Q & A: Determining and Distributing the Costs of Shared Services (June 2014 Webinar)

The Center for Sharing Public Health Services presented a webinar in June 2014 that focused on issues associated with cost determination and allocation methods of shared public health services.

The discussion was led by Justin Marlowe, PhD, CGFM, Endowed Professor of Finance and Civic Engagement at the Daniel J. Evans School of Public Affairs at the University of Washington.

After the webinar, Dr. Marlowe provided the following answers to questions received from participants.

Q: Can someone say more about the “primer” I heard mentioned? Thanks!

A: In addition to the archived webinar, the Center is going to produce a primer that focuses on how to determine and distribute costs for shared public health systems. It will include a lot of what Dr. Marlowe presented, but will be more of a step-by-step guide. It should be available before the end of August.

Q: Generally speaking, does sharing of service usually result in a) reduced cost, b) greater service capacity, c) both or d) neither?

A: There’s not a lot of evidence on this for public health services, but the few studies we have show the answer is (c). Sharing public health services does reduce costs a bit, but those reductions are rarely large enough on their own to justify sharing. The real benefit of sharing is to bolster capacity, especially if you couldn’t provide the service in question without sharing. And this is true not just in public health. In police, fire, education and many other service areas we’ve seen this same pattern of small cost reductions but big gains in capacity.

Q: How should you deal with differences in how jurisdictions handle an indirect cost?

A: Not sure what you mean by handle. Do you mean that one jurisdiction allocates a certain indirect cost but the other does not? Or do you mean differences in how the same cost is measured? Or something else? If the issue is that one jurisdiction allocates a cost but the other does not — building space is a common one — then the jurisdiction that does not allocate needs to estimate what it would pay if it were allocating those costs. And that’s true in general. It’s better, albeit a bit abstract, for both jurisdictions to measure their total indirect costs using the same basic cost items. If the issue is measurement, then you need to agree on how and when to recognize a cost. That’s a separate, and much longer discussion. I’m happy to follow up individually with you if that would help.

Q: We were integrating three separate public health departments into a single department and are challenged to develop a formula for allocating the total county tax levy request to the five individual counties. We are currently contemplating a population based formula but that results in significant winners and losers. We attempted to look at property valuation but that was rejected. Allocating costs by each individual program utilization is administratively complex. We’re stumped on other options. Thoughts?

A: First and foremost, I think most experts would agree that consolidating three individual public health departments is quite different from sharing a discrete service. If you’re integrating entire departments you need to make decisions with a much longer time frame in mind, and with much more careful attention to start-up costs and sunk costs. One of the benefits of sharing is that the “exit costs” are usually less than if you formally consolidate. In other words, if you must, it’s cheaper and easier to end a shared service agreement and go it alone than it is to unwind a formal consolidation. That will affect how you can and should think about allocating costs and benefits.

That said, my other immediate reaction is to ask why property valuation was rejected? Would that also lead to winners and losers? If neither property valuation nor population works on their own, then maybe find some way to weight population by property valuation (i.e. ability to pay)? That’s not uncommon. Or what about number of employees in each jurisdiction? That can proxy for service delivery capacity, which again, has clear connections to ability to pay. Keep in mind also that many shared services follow a simple percentage allocation. If you can’t agree on a consistent underlying allocation metric, then don’t hesitate to negotiate a straight percentage. I’m happy to follow up off-line if that would help.

Q: When you say “finance people,” who do you mean?

A: That depends on your jurisdiction, but for most local health jurisdictions this means your finance director (or equivalent) and respective staff. They tend to have access to the entire organization’s revenues, expenditures, and other financial information. Your budgeting staff—whether a stand-alone staff or the person(s) within the director’s office who handles the budget—are also knowledgeable about this, but they tend to focus more on planning and policy than on where and how costs are incurred.

This resource is included in the CJS Resource Library under the categories listed below. Select a link to find other resources in that category.

  • Fiscal and Service Issues: This webinar presentation was focused on how cost determination methods may vary depending on the types of program or service that are shared; methods to allocate costs; and negotiation strategies to achieve a cost allocation structure agreed upon by all parties.

This resource is also linked to the Roadmap. Select a link below to read more about each area.

  • Fiscal and Service Implications / Phase Two: This webinar presentation was focused on how cost determination methods may vary depending on the types of program or service that are shared; methods to allocate costs; and negotiation strategies to achieve a cost allocation structure agreed upon by all parties.