The Chief Financial Officer (CFO) of the Department has assigned you to deliver an assessment report that would compliment the strategic statement document on the extension of primary healthcare provision in rural areas of East-Bush Province. At the moment, it is not clear whether the Department will adopt a strategy of building of clinics, or strategy of mobile unit fleet, or a combination of the two.

However, the senior managerial team needs to know the cost-effective alternative, and the budgetary implication of the alternatives, if adopted. After your report, the team will make a final decision on the actual structure of the policy.

There are about 50 rural areas in the whole East-Bush Province that are overdue in provision of permanent primary healthcare facilities. The management believes that Moonbango area, located about 300 km to the south from the provincial capital is a representative region that could be used to host the assessment of the two alternative methods.

Locality and Population Moonbango used to have a number of mines operating in the region in the 1960s and 70s. Small scale agriculture schemes were present when the passing river Khontegu had a sufficient volume to support these. Since the end of 1980s, when a dam was built upstream to supply the mines and town of Lepoto with water, local agriculture activities have dwindled to subsistence levels.

At present, the mining and small manufacturing are concentrated around Lepoto, which is also located near one of the provincial roads. Due to its increasing economic activity the land prices in Lepoto are expected to double in next 15 years.

The road infrastructure in Moonbango is now in poor condition since it was built for the mines and currently there is no tarred road in the area. The access of the local communities to the nearest hospital in Lepoto is thus severely restricted, as few mini-bus taxis are available to transport patients from Moonbango.

The latest population census in the area served by the proposed healthcare facility was carried out in 2011, and it recorded 23,970 people living within the area. Since population count was based on the Geographic Information System (GIS) sampling methods, the Department has been advised by the consultants that the population figure for 2020 is approximately 25,000 people.

Many factors affect the population growth rate in the area: birth and mortality, migration, mining developments, and transformation of agriculture lands into game reserves. The study done by consultants concludes that the most likely long-term average growth rate is 1.0% per annum.

Expected Admissions

The proposed clinic will relieve Lepoto Hospital from the primary services currently given to patients coming from Moonbango and allow the hospital to specialize in more intensive services. At the same time, new clinic will allow many patients, who have been restricted in access to primary health services to receive a timely care locally in Moonbango.

On the basis of current statistics from other clinics, the Department has established that the level of admissions to a similar rural clinic depends on the population density of the area, and there are, on the average, 9.85 patient-visits per 1,000 residents a month.

Affordability of Services and Projected Fees investigations conducted by consultants in similar rural areas stated a very low level of income of people in communities, and as a result, extremely low affordability of even primary medical services. This conclusion has been confirmed by a recent survey carried out as a part of the compilation of the provincial database on the social and economic indicators in its districts.

In addition to the low affordability of private sector healthcare, the national law sets out a minimum level of medical services that should be provided for free to certain age groups and categories of citizens. Based on this information, the Department estimated that the average number of patients that could afford paying for the medical services rendered would be only 5.0% of admissions.

The fees charged to these patients would be, on the average, R 20 per patient-visit. The Department will allow the clinic to raise the fee by 0.8% annually, in real terms. The domestic currency is the Sun Rand (R).

Capital Costs

8.1 Clinic

As the proposed clinic would be located in a rural area where vast public lands are available. Due to permanent shortage of water, few agriculture activities are currently undertaken. An area of 0.25 hectare will be required for the building site. The construction of a modern building for housing the clinic would require preliminary works worth R 500,000, which would cover the civil works on the territory of the facility, fencing, an access road, and parking. The building of clinic has been designed to include a diesel-powered generation unit to partially cover the grid supply in times of electricity black-outs, and the total cost of building is assessed as R 2.7 million. The Department has received a quote from a domestic manufacturer for a set of basic medical equipment, which would cost 1.3 million to deliver and assemble.

8.2 Mobile Unit

The operation of mobile unit would require setting up three docking stations in the largest communities of the service area. These docking stations would be equipped, where available, with access to power, water and sanitation during the periods when the mobile unit is stationed in the community. The total cost of preparing these stations is estimated as R 600,000. The medical equipment to be mounted on the unit is worth R 1.5 million. The total cost of two vehicles to be used as a mobile unit is R 1.6 million.

