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

VA Health Economics Course VA Health Economics Course Presentation # 3:Presentation # 3:Costing MethodsCosting Methods

May 2, 2007May 2, 2007

Health Economics Resource CenterHealth Economics Resource Center 22

Costing MethodsCosting Methods

Mark W. Smith, PhDAssociate Director

VA Health Economics Resource Center


Focusing QuestionFocusing Question

What is the cost of a health care intervention?What is the cost of a health care intervention?

ExampleExample

CSP 519 compares separate PTSD and CSP 519 compares separate PTSD and smoking cessation therapy to combined smoking cessation therapy to combined therapy.therapy.


Cost of Health CareCost of Health Care

Outside of health, most items that we Outside of health, most items that we purchase daily have a readily observable purchase daily have a readily observable costcost

Not true with health careNot true with health care– Insurance buffers patient from true cost Insurance buffers patient from true cost – Charges, payments may not equal costCharges, payments may not equal cost


Cost Estimation ApproachesCost Estimation Approaches

Two general approaches to costing:Two general approaches to costing:– MicrocostingMicrocosting

– Average costing (gross costing)Average costing (gross costing)


Estimating Costs: Micro-costingEstimating Costs: Micro-costing

– Determine each input, find its price, Determine each input, find its price, then sum (quantity*price) across all then sum (quantity*price) across all inputsinputs

– DSS uses this approachDSS uses this approach

– Researchers use this approach in some Researchers use this approach in some circumstancescircumstances

– Gold standard but resource intensiveGold standard but resource intensive


Estimating Costs: Average CostingEstimating Costs: Average Costing

– Over a long period, divide total cost by Over a long period, divide total cost by total units of care providedtotal units of care provided

– Less precise than micro-costingLess precise than micro-costing

Health Economics Resource CenterHealth Economics Resource Center

Costing SpectrumCosting Spectrum

Direct measurem

ent

Pseudo-bill

Reduced list costing

Cost regression

Estimate M

edicare payment

Average cost per day

micro average

Microcost method 1Microcost method 1

Direct MeasurementDirect Measurement


Direct MeasurementDirect Measurement

Used to the find the cost of: Used to the find the cost of: – interventionsinterventions– care unique to VA (e.g., CSP 519)care unique to VA (e.g., CSP 519)

MethodMethod1.1. Measure staff activityMeasure staff activity2.2. Find labor costFind labor cost3.3. Find cost of supplies, capital, overheadFind cost of supplies, capital, overhead


Finding Unit CostFinding Unit Cost

Average cost Average cost – Total program cost/number of unitsTotal program cost/number of units– Assumes homogeneous productsAssumes homogeneous products

Relative Values needed for heterogeneous Relative Values needed for heterogeneous productsproducts– Find Relative Value of each productFind Relative Value of each product– Find cost per relative value unit (RVU)Find cost per relative value unit (RVU)– Use this to find cost of each productUse this to find cost of each product


Staff Activity AnalysisStaff Activity Analysis

Methods of finding staff activities– Track staff activity in a log – Estimate activity

Need not be comprehensive; can sample activity

Estimate labor cost

Direct Measurement


Characterizing Staff ActivitiesCharacterizing Staff Activities

Cost of patient care may include non-patient care Cost of patient care may include non-patient care timetime

Activities that produce several products may Activities that produce several products may need to be included, depending on perspectiveneed to be included, depending on perspective– e.g., time spent on clinical research may be e.g., time spent on clinical research may be

regarded as a research cost, or a patient care cost, regarded as a research cost, or a patient care cost, depending on analytical goaldepending on analytical goal

Direct Measurement


Exclude and IncludeExclude and Include

Exclude development costExclude development cost

Exclude research-related costsExclude research-related costs

Should measure when program fully implementedShould measure when program fully implemented

Should measure at constant returns to scaleShould measure at constant returns to scale

Direct Measurement


Direct vs. Indirect vs. OverheadDirect vs. Indirect vs. Overhead

Direct costs: costs that are tied to a particular Direct costs: costs that are tied to a particular encounter (e.g., staff time, medications)encounter (e.g., staff time, medications)

Overhead: costs that cannot be tied to particular Overhead: costs that cannot be tied to particular procedures (e.g., VA police, maintenance, food procedures (e.g., VA police, maintenance, food service)service)


Direct vs. Indirect vs. OverheadDirect vs. Indirect vs. Overhead

Indirect: Indirect:

(a)(a) sometimes means overheadsometimes means overhead

(b)(b) sometimes means non-salary benefits sometimes means non-salary benefits (e.g., health care, annual leave)(e.g., health care, annual leave)

(a)(a) sometimes means secondary impact of sometimes means secondary impact of treatment on other health care usetreatment on other health care use ExampleExample: patient receives better depression care : patient receives better depression care

at VA and later has fewer visits for other at VA and later has fewer visits for other causescauses


DiscussionDiscussion

Which of these should be included in the cost of Which of these should be included in the cost of an intervention?an intervention?

