Grant Agreement number: 2005 -3871 / 001 - 001 ELE-ELEE12

A Cost Benefit Analysis of Net Based Nursing Education

Niklas Hanes, Sofia Lundberg , Centre of Regional Science, Umeå University, SE-901 87 Umeå, Sweden

A Cost Benefit Analysis of Net Based Nursing Education

Niklas Hanes and Sofia Lundberg

Centre of Regional Science, Umeå University, SE-901 87 Umeå, Sweden

Abstract

The inland of Northern Sweden is characterized by a negative net migration partially driven

by people moving away for higher education. As such this region experiences a shortage of

human capital within certain competence areas. One way of tackle this problem is to integrate

higher education with the regional policy and bring the education to the inhabitants hoping for

them to stay within the region after they have graduated. The education is net based and

brought to the region by ICT tools. Thereby the students can stay in their home region and

follow the course online. This is in line with the government bill presented in year 2002 that

points out online education as a mean to target new student groups. This paper analyses a case

where a shortage of nurses was established within a specific region in Northern Sweden and

the prediction was that it would be difficult to attract nurses educated elsewhere in Sweden.

An association of local authorities from the region initiated and partially financed an online

nursing program that made it possible for the nursing students to stay within the region during

their education. In this paper we study if the online program is economically motivated. This

part focuses on the added costs associated with the online version of the nursing program

compared to its campus located counterpart and we perform a cost-benefit analysis from the

perspective of the association of local authorities “Partnership Inland” that initiated the

nursing program.

JEL classification: D61, I21, I22, I28

Key words: Cost-Benefit Analysis (CBA), Economics of e-learning, Net based higher

education, Regional policy.

1. Introduction

Sparsely populated municipalities in the northern part of Sweden are characterized by high

out-migration and depopulation. One consequence is that the municipalities experience a

shortage of human capital. This paper presents a cost-benefit analysis of a net based nursing

programme provided by Academy North, a consortium of 13 municipalities in the northern

part of Sweden.

The nursing programme was initiated by the municipalities as response to the

lack of nurses in the region. By providing the net based nursing programme the municipalities

aimed at attracting new students, i.e. individuals that are strongly attached to the region and

do not consider on-campus education as an alternative. The host municipality for the nursing

programme was the municipality of Lycksele located 130 kilometres from the municipality of

Umeå. Umeå University and the Department of Nursing was the provider of the programme.

Although the programme had a regional perspective, students from all Swedish regions were

able to apply. 31 students were finally appointed to the programme. The nursing programme

started in 2002 and the students were examined in 2005 (see Fåhraeus and Lundberg, 2002).

Although the programme was considered as temporary programme, a second round of the

programme started in 2005. This paper only concerns the first round of students.

The net based nursing programme had two tracks; one had an ”IT profile”

aiming at giving the students knowledge about communication tools valuable for services in

sparsely populated areas. The second had an “inland profile” aiming at giving students

knowledge about living conditions and diseases specific for the inland and sparsely populated

areas.

The cost benefit analysis is supposed to answer the question whether resources

within a project are used efficiently for the society as a whole – compared to an alternative

case. The objective function in a cost-benefit analysis is citizen welfare. This means that the

cost-benefit analysis should estimate all direct and indirect effects on citizen welfare in

monetary values. Generally, the main benefit of a project is the potential increase in

production values (GDP); in the present analysis the main benefit is the value of production,

i.e. the work done by the nurses between exam and retirement. Costs are defined as the

alternative values (costs), i.e. the value of the resources in an alternative case; the case where

the nursing programme is not provided and the individuals are assumed to continue their

former occupation. The empirical analysis in this paper is based on a survey distributed to all

nursing students one year after the exam. Costs associated with the nursing programme are

calculated by the Department of Nursing at Umeå University. Since the implementation of the

programme had a clear regional aim, the paper highlights one national and one regional

dimension of the CBA.

The net based nursing programme attracted a new student group; the students

were older compared to the on campus nursing students, they had a different family situation,

and they stated that the net based education alternative was a necessary condition for them in

order to proceed the programme. This is in line with a national policy that higher education

should be more accessible and attract new student groups, e.g. potential students in sparsely

populated areas. The results indicate that the programme is beneficial for the region. On the

national level, the results are more ambiguous.

The paper is organised as follows. In the next section we present the basics of

cost-benefit analysis and the application to the present case study. Section three presents the

data and section four contains the analysis and the results. Section five contains a short

discussion.

