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Micro-cost Methods of Finding VA Costs

Mark W. Smith, PhD

Paul G. Barnett, PhD

HERC Economics Course

March 16, 2005

Methods described in this talk

- Direct measurement
- Pseudo-bill
- Reduced list costing
- Clinical cost function
- Estimate Medicare inpatient payment

Method # 1: Direct Measurement

- Used to the find the cost of:
- innovative care
- care unique to VA
- Method
- Measure staff activity
- Find labor cost
- Find cost of supplies, capital, overhead

Staff activity analysis

- Methods of finding staff activities
- Time and motion study
- Individual staff keeps log of own activity
- Individual estimates own activities
- Supervisor estimates staff activities
- Need not be comprehensive; can sample activity

Characterizing Staff Activities

- Cost of patient care may include non-patient care time
- Activities that produce several products may need to be included, depending on perspective
- e.g., time spent on clinical research may be regarded as a research cost, or a patient care cost, depending on analytical goal

Staff Activity Analysis for Treatment Innovations

- Should not include development cost
- Should measure when program fully implemented, e.g., with typical productivity

Other costs

- Survey or actual measure of supply costs
- Alternatives for overhead
- Cost report data
- Standard rates
- Alternatives for capital
- Cost report
- Rental rates

Finding VA labor cost

Data Sources:

- VA Payroll System: PAID
- VA General Ledger: Financial Management System (FMS)
- DSS ALBCC reports

PAID

- VA Payroll data
- Detailed to the individual
- Confidential, requires special permission to gain access
- Useful when FMS and DSS have insufficient detail

Financial Management System (FMS)

FMS reports cost and hours

- By Station (medical center)
- By Sub-Account
- Approximately 72 personnel types
- 1081 Physicians, full-time
- 1061 Registered nurses
- Contract expenses, supplies, etc.

DSS ALBCC

ALBCC = Account Level Budgeter Cost Center

- Draws from FMS and DSS data. Unlike FMS, includes contract labor expenses
- Same sub-accounts as FMS
- Estimated wages are typically slightly less in ALBCC than in FMS

Finding Average Compensation

- FMS & DSS report all labor costs, incl. benefits and employer contributions to taxes
- We used the end-of-fiscal-year report (Sept.) to find average employee salaries
- Both DSS and FMS for comparison

Recommendations

- Caution! Do not double count payroll!

Use either payroll analysis (BOC 1000-1099) or personnel services (BOC 1100-1199).

- Activity surveys should use job categories found in VA data.

Resources

Full FMS & DSS data at AAC. Summary data in KLFMenu.

More on FMS in Volume IV of the “Blue Books”

and

HERC Technical Report #12 (Smith & Velez 2003)

on the HERC web site:

www.herc.research.med.va.gov/pubs.htm

Finding unit cost with direct measurement

- Average cost
- Total program cost/number of units
- Assumes homogeneous products
- Relative Values needed for heterogeneous products
- Find Relative Value of each product
- Find cost per relative value unit (RVU)
- Use this to find cost of each product

Method # 2: Pseudo-bill

- Itemize all services utilized
- Use schedule of cost/reimbursement for each service

Method # 3: Reduced list cost

- Some utilization items in pseudo-bill explain most of variation in cost
- E.g., laboratory tests correlate with number of surgical procedures
- Reduce list of utilization items may be sufficient
- Schedule of cost/reimbursement must be adjusted
- E.g., new rate for surgical procedures, including cost of laboratory

Method # 4: Cost Function

- Useful for estimating inpatient cost
- Function is used to simulate costs
- Estimated from external data on cost and characteristics of stays (not from own study data)
- Obtain characteristics of stay from own study
- Apply function to estimate cost of stay
- Advantage: fewer variables than a pseudo-bill

Disadvantage: could have large error for individual bills

Cost function

- Dependent variable is cost-adjusted charge from non-VA data
- Typical independent variables:
- Diagnosis Related Group (or HCCs, ADGs, etc.)
- Diagnoses (1 or more binary vars.)
- Procedures (1 or more binary vars.)
- Vital status at discharge
- Length of stay
- Days of ICU care

Transformation of Dependent Variable

- Cost data skewed
- Skewness violates assumptions of ordinary least squares (OLS)
- Error terms not normally distributed with identical means and variance
- Transformation
- Typical method: log of cost
- can make OLS assumptions more tenable

Correcting Re-transformation Bias

- Model of form
- Cannot simulate cost for X=XO by taking exponent of fitted regression

Retransformation bias

- The expected value of cost is:

Smearing estimator for log transformed regression

- The right term is the smearing estimator

= the mean of the anti-log of the residuals

- See: Duan, N. (1983) Smearing estimate: a nonparametric retransformation method, Journal of the American Statistical Association, 78, 605-610.

