When you have all the records from all direct service providers and you are satisfied with the validity of these records, it is time to analyze the cost numbers. The hardest work is done: The data are in! These data are essential for the cost calculations described in this chapter or for almost any other approach to allocating the cost of each resource to each treatment procedure.

Establish a Reporting Period

The first step is to determine the period you want to analyze. A week is probably too short (except for testing your procedures). One month is a typical period -long enough so that analyses are sufficiently spaced yet short enough that the accumulated data are not overwhelming.

Transform Direct Staff Time Into Costs

The next step is to gather and organize all the personnel time for the selected period. A spreadsheet of rows and columns, on a computer or a large sheet of paper, will help you assemble the time data. The sample spreadsheet in table 8 (due to the size, this is online as a PDF file - 34 Kb) provides the foundation for calculating costs and is built on throughout this chapter. The basic premise on all the spreadsheets is that the greater the detail with which you describe your data now, the more you will be able to do with the data later.

The sample spreadsheet shows only the first two patients. More patients and other service providers can be added with additional columns and rows. Most computer spreadsheets can hold hundreds of columns, many more than can be seen on the screen at one time.

While all the calculations described here can be done by hand, using a computer spreadsheet, like Microsoft Excel© or Lotus 123© will save time copying and calculating. Computer spreadsheets make it easier to transform time data into cost data and to distribute indirect costs over patients and procedures. Also, once you enter the data into a computer spreadsheet, you never have to enter it again. The information can be manipulated many times without having to pull out a calculator or eraser.

Whether on a computer or long sheets of paper, the spreadsheet should list all resources (in rows), all patients (in columns), and all procedures (in columns, repeated under each patient's column). All treatment procedures that are provided at the clinic should be listed under each patient even though some patients will not receive all procedures. For example, some might receive drug-free therapy, some might receive acupuncture, and some might receive methadone, while all might participate in individual and group therapy.

Separate sets of rows should be made for each type of resource (Direct Service Providers, Space, etc.). Different direct service personnel (Counselor X, Counselor Y, Physician Z) should be listed in separate rows. Different spaces (Office 1, Office 2, Group meeting area) should be listed in separate rows as well.

Record Hours per Procedure per Patient

Direct Service Time

Working from the forms used to collect time data, add up the numbers (or fractions) of hours spent by each provider performing each procedure for each patient for the reporting period. Enter this number in the appropriate cell, that is, where provider, patient, and procedure come together on the spreadsheet.

For group counseling, where several patients are involved at the same time, it will be necessary to divide the meeting time equally among the patients attending the meeting. This can become a little complicated when some patients skip a meeting or new ones enter, or when the same group of patients has different co-leaders during the reporting period. Table 9 gives an example of finding the numbers to enter on the spreadsheet.

Patients 1 through 8 attended the first 1-hour group meeting of the month, led by Counselor X and Intern C. (1 hour divided by 8 patients for each leader)

Patient 2 skipped the second group meeting, which was led by Counselor X and Intern A. (1 hour divided by 7 patients for each leader)

Patient 6 and Counselor X had the flu during the third week; the meeting was co-led by Counselor Y and Intern C. (1 hour divided by 7 for each leader)

Patients 2 and 6 were both absent the fourth week; the meeting was led by Counselor X and Intern A. (1 hour divided by 6 patients for each leader)

Indirect Service Time

When indirect time is not broken down into categories, the total indirect time for each staff person for the period is entered in the row for that person in the total column. This applies to direct service staff, indirect staff, and volunteers. Indirect time that is categorized should be entered in the appropriate cell.

Continue entering time for all personnel until you have entered all the information collected for the month.

This is the first step in creating a Resource Use Spreadsheet. It stores the information others will need to replicate your program. The information will remain useful to others after monetary cost data have become obsolete due to inflation or other changes in monetary units.

