Costs of Providing Dental Services for Children in Public and Private Practices
by Neville Doherty and Iftikhar Hussain This study compares the costs of providing children's dental services in three practice settings: private practices, public mobile clinics, and public fixed clinics. Some 15,000 children were provided comprehensive dental care over a three-year period. Results indicate that costs per visit and per child were lowest in mobile clinics and highest in private practices. The differential was partially explained by differences in productivity but mostly by the fact that the price of services in public practices represented costs of production, whereas in private practices they represented market values. One of the more evident trends in public philosophy in this century has been the growing acceptance of governmental intervention in the organization of the health services industry. The movement has been stimulated by the inability of the health care sector to fulfill social responsibilities either effectively or efficiently, it has been complemented by society's belated but growing awareness of the need to allocate scarce resources effectively and efficiently, and it has been accentuated by widespread support for some form of national health program. Necessarily associated with this trend has been a rapid growth in the application of economics to problems conceming the comparative efficiency of the private and public components of the industry. These problems are of acute social importance when public funds are used to purchase health services. Not only does the public have an interest in determining what should be purchased, but it should also be concerned that the prices it pays reflect neither gross inefficiency nor gross monopoly profits. One of the ways that economic research can shed some light on these questions is by comparative analyses of alternative methods of providing services. This paper is concerned with one component of the health sector: the dental component. While dental care accounts for only 5 percent of all health expenditures, the ubiquitousness of dental disease assures it a high degree of public Research supported by Contract No. 294-75-0001, Public Health Service, DHEW. Address communications and requests for reprints to Neville Doherty, Ph.D., Department of Behavioral Sciences and Community Health, University of Connecticut Health Center, Farmington, CT 06032.
244
Health Services Research
COSTS
OF
DENTAL SERVICES
concern. Furthermore, because dental disease generally manifests itself first among children, the care of children tends to be the focus of most dental programs. Thus all the current national health insurance proposals that include dental care, and the American Dental Association's own program for national dental care, concentrate first on the care of children. For a national program to become operational, however, it should be important to know what the costs will be under various market and delivery systems. The purpose of this paper, then, is to draw on one study to examine the costs of providing dental care for children in private and public practice settings and, it is hoped, to shed some light on the vexing economic question of program cost.
Background In 1968 a demonstration project [1] was initiated to provide free comprehensive dental care for school children in a multicounty region of southern Appalachia. The nonservice objectives of the project were to provide the organizational, administrative, and actuarial experience necessary to implement similar projects elsewhere in the country. The project was funded by the U.S. Public Health Service, the Appalachian Regional Commission, and local governments. By 1970, 4,200 children between the ages of 7 and 11, in seven counties, were participating in the program. It was then expanded to cover 13 counties, and by 1973 the number of enrollees had risen to 14,800 children between the ages of 6 and 13. The dental care project is under the auspices of a state public health department and is externally funded, but its operation is quite autonomous. It is run from a regional center and directed by a regional dental officer. All arrangements for care delivery are made from the regional office, and all problems are resolved within the region. The dental care system is designed to assure the availability of care to all eligible children by using the existing private system to the extent possible and supplementing it when dictated by scarcity. Accordingly, wherever private dentists are available and able to participate, they are used. These dentists (there are approximately 40 in the program) are reimbursed directly on a usual and customary fee basis. Where private dentists are unable to participate or, as in three rural counties, are unavailable, care is provided by dentists employed directly by the project. These public dentists practice in fixed and mobile clinics. The project operates seven fixed clinics, permanent structures located mainly in urban areas, and five mobile clinics, specially designed trailers used in areas where there are insufficient people to support permanent fixtures. To complement this pattern of service delivery and to ensure high rates of participation, children see the dentist during school hours and are transported between their school and the dental office or clinic. In the mobile clinic component, however, minimal transportation of children is required since the units are brought to the children; i.e., clinics are moved to and attached to the schools.
Fall 1975
245
Doherty & Hussain
Our study to assess the costs of providing dental services in this experimental delivery system, undertaken in 1974, focused on comparative costs between the private and public practices and between the fixed and mobile clinics in the public sector. The purpose was not only to determine what the cost of a comprehensive dental system would be under realistic conditions but also to compare the efficiency of what could be regarded as alternative approaches within the same system. Thus the system could be viewed from two perspectives: first, as a program which, within certain political constraints, uses available resources as efficiently as possible to achieve the goal of providing comprehensive dental care to as many eligible children as possible; second, as a model for testing the efficiency of altemative approaches to the provision of publicly financed dental services. In the latter case, the different types of practices are regarded as substitutes, whereas in the former, public practices are complements to private practices, made necessary by the lack of an economic base for private practice in certain areas.
The Model and Data There were three methodological problems in this study: devising a model that would describe the appropriate financial relationships, identifying and categorizing the relevant variables, and determining the form in which existing data were available. In devising the model two important decisions were made. The first was to use an economic or social approach to cost-accounting. This was done in order to develop as fully as possible the concept of the system's social cost: the opportunity cost of using scarce resources to provide dental care. As will be seen later, it was accomplished by including interest costs for public capital investments and by considering the implicit costs incurred by the private practitioners. The second decision was to separate costs into direct and indirect categories. Direct costs were defined as the costs of all activities involved in the actual provision of services; i.e., they were costs of production. Indirect costs were defined as the costs of activities involved in supporting the provision of care; i.e., they were costs of program-as distinct from practice-administration. The reasons for this distinction were to clarify the service and administrative costs of operating a public program and to place the interpractice comparisons on equivalent grounds.