References for Retransformation

- Manning WG, Mullahy J. Estimating log models: to transform or not to transform? J Health Econ 2001 Jul;20(4):461-94.
- Basu A, Manning WG, Mullahy J. Comparing alternative models: log vs Cox proportional hazard? Health Economics 2004 Aug;13(8):749-65.
- See HERC web site FAQ response: www.herc.research.med.va.gov/faqE2_retransformation.pdf

Method # 5: Estimating Medicare inpatient reimbursements

- Part A -- Prospective Payment for Inpatient Stays
- Part B -- Payment for Physician Services to Inpatients

Medicare Facility Payment: Inpatient

- Standard payment for DRG of the stay, adjusted by
- Disproportionate Share Provider payments
- Medical education
- Capital
- Outlier
- Geographic adjustments
- Medicare pays flat rate per DRG, regardless of length of stay
- Cost analysis may wish to capture effect of length of stay on cost

Prospective Payment System PC Pricer

- Computer application for calculating facility payment
- Requires
- 6-digit hospital PPS (identifier) - DRG
- Admission and discharge dates (= LOS)
- Optional: cost outlier, patient transferred
- Incorporates adjustments for geography, teaching, disp. share, etc.
- New version each year
- Limitations
- Excludes physician payment
- Payment economic cost

Pricer: www.cms.hhs.gov/providers/pricer/pricdnld.asp#inp

Provider IDs: www.cms.hhs.gov/providers/hipps/ippspufs.asp#psf

Medicare Facility Payment: Outpatient

- Payment based on CPT procedure codes
- Most CPTs assigned an Ambulatory Payment Classification (APC) group with an associated cost
- Some CPTs have no APC:
- Paid on cost pass-through basis
- Paid through another APC (e.g., anesthesia)
- Paid through a separate cost list
- Multiple CPTs assigned to a single group-APC
- Some surgery procedures are discounted
- See documentation for HERC Outpatient Average Cost data: www.herc.research.med.va.gov/Pubs.htm

Medicare Provider Payment: Outpatient

- Medicare distinguishes (inpatient) facility-based providers from (outpatient) office-based providers
- We assume that all VA care is facility-based
- Sum of inpatient facility and provider payments typically exceeds single outpatient payment

Estimate Inpatient Physician Payment

- Urban Institute determined average Part B physician payment
- Reported as RVU weights for each DRG
- Miller, M. E., & Welch, W. P. (1993). Analysis of Hospital Medical Staff Volume Performance Standards: Technical Report (6210-01). Washington D.C.: The Urban Institute

Which method should I use?

- Direct measurement
- Pseudo-bill
- Reduced list costing
- Clinical cost-function
- Estimate Medicare inpatient payment

Barnett PG. Determination of VA health care costs. Medical Care Research and Review 2003;60(3 Suppl.):124S-141S.

Criteria for selecting a micro-cost method

- Data available? [consent, cost to obtain]
- Method feasible? [time, cost, data granularity]
- Assumptions appropriate?
- Method accurate?
- Will it capture the effect of the intervention on resource use?

Method #1: Direct Measurement

- Assumptions
- Activity survey and payroll data are representative
- May assume all utilization uses the same amount of resources
- Advantages
- Useful to determine cost of a program that is unique to VA
- Disadvantages
- Limited to small number of programs
- Can’t find indirect costs
- Can’t find total health care cost

Method #2: pseudo-bill

- Assumptions
- Schedule of charges reflects relative resource use
- Cost-adjusted charges reflect VA costs
- Advantages
- Captures effect of intervention on pattern of care within an encounter
- Disadvantages
- Expense of obtaining detailed utilization data

Method #3: Reduced List Costing

- Assumptions
- Items on reduced list are sufficient to capture variation in resource use
- Cost of items on reduced list is accurate
- Advantages
- Requires less data than pseudo-bill
- Disadvantages
- Needs to find data on cost associated with items on reduced list

Method #4: Cost Function

- Assumptions
- Cost-adjusted charges accurately reflect resource use
- The relation between cost and utilization is the same in the current study as in the previous study
- Advantages
- Less effort to obtain reduced list of utilization measures than to prepare pseudo-bill
- Disadvantages
- Must have detailed data
- Data from prior study may have error or bias

Method #5: Estimate Medicare payment

- Assumptions
- Medicare payment reflect economic cost
- Inpatient: DRG captures effect of intervention on resources used
- Advantage: easy to implement
- Disadvantages:
- Accuracy limited – VA may have different cost structures from average non-VA facilities
- Inpatient: doesn’t reflect variation in resources beyond DRG (or LOS)

Combining Methods

- No single method may fill all needs, even within a single study
- Hybrid method may be best
- Direct method or pseudo-bill on utilization most affected by intervention
- Cost function or Medicare payment for other utilization

Resources

Medical Care Research and Review 2003 (vol. 60, no. 3 Suppl.)

- Direct measurement

- Pharmacy data

- Choosing a method

Supplement available from HERC by request

HERC web site: FAQ responses, technical reports

HERC Help Desk (herc@med.va.gov)

Resources

Articles on estimating the private-sector cost of services provided by VA:

- acute inpatient - outpatient services

- specialized inpatient - VA providers

- nursing home care - assistive devices

Medical Care 2003 (vol. 41, no. 6 Suppl.)

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