Record Hourly Rates

Next, create another spreadsheet, the Cost per Unit Resource spread-sheet. This spreadsheet is exactly like the Resource Use spreadsheet except that instead of time in each cell, it lists the rate per hour for each staff member for each procedure performed for each patient or for indirect activities.

Direct Service Staff

Among direct providers, this rate may be set by contract at so many dollars per hour. On the other hand, individual rates may be set for different procedures performed by the same person. For example, one counselor might be paid $30 for each hour of individual therapy, $40 for each hour of group therapy, and $35 for each hour of group HIV education. Another counselor with different training might be paid at different rates for the same procedures. If these rates are available, they can be entered directly into the spreadsheet. Hourly rates for salaried staff can be computed as shown in table 10.

This cost per unit resource often is the same for each patient, but sliding scales and peculiarities of providing the same procedures to patients with different needs may produce different costs per resource unit expended. These differences should be recorded in the spreadsheet.

Indirect Service Staff

When staff members are on salary, hourly rates should be calculated from the annual salary as in table 10. Once computed, these hourly rates should be entered on the Cost per Unit Resource spreadsheet in the row for that staff member in the cells for indirect activities

Volunteers

Volunteers' time is a valuable resource that should be included in cost assessments. Direct service volunteers, such as counselor interns, can record time spent in program activities in the same way that other direct service providers record their time. The pay rate for their time can be set at what would be paid if someone with similar education, training, and background had to be hired to replace the volunteer.

The pay rate for volunteers who provide exclusively indirect service, such as a patient's family member working in the office, also can be assessed by what it would cost if a replacement had to be hired to do the work.

Compute the Cost of Procedures per Patient

Once the hourly pay rate for each provider is calculated, it can be multiplied by the number of hours spent providing direct service to a patient to figure the cost of administering each procedure to each patient. This amounts to multiplying each of the entries in the Resource Use spreadsheet by the corresponding entries in the Cost per Unit Resource Spreadsheet and entering these new numbers in a third spreadsheet, the Resource Cost spreadsheet that has the same columns and rows as the other two.

Using computer spreadsheets, it is easy to copy the spreadsheet structure to create the second and third spreadsheets from the first. (To make things more convenient, these three spreadsheets can be grouped in the same workbook -a single file on the computer that includes multiple spreadsheets.) It is especially easy then to tell the computer to put in the third spreadsheet's cells the results of multiplying the corresponding cells in the two other spreadsheets.

Summary

At this point, you have completed recording all personnel costs for the chosen period on three spreadsheets:

• Resource Use shows the time each person spent with each patient performing each procedure, the time spent in other direct activities, and time spent in indirect activities.
• Cost per Unit shows the hourly rate for each person and any variability in rate for specific procedures or specific patients.
• Resource Cost shows the personnel time multiplied by the appropriate hourly rate for each procedure for each patient as well as for other direct and indirect activities.

All three spreadsheets should be included as tables or appendices in reports of cost-related analyses. Reporting only Resource Cost data will make findings progressively less useful as years go by and monetary units change due to inflation and other economic phenomena. Cost per Unit Resource data describe many of the assumptions used in the cost assessment and facilitate replication of the cost assessment. The Resource Use spreadsheet provides information particularly useful for replicating the program and its specific procedures.

Calculate the Cost of Space

Personnel is not the only resource used to provide services to patients. The cost of office space used when administering a treatment procedure to a patient also needs to be included, along with the cost of utilities, furnishings, and equipment.

Record Usage Time

The cost of space used to deliver individual therapy or other procedures to a patient can be measured in a manner similar to personnel costs. Enter the time that the particular space was used for a particular procedure and patient on the Resource Use spreadsheet in the row provided and the appropriate cell for that procedure and patient.

If the total cost of specific indirect services is to be calculated, also enter the time that a specific space was used in the appropriate row in the column for the designated indirect activity. Otherwise, the total space cost minus the cost for space used for direct patient services will be assigned to general indirect services.