Direct Costs Cost data for the private practitioners were given by fees billed to the regional office. That the market value of private services thus represented was greater than the costs of production is acknowledged. But what is important to this study is that the fees were the real cost to the public sector of purchasing dental services.
246
Health Services Research
COSTS OF DENTAL SERVICES
To determine the direct costs of the public practices, it was necessary to devise an accounting model and collect data from each clinic. The major items included in the model were labor, capital, consumable supplies, and other operational costs (such as maintenance and utilities). Labor expenditures were recorded as the wages, salaries, and fringe benefits for the dentists and other service personnel employed in the public clinics. Capital costs were calculated on the basis of actual expenditures. (These expenditures reflect the cost of operating this program; they should be converted to current replacement values if they are used as the base for comparative studies.) To convert these expenditures to an annual charge, it was necessary to ascertain both the expected life of the capital items and the annual cost of using resources in capital ventures. The capital value can be represented by an annual annuity paid over the life of the project. Because of market imperfections, current rates of interest are often regarded as inadequate in representing the social cost of capital, and thus there is some controversy about the appropriate rate [2,3]. The rate used in this study is 7 percent, the average return on long-term government securities in the 1970s (Source: Federal Reserve Bank of New York, Monthly Review, various issues). A conservative rate of this type is often used for public sector project appraisals and has been widely used for health care facilities [4]. The economic lives of the capital components were estimated at 30 years for buildings, 10 years for mobile units, and from 3 to 10 years for equipment. Since the actual expenditures are absorbed by local school authorities, other direct costs including clinical supplies, maintenance, repairs, utilities for fixed clinics, and insurance were recorded from actual expenditures. An implicit cost for mobile unit utilities was estimated with the assistance of the Tennessee Valley Authority. Finally, the cost of moving the mobile clinics was estimated from mileage records and standard vehicle allowances. Indirect Costs Indirect costs represent expenditures for overall operation of the program over the above service delivery costs. Components were transportation, administration, and the information system. Transportation expenses were incurred mainly for children transported between their schools and the fixed clinics and private practices. By way of contrast, the flexibility of the mobile clinics allowed them to be moved to the children, thus obviating the need for transporting the children. (The cost of moving the mobile clinics is considered a direct cost since mobility is essential to the clinics' service delivery function.) Administrative expenses were the costs of operating the regional office. These consisted largely of the salaries and expenses of the program administrator and his staff and the rent and maintenance of the administrative building. The information system is a record-keeping and data analysis mechanism maintained by the major funding agency in Washington. The system is used for
Fall 1975
247
Doherty & Hussain
internal analysis and for data feedback. The costs of this component were obtained from government records. Costs of administration and information were assumed to be equal per patient and were prorated among the three practice types according to the number of patients. Measurement of Output The difficulty of developing a satisfactory measure of the output of the health system has received widespread attention in the health economics literature. Because reviews by Arrow [5], Klarman [6], and Bailey [7] have admirably covered the scope of the theoretical and practical issues, the points made here will be brief. Approaches to the measurement of output that have been used fall into two categories. The first follows the norms of production economics and uses output measures such as services, patients, patient visits, bed days, and revenues. This "hard" approach is often dictated by the availability of data. It has been criticized because it does not cope with the outcome of care-the effect on the patient's health [8]. But it has been defended on the grounds that production economics is concerned with the output of goods and services, not with the utility consumers derive from their use [7]. As might be expected, the second approach is concerned with the norms of consumers' welfare and works from the proposition that no output measure is satisfactory unless it includes an indication of the impact of the service on the patient's health. Thus recovery from illness, patient utility, improvement in physical functioning, and other similar measures are defined as outputs, whereas services become intermediate products. The welfare approach has received less emphasis in the applied work than the production approach. This is partly because of the lack of suitable data, but it also reflects the very recent involvement of economics and other quantitatively oriented disciplines in applied health services research. Nevertheless, important steps have been made, and the works of Auster et al. [9], Torrance [10], and Fanshel and Bush [11] represent a few examples of notable advances. Although the production and welfare approaches are not completely exclusive, their separation does not help to define distinctive approaches to inquiry. In this study, where the interest was limited to the costs of treating children, it was clear that the production approach was appropriate. Accordingly, outputs were defined as the number of patients and patient visits recorded in each practice mode. The decision to use the production approach did, however, warrant two assumptions. The first was that there were no differences in the quality of services among types of practices that would adversely affect the input-output relations implicit in production, and the second was that the mix of services provided by different dentists was approximately constant over all patients in each age group. Fortunately, it was possible to obtain a satisfactory (though not definitive) verification of each assumption from records of the types and quantities of each service provided by each dentist in the program. 248
Health Services Research
COSTS OF DENTAL SERVICES
Results
During the three years of the study, an average of 4,978 children per year received dental services through the project. The average cost of operating the program over that period was $286,985 per year. Number of children, number of visits, and the costs per year, by mode of practice, are shown in Table 1. These data reveal little about the comparative efficiency of the practice modes. It is notable that the proportion of direct to total costs is similar-75 percent in each mode. Therefore a reasonable approximation of the total cost of public dental programs of this type may be obtained by estimating direct costs and then adding an additional 33 percent, regardless of the delivery system utilized. Average costs per patient (PP) and per patient visit (PPV) for the three practice modes are shown in Table 2. Average direct costs varied from $48.12 PP and $22.85 PPV in private practices to $37.53 PP and $15.17 PPV in the mobile clinics. There was less variation in indirect costs, although here too the mobile clinic was the least costly mode. The main reason for the differTable 1. Number of Patients, Number of Visits, and Costs Per Year, by Mode of Practice, 1971-73 Practice mode
1971
All modes Costs ( $) Total ................ 245 408 180 623 Direct ............... Indirect .............. 64 785 3750 No. of patients .......... 9370 No. of patient visits ...... Private practice Costs ( $) Total ................ 108 126 78301 Direct ................ Indirect .............. 29 825 1 626 No. of patients .......... 3 636 No. of patient visits ...... Public practice (fixed clinic) Costs ( $ ) 50769 Total ................ 37 257 Direct ............... Indirect .............. 13 512 683 No. of patients .......... 2 136 No. of patient visits ...... Public practice (mobile clinic) Costs ( $) 86 513 Total ................ 65065 Direct ............... Indirect .............. 21 448 1441 No. of patients .......... 3 598 No. of patient visits ......
