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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

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micro cost methods of finding va costs
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
Methods described in this talk
  • Direct measurement
  • Pseudo-bill
  • Reduced list costing
  • Clinical cost function
  • Estimate Medicare inpatient payment
method 1 direct measurement
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
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
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
Staff Activity Analysis for Treatment Innovations
  • Should not include development cost
  • Should measure when program fully implemented, e.g., with typical productivity
other costs
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
Finding VA labor cost

Data Sources:

  • VA Payroll System: PAID
  • VA General Ledger: Financial Management System (FMS)
  • DSS ALBCC reports
slide9
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
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
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
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
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
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
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
Method # 2: Pseudo-bill
  • Itemize all services utilized
  • Use schedule of cost/reimbursement for each service
method 3 reduced list cost
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
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
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
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
Correcting Re-transformation Bias
  • Model of form
  • Cannot simulate cost for X=XO by taking exponent of fitted regression
retransformation bias
Retransformation bias
  • The expected value of cost is:
smearing estimator for log transformed regression
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
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
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
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
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
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 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
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
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
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 measurement35
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 bill36
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
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 function38
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
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
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
resources41
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)

resources42
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.)