Introduction

Why Analyze Costs and Benefits?

Intense competition for limited substance abuse program funds, combined with increased scrutiny of program costs and outcomes, has created a need for better understanding of how costs and outcomes are related in substance abuse treatment. Programs are increasingly called on to show that their treatment of substance-abusing patients is a good investment of public and private funds. Program costs must be justified relative to program outcomes (and vice versa).

There are several advantages to analyzing costs, cost-effectiveness, and cost-benefits. Concise but accurate reports of how much a service costs can help raise funds. Potential contributors may be impressed that you know both where the money is going and how much it takes to run different parts of the program. Having solid reports of the effectiveness and cost-effectiveness of your program will assure donors that their contributions will have the maximum impact possible.

Critics will find it harder to dismiss funding requests as being too high when a careful and complete accounting of all resources used by the program shows their true value and the true cost of providing the services. Critics also will find it more difficult to dismiss your funding requests as wasted money when you can show what is achieved as well as what is done with the funds.

Some funding agencies require regular cost analyses to justify reimbursement for services provided. They may require that you verify your implementation of treatment procedures to account for your expenses. Many agencies set a ceiling on costs. A few agencies may even require that you demonstrate at least minimum levels of effectiveness for no more than a maximum allowable cost. These agencies and critics may be more impressed if you can show that your program not only understands the relationship between funds spent and effectiveness achieved, but also attempts to measure the social and other monetary benefits of treatment.

Acknowledging that substance abuse treatment benefits society by reducing the burden of substance-abusing patients on health care and other social service and criminal justice systems helps to ensure continued funding for your program. One of the most powerful ways to acknowledge this purpose is to measure your program's savings in health care and other services. If your program saves substantially more money than it consumes, it will be easier to defend as a form of social investment that may deserve more attention and additional funds.

Do not worry that analyzing the cost-effectiveness and cost-benefit of your substance abuse program will produce negative findings. Programs and researchers have conducted cost-related analyses since the 1970s. Some of their findings are included in this manual, along with some of the methods they used to attain them. Program evaluators generally have answered the question, Is treatment of substance abuse cost-effective or cost-beneficial? with a qualified or resounding yes.

A review of research by Jones and Vischi (1979), for example, concluded that "the studies are nearly unanimous in finding that subsequent to treatment for ADM [alcoholism, drug abuse, and mental illness] disorders there is a reduction in the utilization of general health care services" (p. iii). Also, Hubbard and French (1991) reviewed research showing that "there was a four-to-one return on the investment of tax dollars for law-abiding citizens for methadone and residential programs" and "the crime-reduction impact estimated here represents only a portion of the potential savings attributable to drug abuse treatment" (p. 98). A study conducted by the State of Oregon concluded, "Thus, every tax dollar spent on treatment produced $5.60 in avoided costs to the taxpayer" (Finigan 1996, p. ii).

Definitions of Terms

We begin by defining important terms. Program funders, patients, and evaluators often confuse the terms cost analysis, cost-effectiveness analysis, and cost-benefit analysis. This section explains what each type of analysis involves and why it is important.

Cost Analysis

A thorough description of the type and amount of all resources used to produce substance abuse treatment services. Cost analyses are critically important for deciding how to allocate funds within a program and for understanding the relationships between costs and outcomes.

Examining cost figures for the program as a whole (or for parts of it) is a basic form of cost analysis. Most accounting services provide cost analyses in the form of a monthly or quarterly report. Costs typically are provided at several levels, from the total cost of the program for the entire period to the cost of each part of the program each day. Costs generally vary over time.

Costs also can be tallied for each patient and for each month for each patient. This is often done for billing or reimbursement. For example, a program's cost records might show that $355 was spent to treat the average patient during a month. Cost per patient per month can vary over time and depends on a host of factors from type of treatment to program size.

Cost-Effectiveness Analysis

The relationship between program costs and program effectiveness, that is, patient outcome. Costs are measured as dollars spent, whereas effectiveness or outcome is measured as changes in patients' behaviors, thoughts, feelings, or biology. For example, the cost-effectiveness of an opiate treatment program might be measured as the cost of generating an opiate-free month for the average patient.

There is no single standard for "cost-effective." Generally, the term is used loosely as a way of saying that something probably costs less, or is more effective, than something else. Cost-effectiveness indices can be compared for different programs, different treatment modalities (such as residential versus outpatient clinics), and different treatment techniques (such as drug-free with or without acupuncture or drug-free versus methadone maintenance).

The overall cost-effectiveness of a program can be improved by first finding which parts of the program contribute most to effectiveness and then discovering which of those program components have the lowest cost. Although substance abuse treatment programs are complex, it may be possible to improve cost-effectiveness by enhancing use of these more effective and less expensive components while decreasing use of less effective and more expensive components.

However, cost-effectiveness indicators vary somewhat over time and over patients because of many factors, not all of which are controlled by the program. It is easy to find an apparent difference in the cost-effectiveness of different program components or different programs. It is harder to show that the difference is real -for example, that it occurs reliably over months and for most patients and therefore should be used in program management decisions.

Cost-Benefit Analysis

The measurement of both costs and outcomes in monetary terms. Costs and benefits can be compared between programs or contrasted within a single program. Cost-benefit analysis can also discover whether program expenditures are less than, similar to, or greater than program benefits. The time it takes for program benefits to exceed program costs is also measured in some cost-benefit analyses. Cost-benefit findings can often stand alone. For example, consider the inherent value of finding that every $1 spent for a particular substance abuse treatment program results in average savings of $4.96 to the taxpayer.

