In business, we often hear that we need to spend money to make money. That concept certainly applies to animal health in our clients’ operations, where investments in prevention and control of diseases, parasites and injuries pay off by improving productivity and reducing economic losses associated with animal morbidity and mortality. But, of course, the devil is in the details, and it falls upon the veterinarian to objectively evaluate the costs and benefits of prevention and control programs.
In some cases, cost-effectiveness of a veterinary service is relatively easy to measure and demonstrate to the client. If, for example, a $50 treatment allows the survival of a calf valued at $1,200, the client can easily see the benefit. The value of other services, however, particularly those focused on disease prevention, risk management or long-term enhancement of production efficiency, can be more difficult to quantify.
Determining cost of disease
Biology and economics intersect when veterinarians determine the cost of a negative condition. Many costs of disease can be captured at the farm level, including production loss, direct treatment costs and labor costs. However, some costs are not captured at the farm level, such as state and federal support for veterinary services, increased food costs due to inefficiencies and potential spread of disease to other populations.
Veterinarians generally find themselves evaluating health interventions based only on the costs and benefits occurring at the farm level and are forced to ignore off-farm costs and benefits. Within this limitation, by evaluating the biologic cost of a disease or condition compared with the economic cost of preventing and treating that disease or condition, veterinarians can determine where the scarce resources of labor, time and money are best spent to alleviate the biologic cost due to disease.
Choose the right evaluation tool
A number of tools are available to approximate the cost of a negative condition such as disease presence, suboptimal body condition, open cows after bull exposure or sub-fertile bulls, and the biologic characteristics of the condition determine the proper economic analysis.
Partial budgets are appropriate for diseases that are horizontally transmitted and when immunity or other responses such as death, sterility, removal from population or sale of feedlot pen confine the negative effect of the disease to a short period of time.
Multi-year enterprise analyses are more appropriate to estimate the economic cost of diseases that are vertically transmitted, due to an environmental source or have a chronic production-losing component, or to estimate the cost of conditions that have an impact on costs in subsequent years such as open cows or sub-fertile bulls.
Partial budgets can be used to assist in the evaluation of veterinary interventions by evaluating changes in resource use and the economic effect of making one adjustment in animal management. The success of using partial budgets depends on their prediction accuracy, which depends on the accuracy of the information and estimates they contain. Partial budgeting is based on the principle that a change in the organization of a business will increase some costs and decrease others, and increase some returns while decreasing other returns. The net effect will be the sum of positive economic effects minus the sum of negative economic effects.
When evaluating disease control or production enhancement, the veterinarian and producer should collect data about the alternatives of using or not using the strategy, such as current costs of production, costs of capital, commodity prices or other items pertinent to the particular decision. In addition, reasonable estimates should be made of future prices and animal production values such as weight, efficiency and carcass value. Production estimates can be obtained from several sources, including published research, extension bulletins and current farm production records. Agricultural economists, USDA statisticians and futures markets provide information about the trend of prices and national production estimates.
In evaluating services for performance enhancement or loss minimization, veterinarians could follow these steps:
1. Find the evidence — Determine the internal validity of the data by evaluating whether studies were done correctly to control for bias and confounding variables. Also determine the external validity or applicability of the data to your client.
2. Estimate the likelihood of performance being enhanced or loss minimized — Determine whether the treatment provides enhancement in all situations and assess important interactions such as diet quality and length of time from treatment to economic capture of value.
3. Estimate magnitude of effect — Determine the most likely magnitude and, importantly, the range of probable enhancement.
4. Identify potential harms — These could include toxicity and health consequences or a reduction in value to buyers.
5. Cost of intervention — These include direct product and veterinary costs along with costs of labor, facilities, etc.
6. Calculate value — Use partial budgets if the costs and value are captured rapidly and multi-year budgets if the costs or value are captured over time.
The partial budget is ready to be developed after all pertinent data is assembled. The seven components of a partial budget are
1. Additional returns
2. Reduced cost
3. Additional costs
4. Reduced returns
5. Total for the additional returns plus reduced costs
6. Total for the additional costs plus reduced returns
7. The net difference of 5 and 6
Additional returns are those that occur if the control strategy is implemented. Reduced costs are those that are not incurred as a result of the proposed strategy. Additional costs are those that are only incurred if the strategy is implemented. Reduced returns are those that are no longer received if the strategy is initiated compared to the current situation.
The difference between positive and negative economic effects is an estimate of the net effect of implementing the proposed disease-control strategy. A positive difference indicates the potential increase in net returns if the strategy is implemented. Conversely, a negative difference is an estimate of the reduction in net returns if the strategy is adopted.
