***Health Services Research and Development Service***

***Cost Analyses***

***Information for Applicants and Reviewers***

***March 2004***

This informational memo describes HSR&D expectations for proposals
involving health care cost determination and other types of economic
analysis.

**Types of Economic Analysis.**

Proposals should describe the type of economic analysis to be done.
Common types of analysis include cost-identification, cost-consequences,
and cost-utility analysis.

-   A [Cost-Identification Analysis]{.underline} determines the cost of
    a health care program, service, or intervention.

-   A [Cost-Minimization Analysis]{.underline} compares the costs of
    alternative treatments under the assumption that they have
    equivalent effects on patient health.

The following three are examples of cost-effectiveness analysis:

-   A [Cost-Consequences Analysis]{.underline} examines all costs
    associated with an intervention, including its effect on health care
    utilization.

-   A [Cost-Outcome Analysis]{.underline} determines a ratio of the cost
    of an intervention to its impact on a nonfinancial outcome, such as
    changes in the number of deaths or the number of services used.

-   A [Cost-Utility Analysis]{.underline} examines the incremental
    effect of health care interventions on both cost and outcomes.
    Outcomes are measured in units of morbidity-adjusted survival,
    called the Quality-Adjusted Life Year (QALY).

-   A [Cost-Benefit Analysis]{.underline} is a cost-utility analysis
    that expresses outcomes in dollars rather than QALYs.

**Standard Methods of Cost-Effectiveness Analysis.**

Most proposals that assess cost-effectiveness will refer to the standard
method described by the U.S. Public Health Service advisory panel on
cost-effectiveness (Gold et al., 1996). Those that do not should explain
why that method is not suitable.

Among the key elements of the standard method (or "reference case") are
the following:

-   The analysis finds the incremental effect of an intervention by
    comparing it to a reference group, often the current standard of
    care. This yields the incremental cost-effectiveness.

-   Costs and outcomes are discounted to reflect the reduction in
    economic value that occurs when cost or benefit is deferred.

-   The analysis adopts the perspective of society. Patient-incurred
    cost is measured.

-   Outcomes are valued, usually in terms of Quality-Adjusted Life Years
    of survival.

-   Uncertainty should be addressed with statistical testing and
    sensitivity analysis.

-   A statistical model may be needed to estimate the lifetime stream of
    cost and benefit associated with the intervention.

# Determination of VA Health Care Costs

Researchers may determine VA health care costs by one or several
methods. They may directly measure costs. They may use VA cost and
utilization databases and apply non-VA measures of relative value to
estimate VA health care cost. They may use estimates from the Health
Economics Resource Center (HERC) or the Decision Support System (DSS). A
combination of methods is often needed. HSR&D proposals should identify
each source of VA cost and utilization data and describe how any
relevant limitations of the data will be addressed.

Articles describing how to find VA costs were published in a 1999
supplement to the journal [Medical Care]{.underline}. A 2003 supplement
to the journal [Medical Care Research and Review]{.underline} provides
additional examples and describes new data resources. Both are available
on request from HERC.

Sources of VA utilization data include the following:

-   The Patient Treatment File (PTF) is a hospital discharge data set
    that characterizes hospitalized patients and the care that they
    received in acute, observation, and extended care stays.

-   The Outpatient Clinic File (OPC) contains data on ambulatory care
    provided by VA. It characterizes ambulatory patients and the
    diagnoses assigned and procedures performed in their outpatient
    encounters. This data source is alternately called the National
    Patient Care Database.

-   The Decision Support System (DSS) is a computerized cost-accounting
    system that determines the cost of VA departments, patient care
    encounters, and specific health care products used in an encounter.
    DSS is based on extracts of other VA data systems (i.e., VISTA, PTF,
    CALM, PAID, CDR). Most data are kept in production databases
    organized by medical center or network, but national data extracts
    (NDEs) have been created of the cost of VA inpatient stays and
    outpatient visits.

> The annual NDEs and the combination of PTF and OPC contain very
> similar numbers and types of records. HERC has prepared an in-depth
> comparison of DSS and PTF/OPC databases, available for download from
> the HERC web site.[^1]

-   Prescriptions dispensed by VA pharmacies may be found in two
    databases:

    -   The VA Pharmacy Benefits Management (PBM) database for
        outpatient prescriptions.