Find the Total Cost per Hour

Just as for personnel, the next step is to find the hourly rate for each defined space and enter it in the Cost per Unit Resource spreadsheet.

Begin by determining the annual cost of the following:

• Lease or Rent. An accountant or administrator should know the cost of leasing the total clinic space. However, this lease cost may not reflect the value of the space used by the clinic if your program uses space given to you at low or no cost by a hospital, government agency, or private firm.

  In that case, the value of that space on the open market (the opportunity value of the space) is what you will need to use as your space cost. The highest amount of money that would be paid for that same space, in that same location or town, by a private enterprise probably is your best estimate of the opportunity value of the space. You can find that value by average rates quoted for that space, or very similar space in the same locale, by local real estate agencies (Yates et al. 1979).

• Utilities and Maintenance. Add the annual utility and maintenance costs to the total cost of your space.
• Office Furniture and Equipment. If the space is fully furnished and equipped by the leaser, these expenses probably are already included in the lease payment. If not, furniture and equipment expenses need to be included in cost calculations.

  The cost of furniture, office equipment, and similar resources should be spread out over their useful lifetime. Standard lifetimes often can be found in Federal tax or accounting guidelines. The cost of a desk, for example, might be $1,200, but its monthly cost might be only $10 over its useful lifetime. Also, to figure the value of the desk, discounting should be applied to the monthly cost. Discounting is described later in the manual.

• Donated Resources. Significant amounts of donated space, furniture, equipment, supplies, and other resources should be considered. The market value of these resources often can be determined with a few calls to neighborhood stores or commercial providers of similar space or services. The market value should be used in cost assessments just as if it had been paid. Costs associated with donated resources can be tagged for later removal to contrast the "actual cost, with donated resources not paid for" with the "expected cost, if every resource had to be paid for."
• Renovations. Renovation costs for an entire facility should be spread out over the expected life of those renovations. For example, if building renovations are expected to last for 10 years, one-tenth of the total cost of the renovation should be added to the annual cost of the space.

To determine the hourly cost of your facility, divide the total space cost by the number of hours it can be used for all procedures, including indirect as well as direct services. This probably would be the number of hours the clinic is open (table 11).

The same procedure can be used to calculate the cost of space in residential programs. Procedures can be delivered 24 hours a day, 7 days a week, in some residential programs. Other residential programs may limit treatment activities to 6:00 a.m. through midnight. In either case, the above procedure can be used to calculate the hourly cost of space in residential programs.

Find the Hourly Cost of a Designated Space

It is incorrect to assign all areas of a facility the same cost. For example, therapy for an individual patient in an office measuring 8 x 10 feet would not cost the same, in terms of space, as therapy in an office measuring 10 x 15 feet. Rather, the cost of different areas should be proportional to their share of the total space. Thus, an 8 x 10 foot office (80 square feet) would account for 10 percent of the total area of an 800 square foot facility (including hallways and other areas that cannot be assigned to a direct service). If the hourly cost for the entire facility were $3.74, the office space in question would cost $0.37 per hour.

However, if there is a marked difference in the quality of different areas within the same facility, simply assigning costs as percentages of space is not adequate. Instead, determine the costs of those resources (e.g., furnishings, equipment, utilities) that differ and apportion the costs by direct treatment spaces and areas used for indirect activities. For example, specific renovations performed on a particular office -say, adding walnut paneling or a skylight -should be charged to that office only. Then compute the hourly cost as above.

Alternatively, special equipment or furnishings could be listed separately in rows added to the spreadsheet, and the time spent using them would be placed in the appropriate column for procedure and patient. The hourly cost for their use would be shown in the proper cell in the Cost per Unit spreadsheet, and the cost would be computed for the Resource Cost spreadsheet.

Record Hourly Rates

The final step is to calculate the space cost for each procedure and patient. Multiply the time that the procedure was performed by the provider for the patient in that space (entered in the Resource Use spreadsheet) by the hourly cost of the space (entered in the Cost per Unit Resource spreadsheet). The spreadsheet column totals will yield the total direct service cost of the space in the Resource Cost spreadsheet.