Some drug treatment programs produce measurable monetary outcomes, like increased days of legitimate employment and decreased job absences. Increased employment can yield increased income, which yields increased tax revenues. In addition, drug treatment programs may reduce patients' use of food stamps, public health services, and other public assistance -a potentially huge cost savings.

These cost savings may not occur as soon as patients begin treatment. Social service costs may actually rise as patients are guided to social services they need for recovery. In a few months or years, however, social service costs may decrease, whereas patient income and taxes paid by patients may increase.

Other major benefits of substance abuse treatment programs are indirect or secondary, such as reduction in crime-related costs, including property losses, medical services required by victims, time taken off from work by victims, and costs of apprehending, trying, and incarcerating offenders. All of these income increments, tax payments, and cost savings can add up to a considerable total benefit that exceeds the cost of treatment several times over.

There are several ways to report the relationships between costs and benefits:

• The net benefit of a program can be shown by subtracting the costs of a program from its benefits. For example, if a substance abuse treatment program cost $100,000 per year but generated in the same year $500,000 in increased patient income, increased tax payments by patients, and reduced expenditures for social and criminal justice services, the net benefit of the program would be $500,000 minus $100,000, or $400,000, for that year.

• The ratio of benefits to costs is found by dividing total program benefits by total program costs. For example, dividing the $500,000 benefit of the program by its $100,000 costs yields a cost-benefit ratio of 5:1.

• Because neither net benefits nor cost-benefit ratios indicate the size of the cost (initial investment) required for treatment to yield the observed benefits, it is important to report this as well. We cannot assume that the same exact relationships between costs and benefits will exist at different levels of investment. Sometimes an increase in cost allows new, more productive procedures to be used for treatment, increasing benefits dramatically. For example, increasing a program budget to allow hiring of a community liaison, vocational counselor, or physician might dramatically increase patient outcome. Therefore, it often is best to report the initial investment, the net benefit, and the cost-benefit ratio.

• The time to return on investment (the time it takes for program benefits to equal program costs) is yet another indicator used in cost-benefit analysis. For programs, benefits and costs occur at the same time, or at least in the same year. For individual patients, however, the investment in treatment may pay off substantially only after several months or years. Costs usually occur up front, but program benefits may take time to reach the point where they exceed costs.

• The decreasing value of benefits attained in the distant future can be calculated as the present value of benefits. When most of the cost of treatment occurs in the first year of treatment but most benefits occur only several years after treatment, the value of those delayed benefits needs to be adjusted (decreased) to reflect the delay.

Analyses of cost, cost-effectiveness, and cost-benefit relationships can provide valuable insights into how a program operates and how its operations could be improved to serve more people better for less. Analyses of costs, cost-effectiveness, and cost-benefit also show funders that program managers are aware of the importance of accountability -accountability for how funds are used and what they are used to achieve.

Additional Resources

Collecting information on costs, procedures, effectiveness, and benefits and analyzing these data is a lot of work. Help may be available to you from several sources.

Literature

Recommendations for how to measure the cost and cost-effectiveness of substance abuse treatment are available from several sources other than this manual (e.g., Apsler and Harding 1991). Cartwright and Kaple (1991) provide a sophisticated discussion of issues and initial findings of large-scale cost and cost-effectiveness analyses of substance abuse treatments.

Cost assessment methods for a variety of substance abuse treatment settings are detailed by Anderson and colleagues (in press), Bradley and associates (1994), and French and colleagues (1994). Nas (1996) provides a sophisticated, detailed description of multiple methods of cost-benefit analysis for a variety of human services. French and associates (1996) propose detailed steps for converting the outcomes of substance abuse treatment programs into monetary units. Yates (1980, 1995, 1996) describes the model used in this manual to conduct improvement-oriented analyses of cost-effectiveness and cost-benefit.

Other Programs

Other programs similar to yours probably have measured their effectiveness and perhaps their costs and benefits. Directors of those programs may be willing to describe their experiences and advise you about which measures and types of analyses worked for them.

Universities

Almost every university and 4-year college has faculty who are knowledgeable about measurement issues in real-world settings such as yours. You are most likely to find these faculty in schools or departments of accounting, business, economics, education, political science, psychology, public health, social work, and sociology. Graduate and undergraduate students in these departments often must collect and analyze data for their theses. Professors also must analyze data and publish findings to advance in their careers. If you can supply access to your program, some professors and students may be able to provide you with data and analyses of costs, effectiveness, and benefits.

High schools also may have teachers and advanced students who can assist. Using these resources not only can save you time and money, but also can build or reinforce ties between your program and the community.

Businesses

Computer spreadsheet software might be donated by local businesses and agencies that are upgrading their software. Older computers that still work well and run good spreadsheet software also may be available as donations from local businesses and agencies.

Governments

This manual is an example of the help that you can get from local, State, and Federal Government agencies at little or no cost. These government resources may have programs that provide technical assistance in program evaluation or program management. Additional funds sometimes are available to conduct the analyses described here. Local and State agencies may be eager to help once they realize that continued funding of your program by Federal agencies or other funders may be a smoother process if you have begun conducting cost, cost-effectiveness, and cost-benefit analyses.

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