    -   The DSS National Data Extract for pharmacy services.

> The contents of each database are described in the VIReC Research User
> Guide: VHA
>
> Pharmacy Prescription Data, which may be downloaded from the VIReC web
> site
>
> (www.virec.research.va.gov).

-   Information on dispenses prosthetics appears in the National
    Prosthetics Patient Database (NPPD). It includes both external and
    internal prostheses of every variety, as well as certain types of
    medical equipment such as catheters, monitors, and external fixture
    devices. A guide to the NPPD was published in the *VIREC
    Insights* v. 2 no. 3, available on the VIREC web site*.*

-   The Veterans Integrated Health Systems Technology & Architecture
    (VISTA) provides detailed clinical and utilization data for every
    individual treated at each VA medical center. It is the source of
    utilization data in all other VA databases. It is difficult to
    create electronic extracts from VISTA, and so proposals to use VISTA
    should explain that data cannot be found in other VA databases and
    should describe a specific plan for extracting data.

Sources of VA cost data include the following:

-   Financial Management System (FMS) is a summary of the VA expense
    journal that reports the cost of supplies and the quantity and cost
    of each type of staff. Expenditures are reported for each medical
    center by cost center, a reporting unit that does not correspond to
    any particular patient care department (e.g., the cost center for
    nursing service is not divided into inpatient wards or outpatient
    clinics). This source does not identify the cost of patient care
    programs, particular services, or patient encounters. This data was
    formerly called the Centralized Accounting for Local Management
    (CALM).

-   The Personnel and Accounting Integrated Data (PAID) system provides
    occupational and payroll data on all VA employees. PAID includes
    confidential data and access to it is not routinely granted.

-   The Monthly Program Cost Report (MPCR) reports costs of departments
    at each VA medical center. Costs reported in FMS are allocated
    according to staff workload data in the DSS NDEs. Proposals for
    projects that will use MPCR data to find costs incurred by patients
    should describe the method to be employed. The MPCR was implemented
    in FY2004. Data for prior years may be obtained from the Cost
    Distribution Report (CDR), which was similarly constructed but based
    workload data on service chief estimates. CDR and MPCR are both
    available for FY2004.

-   The Veterans Equitable Resource Allocation (VERA) system allocates
    funds to VA regional networks based on information in a database
    created by the VA Allocation Resource Center. The VERA database
    includes patient level costs estimated using the CDR, OPC and PTF,
    and other sources. It does not include the cost of specific
    encounters. Proposals that rely on this data source should explain
    how the study question will not be sensitive to the assumptions used
    in creating these cost estimates. This source was formerly known as
    the Resource Planning and Management (RPM) database.

-   HERC Average Cost Data Sets. The HSR&D Health Economics Resource
    Center is creating a comprehensive set of estimates of the cost of
    each VA health care encounter that has occurred since October
    1, 1998. These estimates are based on the costs reported in the CDR,
    utilization from the PTF and OPC, and non-VA data on the relative
    costs of health care encounters. These data rely on the assumption
    that VA uses the same relative quantity of resources as non-VA
    providers, and that encounters with the same characteristics have
    the same cost. Proposals that rely on this data source should
    explain how the study question will not be sensitive to the
    assumptions used in creating these cost estimates.

Many proposals rely on non-VA cost data. Non-VA data are used to
estimate comparable costs where none exist in VA, to identify the costs
of non-VA healthcare utilization of VA patients, and to serve as
benchmarks for VA costs.

Sources of non-VA cost data include the following:

-   Medicare databases include enrollment, entitlement and claims
    history information on all Medicare beneficiaries. Claims data
    include records of individual inpatient stays and outpatient visits.
    Medicare also releases annual hospital financial reports. VIREC has
    produced a dataset of Medicare records for users of VA services. The
    matched VA-Medicare data are described on the VIREC web site
    ([http://www.virec.research.va.gov](http://www.virec.research.va.gov/)).

-   Medicaid is a federally funded, state-operated medical care program
    for the poor and disabled. Researchers should be aware that there
    are differences across states in Medicaid policies, services, and
    datasets. There are multi-state Medicaid data sets, and an emerging
    national database. Medicaid is overseen by the Center for Medicare
    and Medicaid Services (CMS). The Medicaid web site
    (www.cms.hhs.gov/medicaid) contains information on publicly
    available data.

