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As noted earlier in this report, the Cost Sharing Model can be used to address a wide variety of issues: ⢠For the purpose of improving internal program management, the model offers more precise measures of what services currently cost to deliver. ⢠For agencies interested in changing their service delivery methods (e.g., purchasing services instead of providing them) it can demonstrate which method is most attractive on a cost per unit of service. ⢠For transportation providers who sell their services to other agencies, the model can be used to help decide what prices to charge for the services they provide. This chapter examines each of these situations. Whatâs the Cost of the Current Services? The Burke Lake Transportation System (BLTS) provides trips for the members of their com- munity. During the last fiscal year ⢠BLTS provided 405,000 miles of service. ⢠BLTS had 35,325 operating hours. ⢠BLTSâs expenses were $612,917. ⢠The system provided 63,375 trips. This means that the system-wide averages (total costs divided by each unit of service) were the following: ⢠$17.35 total cost per hour ($612,917 divided by 35,325) ⢠$1.51 total cost per mile ($612,917 divided by 405,000) ⢠$9.67 total cost per trip ($612,917 divided by 63,375) Should We Continue to Provide Services? The Area Agency on Aging (AAA) wants to consider purchasing trips from BLTS instead of pro- viding those trips themselves. The AAA has been providing 25,000 trips per year at an annual cost of $310,000. Their average cost per trip is $12.40; it would make sense for them to purchase trips from BLTS at the lower cost of $9.67 per trip because the AAA could realize a savings of $2.73 per trip, which would amount to $68,250 on an annual basis. Those savings could be used to purchase additional trips for existing riders or to add new riders. 29 C H A P T E R 8 Applying the Cost Model to Various Scenarios
Whatâs the Right Price for Each Purchasing Agency? A Simple Situation For the moment, letâs imagine a simple situation. The Burke Lake Transportation System pro- vides trips for the clients of three human service agencies and no other services to any other riders. Each agency gets essentially the same level of services, which means that the trips for each agency require the same numbers of hours and miles to produce. What is the right price for each agency that is purchasing trips? If the services received (hours and miles) are the same, then the prices charged should be the same. In this case, each agency should pay $204,306 a year, or one-third of the total annual expenses of $612,917. (Note that although each agency received the same amount of services, the number of rides received by each agency might not have been the same because different kinds of riders were being served.) Agencies Receiving Different Levels of Service A more common situation is that human service agencies purchase different levels of service for their clients. The right price for each agency then will be dependent on the level of service that they require as indicated by the numbers of hours and the numbers of miles required to produce the trips that they need. Using the chart of accounts of this report and the Cost Sharing Model, Table 8-1 shows that the total expenses were distributed as $278,584 allocated to hourly expenses, $143,226 allocated to mileage expenses, and $191,107 allocated to fixed expenses. Further use of the model shows the following results: ⢠The Fixed Cost Factor for BLTS is 1.4531. ⢠The Annual Hourly Cost of BLTSâs services is $7.886. ⢠The Annual Mileage Cost of BLTSâs services is $0.3536. These figures are important for calculating any potential changes or for allocating total sys- tem costs among the stakeholders. Suppose that BLTS is serving the AAA, a sheltered workshop, and the Medicaid program. The services that those organizations are receiving are those shown in Table 8-2. For each agency, their proportion of the total BLTS annual cost of $612,917 would be determined by the proportions of BLTSâs overall services that they receive. The formula for calculating each agencyâs proportion- ate share is the following: TOTAL ANNUAL COST (for Service A) = The Transportation Systemâs Fixed Cost Factor times the sum of Service Aâs ANNUAL HOURLY COST and ANNUAL MILEAGE COST. ⢠For the AAA, their share of the costs is â 1.4531 times [(16,875 hours times $7.886 per hour) plus (202,500 miles times $0.3536 per hour)], or â 1.4531 times [$133,082 plus $71,613], â Both of which equal $297,434. ⢠For the sheltered workshop, their share of the costs is â 1.4531 times [(10,000 hours times $7.886 per hour) plus (135,000 miles times $0.3536 per hour)], or â 1.4531 times [$78,863 plus $47,742], â Both of which equal $183,965. 30 Sharing the Costs of Human Services Transportation
Applying the Cost Model to Various Scenarios 31 501.00 LABOR 501.01 Operators Salaries and Wages $179,760 501.02 Training Salaries and Wages: Operators $1,477 501.03 Dispatchers Salaries and Wages $28,047 501.04 Administrative Salaries and Wages $67,986 501.99 Other Salaries and Wages: Mechanics $31,344 502.00 FRINGE BENEFITS 502.01 FICA 502.02 Hospital, Medical, and Surgical Plans 502.07 Unemployment Insurance 502.08 Workerâs Compensation 502.09 Sick Leave 502.10 Holiday 502.11 Vacation .01 - .11 Operators $29,967 .01 - .11 Dispatchers and Administrative Staff $5,182 .01 - .11 Mechanics $15,879 503.00 SERVICES 503.03 Professional and Technical Services $2,115 503.05 Contract Maintenance Services $28,214 504.00 MATERIALS AND SUPPLIES CONSUMED 504.01 Fuels and Lubricants $43,872 504.02 Tires and Tubes $5,103 504.03 Inventory $10,788 504.99 Other Materials and Supplies $9,825 505.00 UTILITIES (e.g., telephone) $3,336 506.00 CASUALTY AND LIABILITY Insurance Premiums $44,778 507.00 TAXES (e.g., Vehicle Licensing and Registration Fees) $175 508.00 PURCHASED SERVICES 508.01 Purchased Transportation $67,380 508.09 Volunteer Reimbursements $18,723 509.00 MISCELLANEOUS EXPENSES 509.01 Dues and Subscriptions $50 509.02 Travel and Meetings $871 512.00 LEASES AND RENTALS $18,045 514.00 PURCHASE LEASE PAYMENTS 516.00 OTHER RECONCILING ITEMS Volunteer Services $18,723 518.00 INDIRECT EXPENSES TOTAL EXPENSES $297,307 $143,226 $191,107 Object Codes Expense Account Hours Miles Fixed Cost Table 8-1. BLTS chart of accounts with expense assignments. Agency Service Hours Miles Trips Area Agency on Aging 16,875 202,500 28,700 Sheltered Workshop 10,000 135,000 22,000 Medicaid Program 8,450 67,500 12,675 Totals 35,325 405,000 63,375 Table 8-2. Services received by stakeholders.
⢠For the Medicaid program, their share of the costs is â 1.4531 times [(8,450 hours times $7.886 per hour) plus (67,500 miles times $0.3536 per hour)], or â 1.4531 times [$66,639 plus $23,871], â Both of which equal $131,517. Note that these and other figures are from the Cost Sharing Model and differ very slightly from the computations shown due to rounding. As long as the following are the amounts paid by each agency, it really does not matter how the costs are billed: ⢠$297,434 for the Area Agency on Aging. ⢠$183,965 for the sheltered workshop. ⢠$131,517 for the Medicaid program. For example, each agency could be charged one-twelfth of the total each month. Alternatively, each agency could be charged on a unit price basis, the units being cost per hour, cost per mile, or cost per trip. If the same unit was used for all three agencies, the actual cost per unit would be dif- ferent for each agency because they have received different services. Different unit costs could be used for each agency as long as each agency eventually paid their share of the total annual expenses. Summary These examples illustrate some of the many applications of the Cost Sharing Model. The Excel spreadsheets that accompany this Toolkit provide a high level of automation to the calculations required to determine unit costs and potential pricing structures. 32 Sharing the Costs of Human Services Transportation