays

Victoria Kirkcaldy

D & G Royal

Crosshouse

Borders General

Western General

Western/Gartnavel

Southern GeneralRaigmore

Ninewells

Glasgow RI

Edinburgh RI

Aberdeen RI

y = -0.0234Ln(x) + 1.231

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

Caseload

A:E

DGHs Major Teaching Hospitals Log. (DGHs)

Wishaw

The results show that the 8 Major Teaching Hospitals have higher cost ratios than allthe DGHs. In addition, there is a significant gap (measured vertically) between costratio for each hospital and the point at which it touches the trend-line. This gapmeasures the additional cost of a MTH, compared to what would be expected for aDGH of a similar size.

There appears to be some evidence of economies of scale within the group of majorteaching hospitals - i.e. the ratio of actual to expected costs in major teachinghospitals falls as the size of the teaching hospital increases. The small sample size,however, makes it impossible to offer any solid conclusions without furtherinvestigation into what factors might determine relative costs.

The tables below shows the additional costs incurred each of the Major TeachingHospitals , and also the results by Health Board. At this stage, note that there hasbeen no adjustment for case-mix.


35

Table 1: Additional Gross costs, by Major Teaching Hospital

6.3 The Additional Costs of MTHs: Results of the Gross Costs Analysis (case-mix adjusted)

Chart 3 shows the plot of cost ratios for MTHs, after case-mix adjustments have beenapplied. The main points to note are:

(i) the general relationship between cost ratios and hospital size stays the same(ii) overall cost ratios for the Major Teaching Hospitals are reduced when the effect

of more complex cases are taken out. The difference between these ratios andthose for unweighted gross costs indicate the extent to which MTH costs arehigher due to these hospitals having a more complicated case-mix.

Major TeachingHospital

AdditionalCost£m

%difference

Aberdeen RIEdinburgh RIGlasgow RINinewellsRaigmoreSouthern GeneralWestern/GartnavelWestern General

11.730.716.228.20.14.4

14.119.3

12%36%19%31%0%6%15%46%

TOTAL 124.8 -


36

Chart 3: Cost Ratios for Weighted Gross Costs, by Hospital

Ratio of Actual:Expected Weighted Hospital Costs (2001-02)

Dr Gray's, Elgin Perth RIFalkirk RI

Royal AlexandraD & G RI

Borders General

Western General

Southern General

NinewellsEdinburgh RI

Glasgow RIWestern/Gartnavel

Aberdeen RI

y = -0.0141Ln(x) + 1.1284

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

Caseload

DGH Major Teaching Hospitals Log. (DGH)

Raigmore

Queen MargaretMonklands

Hairmyres

The Ayr

Crosshouse

Wishaw

Victoria Infirmary

Victoria Kirkcaldy

Stirling RI

Inverclyde

St John's

Forecast

Stobhill

Table 2 shows the change in additional costs after adjusting for case-mix. It indicatesthat case-mix adjustment reduces the additional costs of Major Teaching Hospitals byaround £34.4 million.

Table 2: Additional Costs of MTHs, adjusted for case-mix

The results can also be aggregated to Health Board level as shown in Table 3.


AdditionalCost£m

%difference


6.421.810.822.6-1.98.28.0

14.7

6%25%12%24%-3%12%8%

34%TOTAL 90.4 -


37

Table 3: Summary of Gross Costs by NHS Health Board

Does not sum to £90m as Raigmore has been excluded from the Health Boardanalysis.Give that it has overall negative additional costs, this would reduced the total figurehere.

6.4 Limitations to the Analysis:

Some caution should be exercised when interpreting the calculated ACT figure of£90m. The statistical analysis carried out only includes those specialties which arealso present among the DGHs. Other specialties that are limited in DGHs, or onlyexclusive to MTHs have been excluded. For example, neurosurgery is excludedbecause it is almost exclusively performed in the MTHs. The study recognises,however, that there are excess teaching costs associated with such specialties, whichare not accounted for by this particular analysis.

6.5 Further Analysis: Additional Costs by Cost Category

The differences in cost ratios for the major teaching hospitals can be explored further,by looking at the various direct cost components which make up the Gross costsfigure that was used to compute the results in the above section. There are sevenmain categories: Dental & Medical, Nursing, Group Allocated, Theatre, PAMS,Laboratory and Other. Annex B details the contents of each of these groupings.

The pie-chart below shows the relative proportions of each of these categories withintotal costs for MTHs.