Fall 1975
1972
1973
Mean
306 151 234 860 71 291 5680 13 335
309 397 228 422 80975 5503 12395
286 985 214 635 72 350 4978 11 700
131 019 101 149 29 870 2 156 4 321
126 139 95 004 31 135 1 922 4 053
121 762 41 485
62 175 46 618 15 557 1 145 2 926
65 668 47 591 18 077. 1 059 2 335
59 537 43 822 15 715 963 2 466
112 957 87 093 25 864 2379 6 088
117 590 85827 31 763 2522 6 007
105 686 79328 26 358 2 114 5 231
30277 1 901 4 003
249
Doherty & Hussain
Table 2. Average Cost per Patient and per Patient Visit, by Practice Mode
All modes Per patient .......... Per patient visit ...... Private practice Per patient .......... Per patient visit ...... Public practice (fixed clinic) Per patient .......... Per patient visit ...... Public practice (mobile clinic) Per patient .......... Per patient visit ......
Direct
Average cost in dollars Indirect
Total
43.12 18.34
14.53 6.18
24.53
48.12 22.85
15.92 7.56
64.04 30.41
45.54 17.77
16.33 6.37
61.87 24.15
37.53 15.17
12.47 5.04
49.99 20.20
57.65
ence was the absence of transportation costs for children using the mobile clinic. This difference, incidentally, was not offset by the direct cost of moving the trailers; the latter, plus transportation for a few children, amounted to $1.00 per child, compared with $3.64 per child for transportation in the other modes.
Interdelivery Comparisons One of the most striking findings of this study was the large difference in average cost between private and public practice. As shown in Table 2, over the three-year period, direct costs per patient visit were $22.85 in private practices, $17.77 in fixed clinics, and $15.17 in mobile units. On the surface, this finding suggests considerable efficiencies in the public services. Although differences should, of course, be expected from the profit and nonprofit status of the two practice systems, the size of the difference is an interesting reflection on the profitability of dentistry. To explore this finding a little further, one can look at components of the differences in costs of production. Based on the dentists' hourly wages in public practice and on the number of patient visits per hour, the dentist's labor cost per patient visit was $7.36. The net average costs PPV less dentists labor, then, were $15.49 in private practices and $8.64 in public practices. If it is assumed that there were no qualitative differences in output and that the costs of nondentist inputs were equal in all practice modes, the difference in net average costs, $6.85, is an estimate of the return on enterprise per patient visit to private practices. This conclusion assumes that the $7.36 is the opportunity cost of a dentist in the program, that relative prices are constant, and that total revenue received by private 250
Health Services Research
COSTS OF DENTAL SERVICES
practices is equal to total cost to the program so that profits in private practices can be defined as the return on enterprise or economic rent. The definition of economic rent implicitly assumes that productivity (patient visits per dentist hour) was equal in the public and private practices. In fact, largely because of the relative ease in scheduling, public dentists treated 12.5 percent more children per hour than did private dentists. Because the opportunity cost found above was based on the public dentists' productivity, this difference underlies a difference in real costs that must be considered in estimating the rent. In order to correct for this difference, the cost of lower productivity (12.5 percent of $12.85, or $2.86) is subtracted from the previous estimate of economic rent. When this correction is made ($6.85-$2.86), an adjusted figure of $3.99 per patient visit is obtained for the private practices. In terms of the prices paid by the program to the private dentists (i.e., $22.85), $3.99 represents a rate of return on enterprise of 17.5 percent. Discussion
The finding that private dentists earn a substantial return on their enterprise is subject to two interpretations. The first is that the private dentists' economic rent is really close to zero or, at least, is considerably less than the amount estimated, i.e., the finding is fictitious. If such were the case, it would necessarily be true that the private dentists' costs were significantly higher than those of dentists in public practice. And if this were true it would follow that, for a given quantity of patient visits, the private dentists were even less efficient than the minor productivity adjustments previously noted allow for. It has been suggested that small private dental practices do operate within the production frontier and thus not at least-cost combinations [12,13]. This explanation is implausible, however; differences in labor productivity have been accounted for, and dental practices tend to be highly labor-intensive. Another reason for the difference could be bulk purchases of supplies in the public sector, but this could scarcely be used as a rationalization for inefficiency in the private sector. Schoen [14], moreover, has pointed out that savings in dental practice commonly attributed to factors such as bulk purchases of supplies or lower capital costs become very small when amortized over a number of years and many patient visits. An alternative interpretation is that the estimate is valid and that its magnitude is merely a reflection of the economic structure of the market for dental services. In support of this interpretation, it might be noted that a 17.5-percent rate of return on enterprise is comparable to that found by Maurizi [15] though somewhat less than Feldstein's 24.5 percent [16] as the return on the investment by dental students. Moreover, several authors [13, 15-17] have argued that the organization of the dental profession departs from competitive norms. Thus the difference may logically be regarded as the economic rent or returns to entrepreneurship that private dentists derive as a result of market forces.