2. Cost-benefit analysis

The welfare of the citizens is the primary interest in a cost-benefit analysis. In the best of

worlds, a cost-benefit analysis considers all effects that directly or indirectly affect the welfare

of the citizens. The cost-benefit analysis differs in this respect from a traditional investment

analysis. Furthermore, taking into account all costs and benefits may not be the same as

maximising the objective function for the national government or the public sector.

The point of departure in the analysis is that the aggregate production (GDP)

requires resources today and gives consumption opportunities today or in the future. Put it

simply, the benefit of a project is the value of the production increase that follows. The main

purpose of the cost-benefit analysis is to evaluate whether the resources are used efficiently in

a project. The resources used in a project have always an alternative use, or an alternative

value. These values, or alternative costs, are the costs that are associated with the project.

Thus, the effects that are generated by a project must be compared to an alternative situation,

e.g. when the project is not implemented.

A cost-benefit analysis is characterised by the transformation of all effects to

monetary values. Some effects are very difficult to express in monetary terms. It is inevitable

that a cost-benefit analysis concentrates on effects that are possible to quantify. The structure

of a cost-benefit analysis may differ for different applications. Some general steps in the

analysis are given by:

1. Identification of costs and benefits

2. Quantify the costs and benefits

3. Calculation of net present values

4. Decision criteria

5. Sensitivity analysis

2.1 Identification of costs and benefits

The main benefit of the nursing programme is production value that follows from the

education of nurses, i.e. the value of the services that the nurses provide in the labour market.

It is possible to think of other benefits, e.g. the utility that an individual may experience from

education, more than receiving a job and earnings. In the present analysis, individuals are

given the opportunity to stay in their region and study and work, although this opportunity is

clearly beneficial to the individual the monetary value is difficult to determine. However,

since net based higher education is a policy tool for reaching new student groups and to attract

educated labour force to stay in sparsely populated areas, the government has put some value

on these effects.

In the context of a cost-benefit analysis, costs are defined as opportunity costs,

i.e. the value of the resources in an alternative use. Taxes and transfers are generally not seen

as costs in a cost-benefit analysis. Taxes and transfers represent flows of income between

individuals and sectors in the economy. For example, study loans and study grants are

transfers and not a cost in the context of a cost-benefit analysis. However, the external effects

that are caused by taxes may generate costs (marginal cost of public funds). The costs

associated with an education programme may be sorted into the following categories1:

• Production losses

• The value of the personnel in the alternative case

• The value of the buildings in the alternative case

• Depreciation of inventories

1 This classification follows from Axelsson and Löfgren (1992).

• Goods and services associated with the education

Production losses

There is an important production loss caused by the students who chooses to study. The value

of the production in the alternative case must be considered in a cost-benefit analysis.

Consequently, the alternative cost of an unemployed person taking part in a project is zero, or

equal to the individual’s utility from leisure. If it is assumed that the labour market is in

equilibrium we know that the student’s utility from leisure is at least as large as the wage they

could have had if they had chosen to work.

The value of the personnel in the alternative case

Implementing a new education programme requires more working hours for university

teachers. It is not possible to obtain information about their activity in the alternative case.

However, a reasonable assumption is that the value of their contribution to the production in

the alternative case is the same as the cost that arise in the programme that we study.

The value of the buildings in the alternative case

The alternative cost of building should reflect the value of the buildings in an alternative use.

Depreciation of inventories

Depreciation of inventories must be added to the cost of an education programme.

Goods and services

A number of goods and services have to be included in the calculation of the total cost.

2.2 Quantification of costs and benefits

Estimation of future production values is by nature associated with a high degree of

uncertainty. In the present analysis we have based our calculations of benefits on the wages

reported by the survey respondents (former students), i.e. their wage as a nurse after exam.

The calculations of production losses are also based on the wages that are reported in the

surveys, i.e. their wage prior to the nursing education. The wage is assumed to reflect the

production value. For several reasons, it is very difficult to predict the future production

values. In the present analysis we have assumed that labour market behaviour (labour supply,

retirement age, etc.) is not affected by the individual’s education choice, e.g. we have

assumed that the individual’s retirement age is the same in the alternative case. The

assumption of similar labour market behaviour between the two cases is a very simplifying

assumption which may be questionable, e.g. in the regional analysis it is likely that education

and career choices do affect migration decisions. Furthermore, we have assumed that

productivity increases are the same between the two cases, i.e. the case where the individual

chooses the nursing programme (the case that we observe) and the alternative case where the

individual stayed in the former occupation.

