# Presentation: 075444

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

- April 6, 2006

## Costing Methods

- Mark W. Smith, PhD
- Associate Director
- VA Health Economics Resource Center

## Focusing Question

- What is the cost of a health care intervention?
*	**Example*
*	*CSP 530 compares dialysis 3x/week to 6x/week for patients with acute renal failure.

## 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

## Cost Estimation Approaches

- Two general approaches to costing:
- Microcosting
- Average costing  (gross costing)

## 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

## Estimating Costs: Average Costing

- Over a long period, divide total cost by total units of care provided
- Less precise than micro-costing

## Costing Spectrum

- Micro costing and average costing represent ends of a spectrum

- Micro costing

- Average Costing

## Costing Spectrum

**Direct measurement**

**Pseudo-bill**

**Reduced list costing**

**Cost regression**

**Estimate Medicare payment**

**Average cost per day**

**micro**

**average**

## Microcost method 1

- Direct Measurement

## Direct Measurement

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

## 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

## Staff 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 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

***Direct Measurement***

## Exclude and Include

- Exclude development cost
- Exclude research-related costs
- Should measure when program fully implemented
- Should measure at constant returns to scale

***Direct Measurement***

## 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)

## 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

## Poll & 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

## Other Costs

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

***Direct Measurement***

## Microcost method 2

- Pseudo-Bill

## 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

## Microcost method 3

- Reduced List Costing

## 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

## Microcost method #4: 

- Cost Regression

## 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.

## 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

## 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.

## References - II

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

## Limitations

- Relies on similar cost structures of external and study (internal) data.
- Reduces the number of outliers.
- Can create statistical anomalies.

## Microcost method # 5: 

- Estimating Medicare reimbursements

## Medicare Reimbursements

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

## 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

## 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

## Medicare Pricer Software

- Computer application for calculating facility payment
- Requires
- 6-digit hospital PPS (identifier)
- DRG
- Admission and discharge dates (LOS)

## 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: www.herc.research.med.va.gov/ methods_data/va_cost_methods_ac.asp

## 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

## Selecting a Method

- Data available?
- Method feasible?
- Assumptions appropriate?
- Method accurate: Will it capture the effect of the intervention on resource use?

## 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

## 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

## 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

## 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

## 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)

## 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

## Whiteboard Exercise / Discussion

-    CSP 530 compares dialysis 3x/week to 6x/week for patients with acute renal failure.
-   What are some costs that you could estimate by an average-costing approach?

## Reference

- 	Barnett PG.  Determination of VA health care costs. *Medical Care Research and Review *2003;60(3 Suppl.):124S-141S.
- 	www.herc.research.med.va.gov/
-       publications/supplement_mcrr_2003.asp

## Other Resources

- HERC web site: FAQ responses, technical reports (click on Publications tab)
- HERC Help Desk  (herc@med.va.gov)

## HERC email list

- To join the HERC email list, send a request to *herc@va.gov*.

## Next session

- Thursday, 4/16/2006, 2 p.m. ET
- Estimating the Cost of Health Care: VA Costs
- Todd Wagner, PhD
- 				Reading for next session:
- M Gold et al.  _Cost-Effectiveness in Health and Medicine_
- 	pp. 199-210. Available for purchase at _[http://www.](http://www.oup.com/us/)__[oup](http://www.oup.com/us/)__[.com/us/](http://www.oup.com/us/)_  or _[http://www.](http://www.amazon.com/)__[amazon](http://www.amazon.com/)__[.com](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.herc.research.med.va.gov/publications/supplement_mcrr_2003.asp)_