Health Board

Estimates ofAdditionalCosts (£m)

CurrentAllocation

(£m)

GrampianGreaterGlasgowLothianTayside

6.426.836.622.6

6%11%29%25%

Total ACT 92.3* -


38

Chart 4

Direct Costs as a proportion of the Total Actual Costs for MTHs

Other6%PAM

5%

Pharmacy9%

Laboratory5%

Theatre 10%

Nursing22%

Group Allocated 30%

Medical & Dental 13%

Source: Scottish Health Service Costs, 2001/02

Each of the cost components were analysed separately. The purpose of this was todetermine whether MTHs have uniformly higher costs that cannot be explained, orwhether certain features of MTHs, such as the costs of medical and dental staff canaccount for the higher cost ratios found in the earlier results. The main findings forthe individual cost components show that:

Medical and Dental, Group Allocated and Nursing costs all display strong evidence ofeconomies of scale. For each of these cost categories, cost ratios for the MajorTeaching Hospitals lie at points that are significantly higher than expected for similarsized hospitals.

By way of example, the chart below shows the plot for Medical and Dental costratios. These are adjusted for case-mix complexity. Tables 4 & 5 highlight theadditional costs in monetary terms, by individual hospital and by Health Board.


39

Chart 5: Cost Ratios for Weighted Medical Costs

Ratio of Actual:Expected (Weighted) Medical Costs (2001-02)

Royal Alexandra

Dr Gray's Elgin

Borders

Perth RI

Falkirk RI

Queen Margaret

Stirling RI

InverclydeStobhill

Crosshouse

Monklands

Victoria Infirmary

St John's

The Ayr

D&G RI

Victoria KirkcaldyHairmyres

Ninewells

Western/Gartnaval

Aberdeen RI

Glasgow RI

Western General

Southern General

Edinburgh RI

Raigmore

y = -0.3189Ln(x) + 4.3382

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

Caseload

Co

st R

atio

DGHs Major Teaching Hospitals Log. (DGHs)

Wishaw

Table 4: Additional Medical Cost by Hospital


AdditionalCost£m

%difference


5.41.94.07.1-1.32.73.52.3

41%18%41%61%-17%35%29%48%

TOTAL 25.6 -


40

Table 5: Summary of Additional Medical Costs by Health Board

There appears to be little evidence of any relationship between hospital size and costratios for laboratory costs, theatre, pharmacy and PAM costs. However, withlaboratory costs the cost ratios are still persistently greater than those classed as non-teaching hospitals. Also, within the Major Teaching Hospitals, the chart shows thatcost ratios tend to fall as voume increases (Ninewells is an outlier, although it doesnot affect the downward trend apparent among MTHs).

Chart 6: Cost Ratio

Ratio of Actual: Expected (Weighted) Laboratory Costs (2001-02)

Royal Alexandra

Gilbert Bain

Dr Gray's Elgin

Borders

Perth RI

Falkirk RI

Queen MargaretStirling RI

Inverclyde

Stobhill

Crosshouse

MonklandsVictoria Infirmary

St John'sThe Ayr

D&G RI

Victoria Kirkcaldy

Hairmyres

Ninewells

Western/Gartnaval

Aberdeen RIGlasgow RI

Western General

Southern General

Edinburgh RIRaigmore

0.00

0.50

1.00

1.50

2.00

2.50

0 10000 20000 30000 40000 50000 60000 70000 80000 90000

Caseload

Co

st R

atio

DGHs Major Teaching Hospitals

Wishaw

In calculating the extent of additional costs, it is impossible to estimate what the costratio would be for a non-teaching hospital of a similar size, that can be compared toMTHs, given that no relationship exists on which to base the assumptions.

Health Board


CurrentAllocation

(£m)


5.410.24.27.1

41%42%31%61%

Total ACT 26.9*(*Raigmore

exl)

-


41

The additional costs have therefore, been calculated on the difference in cost ratioscompared to the national average. These are given for both hospital level and HealthBoard.

Table 6 : Additional Laboratory Costs, by Hospital

Table 7: Summary of Additional Lab Costs by Health Board

MTH AdditionalCosts (£m)


1.32.61.22.31.61.0-0.11.4

TOTAL 11.2

Health Board


CurrentAllocation

(£m)


1.32.14

2.3

32%23%88%76%

Total ACT 10*(excl.

Raigmore)

-


42

Analysis Summary and Implications

This section of the report has looked at estimating the extent of overall additionalcosts in Major Teaching Hospitals (MTHs). The purpose of this is to provide astarting point from which indirect costs can be calculated.

The main findings indicate that:

♦ Overall, major teaching hospitals are shown to have costs that are greater thanwould be expected for hospitals of a similar size. Across the 8 MTHs, this isestimated to be around £124.8 million.

♦ Complexity of case-mix accounts for around £34 million of the additional costs.Adjusting for this results in an estimated additional cost of teaching hospitals at£90.4m.

♦ The additional costs are explained to some extent by medical and dental, groupallocated and nursing costs where cost ratios are persistently higher than thosefound for District General Hospitals. Laboratory costs are also significantlyhigher than the national average.

