Assessing Administrative Costs of Mental Health and Substance Abuse Services

Increasing competition in the market for mental health and substance abuse MHSA services and the potential to realize significant administrative savings have created an imperative to monitor, evaluate, and control spending on administrative functions. This paper develops a generic model that evaluates spending on administrative personnel by a group of providers. The precision of the model is demonstrated by examining a set of data assembled from five MHSA service providers. The model examines a differential cost construction derived from inter-facility comparisons of administrative expenses. After controlling for the scale of operations, the results enable MHSA programs to control the efficiency of administrative personnel and related rates of compensation. The results indicate that the efficiency of using the administrative complement and the scale of operations represent the lion's share of the total differential cost. The analysis also indicates that a modest improvement in the use of administrative personnel results in substantial cost savings, an increase in the net cash flow derived from operations, an improvement in the fiscal performance of the provider, and a decline in opportunity costs that assume the form of foregone direct patient care.