Recurrent Costs

9.1 Clinic

The scope of services provided by the clinic will require the following personnel: one full-time doctor, 4 nurses and 3 semi-skilled workers. The respective monthly wage is R 10,000, R 5,000 and R 2,000 per person. It is expected that the wage rates will grow by 2% per annum, in real terms.

A standard set of medicine and supplies for such clinics has an average monthly cost of R 5,000. From the past experience, it is known that the quantity of medicine and supplies consumed increases at the same pace as the annual rise in the inflow of patients.

The average monthly cost of services (mainly power, water, sanitation, and also miscellaneous services) is R 2,500. The average expenditure on maintenance of building, medical and mechanical equipment is estimated as R 1,800 per month. The past pattern of diesel generator usage in other provincial clinics suggests that R 1,000 should be budgeted for fuel during every month of clinic operation.

9.2 Mobile Unit

The personnel of mobile unit would consist of 1 full-time doctor, 4 nurses, and 4 semi-skilled workers. Their respective monthly wage is R 12,000, R 5,500 and R 2,000 per person. It is expected that the wage rates will grow by 2% per annum, in real terms.

The consumption of medicine and supplies would not only rise with the inflow of patients (population increase) but also be dependent on the relative patient coverage efficiency of the mobile unit (a higher level of admissions would imply additional usage of the consumables).

As the mobile unit will be less reliant on the outside power supply, the average monthly provision for services has been estimated as only R 800.

The continuous usage of vehicles on rough rural terrain would necessitate regular servicing and repair at the average maintenance expenditure of R 6,000 a month. Since the mobile unit would have to generate its own power, the average fuel cost is expected to be R 8,000 per month.

10. Project Duration

The Department is considering launching this project in the next budget period, starting from January 1, 2020. If the clinic alternative is adopted, the construction of clinic and furnishing it with the necessary equipment can be accomplished during the same year, and it can start operation in 2021.

If the mobile unit is deployed, the procurement of the equipment and vehicles will take 9 months, during which the docking stations would also be prepared. The staffing of the mobile unit and training of the personnel will take, at most, three more months, so that the first admissions could be done on January 1, 2021.

Both the clinic and mobile unit are expected to operate continuously over 12 years until December 31, 2032, after which liquidation of the project will take place.

Liquidation

All equipment is brand new and expected to last over 12 years of operation, and then it is expected to be useless and can only be sold for scrap. The Department does not think that the vehicles and equipment could raise more cash than the amount of liquidation expenses necessary for dismantling the clinic/mobile unit at the end of the project in 2033.

As the building of the clinic could still be used by local residents, the Department is planning to grant it to the community in case if the clinic ceases its operation at the end of project.

Discounting and Treatment of Costs

The appropriate discount rate for public sector expenditures is the economic opportunity cost of capital (EOCK) for the country. The National Government has estimated the EOCK for the Republic of Sunshine at 11.0%, in real terms.

To facilitate inter-temporal comparison of patient-visits, the EOCK must be used as a discount rate in order to estimate the present value (PV) of patients-visit admitted by the proposed facility.

All costs stated above are given in real terms, and no inflation is expected in the Republic of Sunshine for the next 20 years.

QUESTIONS

1 In order to prepare the report requested by the CFO, construct a model that would contain the following sections:

1. Parameters Panel,
2. Schedule of Patients Served by Clinic and Mobile Unit (2021-2032),
3. Schedule of Fees and Revenues for Clinic and Mobile Unit (2021-2032),
4. Personnel Wages and Expenditures (2021-2032),
5. Expenditure Profile for Clinic (2021-2032),
6. Expenditure Profile for Mobile Unit (2021-2032),

2. Compare the cost-effectiveness ratios for the proposed clinic and mobile unit. The cost-effectiveness is measured in terms of cost per a patient-visit:
3. Calculate the average subsidy per patient-visit in clinic and mobile unit.

CE = PV of Costs 2020-2032 PV of Patient Visits 2020-2032