♦ The general pattern of high cost ratios within MTHs does vary between costcategory. For example, while Edinburgh Royal Infirmary has relatively lowercost ratios for Medical and Dental costs and Nursing, its costs are relativelygreater than other MTHs for Laboratory and Theatre costs. The only exceptionis Ninewells, which appears to have consistently higher cost-ratios in every costcategory.

♦ There is also considerable variation between the additional costs by Health Boardand within Health Board. It is not clear why the cost ratios of MTHs that are ofsimilar size should vary, nor why hospitals within the same Health Board shouldhave significantly different cost ratios.


43

7. CONCLUSIONS

7.1. Direct cost modelling

The direct costing exercise has collated together � for the first time � a vast databaseof comparable information on activities and costs across all four Medical Schools.This is a significant achievement given the complexity of the curricula and the varietyin delivery between Schools.

This information now makes possible much more detailed analysis of individual coststructures, NHS inputs and overhead recharges that has hereto been possible.

Section 4.5 of this report has described several (out of many) ways in which theresults from the direct cost modelling might be used in resource allocation. It positsfour options all of which require top-slicing of the aggregate quantum of fundingidentified.

Option 1: Make allocations to Boards on the basis of the number of studentssupported in the local NHS at a single Scotland-wide average cost per student acrossall years

Option 2: A similar approach to option1 � except that a different Scotland-wide costis applicable to students in each year of the curriculum.

Option 3: Delivery Unit costingIn which information is collected from the Medical Schools on the volume of teachingactivity delivered by each institution (teaching and non-teaching hospital) includingthat delivered in primary care settings. Scottish wide costs are then applied to eachactivity todetermine a �budget� for each institution, which are then summed to give a Boardlevel total.

Option 4: Allocations by student weekIn which Scottish average costs are derived for a student week in different teachingsettings as the basis of a compensation mechanism to all Boards providingundergraduate teaching.

All four models are described in detail in Section 4.5, which also includes a set ofspecimen calculations using the first option. With this option, although the quantumof funding has significantly reduced, the share of resources under the proposedmechanism is, for each teaching Board, within 2% points of the ACT shares.

Options for direct cost compensation are currently under further development byAnalytical Services Division, Scottish Executive Health Department.


44

7.2 Estimating overall cost differences and indirect costs

The most innovative feature of this project has been the separation of costs associatedwith teaching into direct and indirect components � a division that might be carriedinto procedures for resource allocation.

This approach differs from the most obvious comparison case, the SIFT (ServiceIncrement for Teaching) mechanism for allocating funds for undergraduate medicalplacements to English teaching hospitals. The derivation of SIFT concentrated on theoverall cost differences between teaching and other hospitals and analysed thesedifferences by specialty. In so doing, it found great variability in the case costs ofspecialties at teaching hospitals and there have been criticisms in the way that thesediverse costs were �averaged� in the development of a funding mechanism.

A similar approach was explored by this project, using specialty case costs for bothScottish and English hospitals. We found that the average differences in specialty casecosts (after adjusting for case-mix) between teaching and non-teaching hospitals inEngland, when applied to Scottish teaching hospitals, predicted an overall cost ofteaching that is similar to present levels of ACT minus estimated direct costs. Thisresult supports the assumption that Scottish and English teaching hospitals have asimilar cost base because the English cost differences are based on figures that shouldalready exclude most direct teaching costs.

Building on these results, the specialty level analyses were applied directly to theScottish hospital cost data, albeit with the English HRG costs used to control for case-mix. The recurring difficulties with such work, as has been noted by commentators onSIFT, is the high variability in specialty level data, the small number of teachinghospitals available for analysis and the absence of comparable data for thosespecialties that tend to be concentrated in teaching hospitals. Despite thesedifficulties, a few regression analyses were applied to the various components ofspecialty costs presented in the Scottish hospital data. However, the problems of highunexplained variability and small numbers of cases led to this line of investigationbeing abandoned.

Subsequently, ASD has taken the lead in analysing overall cost differences at thehospital level, leading to the results presented in Section 5 of this report. Parallelanalyses of the Scottish hospital costs, conducted by MSA-Ferndale, have producedvery similar results. Moreover, further analyses of the English cost data haveidentified close parallels to the Scottish results, notably very similar economy of scaleeffects to those found for the non-teaching hospitals in Scotland.

The shift in the level and methods of analyses was accompanied by something of ashift in objectives. These became: firstly, to establish the overall difference in costbetween the two groups of hospitals; secondly, to remove identifiable elements suchas direct costs and research income from these differences and, thirdly, to explore thecauses of the differences between the MTHs.


