When considering new investment in long-term care, and in particular when evaluating a specific intervention, cost will always be a key component. Costs can be measured either broadly or narrowly, depending on the purpose of the discussion, decision or study. The purpose may be to inform resource allocation decisions within a particular agency (such as a municipality or a private sector provider agency), or in a wider care system in a city, covering all provider sectors and funding sources, both public and private. Another purpose might be to consider the value of an investment to the whole society. The costs to be measured would probably need to be different in each of these cases.

A distinction is sometimes made between direct and indirect costs. Direct costs are incurred by the ‘main’ organisation or sector, while indirect costs are incurred by other sectors (such as healthcare or housing, or perhaps by individual service users or families). The distinction between the two is not always easy to maintain, and is anyway context-specific. A more useful way to distinguish different cost elements would be to separate the following:

·        costs for the long-term care sector narrowly defined: these would be the resources needed to organise and operate the intervention (service or programme), and would include variable elements such as costs of staff salaries, equipment and transport, as well as fixed or overhead elements, such as costs associated with buildings and other capital inputs;

·        costs for other service sectors, such as healthcare, housing or criminal justice;

·        costs for people who use services and their families, such as out-of-pocket payments for services, travel costs, or lost income because of unpaid care commitments;

·        costs of productivity losses because of disruptions to employment patterns for service users or carers, e.g. from short- or long-term absenteeism, reduced performance while at work (so-called ‘presenteeism’), early retirement or reduced opportunities for career development; these productivity costs might be incurred by employers and the national economy, but might also affect an individual’s earnings and household income.

In measuring those costs in practice, the theoretically correct approach is to measure the long-run marginal opportunity costs of resources (Knapp 1984). A long-term measure ensures that a long-term (i.e. multi-year) perspective is taken when considering investment, while short-term perspectives and decisions could be misleading because they might overlook the need for proper investment in durable physical or human capital. A marginal measure is needed: this is the additional cost of producing one more unit of service (e.g. one more home care visit or one additional day’s residence in a nursing home). The word opportunity refers to the fact that using a resource in one way means that it cannot be used in another: in economics, an opportunity cost is the value of the opportunity forgone by not using the resource in its best alternative use, whatever that may be. The opportunity cost value will often not be the same as the amount of money actually spent (the ‘accounting cost’).