The extent of the positive or negative difference, given the producer’s confidence in the numbers used, impacts the final decision made. Only the costs and returns that change by proceeding with the control strategy should be included in the partial budget. The unit used to analyze the change may be any size, such as one animal or the entire herd. After the analysis is performed, the result should be multiplied as necessary to show the economic impact on the entire enterprise or business.
Evaluating disease intervention on a loss-expenditure frontier
This approach is appropriate for endemic or common disease issues. The total biologic or economic loss associated with a disease condition is not the estimate on which veterinarians should focus when evaluating health interventions; veterinarians should focus on the avoidable loss. We should recognize that there are technical and biologic limits to the amount of loss that can be avoided. The optimum set of interventions will reduce economic losses while at the same time conserving resources that can be used more effectively on other important problems.
Each available health intervention can be evaluated for its potential to avoid biologic loss compared to its economic cost. The first intervention implemented should be the one that provides the greatest biologic advantage per unit of economic cost, assuming the benefit/cost ratio is greater than one. Further health interventions may be implemented if they continue to provide economic benefits, but because the most cost-effective interventions are implemented first, one will expect diminishing returns from increasing expenditures on disease prevention. At the point where additional expenditures on health interventions equals the benefit, further interventions should cease, and any remaining resources such as time, money and labor should be targeted to other important problems.
Multi-year enterprise analysis
In contrast to diseases with a confined time period of negative effect, evaluation of control strategies or risk-reduction for diseases that can become endemic, such as BVDV, neosporosis or trichomoniasis, require multi-year models that generate annual cash flow, balance sheet and income statements to compare alternate strategies.
In these cases, a client accepts some level of annual veterinary costs, and reduced average income, by investing in strategies such as diagnostic testing, vaccination and biosecurity to reduce the risk of catastrophic losses such as a storm of BVD-related abortions. This type of analysis is more difficult than a partial budget but also more realistic. A partial budget in these situations tends to overestimate costs versus returns.
Evaluating disease intervention with a risk-management focus
For diseases with sporadic or rare occurrence and subsequent biologic and economic cost, this ongoing expense of prevention may equal or exceed the long-term cost of the disease. Therefore, if using a straightforward partial budget to evaluate the cost-effectiveness of the control strategy, the most appropriate answer may appear to be to avoid the health-intervention cost and accept the disease cost.
However, by taking a risk-management approach, other factors such as the economic position of the client to absorb an occasional severe disruption in cash flow and the overall economic and non-economic cost of the disease are considered. If an individual farm could not survive the costs of an uncommon but realistic disease event, or has high aversion to risk, the operator might elect to incur the annual expenses for disease prevention as a risk-management decision rather than to optimize long-term resource allocation.
Another way to describe the risk-avoidance perspective is to state that when combining the disease and prevention costs, the purpose is to optimize the range rather than the mean economic cost.
One way to evaluate potential health interventions based on a risk-assessment perspective is to calculate the probability of experiencing a financial loss equal to or greater than a 20 percent reduction in net return (or another level of reduction) between different disease-prevention strategies. Then, based on the annual costs of each strategy, the manager can make an informed decision based on the level of risk avoidance.
Assuming that all the health interventions being considered are effective at reducing the biologic and economic cost of disease, higher cost of health intervention will result in lower cost due to disease, and lower cost of health intervention will result in higher cost due to disease. Under this assumption, one could spend very little on health interventions and tolerate a high cost of disease or spend a great deal on health interventions and tolerate a low cost of disease.
However, neither of these options is likely to optimize resources. Rather, somewhere between these two extremes is a combination of control expenditures and disease costs at which the total is minimized.
Determining the “best” level of expense assumes that resources are limited and more than one problem confronts a population. Resources “overspent” on one problem are not available to spend on other problems. For some occasional or rare events that have substantial negative effects, the best number to look at may not be the “profit” but rather the “spread” or “variance” of the outcome and cost of reducing that “spread.”
If a particular risk is unlikely but costly, risk reduction is not likely to improve profitability, but risk is avoided and, therefore, sustainability is improved. If a particular risk is likely and even moderately costly, risk reduction may improve both profitability and sustainability.
Veterinarians and the animal populations for which they are responsible must deal with multiple disease, health, and production risks while being limited by scarce resources. In order to provide the best animal health and welfare per unit of resource expended, veterinarians must be able to accurately determine for a number of specific diseases: the cost of disease, the cost of disease control, and the likelihood or risk of a particular disease occurring. Then by working with the livestock producer, veterinarians can devise a disease-control plan that most efficiently protects the herd from multiple disease risks while protecting the economic stability of the livestock operation.