45

Results relating to the first of these objectives have been reported in Section 5 of thisreport. The main findings are that:

♦ Overall, major teaching hospitals are shown to have costs that are greater thanwould be expected for hospitals of a similar size. Across the 8 MTHs, this isestimated to be around £124.8 million.

♦ Complexity of case-mix accounts for around £34 million of the additional costs.Adjusting for this results in an estimated additional cost of teaching hospitals at£90.4m.

These additional costs of £90M include components that can be separately estimated,such as the direct costs of teaching and some forms of research funding. A separatepaper will be presented to the ACT Sub-Group by ASD discussing the implications ofsubtracting the costs of these components from the £90M and approaches toexplaining the remaining additional cost.

In relation to resource allocation, the outstanding problems are how to fund theseadditional costs and whether it is possible to develop any sort of formula for hospitallevel allocations. Several mechanisms have been suggested for using the results fromthe direct costs model as the basis for allocating resources to cover direct costs (seeabove and Section 4.5). Although these differ in detail, their common feature is thatcost estimates will be more or less proportional to numbers and lengths of placements.

The relation between indirect costs and teaching load is far less clear. On the onehand, it can be argued that these costs relate to infrastructure, services and otheractivities that are relatively independent of student numbers. On the other hand, thereis some evidence that additional (indirect) costs are correlated with the numbers ofstudent placements amongst the 8 MTHs as well as in the other Scottish hospitals thathost student placements. The relationship is statistically significant, but is notsufficiently robust to use as the sole, or possibly even a major, basis for resourceallocation.

ASD have been examining other factors that might explain the cost differencesbetween the 8MTHs, but many of these are more obviously related to the type andquality of care than the needs of undergraduate teaching. Whether it is moreappropriate to fund them via mechanisms other than ACT is one of the issues raised inthe separate ASD paper to the Group.


46

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Annex 1

(a) Hospitals used in study

MTHs

Aberdeen Royal InfirmaryEdinburgh Royal InfirmaryGlasgow Royal InfirmaryNinewellsRaigmoreSouthern GeneralWestern/GartnavelWestern General, Edinburgh

DGHs

Borders GeneralCrosshouse HospitalD & G Royal InfirmaryDr Grays, ElginFalkirk Royal InfirmaryHairmyres, East KilbrideInverclyde Royal HospitalMonklandsPerth Royal InfirmaryQueen Margaret HospitalRoyal Alexandra HospitalSt John�sStirling Royal InfirmaryStobhillThe Ayr HospitalVictoria InfirmaryVictoria KirkcaldyWishaw


51

(b) Specialties used in study

A & ECoronary Care UnitDermatologyEar, Nose & ThroatGeneral SurgeryGeriatric AssessmentGynaecologyHaematologyMedicalMedical PaediatricsNephrologyObstetrics SpecialistOphthalmologyOral Surgery & MedicineOrthopaedicsPain ReliefPlastic Surgery & BurnsRehabilitation MedicineRespiratory MedicineRheumatologySpecial Care Baby UnitUrology

(c) Specialties excluded from study

(i) Those specialties which are performed in Major Teaching Hospitals, but in veryfew/no DGHs. These are cardiothoracic surgery, communicable diseases,neurosurgery, surgical paediatrics and spinal paralysis.

(ii) Those specialties which are carried out in District General Hospitals, but not inMTHs. These are acute other and general practice.

(iii) Those specialties which have significant numbers of outpatients, but a verylimited number of inpatients. These are radiotherapy, neurology and dental.


52

Annex 2

Costs are analysed between Direct Costs and Allocated Costs with, in some cases, asub-analysis of Direct Costs. Details of the contents of each are shown below.

Medical and Dental Medical and Dental staff

Nursing Nursing staff

Pharmacy Pharmacy staff and direct supplies, i.e. drugs, dressings,instruments and sundries, TSSU and CSSD.

PAM PAM staff directly involved in patient care and directsupplies, i.e. radiography, physiotherapy,occupational therapy, industrial therapy, chiropody andany other P & T departments, paramedicalequipment purchase, rental and repair.

Other Direct Care Other direct care staff and supplies, i.e. surgicalappliances, medical/surgical equipment purchase,rental and repair.

Theatre Theatre staff and theatre supplies

Laboratories Laboratory costs are likely to emanate from a tradingaccount which will include the costs of directstaff and supplies and allocated costs such as premisescosts, heat, light and depreciation.

Allocated costsAll other costs not included as direct costs,

i.e. AdministrationNurse teachingCatering � patients and staffBedding and LinenPatients ClothingUniformsLaundryPorteringResidencesWaste DisposalTransport and TravelProperty maintenanceCleaningHeatingRent and Rates


53

Furniture and other equipment purchase, rental and repairsDepreciationNotional interestMiscellaneous

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