Fall 1975
251
Doherty & Hussain
Regardless of the causes of the differences in costs discovered in this study, whether they be due to inefficiency or to quasi-monopolistic pricing or to both, it is the social cost that is critical. To see why, let the adjusted difference in costs between the private practices and the average of the public practices, $3.99, be ruled as the norm for measuring foregone output and consider its alternative use per patient visit. To do this simply, it will be assumed that marginal costs are equal to average costs in all practices, that only direct costs are considered, and that there are no external economies or diseconomies to be considered. There were 11,700 patient visits in the private practices. If each visit generated an economic rent of $3.99, over three years the net welfare loss attributable to imperfect competition in the private sector was $46,683. This sum can be regarded as the difference between the cost to the government of producing its services and the price it pays to purchase services in the market, i.e., the difference between prices and social costs. It should be noted that under the given assumptions, had these 11,700 visits occurred in public practices, their total direct costs would have been $187,200. The difference between this sum and the $274,454 spent in private practices raises, albeit indirectly, some interesting political and economic questions about the welfare effects of the distribution of benefits from public expenditures for health care.
Conclusions Mitry [18] has described the dental industry as being in a transitory state and therefore presenting many research questions. The study discussed in this paper was an attempt to analyze the costs of providing care under different practice arrangements. As a result, it dealt with an area in which there is considerable concern, not only for efficiency of operation as an end in itself but also for the implications of public involvement. This study was a preliminary effort based on limited data. In future work, steps can be taken to strengthen and refine both the method of analysis and the meaning of the results. These include incorporating data on services, age distributions, and costs among practices within the practice types. Another important step would be to study all costs in constant dollars. This was not done in this study primarily because data were available only for three years. Further, any projections based on a study such as this should use appropriate dollar values for all fixed and variable resources; capital should be estimated at replacement value and labor at market rates; and, as is always the case in economic cost analysis, future expenditures should be discounted to their present values for comparative purposes. In the final analysis, however, it is unlikely that the refinements will substantially modify the overall conclusion that governmental efficiency is an attainable goal. The degree of attainment, though, depends on the existence and work of an enlightened civil service exhibiting the type of dedication envisioned by Keynes, who rationalized government involvement because he saw it as 252
Health Services Research
COSTS OF DENTAL SERVICES
necessary to preserve and promote human values in a predominantly capitalistic society. REFERENCES
1. Lewis, G. P. and G. F. Monroe. Children's incremental dental care program: An overview of the southeast Tennessee-northeast Georgia project. J Am Dent Assoc 88:789 Apr. 1974. 2. Silberston, A. Economics of scale in theory and practice. Econ J 82:369 Mar. 1972
(suppi. ). 3. Wager, R. and A. Williams. Care of the Elderly: An Exercise in Cost Benefit Analysis Commissioned by Essex County Council. The Institute of Municipal Treasurers and Accountants, 1 Buckingham Place, London, 1972. 4. Griffith, J. R. Quantitative Techniques for Hospital Planning and Control. London: Heath, 1973. 5. Arrow, K. G. Uncertainty and the welfare economics of medical care. Am Econ Rev 53:941 Dec. 1963. 6. Klarman, H. Present status of cost-benefit analysis in the health field. Am J Public Health 57:1948 Nov. 1967. 7. Bailey, R. M. Economies of Scale in Medical Practice. In Herbert E. Klarman (ed.), Empirical Studies in Health Economics, pp. 255-73. Baltimore, MD: Johns Hopkins Press, 1970. 8. Reder, M. W. Economies of Scale in Medical Practice (Comment). In Herbert E. Klarman (ed.), Empirical Studies in Health Economics, pp. 274-77. Baltimore, MD: Johns Hopkins Press, 1970. 9. Auster, R., I. Leveson, and D. Sarachek. The production of health: An exploratory study. J Hum Resour 4:411 Fall 1969. 10. Torrance, G. W. A Generalized Cost-Effectiveness Model for the Evaluation of Health Programs. Research Series No. 101, McMaster University, 1970. 11. Fanshel, S. and J. W. Bush. A health-status index and its application to health-services outcomes. Oper Res 18:1021 Dec. 1970. 12. Mitry, D. J. The Economics of a Non-profit Enterprise in the Dental Health Field. Doctoral dissertation, Department of Economics, University of Southern California. 13. Doherty, N. Production Economics Research and Dental Group Practice. Paper presented at the National Conference on Dental Group Practice, Moodus, CT, Oct. 1315, 1972. 14. Schoen, M. H. Program Development in Dental Group Practice: The Quality and Distribution of Services. Paper presented at the National Conference on Dental Group Practice, Moodus, CT, Oct. 13-15, 1972. 15. Maurizi, A. Economic Essays on the Dental Profession. Technical Series Paper No. 57, University of Iowa, Iowa City, 1970. 16. Feldstein, P. J. Financing Dental Care: An Economic Analysis. London: Heath, 1973. 17. Schoen, M. and N. Doherty. Dental fees, productivity and income. J Am Coll Dent 41:190 July 1974. 18. Mitry, D. J. Productivity measures and production relations in dental health care services. Paper presented at the Health Economics Session, 49th Annual Conference of the Western Economic Association, San Francisco, June 1974.
