Examining variation in treatment costs: a cost function for outpatient methadone treatment programs.

Although a substantial literature provides estimates of the total and per-patient costs for substance abuse treatment, relatively little is known about what drives these costs or why large variation in treatment costs is often observed across programs. In this paper, we use data from a multistate sample of methadone treatment programs to examine the factors that drive the costs of providing outpatient methadone treatment. Understanding these factors has become particularly important given the limited funding for treatment and the demand for greater fiscal accountability for the services delivered. Moreover, this information is a crucial piece in understanding the delivery of treatment services as providers and policy makers continue to strive toward cost-effective treatment. Numerous studies have examined costs for hospitals, physician practices, and other medical services (Reinhardt 1972; Grannemann, Brown, and Pauly 1986; Breyer 1987; Nyman and Dowd 1991; Goodman et al. 1992; McAvinchey and Yannopoulos 1994; Wholey et al. 1996; Carey 1997; Goodman, Nishiura, and Hankin 1998; McNamee et al. 1998; Andersen, Andersen, and Kragh-Sorensen 2000; Bilodeau, Cremieux, and Oullette 2000). Perhaps the most relevant lesson from this literature is that, in addition to examining the influence of output and input prices on cost, the empirical specification should control for other variables that may affect costs. These variables include program characteristics such as ownership structure, urbanicity of the facility's geographic location, and severity of the program's patients. A specification that includes output, input prices, and these other program characteristics is known as a hybrid cost function (Rosko and Broyles 1988). Using data from the 1996 Alcohol and Drug Services Study (ADSS), Duffy et al. (2004) estimated a hybrid cost function for 222 outpatient nonmethadone substance abuse treatment programs. In addition to measures of annual admissions (as a measure of output) and staff wages and rent (as measures of input prices), Duffy et al. include in their model several variables capturing facility characteristics (e.g., age, ownership, urbanicity) and patient case mix (e.g., patient race/ethnicity, percentage of criminal justice referrals). The authors found that a 10 percent increase in admissions yielded a 6.7 percent increase in total annual costs. In addition, the percentage of clients who received Supplemental Security Income (SSI) or Social Security Disability Insurance (SSDI) was positively associated with total annual costs. No other explanatory variables were statistically significant. Harwood, Kallinius, and Liu (2001) estimated the relationship between total cost per patient day and average daily client census for 60 residential treatment programs. Average daily census was the only explanatory variable in the regression model. Harwood and colleagues found that larger programs had lower costs per day and that a 10 percent increase in average daily census is associated with decreases in the cost per patient day ranging from 3.5 to 10.7 percent. Studies of methadone treatment over the past 25 years have rarely provided information on how a treatment program's costs vary with its output and input prices. But, as new funding mechanisms are being adopted and patients and providers face increasing pressures to reduce services and control costs, meaningful information on the relationship between program costs, program output, and treatment inputs is needed. Understanding this relationship may help methadone treatment providers in their decisions on staffing, setting reimbursement rates, and strategic business planning. In this study, we estimate a hybrid long-run cost function of outpatient methadone treatment programs. This study is significant because it examines the effect of key inputs and program characteristics on the costs of providing methadone treatment—the most common treatment modality for opioid abuse in the United States. To date, there are no published studies that examine how a methadone treatment program's costs vary with its output, input prices, and other relevant covariates.