Introduction
The number one problem in costing is that
administrators fail to realize that there are two types of costs
Client Cost
The cost to the Client for health care services is equally important in health care as the
health care organization's cost.
This, in a large part, determines the client's accessibility and the
sustainability of the program.
-
Direct Cost
-
Travel
-
Opportunity Cost
Supply driven
These are costs that are funded with a fixed amount of money derived from a
budget or paid with a lump sum amount. It is not based on variable units of
service. The total cost is fixed no matter how many service units are given. Basically you spend what you have. Any good manager knows that he is not
suppose to have any money left at the end of the period or he may not get more
in the next budget period. In effect, no matter how many clients are served,
the costs incurred will always be the same. Most donor funding is developed in
this matter.
Example
In one rural hospital in
Bangladesh, when the hospital was overrunning with cholera patients, the
average stay was 3.5 days. When it was slow, the hospital had an average
patient stay of 5.0 days. When medical supplies were readily available, they
were prescribed more often then when they were in short supply. The
resources that were available were always used to the extent that they were
available.
What was the per unit cost?
Most, if not all, funding is strictly budgeted. This
allows for no incentive to operate efficiently or to make improvements.
What is worst is that the organization may not have
budgeted (asked for) enough money in order to perform the contract under with
the funding was provided. Staff become overworked and the quality of care
declined as is given in the above example.
Example
Under one funding agreement, computers were
budgeted for $30,000. Since the costs of computers had declined, the
same number and types of computers could have been purchased for $15,000.
Yet, the organization "had" to make the purchase for the full
$30,000 in order to "get their overhead costs" and because it
would be "to much trouble to go back to the donor and have them change
the item." The organization purchased from a local supplier at an
inflated price. What was the per unit cost?
In supply driven systems, it is
extremely difficult to analysis the cost of services. One nurse may be
employed to give family planning consultation. One day the nurse may have
two clients and the next day she may have ten clients. The cost to the
project will always be exactly the same. The cost per client will vary
according to the number of clients the nurse has.
Demand driven
These are costs that are actually driven by the
demand for services. They are classified as Variable Costs. The costs of an
item are only incurred if the item is actually used in treatment of a client
Many administrators assume that
because they have spent X dollars in running their program, that that is the
cost of treatment (?) for the number of patients served. Well, it is, to a
certain extent. However, what it is not, and CANNOT be used to determine, is
the cost-benefit of treating one patient. These costs CANNOT be used to make
cross comparisons between projects without major adjustments and a complete
understanding of the types of costs incurred.
There are two other types of costs
that administrators seem to have little problem with:
Indirect Costs
These are costs that are allocated to operating
units in order to cover the costs of “overhead”, administrators’
salaries. Other costs that are often forgotten and may or may not be included
in indirect costs are
-
Fringe Benefits
-
Inflation and Currency Adjustments
Direct Costs
These
are costs that are directly incurred by the operating units.
Cost
Accounting and its twins, Standard Unit Costing and Allocated Costs by cost
center, are two of the most important concepts in cost-benefit analysis. It is
the process of breaking down the total costs into each of its different types
in order to understand the costs of delivery of services to a client. These
costs, as broken down into its various components, enable management to make
informed decisions concerning operations and alternate actions.
There is one more cost
that comes up quite often in the International setting…Political costs.
Political
Costs
These costs are not
necessarily “pay-offs” as one would expect, but rather the fact that
expatiates salaries and political personage that are employed are generally
substantially higher than general local salaries
Example:
InHCc once had a project that
was budgeted based on the cost of
“certain
individuals”, not the generally excepted rate. This staff
was “cost” at $120,000, over four times the normal rate of an individual
performing exactly the same function. The donor organization saw no problem
with this arrangement. What was
the cost of that project?
In another case, the project was
required (it was suggested) that we hire an ex-politician as the director of
the project. Not only was this politician costly in monetary terms to the
project, but he was also such a poor administrator that he cost the project
in terms of efficiency. What was the cost of the project?
And
then there is always,
Subjective Costs
One health care organization was
“given” a research scientist [sic] to act as an administrator of a very
important unit in the organization. Although it was well known that this
particular scientist was an incompetent administrator, InHCc was told by
the then current director of the health care organization “since he was free
we should take him.” A short analysis was present to the Director to convent
him otherwise:
Enclosed
is an estimate of the cost of Dr. Big:
At least 10 people too many on
the payroll
xxxx.xx
Secretary
xxxx.xx
Office,
lights,
Travel
Expenses other Benefits
xxxx.xx
Lost
of image to the Organization
xxxx.xx
No
research being produced from the
Project
xxxx.xx
No
planning for the future of the Project
(nothing new to entice the
donors to want to participate)
xxxx.xx
No
direction of the staff
xxxx.xx
This Organization would have been better off
paying the $100,000 to get someone that was competent. A good manager will
always return more money and benefits to his organization than it cost the
organization. What was the cost of this “free” person to the organization?
