Using Regression Analysis To Estimate Costs

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USING REGRES,SION ANALYSIS

TO'ESTIMATE COSTS:

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CONTENTS

INTRODUCTION Purpose of case s t u d y What is regression?

THE AUDIT SITUATION Legislative mandate for the review Need for life-cycle estimates

GAO ANALYSIS Analytical Procedure Example: analysis of pharmacy department

USE OF THE ANALYSIS

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CHAPTER 1

INTRODUCTION

This r e p o r t d e s c r i b e s an instance i n which a t a s k f o r c e of r e g i o n a l and h e a d q u a r t e r s GAO s t a f f members extensively used regression analysis t o estimate the lifecycle c o s t s of a l t e r n a t i v e methods of carrying out a c t i v i t i e s e s s e n t i a l t o t h e o p e r a t i o n of a h o s p i t a l . The a n a l y s i s w a s a p a r t of t h e work performed i n a wide-ranging review of health care facilities costs. PURPOSE OF CASE STUDY

This i s t h y second case study on r e g r e s s i o n a n a l y s i s i n t h i s series. This report, as well as the previous s t u d y , shows how t h e t e c h n i q u e h a s been used i n c a r r y i n g o u t an a u d i t assignment and can serve a s a reference i n future use of the technique.

WHAT I S R E G R E S S I O N ANALYSIS?

Regression analysis i s a s t a t i s t i c a l technique used t o measure t h e e x t e n t t o which a change i n one q u a n t i t y ( v a r i a b l e ) i s accompanied by a change i n some o t h e r q u a n t i t y ( v a r i a b l e ) . For example, increases i n years of education received tend t o be accompanied by i n c r e a s e s i n annual i n come earned.

"'Regression A n a l y s i s A s An Audit Tool: A Case S t u d y , ' ' June 1972.

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THE AUDIT S I T U A T I O N

The s t a f f a s s i g n e d t o t h e h e a l t h f a c i l i t i e s study needed a way t o e s t i m a t e t h e l i f e - c y c l e ( i n i t i a l investment p l u s l i f e t i m e operation and maintenance) c o s t implications of innovative methods t h a t have been developed and proposed f o r u s e i n h o s p i t a l o p e r a t i o n s so a s t o compare t h e c o s t s of t h e s e a l t e r n a t i v e methods w i t h t h o s e of more c o n v e n t i o n a l methods.

LEGISLATIVE MANDATE FOR THE REVIEW

The Comprehensive Health Manpower T r a i n i n g Act of 1 9 7 1 required the Comptroller General t o study health f a c i l i t i e s c o n s t r u c t i o n c o s t s . The study was t o i n c l u d e t h e f e a s i b i l i t y of reducing t h e c o s t of constructing health f a c i l i t i e s , such as h o s p i t a l s . I n a d d i t i o n , t h e Senate Committee on Labor and Public Welfare, which had i n i t i a t e d t h e requirement f o r the study, expressed i n t e r e s t i n the operating cost of hospitals.

Recently innovations have been developed i n several major h o s p i t a l a c t i v i t i e s , including the d i e t a r y , pharmacy, c l i n i c a l laboratory, and laundry departments and t h e m a t e r i a l handling and waste disposal a c t i v i t i e s . I n accordance with t h e mandate, t h e GAO s t a f f wished t o examine t h e c o s t s of the innovations i n these operations t o ascertain the extent t o which t h e innovations could reduce h e a l t h care c o s t s .

NEED FOR LIFE-CYCLE ESTIMATES

I n examining t h e c o s t impact of t h e s e i n n o v a t i o n s , we wished t o not l i m i t t h e review t o i n i t i a l construction c o s t s b u t t o examine t h e i r impact on o p e r a t i o n and maintenance c o s t s a s w e l l . Thus t h e t a s k f o r c e was i n t e r e s t e d i n determining t h e impact of t h e s e i n n o v a t i o n s on t h e l i f e cycle costs of health care f a c i l i t i e s .

I n many c a s e s t h e a l t e r n a t i v e approaches t o a g i v e n

hospital activity differ greatly i n their i n i t i a l investment c o s t , and t h e more c o s t l y o f t e n provide s a v i n g s i n

operation and maintenance costs. Savings i n operation and

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maintenance co-sts frequently a r e the r e s u l t of automation o r of material handling methods which increase productivity of l a b o r , t h a t i s , i n c r e a s e volume c a p a b i l i t y per employee. In such a s i t u a t i o n t h e answer t o t h e q u e s t i o n o f which a l t e r n a t i v e i s l e a s t c o s t l y depends on t h e volume demanded of t h e a c t i v i t y i n question.

I n a large hospital, an innovation having an i n i t i a l investment g r e a t e r than t h a t of t h e conventional method might prove l e s s c o s t l y , on a l i f e - c y c l e b a s i s , because t h e volume demanded of t h e a c t i v i t y i s s u f f i c i e n t l y l a r g e t h a t t h e saving i n operation and maintenance c o s t s exceeds t h e higher investment c o s t s of the innovation. But t h i s might not h o l d t r u e for a s m a l l h o s p i t a l . For t h i s r e a s o n , t h e task force wished t o estimate the life-cycle c o s t s of each of t h e a l t e r n a t i v e methods over a range of h o s p i t a l s i z e s .

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