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The basis of the cost-benefit analysis is simple: to determine whether the benefits of a particular project outweigh the costs. The following formula is used:
NB = B – C
In this formula, NB represents the expected net benefits of a project, B is the expected total benefits from that project, and C is the expected total costs (Finkler, Kovner, & Jones, 2010).
For example, suppose three public health programs—a breast cancer screening program for adult women, a nutrition program for school-aged children, and an anti-smoking program for adolescents—are presented for funding. Suppose, too, that all three programs have been shown to be effective in achieving their intended objectives. A cost-benefit analysis can be applied to estimate the total benefit and costs of the three competing programs to determine the net benefits of each. An estimation of net benefits in terms of a common unit, dollars, makes it possible to discern whether a particular program generates greater net benefits for society than competing projects.
Now, let’s suppose that a nurse executive is deciding whether to implement a shared-governance program to enhance staff-nurse engagement and nursing autonomy and independence. The shared-governance program’s underlying philosophy will be to support clinical practice using the principle of participatory management. The nurse executive can utilize a cost-benefit analysis to identify and measure both the direct and indirect costs of the program and direct benefits to the organization and the nursing staff.
In carrying out a cost-benefit analysis, the nurse executive can ask a series of three practical questions.
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- Which costs should be included in the cost-benefit calculation?
- Which benefits should be included?
- How should future costs and benefits be treated?
The costs that should be included in the analysis would consist of: meeting time for nurses to attend unit-based and organization-wide shared-governance meetings, time for nurses to complete projects, staff coverage, materials for completing special projects, and for nurses to attend other hospital-wide meetings. The benefits included in this analysis would be staff- satisfaction scores, retention rate of nurses, patient-satisfaction scores, and project outcomes. If the benefits outweigh the costs, then implementing shared governance is an optimal decision for the nurse executive (Finkler, et al., 2010).
Types of Cost Analysis
In the healthcare literature, several different types of cost analysis are used.
• Cost-benefit analysis—The outcome or benefits of a program are measured in terms of dollars.
• Cost effectiveness—The benefits are measured in terms of health units.
When costs and outcomes are measured in terms of dollars, cost-benefit analysis is the appropriate tool to use. The costs are subtracted from the benefits to determine the net economic benefit. This analysis permits the comparison of alternatives, since all costs and benefits are converted into dollars.
Cost effectiveness is used to evaluate competing programs that are designed to achieve the same or similar objectives. Because the program outputs are assumed to be the same, attention is focused on the identification and estimation of program costs, thus avoiding many of the difficulties of benefits estimation. For example, both physicians and nurse midwives can provide routine prenatal care, but the costs and effectiveness may be very different. Cost-effectiveness analysis can be used to evaluate the relative merits of the two types of healthcare providers who can serve the needs of the same group of patients.
Breakeven Analysis
Break-even analysis is used to determine at what point a new program or service will break-even and then start to make money (Finkler, et al., 2010). The analysis is based on the following formula.
The breakeven quantity (Q) =
Fixed Costs (FC)
Price (P) – Variable Cost per Patient (VC)
Or
Q = FC
P – VC
Where Q is the number of patients needed just breakeven.
FC is the total fixed cost.
P is the assumed average amount collected per patient.
VC is the variable cost per patient.
At a quantity lower that Q, there would be a loss; at a quantity higher than Q, there would be a profit. P is assumed to be the average amount of revenue the organization ultimately receives per patient. The basis for the formula is the underlying relationship between revenues and expenses. If total revenues are greater than expenses, there is a profit. If total revenues are less than expenses, there is a loss. If revenues are just equal to expenses, there is neither a profit nor a loss, and the service is said to just break-even (Finkler, et al., 2010).