Fall 1975
253
by Neville Doherty and Iftikhar Hussain This study compares the costs of providing children's dental services in three practice settings: private practices, public mobile clinics, and public fixed clinics. Some 15,000 children were provided comprehensive dental care over a three-year period. Results indicate that costs per visit and per child were lowest in mobile clinics and highest in private practices. The differential was partially explained by differences in productivity but mostly by the fact that the price of services in public practices represented costs of production, whereas in private practices they represented market values. One of the more evident trends in public philosophy in this century has been the growing acceptance of governmental intervention in the organization of the health services industry. The movement has been stimulated by the inability of the health care sector to fulfill social responsibilities either effectively or efficiently, it has been complemented by society's belated but growing awareness of the need to allocate scarce resources effectively and efficiently, and it has been accentuated by widespread support for some form of national health program. Necessarily associated with this trend has been a rapid growth in the application of economics to problems conceming the comparative efficiency of the private and public components of the industry. These problems are of acute social importance when public funds are used to purchase health services. Not only does the public have an interest in determining what should be purchased, but it should also be concerned that the prices it pays reflect neither gross inefficiency nor gross monopoly profits. One of the ways that economic research can shed some light on these questions is by comparative analyses of alternative methods of providing services. This paper is concerned with one component of the health sector: the dental component. While dental care accounts for only 5 percent of all health expenditures, the ubiquitousness of dental disease assures it a high degree of public Research supported by Contract No. 294-75-0001, Public Health Service, DHEW. Address communications and requests for reprints to Neville Doherty, Ph.D., Department of Behavioral Sciences and Community Health, University of Connecticut Health Center, Farmington, CT 06032.
244
Health Services Research
COSTS
OF
DENTAL SERVICES
concern. Furthermore, because dental disease generally manifests itself first among children, the care of children tends to be the focus of most dental programs. Thus all the current national health insurance proposals that include dental care, and the American Dental Association's own program for national dental care, concentrate first on the care of children. For a national program to become operational, however, it should be important to know what the costs will be under various market and delivery systems. The purpose of this paper, then, is to draw on one study to examine the costs of providing dental care for children in private and public practice settings and, it is hoped, to shed some light on the vexing economic question of program cost.
Background In 1968 a demonstration project [1] was initiated to provide free comprehensive dental care for school children in a multicounty region of southern Appalachia. The nonservice objectives of the project were to provide the organizational, administrative, and actuarial experience necessary to implement similar projects elsewhere in the country. The project was funded by the U.S. Public Health Service, the Appalachian Regional Commission, and local governments. By 1970, 4,200 children between the ages of 7 and 11, in seven counties, were participating in the program. It was then expanded to cover 13 counties, and by 1973 the number of enrollees had risen to 14,800 children between the ages of 6 and 13. The dental care project is under the auspices of a state public health department and is externally funded, but its operation is quite autonomous. It is run from a regional center and directed by a regional dental officer. All arrangements for care delivery are made from the regional office, and all problems are resolved within the region. The dental care system is designed to assure the availability of care to all eligible children by using the existing private system to the extent possible and supplementing it when dictated by scarcity. Accordingly, wherever private dentists are available and able to participate, they are used. These dentists (there are approximately 40 in the program) are reimbursed directly on a usual and customary fee basis. Where private dentists are unable to participate or, as in three rural counties, are unavailable, care is provided by dentists employed directly by the project. These public dentists practice in fixed and mobile clinics. The project operates seven fixed clinics, permanent structures located mainly in urban areas, and five mobile clinics, specially designed trailers used in areas where there are insufficient people to support permanent fixtures. To complement this pattern of service delivery and to ensure high rates of participation, children see the dentist during school hours and are transported between their school and the dental office or clinic. In the mobile clinic component, however, minimal transportation of children is required since the units are brought to the children; i.e., clinics are moved to and attached to the schools.
Fall 1975
245
Doherty & Hussain
Our study to assess the costs of providing dental services in this experimental delivery system, undertaken in 1974, focused on comparative costs between the private and public practices and between the fixed and mobile clinics in the public sector. The purpose was not only to determine what the cost of a comprehensive dental system would be under realistic conditions but also to compare the efficiency of what could be regarded as alternative approaches within the same system. Thus the system could be viewed from two perspectives: first, as a program which, within certain political constraints, uses available resources as efficiently as possible to achieve the goal of providing comprehensive dental care to as many eligible children as possible; second, as a model for testing the efficiency of altemative approaches to the provision of publicly financed dental services. In the latter case, the different types of practices are regarded as substitutes, whereas in the former, public practices are complements to private practices, made necessary by the lack of an economic base for private practice in certain areas.
The Model and Data There were three methodological problems in this study: devising a model that would describe the appropriate financial relationships, identifying and categorizing the relevant variables, and determining the form in which existing data were available. In devising the model two important decisions were made. The first was to use an economic or social approach to cost-accounting. This was done in order to develop as fully as possible the concept of the system's social cost: the opportunity cost of using scarce resources to provide dental care. As will be seen later, it was accomplished by including interest costs for public capital investments and by considering the implicit costs incurred by the private practitioners. The second decision was to separate costs into direct and indirect categories. Direct costs were defined as the costs of all activities involved in the actual provision of services; i.e., they were costs of production. Indirect costs were defined as the costs of activities involved in supporting the provision of care; i.e., they were costs of program-as distinct from practice-administration. The reasons for this distinction were to clarify the service and administrative costs of operating a public program and to place the interpractice comparisons on equivalent grounds.
