Determining Costs for Interventions
Whatever outcome measures are used to evaluate an intervention, its costs must be estimated. This need raises several questions about which costs to attribute to the intervention and how some of them should be valued.
Direct and indirect costs should be distinguished, and choices should be made about which, if any, of the latter to include. In addition to the direct costs to the health system of producing an intervention, the U.S. Public Health Service guidelines (Gold and others 1996) recommend including the indirect costs to patients and their families of consuming it. This recommendation means, in particular, the value of time needed for travel, waiting, and undergoing medical tests and procedures, or the value of time used in caregiving, as well as any income forgone during treatment. Externalities, or costs imposed on third parties, such as on the school system or the environment, should also be included. The analyses in this volume generally exclude such costs and report only the direct costs of delivering interventions, partly because published analyses seldom include the various indirect costs, and they are harder to estimate. Walker and Fox-Rushby (2000) found that only 20 of 101 studies included some element of indirect costing. Valuing time according to local wages or income, for example, may underestimate how valuable time actually is to poor people. Estimating such costs, even if time is not valued in money, may show whether time or monetary costs or both account for a relatively low level of use and therefore impede expanding coverage. Applying one or more of the policy instruments discussed earlier, along with the intervention, may then be important in order for it to be cost-effective.
Including such costs also raises a question of interpretation. If an intervention appears low in cost-effectiveness because it requires much travel or waiting time, the fault may lie not with the intervention itself but with health facilities that are located too far from the beneficiary population, are understaffed, or are inefficiently managed. For this reason, cost-effectiveness is estimated assuming a functional health system that does not impose prohibitive time costs on users.
Not only the characteristics of the interventions themselves, but also the capacity to deliver interventions greatly affect cost-effectiveness across many activities. In a complete analysis, each intervention is characterized by how demanding it is of managerial or institutional capacity. This element is difficult to measure directly, but authors often provide at least an intuitive description of how easy or hard delivery of an intervention is or what factors facilitate or impede its implementation. Where capacity to deliver several interventions together is important, authors deal explicitly with the issue, as in the chapters on health facilities (chapters 64-66), resources (chapters 71-72), service management (chapter 73), and whole packages of interventions (chapters 56 and 63).
Dollar values of unit costs need to be calculated for international comparisons. The inputs used to produce an intervention—the time (and training) of human resources; drugs and supplies; and depreciation or rental value of equipment, vehicles, and buildings—are either produced in the country or imported. If the latter, they already have prices in U.S. dollars; if the former, prices in local currency must be converted to U.S. dollars for comparison with other interventions and other countries. The usual distinction between tradable and nontradable goods is that tradables move from producing to importing countries at relatively constant "world" prices. In fact, the same good may be imported at different prices to different countries or may be imported to one country but locally produced in another, so that it has both an international and a local price. This situation is increasingly true of drugs and supplies, which middle-income countries (Brazil, for example) and some low-income countries (India) now produce and sometimes export.
Prices in local currency can be converted to U.S. dollars by exchange rates or by purchasing-power parity rates (as estimated in World Bank 2003). The former may reflect under- or overvaluation of the local currency, making goods systematically cheaper or more expensive than at world prices, and they may change quickly and substantially in response to changes in a country's trade balance, indebtedness, or capital flows. Nonetheless, they represent what is actually paid for locally produced inputs at any given moment. Purchasing-power parity rates, in contrast, attempt to say what local currency is worth in purchasing power, correcting for systematic price differences. Such rates can be calculated for the country as a whole, for the health sector, or for specific inputs or combinations thereof (Wordsworth and Ludbrook 2004). This calculation means valuing local inputs at external prices, assuming they are equally productive or of equal quality in the particular country as in the countries from which purchasing-power parity rates are derived. A doctor in South Asia or Sub-Saharan Africa is treated as costing just as much as a physician in high-income countries. This approach approximates measuring the real resource cost of intervention by comparing quantities of inputs among countries, eliminating price differences as a source of cost variation. Estimates of real national income are derived this way, making poor countries usually look less poor in dollar terms than if income in local currency were valued at exchange rates.
Granted that purchasing-power parity rates are reasonable for comparing large aggregates such as income across countries, but they bear little relation to the allocation of resources and budgetary choices within a country. The cost calculations in this volume are, therefore, all based on exchange rates. Exchange rates more accurately reflect what a domestic buyer—or a foreign donor or investor—has to pay for imported versus domestic inputs and, therefore, are more relevant for choices between interventions with high or low imported content. (If exchange rates are artificially fixed, the country pays a cost for that distortion that affects all interventions to the extent that they require foreign exchange.) In general, the more an intervention is produced with local inputs, the more cost-effective it will appear when priced using exchange rates, compared with its cost at purchasing-power parity rates. For decision makers and purchasers in the country, efficiency means choosing interventions according to what they actually cost, not according to what they would cost if prices were more nearly uniform among countries. If, in local currency, physicians are paid little more than nurses are, it may make sense to employ more doctors per nurse—even if at international prices doctors would cost much more and should be replaced by nurses when possible. Of course, the staffing decision turns on the competencies of the two groups as well as on their costs; for certain health problems, more nurses might be the better choice even if they cost more.
Two other reasons besides that of efficiency in buying interventions support basing cost-effectiveness on exchange rate prices. First, authors who have used published costs (which usually involve exchange rates) rather than building up estimates from individual prices and quantities seldom break down costs into imported and domestic components. Local inputs cannot be repriced at purchasing-power parity rates or can only be repriced very approximately. Second, for readers accustomed to dealing with prices converted using exchange rates, real resource estimates may simply appear to penalize the use of local inputs by valuing them at unrealistic prices. The problem with exchange rate prices, in contrast, is that when rates change, so may the relative cost-effectiveness of interventions, as imported inputs become relatively more or less expensive. Cost-effectiveness is not static or intrinsic but depends on prices as well as on quantities and on the results of an intervention—and prices can change individually or generally, through exchange movements. Priorities sometimes need to shift because of such price changes, as well as because of technological changes that make interventions more effective, and so analyses should be kept up to date.
