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VA Health Economics Course Presentation # 3: Costing Methods PowerPoint Presentation
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  1. VA Health Economics Course Presentation # 3:Costing Methods May 2, 2007

  2. Costing Methods • Mark W. Smith, PhD • Associate Director • VA Health Economics Resource Center Health Economics Resource Center

  3. Focusing Question • What is the cost of a health care intervention? • Example • CSP 519 compares separate PTSD and smoking cessation therapy to combined therapy. Health Economics Resource Center

  4. Cost of Health Care • Outside of health, most items that we purchase daily have a readily observable cost • Not true with health care • Insurance buffers patient from true cost • Charges, payments may not equal cost Health Economics Resource Center

  5. Cost Estimation Approaches • Two general approaches to costing: • Microcosting • Average costing (gross costing) Health Economics Resource Center

  6. Estimating Costs: Micro-costing • Determine each input, find its price, then sum (quantity*price) across all inputs • DSS uses this approach • Researchers use this approach in some circumstances • Gold standard but resource intensive Health Economics Resource Center

  7. Estimating Costs: Average Costing • Over a long period, divide total cost by total units of care provided • Less precise than micro-costing Health Economics Resource Center

  8. Costing Spectrum micro average Pseudo-bill Cost regression Reduced list costing Direct measurement Average cost per day Estimate Medicare payment Health Economics Resource Center

  9. Microcost method 1 Direct Measurement

  10. Direct Measurement • Used to the find the cost of: • interventions • care unique to VA (e.g., CSP 519) • Method • Measure staff activity • Find labor cost • Find cost of supplies, capital, overhead Health Economics Resource Center

  11. Finding Unit Cost • 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 Health Economics Resource Center

  12. Staff Activity Analysis Direct Measurement • Methods of finding staff activities • Track staff activity in a log • Estimate activity • Need not be comprehensive; can sample activity • Estimate labor cost Health Economics Resource Center

  13. Characterizing Staff Activities Direct Measurement • 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 Health Economics Resource Center

  14. Exclude and Include Direct Measurement • Exclude development cost • Exclude research-related costs • Should measure when program fully implemented • Should measure at constant returns to scale Health Economics Resource Center

  15. Direct vs. Indirect vs. Overhead • Direct costs: costs that are tied to a particular encounter (e.g., staff time, medications) • Overhead: costs that cannot be tied to particular procedures (e.g., VA police, maintenance, food service) Health Economics Resource Center

  16. Direct vs. Indirect vs. Overhead • Indirect: • sometimes means overhead • sometimes means non-salary benefits • (e.g., health care, annual leave) • sometimes means secondary impact of treatment on other health care use Example: patient receives better depression care • at VA and later has fewer visits for other causes Health Economics Resource Center

  17. Discussion • Which of these should be included in the cost of an intervention? • Non-salary benefits • Secondary impact on other health care services • Overhead costs Health Economics Resource Center

  18. Other Costs Direct Measurement • Survey or actual measure of supply costs • Alternatives for overhead • Cost report data • Standard rates • Alternatives for capital • Cost report • Rental rates Health Economics Resource Center

  19. Pseudo-Bill Microcost method 2

  20. Pseudo-bill • Itemize all services utilized/provided • Use schedule of cost/reimbursement for each service • Example: HERC outpatient costs • Itemized all CPT codes • Used relative value weights to assign costs to procedures Health Economics Resource Center

  21. Microcost method 3 Reduced List Costing

  22. Reduced List Costing • Some utilization items in pseudo-bill explain most of variation in cost • e.g., surgical procedures • Costing major items may be sufficient • Schedule of cost/reimbursement must be adjusted • e.g., new rate for surgical procedures that includes cost of laboratory services Health Economics Resource Center

  23. Microcost method #4: Cost Regression

  24. Cost Regression • Dependent variable is charges or cost-adjusted charge from non-VA data • Independent variables: • Clinical information • Diagnosis Related Group • Diagnosis • Procedures • Vital status at discharge • Length of stay • Days of ICU care Anything that predicts cost and is in both datasets. Health Economics Resource Center