Non-salary benefits Non-salary benefits Secondary impact on other health care servicesSecondary impact on other health care services Overhead costsOverhead costs


Other CostsOther Costs

Survey or actual measure of supply costsSurvey or actual measure of supply costsAlternatives for overheadAlternatives for overhead

– Cost report dataCost report data– Standard ratesStandard rates

Alternatives for capitalAlternatives for capital– Cost reportCost report– Rental ratesRental rates

Direct Measurement


Pseudo-BillPseudo-Bill


Pseudo-billPseudo-bill

Itemize all services utilized/providedItemize all services utilized/provided

Use schedule of cost/reimbursement for each serviceUse schedule of cost/reimbursement for each service

Example: HERC outpatient costsExample: HERC outpatient costs– Itemized all CPT codesItemized all CPT codes– Used relative value weights to assign costs to proceduresUsed relative value weights to assign costs to procedures


Reduced List Costing Reduced List Costing


Reduced List CostingReduced List Costing

Some utilization items in pseudo-bill explain Some utilization items in pseudo-bill explain most of variation in costmost of variation in cost– e.g., surgical procedurese.g., surgical procedures

Costing major items may be sufficientCosting major items may be sufficient

Schedule of cost/reimbursement must be adjustedSchedule of cost/reimbursement must be adjusted– e.g., new rate for surgical procedures that includes e.g., new rate for surgical procedures that includes

cost of laboratory servicescost of laboratory services

Microcost method #4: Microcost method #4:

Cost RegressionCost Regression


Cost RegressionCost Regression

Dependent variable is charges or cost-adjusted Dependent variable is charges or cost-adjusted charge from non-VA datacharge from non-VA data

Independent variables:Independent variables:– Clinical informationClinical information– Diagnosis Related GroupDiagnosis Related Group– DiagnosisDiagnosis– ProceduresProcedures– Vital status at dischargeVital status at discharge– Length of stayLength of stay– Days of ICU careDays of ICU care

Anything that predicts cost and is in both datasets.


Transformation of Dependent Transformation of Dependent VariableVariable

Cost data are frequently skewedCost data are frequently skewed– Skewed errors violates assumptions of Ordinary Least SquaresSkewed errors violates assumptions of Ordinary Least Squares– Error terms not normally distributed with identical means and Error terms not normally distributed with identical means and

variancevariance– Transformation Transformation

Typical method: log of costTypical method: log of cost Can make OLS assumptions more tenableCan make OLS assumptions more tenable


References - IReferences - I

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

Manning WG, Mullahy J. Estimating log Manning WG, Mullahy J. Estimating log models: to transform or not to transform? models: to transform or not to transform? J J Health EconHealth Econ 2001 Jul;20(4):461-94. 2001 Jul;20(4):461-94.


References - IIReferences - II

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


HERC Web Site FAQs HERC Web Site FAQs

E1. How do I estimate costs with a clinical cost function?

http://www.herc.research.va.gov/resources/ faq_e02.asphttp://www.herc.research.va.gov/resources/ faq_e02.asp

E2. What is retransformation bias, and how can it be corrected?

http://www.herc.research.va.gov/resources/ faq_e02.asphttp://www.herc.research.va.gov/resources/ faq_e02.asp


LimitationsLimitations

Relies on similar cost structures of external and Relies on similar cost structures of external and study (internal) data.study (internal) data.

Reduces the number of outliers.Reduces the number of outliers.

Can create statistical anomalies.Can create statistical anomalies.

Microcost method # 5: Microcost method # 5:

Estimating Medicare Estimating Medicare reimbursementsreimbursements


Medicare ReimbursementsMedicare Reimbursements

Part A -- Prospective Payment for Inpatient Part A -- Prospective Payment for Inpatient StaysStays

Part B -- Payment for Physician Services to Part B -- Payment for Physician Services to InpatientsInpatients


Medicare Inpatient Facility Medicare Inpatient Facility PaymentPayment

DRG-based payments adjusted byDRG-based payments adjusted by– Disproportionate share payments Disproportionate share payments – Indirect medical educationIndirect medical education– Geographic adjustmentsGeographic adjustments

Outlier payments for unusual casesOutlier payments for unusual cases

Direct medical educationDirect medical education


Medicare PaymentsMedicare 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


Medicare Pricer SoftwareMedicare Pricer Software

Computer application for calculating facility Computer application for calculating facility paymentpayment

Requires Requires – 6-digit hospital PPS (identifier)6-digit hospital PPS (identifier)– DRGDRG– Admission and discharge dates (LOS)Admission and discharge dates (LOS)


Medicare Outpatient PaymentMedicare Outpatient Payment

Payment based on CPT procedure codesPayment based on CPT procedure codes

Provider payment and facility payment (if done in Provider payment and facility payment (if done in hospital)hospital)

See documentation for HERC Outpatient Average See documentation for HERC Outpatient Average Cost data: www.herc.research.med.va.gov/ Cost data: www.herc.research.med.va.gov/ methods_data/va_cost_methods_ac.aspmethods_data/va_cost_methods_ac.asp


Outpatient Medicare PaymentsOutpatient Medicare Payments

Some CPTs have no APC:Some CPTs have no APC:– Paid on cost pass-through basis Paid on cost pass-through basis – Paid through another APC (e.g., anesthesia)Paid through another APC (e.g., anesthesia)– Paid through a separate cost listPaid through a separate cost list– Multiple CPTs assigned to a single group-Multiple CPTs assigned to a single group-

APCAPC– Some surgery procedures are discountedSome surgery procedures are discounted


Selecting a MethodSelecting a Method

Data available?