Recurring Costs
Many health care organizations and donors do not
calculate recurring costs. These are costs that continue to occur after
initial costs are incurred. Although many donors state that the project should
be sustainable, very few will take the time or make the effort to calculate
those costs.
Sunk Costs
Costs once they are made is “past history”
and for investment purposes should no longer be considered into the analysis.
An example would be the best way to illustrate.
Example:
One large project that
was funded by a donor to the extent of $500,000 was taken by the health care
organization eagerly. However, no one performed an analysis to determine what
the new $500,000 project was going to cost on an on-going basis, its recurring
costs. After an analysis, after the fact, it was calculated that it would cost
the health care organization an additional $100,000 per year to sustain the
project. The health care organization did not have the money. A different
“project’ was proposed at a cost of $100,000 that would replace the first
project, do a better job, and that would save the health care organization over
$50,000 per year after the first year. Here are the numbers:
|
Cost to the organization
|
Project ($500,000)
|
Project ($100,000)
|
|
Year 1
|
100,000
|
100,000 (initial
investment)
|
|
Year 2
|
100,000
|
(50,000)
|
|
Year 3
|
100,000
|
(50,000)
|
|
Year 4
|
100,000
|
(50,000)
|
|
Year 5
|
100,000
|
(50,000)
|
In five years the cash
outlay to the health care organization for the first project was $500,000. Under
the second proposal the health care organization would have had a cash saving of
$100,000. For the health care organization it would have been better to
throw the first project in the garbage. It was a sunk cost.
When the proposal was
made to the donor, the donor demanded that the health care organization keep the
first proposal and demanded that the health care organization sign a letter to
that affect or lose any future funding.
Back to top
Donations
Donated items should be
carried at their full fair market value. Only by including these items at this
cost can the organization determine their true operating costs. Without these
true costs there is no way to make comparisons between similar organizations.
In many cases these items
are for on going projects. At some time, these donated items may have to be
replaced. A reserve should be sit up to provide for this event.
Example:
In one organization, a high quality computer
printer was “discovered” after a employee had left the organization. No
one knew who “owned” the printer so a search was made of the capital
assets of the organization. Nowhere could it be found. The accountant [sic]
said that it had been donated; therefore he had not itemized it on the
books.
Example:
A health care organization was under pressure
by a funding organization to “prove” that its overhead costs were a
certain amount. The organization could not provide that proof because most
of the organizations assets were donated and was “carried on the books”
at a $1.00 evaluation [also they didn't have an accounting system that could
give them the information].
An organization should look very closely at any
donation they are to receive and to calculate if they can afford the donation!
Example:
One organization was given a sum of $600,000
to build a new building. The project manager was asked what plans he had for
the new building. He replied "I don't have any yet. We will just get
the money and worry later about what we are going to do with it." A
quick calculation showed that the new building would cost over $50,000 per
year in maintenance and operating expenses (not counting depreciation). The
organization at the time was experiencing a sever cash shortage. Yet no one,
including the donors, had calculated the recurring cost of having this
building. The organization could not afford to take the donation (or they
had to ask for more money to provide for the recurring operating expenses).
Hidden Costs
Hidden costs are costs that occur to maintain or to “carry” an item. An
example is in order
Examples:
Staff time
Another form of hidden costs, are payments made
to staff for time that is not spend in the actual project. In many developing
countries, newly graduated physicians must spend a certain amount of time in
the rural areas before they are allowed to choose their own place to practice.
Many of these physicians are assigned an area and are on the “books” of
these rural area clinics yet in actuality they are not there. In one study in
the Dominican Republic by Lewis and colleagues it was found that the
physicians only worked 12% of the time in which they were getting paid (Lewis,
Maureen et al., 1995)
Inflation and Currency Exchange Adjustments
In
order to make comparisons, all currency transactions should be adjusted to a
major currency such as the US dollar or now the Euro. Without a
like-comparison among costs, management cannot take place. To minimize the
amount of time that is taken to perform this calculation, either the
organization should have a modern accounting package that will perform this
function automatically or a daily table of currency exchanged rates should be
created that can be queried.
Since
local inflation rates are a major consideration in many developing countries,
a method must be developed in order to make comparisons. This can also be
handled exactly as the currency exchange adjustments. As local costs changes,
a table of rates can be easily consulted to determine standard costs at a
particular place in time.
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