-   American Hospital Association (AHA) Annual Survey is a voluntary
    survey of hospitals. The publicly extract, available for a fee,
    features data on workload, staffing, revenues and expenses at the
    facility level, including VA medical centers.

VA investigators may learn more about cost and utilization databases
from the following centers:

Information on VA cost databases may be obtained from the VA HSR&D
Health Economics Resource Center. HERC maintains a web site
([http://www.herc.research.va.gov](http://www.herc.research.va.gov/))
with resources for researchers. HERC staff may be contacted by e-mail
(<herc@va.gov>), or by phone (650-617-2630).

Information on VA utilization databases may be obtained from the VA
Information Resource Center (VIREC). VIREC has a web site
([http://www.virec.research.va.gov](http://www.virec.research.va.gov/))
and may be contacted by e-mail (<virec@va.gov>), or by phone
(708-202-2413).

The VA Management Science Group (MSG) has information on sources of
non-VA cost and utilization data that are available to VA researchers.
MSG make several datasets available at the VA Austin Automation Center,
including Medicare cost reports, AHA Surveys, and state discharge data
sets. The MSG may be contacted by phone (781-687-2678). Information on
Medicare databases can also be obtained from VIREC or from the Research
Data Assistance Center (RESDAC). RESDAC is a resource center for all
researchers who wish to work with Medicare data. It maintains a web site
(<http://www.resdac.umn.edu/>) and may be contacted by e-mail
(resdac@umn.edu) or by phone (888-973-7322).

[]{.mark}

The VISN Support Service Center (VSSC) offers a wealth of financial and
utilization data on its web site (http://www.vssc.va.gov). Data sources
accessible through VSSC include the "KLF Menu," a tool for accessing DSS
and certain other databases in real time and viewing results on the
user's screen; FMS finance data; and a growing number of other data
sources.

# Issues Addressed by Proposals for Economics Research

Proposals to identify health care costs may need to consider the
following issues:

-   Economic costs may not be entirely captured in cost or utilization
    databases.

-   Charges do not equal cost.

-   Costs are affected by geographic variations in wages.

-   Health care products are diverse, and their cost may be affected by
    severity of illness.

-   The definition of individual health care products may differ across
    institutions.

-   Cost and utilization data often require validation.

-   Some type of direct measurement of cost and utilization may be
    required.

The economic analysis section of an HSR&D proposal ordinarily addresses
the following:

[Research Question(s)]{.underline}

1.  The study question is described. Cost questions are posed in an
    answerable form.

2.  The type of analysis is indicated (cost-identification,
    cost-consequences, etc.)

3.  Comparator groups (or usual care) are clearly described.

4.  The proposal details the study's relevance to VA and non-VA
    providers or patients.

5.  The proposal identifies the perspective of the analysis (e.g., the
    patient, payer, provider, society at large). This perspective is
    considered in defining cost.

### Cost Methods

6.  Cost is defined. All important and relevant costs for each
    alternative are identified. The investigator may wish to consider
    the cost of non-VA healthcare costs, and the costs of capital, such
    as buildings and equipment.

7.  Data and methods are described. The proposal demonstrates an
    understanding of the limits and appropriate use of data sources. It
    discusses the strengths and shortcomings of each data source, and
    its validity and accessibility. The proposal describes what
    permissions must be obtained, and costs incurred, to obtain data.

8.  If costs will be measured directly, the method of determining
    personnel cost is described, including the means of allocating
    personnel time. Studies of new interventions explain how costs that
    pertain to the intervention will be distinguished from costs
    incurred in researching its effect.

9.  The proposal considers any special circumstances that may make cost
    measurement difficult and describes appropriate strategies.

10. If indirect costs or non-healthcare costs are to be considered, the
    proposal describes how they will be measured. The proposal indicates
    whether time lost from work or the value of the time of unpaid
    caregivers will be included.

### Outcomes and Benefits 

11. If the proposal is a cost-effectiveness or cost-benefits analysis,
    then the method of measuring outcomes is described. The proposal
    clarifies whether indirect costs will be counted as a cost or as an
    outcome. Cost-effectiveness studies ordinarily measure outcomes in
    Quality-Adjusted Life Years. Such proposals describe the method of
    measuring the utility associated with different health states.