Direct Costs Cost data for the private practitioners were given by fees billed to the regional office. That the market value of private services thus represented was greater than the costs of production is acknowledged. But what is important to this study is that the fees were the real cost to the public sector of purchasing dental services.
246
Health Services Research
COSTS OF DENTAL SERVICES
To determine the direct costs of the public practices, it was necessary to devise an accounting model and collect data from each clinic. The major items included in the model were labor, capital, consumable supplies, and other operational costs (such as maintenance and utilities). Labor expenditures were recorded as the wages, salaries, and fringe benefits for the dentists and other service personnel employed in the public clinics. Capital costs were calculated on the basis of actual expenditures. (These expenditures reflect the cost of operating this program; they should be converted to current replacement values if they are used as the base for comparative studies.) To convert these expenditures to an annual charge, it was necessary to ascertain both the expected life of the capital items and the annual cost of using resources in capital ventures. The capital value can be represented by an annual annuity paid over the life of the project. Because of market imperfections, current rates of interest are often regarded as inadequate in representing the social cost of capital, and thus there is some controversy about the appropriate rate [2,3]. The rate used in this study is 7 percent, the average return on long-term government securities in the 1970s (Source: Federal Reserve Bank of New York, Monthly Review, various issues). A conservative rate of this type is often used for public sector project appraisals and has been widely used for health care facilities [4]. The economic lives of the capital components were estimated at 30 years for buildings, 10 years for mobile units, and from 3 to 10 years for equipment. Since the actual expenditures are absorbed by local school authorities, other direct costs including clinical supplies, maintenance, repairs, utilities for fixed clinics, and insurance were recorded from actual expenditures. An implicit cost for mobile unit utilities was estimated with the assistance of the Tennessee Valley Authority. Finally, the cost of moving the mobile clinics was estimated from mileage records and standard vehicle allowances. Indirect Costs Indirect costs represent expenditures for overall operation of the program over the above service delivery costs. Components were transportation, administration, and the information system. Transportation expenses were incurred mainly for children transported between their schools and the fixed clinics and private practices. By way of contrast, the flexibility of the mobile clinics allowed them to be moved to the children, thus obviating the need for transporting the children. (The cost of moving the mobile clinics is considered a direct cost since mobility is essential to the clinics' service delivery function.) Administrative expenses were the costs of operating the regional office. These consisted largely of the salaries and expenses of the program administrator and his staff and the rent and maintenance of the administrative building. The information system is a record-keeping and data analysis mechanism maintained by the major funding agency in Washington. The system is used for
Fall 1975
247
Doherty & Hussain
internal analysis and for data feedback. The costs of this component were obtained from government records. Costs of administration and information were assumed to be equal per patient and were prorated among the three practice types according to the number of patients. Measurement of Output The difficulty of developing a satisfactory measure of the output of the health system has received widespread attention in the health economics literature. Because reviews by Arrow [5], Klarman [6], and Bailey [7] have admirably covered the scope of the theoretical and practical issues, the points made here will be brief. Approaches to the measurement of output that have been used fall into two categories. The first follows the norms of production economics and uses output measures such as services, patients, patient visits, bed days, and revenues. This "hard" approach is often dictated by the availability of data. It has been criticized because it does not cope with the outcome of care-the effect on the patient's health [8]. But it has been defended on the grounds that production economics is concerned with the output of goods and services, not with the utility consumers derive from their use [7]. As might be expected, the second approach is concerned with the norms of consumers' welfare and works from the proposition that no output measure is satisfactory unless it includes an indication of the impact of the service on the patient's health. Thus recovery from illness, patient utility, improvement in physical functioning, and other similar measures are defined as outputs, whereas services become intermediate products. The welfare approach has received less emphasis in the applied work than the production approach. This is partly because of the lack of suitable data, but it also reflects the very recent involvement of economics and other quantitatively oriented disciplines in applied health services research. Nevertheless, important steps have been made, and the works of Auster et al. [9], Torrance [10], and Fanshel and Bush [11] represent a few examples of notable advances. Although the production and welfare approaches are not completely exclusive, their separation does not help to define distinctive approaches to inquiry. In this study, where the interest was limited to the costs of treating children, it was clear that the production approach was appropriate. Accordingly, outputs were defined as the number of patients and patient visits recorded in each practice mode. The decision to use the production approach did, however, warrant two assumptions. The first was that there were no differences in the quality of services among types of practices that would adversely affect the input-output relations implicit in production, and the second was that the mix of services provided by different dentists was approximately constant over all patients in each age group. Fortunately, it was possible to obtain a satisfactory (though not definitive) verification of each assumption from records of the types and quantities of each service provided by each dentist in the program. 248
Health Services Research
COSTS OF DENTAL SERVICES
Results
During the three years of the study, an average of 4,978 children per year received dental services through the project. The average cost of operating the program over that period was $286,985 per year. Number of children, number of visits, and the costs per year, by mode of practice, are shown in Table 1. These data reveal little about the comparative efficiency of the practice modes. It is notable that the proportion of direct to total costs is similar-75 percent in each mode. Therefore a reasonable approximation of the total cost of public dental programs of this type may be obtained by estimating direct costs and then adding an additional 33 percent, regardless of the delivery system utilized. Average costs per patient (PP) and per patient visit (PPV) for the three practice modes are shown in Table 2. Average direct costs varied from $48.12 PP and $22.85 PPV in private practices to $37.53 PP and $15.17 PPV in the mobile clinics. There was less variation in indirect costs, although here too the mobile clinic was the least costly mode. The main reason for the differTable 1. Number of Patients, Number of Visits, and Costs Per Year, by Mode of Practice, 1971-73 Practice mode
1971
All modes Costs ( $) Total ................ 245 408 180 623 Direct ............... Indirect .............. 64 785 3750 No. of patients .......... 9370 No. of patient visits ...... Private practice Costs ( $) Total ................ 108 126 78301 Direct ................ Indirect .............. 29 825 1 626 No. of patients .......... 3 636 No. of patient visits ...... Public practice (fixed clinic) Costs ( $ ) 50769 Total ................ 37 257 Direct ............... Indirect .............. 13 512 683 No. of patients .......... 2 136 No. of patient visits ...... Public practice (mobile clinic) Costs ( $) 86 513 Total ................ 65065 Direct ............... Indirect .............. 21 448 1441 No. of patients .......... 3 598 No. of patient visits ......