The Department of Nursing have provided the data on costs for the net bases

nursing programme, e.g. resources associated with teachers, goods and services, inventories,

buildings. These resources are assumed to have an alternative use and their value in an

alternative use are approximated by the values entered in the accounts

2.3 Calculation of net present values

The nursing programme give rise to costs today (year 1-3) and the main benefits arise in the

future; i.e. production values up to the year of retirement. Future costs and benefits have to be

discounted in order to be comparable. A project requires resources today which mean that

consumption opportunities today are restricted. A positive discount rate implies that

individuals prefer consumption today to consumption in the future. The basic criterion is that

the discount rate should reflect the individual’s time preference rate. In a perfect market

economy the time preference rate equals the interest rate in the money market which perfectly

reflects the individual’s choice of consumption today and in the future. In reality there is no

unitary interest rate. We do not discuss the choice of interest thoroughly in the present

analysis.

2.4 Decision criteria

The net present value is used as the decision criteria in this analysis. The costs and benefits

are discounted to present values and if the discounted benefits exceed the discounted costs,

the net social benefit is positive.2

2 Net present value = !Bt(1+i)-t - !Ct(1+i)-t, where B is benefits, C is costs , i represents the discount rate and t is the time period (see

Hultkrantz and Nilsson, 2004).

2.5 Sensitivity analysis

There are several sources of uncertainty in the analysis. Thus, it is very important to evaluate

how sensitive the result is for small changes in key variables. One key factor in cost benefit

analysis is the discount rate. A higher discount rate implies that the present value of future

benefits and costs reduces. Due to the fact that the choice of discount rate to some extent is

arbitrary, it is important to evaluate how sensitive the result is to changes in the discount rate.

3. Data

This case study is mainly based on information from a survey distributed to the students and

information received from the Department of Nursing at Umeå University. The survey was

distributed one year after the students were graduated, i.e. spring 2006. Students were asked

about occupation prior to the nursing programme, earnings, occupation and earnings after the

exam from the nursing programme, family situation, etc. (see Lundberg, 2006, for a more

comprehensive description of the survey and the results). When the students graduated from

the nursing programme, 65 percent had an employment as nurse which should be compared to

ten percent for the students graduated from the on-campus nursing programme in Umeå. One

year after exam, 93 percent of the students in Lycksele (the host municipality for the net based

programme) had an employment and 89 percent of the student in Umeå. Most of the students

stayed in Lycksele after exam which was one aim of Academy North.

Below we present some statistics concerning wages, prior to the nursing

education and after the exam, and the time to retirement. In table 1 below, descriptive

statistics for wages and time to retirement is presented.

Table 1: Descriptive statistics for wage (monthly) and time to

retirement

Wage (SEK) Time to retirement (year)

Lycksele Umeå Lycksele Umeå

Minimum 18 750 18 250 18 18

Maximum 24 750 26 750 43 43

Mean 21 459 20 445 28.9 37.3

Std dev 1 521 1 883 8.7 7.0

N 26 45 28 52

In table 2, descriptive statistics for monthly wages and time to retirement is presented for the

alternative case

Table 2: Descriptive statistics for wage (monthly) and time to

retirement for the alternative case

Wage (SEK) Time to retirement (year)

Lycksele Umeå Lycksele Umeå

Minimum 15 000 15 000 21 21

Maximum 20 250 30 000 46 46

Mean 17 209 18 148 31.9 40.3

Std dev 1 688 3 566 8.7 7.0

N 22 31 28 52

As can be seen from the tables, the mean value of time to retirement is three years longer for

the second table, i.e. the time it takes to complete the studies. The wages are higher after

education. This increase in wages is assumed to reflect to production increase of education.

The sum of production increases up to retirement should be compared to the costs of the

education.

The Department of Nursing at Umeå University has been able to break down

costs to the following categories (see Lundberg, 2006, for a comprehensive description of the

costs).

Table 3: Total costs for the net based nursing programme (SEK)

Costs within Umeå University

Marketing 80 000

Planning costs 1 225 000

Direct programme costs 6 946 644

Indirect programme costs 806 608

Sum 9 058 252

Costs outside the University of

Umeå

4 125 600

Total sum 13 183 852

These figures are thoroughly described in Lundberg (2006). A short comment on the figures is

that per student costs are almost twice as high for the net based nursing programmes

compared to per student costs on the traditional on campus education.