Other Direct Costs

Some costs are entered directly in the Resource Use spreadsheet and can be transferred directly to the Resource Cost spreadsheet. Other costs may have to be calculated. For example, you may decide to record number of doses of methadone per patient for the month on the Resource Use spreadsheet. The cost per dose would then be entered on the Cost per Unit Resource spreadsheet. The result of multiplying the two entries would appear on the Resource Cost spreadsheet.

Fortunately, mileage and phone rates are readily available from billing receipts and can be used to complete the Cost per Unit Resource spreadsheet. Multiplication of these rates by the total amount of transportation miles, phone use, and so on results in total costs, which are entered on the Resource Cost spreadsheet.

Divide Indirect Service Costs Among Patients

Deciding how to distribute indirect costs provides an overview of the cost assessment and shows how important it is to measure direct service costs accurately.

One way to distribute indirect costs is to "charge" all patients the same fraction of indirect service costs. This flat rate approach to assigning costs is fair and accurate only if all patients use the same amount of direct service resources. Because patients use varying amounts of resources, gross distribution of indirect costs across patients rarely presents an accurate cost per patient.

A more accurate description of the value of resources actually used (rather than available for use) is generated by finding the percentage of direct service resources used by the patient and assigning the same percentage of indirect resource costs to the patient. Because patients' use of direct service resources changes over time, the percentage should be calculated for each basic reporting period.

Indirect resources can be distributed over patients according to criteria other than the total direct costs of serving the patient. For example, the number of hours the patient spent in treatment, or the number of visits, could be used instead of total costs. It seems likely, however, that during a visit some patients will use more treatment resources than will other patients. These additional treatment services may well require consumption of additional indirect resources such as more space or administrator time.

For example, although it is possible that patients who see higher priced therapists (such as psychiatrists) use the same amount of space, equipment, and other materials as are used by patients who see less expensive therapists (such as paraprofessional counselors), experience suggests that higher priced therapists have nicer, larger offices, more up-to-date equipment, and more of other resources. For similar reasons, it seems likely that patients who spend the same amount of time receiving treatment services may receive services that differ in indirect as well as direct costs. Thus, the procedure used in this manual to distribute indirect costs over patients is based on the value of resources directly consumed in treatment, that is, direct service costs.

Determine Total Direct Costs and Patients' Shares

Using the Resource Cost spreadsheet, find the total for each column (except indirect activities) and enter it in the row for total direct service resources. Then add up the column totals for each patient and enter that in the TOTAL column for that patient. Next, add up all the patient totals and enter that number in the TOTAL FOR ALL PATIENTS column. That will be your total direct costs.

Next, calculate the proportion of direct services used by each patient by dividing the TOTAL for the patient by the TOTAL FOR ALL PATIENTS. If you are using computer spreadsheets, you can simply copy the formula developed for one patient and use it for all other patients. Be careful to type in the formula so that it always refers to the same total cost for all patients.

Similarly, compute the proportion of direct resources used by each patient for each procedure. That is, take the total from one procedure column for a given patient and divide it by the total cost for all patients. Enter that proportion, then calculate the proportion for the next procedure for that patient, and so forth.

Enter the proportions in the appropriate row on the Resource Cost spreadsheet. Every column with a total should have a percentage in the row below it, except the columns for indirect costs.

Determine Total Indirect Costs

Next, find the total indirect costs of your program. Start by totaling the columns under Indirect activities. All personnel costs should be accounted for here or in direct costs, but other resources may require further calculations. For example, all costs for space must be included. Some space will have been listed under direct costs (and some may have been designated for indirect activities).

• Total the rows for each designated space and add these totals together.
• Subtract these allocated costs from the total cost of your space and enter that number in the space row and the total indirect activities column.
• To check your accuracy, retotal the space rows and add these row totals together; this should give you the total cost of your space.