### Analysis 

12. The analysis plan addresses uncertainty by including statistical
    tests and sensitivity analyses.

13. The effect of time on costs and outcomes is considered through
    discounting.

14. If a model is necessary, it is completely described.

15. Qualifications of research staff, including their familiarity with
    VA data sources, are noted. Not every cost study requires a health
    economist.

## Involving a Health Economist 

Some cost analyses may be straightforward enough to be conducted by an
experienced VA researcher without economic training or costing
experience. Other analyses will require the assistance of a health
economist. Although there are guides to using VA cost systems, be
prepared for many challenges if no one on the research team has prior
experience with VA costing. There are no formal rules about when to use
a health economist, but there are some good rules of thumb.

An economist is not needed for every health services study involving
cost. If cost is the secondary rather than central outcome of the study,
if the study takes the payer's perspective, or if the study is limited
to an examination of the cost of the intervention, an experienced health
services researcher or biostatistician may be able to carry out the
study without the assistance of an economist. An example of this type of
study is a cost identification analysis in which the payer's perspective
is used and the cost of a single intervention is determined (e.g., the
cost of pill A versus pill B). Some very experienced researchers may be
able to conduct cost-effectiveness studies without the assistance of a
health economist. Familiarity with VA databases may be at least as
important as health economics training. Health economists who are
unfamiliar with the VA system will need to learn VA cost determination
methods.

An economist may be needed for complex studies. Greater complexity
requires greater expertise. A health economist may be needed if the
study will determine all health care costs, if it adopts a societal
perspective, if it examines cost-effectiveness, or if costs and outcomes
are to be discounted. Adoption of the societal perspective requires
methods to measure patient-incurred cost and costs that VA patients
incur in visits to non-VA providers. Studies that require modeling may
require research staff who are experienced in constructing decision
analysis models.

A list of VA economics researchers is maintained at the HERC web site
at: <http://www.herc.research.va.gov/resources/experts.asp>

## 

## 

## References on VA Cost Determination

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

Phibbs CS, Bhandari A, Yu W, Barnett PG. Estimating the costs of VA
ambulatory care. Medical Care Research and Review 2003;60(3
Suppl):54S-73S.

Smith MW, Barnett PG. Direct measurement of health care costs. Medical
Care Research and

Review 2003;60(3 Suppl):74-91.

Smith MW, Joseph G. Pharmacy data in the VA health care system. Medical
Care Research and Review 2003;60(3 Suppl):92-123.

Swindle RW, Beattie MC, Barnett PG. The quality of cost data: a caution
from the Department of Veterans Affairs experience. Medical Care
1996;34(3 Supplement):MS83-90.

Wagner TH, Chen S, Barnett PG. Using average cost methods to estimate
encounter-level costs for medical-surgical stays in the VA. Medical Care
Research and Review 2003;60(3 Suppl):15-36.

Yu W, Wagner TH, Chen S, Barnett PG. Average cost of VA rehabilitation,
mental health, and long-term hospital stays. Medical Care Research and
Review 2003;60(3 Suppl):40S-53S.

## References on Cost-Effectiveness Analysis

Drummond NE, Stoddart GL, Torrance GW. Methods for the economic
evaluation of healthcare programs. 2nd Edition. Oxford: Oxford
University Press, 1997.

Gold MR, et al. Cost-effectiveness in health and medicine. New York:
Oxford University Press, 1996.

Russell LB, Gold MR, Siegel JE, Weinstein MC. 1996. \"The role of
cost-effectiveness analysis in health and medicine.\" Journal of the
American Medical Association 276(14): 1172-1177.

Siegel JE, Weinstein MC, Russell LB, Gold NM. 1996. \"Recommendations
for reporting cost-effectiveness analyses.\" Journal of the American
Medical Association 276(16): 1339-1341.

Sloan FA, ed. Valuing health care: costs, benefits, and effectiveness of
pharmaceuticals and other medical technologies. Cambridge: Cambridge
University Press, 1994.

Weinstein MC, Siegel JE, Gold MR. 1996. \"Recommendations of the panel
on cost-effectiveness in health and medicine.\" Journal of the American
Medical Association 276(15): 1253-58.

[^1]: "Research Guide to Decision Support System National Cost Extracts
    FY1999-FY2002."