Method feasible?

Assumptions appropriate?

Method accurate: Will it capture the effect of the intervention on resource use?


Direct MeasurementDirect MeasurementAssumptionsAssumptions

– Activity survey and payroll data are representativeActivity survey and payroll data are representative– May assume all utilization uses the same amount of May assume all utilization uses the same amount of

resourcesresources

AdvantagesAdvantages– Useful to determine cost of a program that is unique to VAUseful to determine cost of a program that is unique to VA

Disadvantages Disadvantages – Limited to small number of programsLimited to small number of programs– Can’t find indirect costsCan’t find indirect costs– Can’t find total health care costCan’t find total health care cost


Pseudo-billPseudo-billAssumptions

– 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


Reduced List CostingReduced List Costing

AssumptionsAssumptions– Items on reduced list are sufficient to capture Items on reduced list are sufficient to capture

variation in resource usevariation in resource use– Cost of items on reduced list is accurateCost of items on reduced list is accurate

AdvantagesAdvantages– Requires less data than pseudo-billRequires less data than pseudo-bill

DisadvantagesDisadvantages– Needs to find data on cost associated with items Needs to find data on cost associated with items

on reduced liston reduced list


Cost RegressionCost RegressionAssumptionsAssumptions

– Cost-adjusted charges accurately reflect resource useCost-adjusted charges accurately reflect resource use– The relation between cost and utilization is the same in The relation between cost and utilization is the same in

the current study as in the previous studythe current study as in the previous study

Advantages Advantages – Less effort to obtain reduced list of utilization measures Less effort to obtain reduced list of utilization measures

than to prepare pseudo-billthan to prepare pseudo-bill

Disadvantages Disadvantages – Must have detailed data Must have detailed data – Data from prior study may have error or biasData from prior study may have error or bias


Estimate Medicare paymentsEstimate Medicare paymentsAssumptionsAssumptions

– Medicare payments reflect average cost for a Medicare payments reflect average cost for a population; your sample is generalizablepopulation; your sample is generalizable

– RVU captures effect of intervention on resources RVU captures effect of intervention on resources usedused

Advantage: easy to understandAdvantage: easy to understand

DisadvantagesDisadvantages– Accuracy limited – VA may have different cost Accuracy limited – VA may have different cost

structures from average non-VA facilitiesstructures from average non-VA facilities– Inpatient: doesn’t reflect variation in resources Inpatient: doesn’t reflect variation in resources

beyond DRG (or LOS) beyond DRG (or LOS)


Combining MethodsCombining Methods

No single method may fill all needs, even within No single method may fill all needs, even within a single studya single study

Hybrid method may be bestHybrid method may be best– Direct method or pseudo-bill on utilization most Direct method or pseudo-bill on utilization most

affected by interventionaffected by intervention– Cost regression or Medicare payment for other Cost regression or Medicare payment for other

utilizationutilization


DiscussionDiscussion

CSP 519 compares CSP 519 compares • Separate PTSD and smoking cessation visits Separate PTSD and smoking cessation visits • Combined PTSD and smoking cessation visitsCombined PTSD and smoking cessation visits

What are some costs that you could estimate by an What are some costs that you could estimate by an average-costing approach?average-costing approach?

Is there anything that might need to be measured Is there anything that might need to be measured directly?directly?


ReferenceReference

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

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

publications/supplement_mcrr_2003.asppublications/supplement_mcrr_2003.asp


Other ResourcesOther Resources

HERC web site: FAQ responses, technical reports (click HERC web site: FAQ responses, technical reports (click on Publications tab)on Publications tab)

HERC Help Desk ([email protected])HERC Help Desk ([email protected])


HERC email listHERC email list

To join the HERC email list, send a request to To join the HERC email list, send a request to [email protected]@va.gov..


Next sessionNext session

Wednesday, 5/16/2006, 2 p.m. ETWednesday, 5/16/2006, 2 p.m. ET

Estimating the Cost of Health Care: VA CostsEstimating the Cost of Health Care: VA Costs

Paul Barnett, PhDPaul Barnett, PhD

Reading for next session:Reading for next session:

M Gold et al. Cost-Effectiveness in Health and Medicine

pp. 199-210. Available for purchase at http://www.oup.com/us/ or http://www.amazon.com

PG Barnett. Medical Care Research and Review 60(3), pp. 124S-141S. Download from http://www.herc.research.med.va.gov/ publications/supplement_mcrr_2003.asp

http://www.oup.com/us/



http://www.amazon.com/

http://www.amazon.com/

http://www.herc.research.med.va.gov/publications/supplement_mcrr_2003.asp

http://www.herc.research.med.va.gov/publications/supplement_mcrr_2003.asp

Documents

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