  25. Transformation of Dependent Variable • Cost data are frequently skewed • Skewed errors violates assumptions of Ordinary Least Squares • Error terms not normally distributed with identical means and variance • Transformation • Typical method: log of cost • Can make OLS assumptions more tenable Health Economics Resource Center

  26. References - I • Duan, N. (1983) Smearing estimate: a nonparametric retransformation method, Journal of the American Statistical Association, 78, 605-610. • Manning WG, Mullahy J. Estimating log models: to transform or not to transform? J Health Econ 2001 Jul;20(4):461-94. Health Economics Resource Center

  27. References - II • Basu A, Manning WG, Mullahy J. Comparing alternative models: log vs Cox proportional hazard? Health Economics 2004 Aug;13(8):749-65. Health Economics Resource Center

  28. HERC Web Site FAQs • E1. How do I estimate costs with a clinical cost function? • faq_e02.asp • E2. What is retransformation bias, and how can it be corrected? • faq_e02.asp Health Economics Resource Center

  29. Limitations • Relies on similar cost structures of external and study (internal) data. • Reduces the number of outliers. • Can create statistical anomalies. Health Economics Resource Center

  30. Microcost method # 5: Estimating Medicare reimbursements

  31. Medicare Reimbursements • Part A -- Prospective Payment for Inpatient Stays • Part B -- Payment for Physician Services to Inpatients Health Economics Resource Center

  32. Medicare Inpatient Facility Payment • DRG-based payments adjusted by • Disproportionate share payments • Indirect medical education • Geographic adjustments • Outlier payments for unusual cases • Direct medical education Health Economics Resource Center

  33. Medicare Payments • Medicare pays flat rate per DRG, regardless of length of stay (except for outliers) • Cost analysis may wish to capture effect of length of stay on cost Health Economics Resource Center

  34. Medicare Pricer Software • Computer application for calculating facility payment • Requires • 6-digit hospital PPS (identifier) • DRG • Admission and discharge dates (LOS) Health Economics Resource Center

  35. Medicare Outpatient Payment • Payment based on CPT procedure codes • Provider payment and facility payment (if done in hospital) • See documentation for HERC Outpatient Average Cost data: methods_data/va_cost_methods_ac.asp Health Economics Resource Center

  36. Outpatient Medicare Payments • 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 Health Economics Resource Center

  37. Selecting a Method • Data available? • Method feasible? • Assumptions appropriate? • Method accurate: Will it capture the effect of the intervention on resource use? Health Economics Resource Center

  38. 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 Health Economics Resource Center

  39. 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 Health Economics Resource Center

  40. 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 Health Economics Resource Center

  41. Cost Regression • 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 Health Economics Resource Center

  42. Estimate Medicare payments • Assumptions • Medicare payments reflect average cost for a population; your sample is generalizable • RVU captures effect of intervention on resources used • Advantage: easy to understand • 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) Health Economics Resource Center

  43. 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 regression or Medicare payment for other utilization Health Economics Resource Center

  44. Discussion • CSP 519 compares • Separate PTSD and smoking cessation visits • Combined PTSD and smoking cessation visits • What are some costs that you could estimate by an average-costing approach? • Is there anything that might need to be measured directly? Health Economics Resource Center

  45. Reference • Barnett PG. Determination of VA health care costs. Medical Care Research and Review 2003;60(3 Suppl.):124S-141S. • • publications/supplement_mcrr_2003.asp Health Economics Resource Center

  46. Other Resources • HERC web site: FAQ responses, technical reports (click on Publications tab) • HERC Help Desk ( Health Economics Resource Center

  47. HERC email list • To join the HERC email list, send a request to Health Economics Resource Center

  48. Next session • Wednesday, 5/16/2006, 2 p.m. ET • Estimating the Cost of Health Care: VA Costs • Paul Barnett, PhD • Reading for next session: • M Gold et al. Cost-Effectiveness in Health and Medicine • pp. 199-210. Available for purchase at or • PG Barnett. Medical Care Research and Review 60(3), pp. 124S-141S. Download from publications/supplement_mcrr_2003.asp Health Economics Resource Center