Condition #4: Produced Cost Effectively and Efficiently
| Type of Analysis | Measurement of Benefits |
|---|---|
| Cost-Minimisation | Benefits found to be equivalent |
| Cost-Effectiveness | Physical units (e.g. life years gained) |
| Cost-Utility | Healthy years (e.g. quality adjusted life years) |
| Cost-Benefit | Monetary terms |
- Cost-effectiveness of PHARMAC investments each year, 1998/99 to 2004/05
The Public Finance Act requires departments to identify measures that will be used to report cost-effectiveness. The way benefit is measured will favour different methods of economic analysis (right).
Economic analysis will show whether a given intervention is worth funding, and can show whether it better than other options. Measured regularly over time, economic ratios show how – or whether - overall efficiency and value have improved (right).
Economic measures must thus be reported if benefits and costs are linked in a robust way. When this is not possible, cost-effectiveness can be inferred by benchmarking or real price analysis (below), and proving that the intervention works as intended (see #5-7).
An efficient producer maintains or reduces prices, after inflation is allowed for. As efficiency improves real prices for homogenous inputs and outputs fall (and vice versa).
- Real Price Per Unit of Output, 1995-2004
Real price analysis requires time series information on price and volume for major:
- outputs (eg, cases, passports, patients or children processed), and/or
- assets (eg, km of road, classroom or prison bed built), and/or
- inputs (eg, per cop, fireman or analyst).
A spreadsheet for exploring price and volume data is on the SSC’s Expenditure Review Portal[3]. The results on the right show periods when the agency showed it could manage costs downwards (green arrow), and periods when costs rose much faster than inflation.
Remember: a 1% price increase in major Votes costs ~$200 million, without adding value.
- Good managers manage costs: look for efficient production and economies of scale.
- Quality alone does not justify a price rise: improved results must also be shown.
- Utilisation rates also reveal efficiency (eg, cases per worker; % houses occupied).
- Inefficiency is implied by year end spends, and persistent or major under-spends.
- Improved quality usually shows as step changes in prices, not slow upwards drift.
Cost-effectiveness cannot be inferred from efficiency data alone. Agencies must show that their major interventions are also effective (see Conditions #6 and #7, below).
Notes
- [3]Treasury staff should read TSY #855600, which lists ‘tips & traps’ for using the spreadsheet.