4. Results

We present two analyses; the first is a “regional cost benefit analysis” and the second is a

“national cost benefit analysis”. The difference between the two depends on which costs and

benefits that are considered. In the national analysis, all costs are taken into account and all

students and their future income flows are considered regardless of the place of residence. In

the regional analysis, only funding by municipalities in Academy North are considered and

students working outside the region after exam are not taken into account. This means that

regional costs are lower compared to national costs. However, on the benefit side, the region

is vulnerable for migration of the labour force. If a newly educated nurse migrated from the

region, the region looses the expected benefit; as long as the individual migrated within

Sweden, the national analysis is indifferent between places of residence. In the table below,

production increases and production losses are presented for the regional and national analysis

respectively.

Before presenting the results, some important assumptions behind the analysis

should be noted. Firstly, in the alternative case, the nursing programme is not provided

elsewhere, i.e. the alternative case is based on the assumption that the students had continued

in their occupation prior to the education. Secondly, although the nursing programme has

appointed a second cohort of students (spring 2005), costs and benefits are estimated for one

cohort of students. Thirdly, we have not considered future productivity increases in the

calculations; we have simply assumed that future productivity increases (and higher wages)

are similar for the nurses (educated in the programme) and the occupations in the alternative

case. This is of course a simplifying assumption.

In table 4, net present values of calculated production increases and production

losses are presented for different discount rates. As can be seen in the table the difference

between production increases and production losses decreases with a higher discount rate. The

explanation is that the production loss during the first three years is not affected to the same

extent as future production values when the discount rate increases. During the first years,

when figures are relatively insensitive to the discount rate, there are no benefits, only costs.

Table 4: Production increase and production losses at discount rates of 2, 4

and 6 percent

Region Nation

2 percent

Production increase 176 287 449 210 336 054

Production loss 160 628 137 189 912 549

4 percent

Production increase 132 963 100 155 882 307

Production loss 125 275 244 146 071 798

6 percent

Production increase 103 328 980 120 350 595

Production loss 100 868 962 121 954 567

In table 5 below, the results of the cost benefit analysis are presented. At a low

discount rate of two percent, both the regional and the national analysis give a positive net

sum. However, at a discount rate of four percent the national analysis yields a negative net

sum and the regional analysis a very small positive net sum. Should the interpretation of the

results be that the programme is not beneficial for the society? It should be noted that we have

only considered the effect on output as a benefit. It is reasonable to assume that individuals

benefit from the education in other ways that we have not considered. Furthermore, the effect

on output is measured by predicted wages as nurses. It is very important to note that wages in

the public sector may not be a good approximation of the marginal value of production,

mainly because the labour market is a monopson market, i.e. there is one major employer and

wages are likely to be lower compared to a situation with free competition. Thus, our

estimation of production values is likely to be a lower bound for the true value.

The results highlight a conflict when net-based higher education is used as a

regional policy tool. Clearly the benefits, and costs, differ depending on whether a local or

national policy maker analyse the conditions for the education. This raises a very important

question of how the incentive structure affects the education system. What are the incentives

for the national government to fund project with a specific regional perspective? To what

extent can local governments require that the national government funds education

programmes such as the net based nursing programme? These are important questions to

discuss, especially since net-based education is national policy tool in order to reach new

student groups.

Table 5: Results of the cost-benefit analysis (figures in SEK)

Discount rate

2 percent 4 percent 6 percent N

Regional 7 713 388 11 259 -5 110 536 27

National 5 686 861 -1 536 466 -12 595 102 31

Discussion

The present study is a case study concerning a specific nursing programme. One aim of the

paper is to highlight the incentive structure for different stakeholders. The nursing programme

was partly initiated as a regional policy. The results also show that outcomes may differ

significantly depending on whether a regional or national approach is adopted. The benefit for

the region is more distinct compared to the national outcome, which of course is dependent

upon the financial support from the national government to the region. A question that

remains to be answered is to what extent the negative figures in the national analysis

represents a reasonable price for the regional development that the programme contributes to.

Several key factors are not considered in this study, mainly due to lack of data.

For future research it would be interesting to study wage premiums from net-based education

compared to on-campus education. This question concerns the effect of net-based education

on human capital and productivity. However, econometric studies of wage premiums require

that individuals have reached an age were earnings are relatively stable. Furthermore, it

requires data set of a large number of individuals where individual characteristics can be

observed together with education choices. Other important research questions concerns the

incentive for the students to choose net base education.

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