Fall 1975
1972
1973
Mean
306 151 234 860 71 291 5680 13 335
309 397 228 422 80975 5503 12395
286 985 214 635 72 350 4978 11 700
131 019 101 149 29 870 2 156 4 321
126 139 95 004 31 135 1 922 4 053
121 762 41 485
62 175 46 618 15 557 1 145 2 926
65 668 47 591 18 077. 1 059 2 335
59 537 43 822 15 715 963 2 466
112 957 87 093 25 864 2379 6 088
117 590 85827 31 763 2522 6 007
105 686 79328 26 358 2 114 5 231
30277 1 901 4 003
249
Doherty & Hussain
Table 2. Average Cost per Patient and per Patient Visit, by Practice Mode
All modes Per patient .......... Per patient visit ...... Private practice Per patient .......... Per patient visit ...... Public practice (fixed clinic) Per patient .......... Per patient visit ...... Public practice (mobile clinic) Per patient .......... Per patient visit ......
Direct
Average cost in dollars Indirect
Total
43.12 18.34
14.53 6.18
24.53
48.12 22.85
15.92 7.56
64.04 30.41
45.54 17.77
16.33 6.37
61.87 24.15
37.53 15.17
12.47 5.04
49.99 20.20
57.65
ence was the absence of transportation costs for children using the mobile clinic. This difference, incidentally, was not offset by the direct cost of moving the trailers; the latter, plus transportation for a few children, amounted to $1.00 per child, compared with $3.64 per child for transportation in the other modes.
Interdelivery Comparisons One of the most striking findings of this study was the large difference in average cost between private and public practice. As shown in Table 2, over the three-year period, direct costs per patient visit were $22.85 in private practices, $17.77 in fixed clinics, and $15.17 in mobile units. On the surface, this finding suggests considerable efficiencies in the public services. Although differences should, of course, be expected from the profit and nonprofit status of the two practice systems, the size of the difference is an interesting reflection on the profitability of dentistry. To explore this finding a little further, one can look at components of the differences in costs of production. Based on the dentists' hourly wages in public practice and on the number of patient visits per hour, the dentist's labor cost per patient visit was $7.36. The net average costs PPV less dentists labor, then, were $15.49 in private practices and $8.64 in public practices. If it is assumed that there were no qualitative differences in output and that the costs of nondentist inputs were equal in all practice modes, the difference in net average costs, $6.85, is an estimate of the return on enterprise per patient visit to private practices. This conclusion assumes that the $7.36 is the opportunity cost of a dentist in the program, that relative prices are constant, and that total revenue received by private 250
Health Services Research
COSTS OF DENTAL SERVICES
practices is equal to total cost to the program so that profits in private practices can be defined as the return on enterprise or economic rent. The definition of economic rent implicitly assumes that productivity (patient visits per dentist hour) was equal in the public and private practices. In fact, largely because of the relative ease in scheduling, public dentists treated 12.5 percent more children per hour than did private dentists. Because the opportunity cost found above was based on the public dentists' productivity, this difference underlies a difference in real costs that must be considered in estimating the rent. In order to correct for this difference, the cost of lower productivity (12.5 percent of $12.85, or $2.86) is subtracted from the previous estimate of economic rent. When this correction is made ($6.85-$2.86), an adjusted figure of $3.99 per patient visit is obtained for the private practices. In terms of the prices paid by the program to the private dentists (i.e., $22.85), $3.99 represents a rate of return on enterprise of 17.5 percent. Discussion
The finding that private dentists earn a substantial return on their enterprise is subject to two interpretations. The first is that the private dentists' economic rent is really close to zero or, at least, is considerably less than the amount estimated, i.e., the finding is fictitious. If such were the case, it would necessarily be true that the private dentists' costs were significantly higher than those of dentists in public practice. And if this were true it would follow that, for a given quantity of patient visits, the private dentists were even less efficient than the minor productivity adjustments previously noted allow for. It has been suggested that small private dental practices do operate within the production frontier and thus not at least-cost combinations [12,13]. This explanation is implausible, however; differences in labor productivity have been accounted for, and dental practices tend to be highly labor-intensive. Another reason for the difference could be bulk purchases of supplies in the public sector, but this could scarcely be used as a rationalization for inefficiency in the private sector. Schoen [14], moreover, has pointed out that savings in dental practice commonly attributed to factors such as bulk purchases of supplies or lower capital costs become very small when amortized over a number of years and many patient visits. An alternative interpretation is that the estimate is valid and that its magnitude is merely a reflection of the economic structure of the market for dental services. In support of this interpretation, it might be noted that a 17.5-percent rate of return on enterprise is comparable to that found by Maurizi [15] though somewhat less than Feldstein's 24.5 percent [16] as the return on the investment by dental students. Moreover, several authors [13, 15-17] have argued that the organization of the dental profession departs from competitive norms. Thus the difference may logically be regarded as the economic rent or returns to entrepreneurship that private dentists derive as a result of market forces.