In the same way, total each 'other resources' row where costs have been allocated and subtract the total from the total cost of that resource. Enter this number in the total column for that resource. An exception would be resources that are used entirely for direct treatment, such as methadone.

Enter the monthly costs of all other resources not otherwise accounted for in the appropriate row in the TOTAL column under Indirect Activities. When all numbers are entered, retotal the columns for Indirect activities and enter the numbers in the row for Total indirect service resources. Then add these column totals together and enter the total in the same row in the TOTAL FOR ALL PATIENTS column.

Assign Indirect Costs

The next step is to multiply the proportion of direct costs used in each column by the total of indirect costs as entered in the TOTAL FOR ALL PATIENTS column. Enter that number in the Total Indirect Service Resources row.

Combine Indirect and Direct Costs

The final steps in cost assessment are to combine the indirect and direct costs for each procedure and for each patient. This amounts to adding up the indirect and direct costs for each procedure, then for each patient, and finally for the program as a whole. Computer spreadsheets make this easy, and it is especially easy to repeat each month as new cost data come in.

Sample Resource Sheets

Tables 12 through 14 (due to the size of these files, they are online as a PDF file - 39 Kb) give examples of the three spreadsheets described here. In order to show the calculations and indirect cost distributions, the figures unrealistically assume that only two patients are sharing all resources, including group counseling, and that space and other indirect costs are only large enough to accommodate two patients.

Keeping Down the Cost of Measuring Costs

Although continual measurement of costs for all patients and procedures usually is best from a measurement perspective, there are several other ways to measure costs per resource per procedure per patient that may be less expensive. You may want to consider these if your cost assessment budget is small. Keep in mind, however, that the most time-consuming and, in turn, most costly efforts are in the beginning. Once you have a process in place with all the necessary pieces, it is fairly easy to replicate, update, and reassess costs at different times.

One approach to reducing the cost of cost measurement while maintaining its potential to contribute to cost-effectiveness and cost-benefit analysis is to sample. If costs are measured for a representative few months instead of a whole year, and if a representative group of patients is followed, the costs of measuring costs for the rest of the year for the remainder of the patients can be saved.

It is important that the months used not be ones during which patient load was particularly high or low or when average patient length of stay was atypically long or short. A random sample of patients would be crucial, too, for generalizing cost findings to other patients. To avoid selecting time periods that are not representative, you may want to choose several different time periods, such as one month out of each quarter.

Another way to make cost assessment easier is to divide up the tasks. It would be natural to divide up cost assessment into data collection and data analysis tasks and let different people be responsible for the collection and analysis. These methods of cost measurement reduction deserve attention. You might also consider sharing cost measurement efforts with similar programs in your area, pooling your cost data, and sharing your solutions to cost measurement problems.

Finding Information on Cost Measurement

Cost measurement at the level of detail described in this manual is relatively new to human services. Most cost-measurement methods have been more global; they have been used for purposes of judging a program's overall cost rather than finding specific ways to improve cost-effectiveness and cost-benefit by adding, deleting, or modifying treatment procedures.

Some additional sources of information, cost measurement methods, and case studies are available in the professional literature. These include the following:

A Client-Oriented System of Mental Health Service Delivery and Program Management: A Workbook and Guide by D.E. Carter and F.L. Newman, 1976.

Integrated Clinical and Fiscal Management in Mental Health: A Guidebook by F.L. Newman and J.E. Sorensen, 1985.

Improving Effectiveness and Reducing Costs in Mental Health by B.T. Yates, 1980.

Cost-Effectiveness Analysis and Cost-Benefit Analysis: An Introduction by B.T. Yates, 1985.

Cost-Effectiveness Analysis, Cost-Benefit Analysis, and Beyond: Evolving Models for the Scientist-Manager-Practitioner by B.T. Yates, 1995.

Analyzing Costs, Procedures, Processes, and Outcomes in Human Services by B.T. Yates, 1996.