Fall 1975
251
Doherty & Hussain
Regardless of the causes of the differences in costs discovered in this study, whether they be due to inefficiency or to quasi-monopolistic pricing or to both, it is the social cost that is critical. To see why, let the adjusted difference in costs between the private practices and the average of the public practices, $3.99, be ruled as the norm for measuring foregone output and consider its alternative use per patient visit. To do this simply, it will be assumed that marginal costs are equal to average costs in all practices, that only direct costs are considered, and that there are no external economies or diseconomies to be considered. There were 11,700 patient visits in the private practices. If each visit generated an economic rent of $3.99, over three years the net welfare loss attributable to imperfect competition in the private sector was $46,683. This sum can be regarded as the difference between the cost to the government of producing its services and the price it pays to purchase services in the market, i.e., the difference between prices and social costs. It should be noted that under the given assumptions, had these 11,700 visits occurred in public practices, their total direct costs would have been $187,200. The difference between this sum and the $274,454 spent in private practices raises, albeit indirectly, some interesting political and economic questions about the welfare effects of the distribution of benefits from public expenditures for health care.
Conclusions Mitry [18] has described the dental industry as being in a transitory state and therefore presenting many research questions. The study discussed in this paper was an attempt to analyze the costs of providing care under different practice arrangements. As a result, it dealt with an area in which there is considerable concern, not only for efficiency of operation as an end in itself but also for the implications of public involvement. This study was a preliminary effort based on limited data. In future work, steps can be taken to strengthen and refine both the method of analysis and the meaning of the results. These include incorporating data on services, age distributions, and costs among practices within the practice types. Another important step would be to study all costs in constant dollars. This was not done in this study primarily because data were available only for three years. Further, any projections based on a study such as this should use appropriate dollar values for all fixed and variable resources; capital should be estimated at replacement value and labor at market rates; and, as is always the case in economic cost analysis, future expenditures should be discounted to their present values for comparative purposes. In the final analysis, however, it is unlikely that the refinements will substantially modify the overall conclusion that governmental efficiency is an attainable goal. The degree of attainment, though, depends on the existence and work of an enlightened civil service exhibiting the type of dedication envisioned by Keynes, who rationalized government involvement because he saw it as 252
Health Services Research
COSTS OF DENTAL SERVICES
necessary to preserve and promote human values in a predominantly capitalistic society. REFERENCES
1. Lewis, G. P. and G. F. Monroe. Children's incremental dental care program: An overview of the southeast Tennessee-northeast Georgia project. J Am Dent Assoc 88:789 Apr. 1974. 2. Silberston, A. Economics of scale in theory and practice. Econ J 82:369 Mar. 1972
(suppi. ). 3. Wager, R. and A. Williams. Care of the Elderly: An Exercise in Cost Benefit Analysis Commissioned by Essex County Council. The Institute of Municipal Treasurers and Accountants, 1 Buckingham Place, London, 1972. 4. Griffith, J. R. Quantitative Techniques for Hospital Planning and Control. London: Heath, 1973. 5. Arrow, K. G. Uncertainty and the welfare economics of medical care. Am Econ Rev 53:941 Dec. 1963. 6. Klarman, H. Present status of cost-benefit analysis in the health field. Am J Public Health 57:1948 Nov. 1967. 7. Bailey, R. M. Economies of Scale in Medical Practice. In Herbert E. Klarman (ed.), Empirical Studies in Health Economics, pp. 255-73. Baltimore, MD: Johns Hopkins Press, 1970. 8. Reder, M. W. Economies of Scale in Medical Practice (Comment). In Herbert E. Klarman (ed.), Empirical Studies in Health Economics, pp. 274-77. Baltimore, MD: Johns Hopkins Press, 1970. 9. Auster, R., I. Leveson, and D. Sarachek. The production of health: An exploratory study. J Hum Resour 4:411 Fall 1969. 10. Torrance, G. W. A Generalized Cost-Effectiveness Model for the Evaluation of Health Programs. Research Series No. 101, McMaster University, 1970. 11. Fanshel, S. and J. W. Bush. A health-status index and its application to health-services outcomes. Oper Res 18:1021 Dec. 1970. 12. Mitry, D. J. The Economics of a Non-profit Enterprise in the Dental Health Field. Doctoral dissertation, Department of Economics, University of Southern California. 13. Doherty, N. Production Economics Research and Dental Group Practice. Paper presented at the National Conference on Dental Group Practice, Moodus, CT, Oct. 1315, 1972. 14. Schoen, M. H. Program Development in Dental Group Practice: The Quality and Distribution of Services. Paper presented at the National Conference on Dental Group Practice, Moodus, CT, Oct. 13-15, 1972. 15. Maurizi, A. Economic Essays on the Dental Profession. Technical Series Paper No. 57, University of Iowa, Iowa City, 1970. 16. Feldstein, P. J. Financing Dental Care: An Economic Analysis. London: Heath, 1973. 17. Schoen, M. and N. Doherty. Dental fees, productivity and income. J Am Coll Dent 41:190 July 1974. 18. Mitry, D. J. Productivity measures and production relations in dental health care services. Paper presented at the Health Economics Session, 49th Annual Conference of the Western Economic Association, San Francisco, June 1974.
Fall 1975
253
