Todd Wagner, PhD 

April 30, 2014

Estimating the Cost of an 

Intervention 

1 
Objectives 

 At the end of the class, you should 

– Understand what micro-costing means

– Be familiar with different micro-costing 

methods 

– Understand that the method you use will 

affect your future analyses

2 
Perspective 

 The talk is focused on estimating costs 

for a CEA using the societal perspective 

 Implementation researchers may need to 

vary these methods 

3 
Outline 

1. Introduction

2. Micro-costing methods

 - Direct Measurement

 - Cost Regression

3. An important assumption: efficient 

production and economies of scale

4. Example

4 
Focusing Questions

 What is the cost of a new health care 

intervention?

What does it cost to: 

1. Labor: use outreach workers to improve cancer 

screening?

2. Capital: use a robot for stroke rehabilitation?

5 
Outreach workers

 A local hospital routinely performed Pap 

smears in the ED (when clinically indicated).

 Problem: Low rates of follow-up among 

abnormal Pap smears (~30% follow-up)

 Potential solution: employ outreach workers 

to improve follow up

 Question: what is the added cost of using an 

outreach worker to improve follow-up?

6 
Robots 

 Engineers have developed robotic devices to 

facilitate arm rehabilitation after stroke

 Robots offer precise, repetitive actions to help 

the patient with impairment

– Direction 

– Speed

– Control

 What is the cost of robotic enhanced rehab?

7 
The answer

 To answer these questions, we need to 

use micro-costing methods

8 
Outline 

1. Introduction

2. Micro-costing methods

 - Direct Measurement

 - Cost Regression

3. An important assumption: Efficient 

production and economies of scale

4. Example

9 
Micro-costing 

 This term refers to a set of methods that 

researchers use to estimate costs 

 Methods are needed because costs* are 

not readily observable 

*cost resulting from a competitive market

10
Micro-cost Methods

 Three commonly-used methods

– Direct measure: measure activities and assign 

prices to them

– Pseudo-bill: capture services using billing codes. 

Assign costs to billing codes

– Cost regression: use statistical techniques to 

identify marginal cost of the intervention

11
Selecting a Method

 Data availability

 Method feasibility 

 Appropriate assumptions

 Precision and Accuracy 

12
Direct Measurement

 Four steps 

1. Specify the production processes

2. Enumerate the inputs for each process

3. Identify price for the inputs

4. Sum (quantity*price) across all inputs

 Level of precision is critical. 

13
Imagine microcosting a 

cup of coffee

 Growing

 Harvesting

 Distribution

 Roasting

 Enjoying

Keep in mind:

- Scale of production

- Quality

Luckily, the cost of a cup of coffee is 

observable and sellers compete on 

price and quality.

14
Precision 

 Intervention used 2 FTE outreach workers for 1000 

participants

 Total labor cost is $100,000 for a year

 Less Precise Method: Labor cost per participant is 

$100,000/1,000 or $100

 More Precise Method: Track intervention time per 

participant. Use time estimates as a relative value to 

apportion labor costs.

15
Precision is 

Expensive

 It is time consuming to 

track staff activities

 Form was created with 

input from outreach 

workers

 Manager reviewed them 

for accuracy each week

16 
Precision and Accuracy

 The center of the 

target represents 

perfect accuracy

 A and B are equally 

accurate

 A is more precise 

than B

B 

A 

17
Accuracy 

 SCI-VIP program developed a CPRS app 

so that time spent providing supportive 

employment was gathered as part of the 

documentation in VISTA

 This improved data accuracy

18
The Precision Payoff

Subgroup analysis

Expense and effort

Example at end of lecture

About subgroup analysis

19
Direct Measurement: 

Personnel Activities

 Research staff can produce several 

“products” 

– Exclude development cost

– Exclude research-related costs

– Should measure when program fully 

implemented

20
Personnel Costs

 Pay can affect quantity and quality; attracts different 

types of people

 Need to include benefits (when appropriate)

 Need to include direct/productive and indirect/nonproductive costs (e.g., meeting times)

 Assumption: changing personnel pricing will not 

affect the quality or effectiveness of the intervention

 VA Labor costs

 http://www.herc.research.va.gov/resources/faq_c02.asp 

21
Outline 

1. Introduction

2. Micro-costing methods

 - Direct Measurement

 - Cost Regression

3. An important assumption: Efficient 

production and economies of scale

4. Example

22
Cost Regression

 Use a regression model to understand the 

marginal effect of an intervention 

 Caveats 

– Only works when there are existing cost 

data

– Not a good method for a new technology 

(e.g., secure messaging) where cost 

accounting may be underdeveloped

23
Ex: Cost of Telephone Care

 We conducted a RCT to examine whether 

telephone case monitoring improves substance 

use care relative to usual care.

 Intervention averaged 9.1, control averaged 1.9 

calls (difference=7.2, p<.001)

 DSS tracks SUD telephone care costs in clinic 

stops (543, 544, 545)

 We summarized the cost data per person

24
Regression 

Linear 

Regression

Number of phone calls 10.53

[2.32]**

Female -4.14

[22.47]

Site 1 -2.92

[14.73]

Age 0.87

[0.86]

other covariates omitted for brevity

Observations 667

Robust standard errors in brackets

Each additional 

call cost an 

average of $10.53

25
Assumptions 

 Cost and workload data are accurately 

captured 

 Accuracy could vary by location 

 Costs are biased toward 0 if the workload 

is not being captured 

26
Cost Regression

 Large literature on analyzing cost data

 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

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.

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

27
Outline 

1. Introduction

2. Micro-costing methods

 - Direct Measurement

 - Cost Regression

3. An important assumption: Efficient 

production and economies of scale

4. Example

28
Important Assumptions:

Scale Economies

 We created a health guide for a RCT

 We paid $14 per guide for 1000 guides 

 If we ordered more, the cost per guide 

would decrease, eventually reaching $3

 Which cost estimate should you use for 

the CEA?

29
Poll 

 Which method should you use? 

– $14 per guide 

– $3 per guide

– Somewhere in between

30
Economies of Scale

 If the unit costs ($/Q) of producing a good 

decrease as the quantity (Q) of goods increase, 

use the unit cost when there are constant 

returns to scale.

$/Q

Quantity

Constant returns 

to scale

Increasing 

returns to 

scale

31
Outline 

1. Overall approaches

2. Direct Measurement

3. Cost Regression 

4. An important assumption: Efficient 

production and economies of scale 

5. Example

32
Example: Estimating Labor Costs by 

Direct Measurement

Wagner, T. H., Engelstad, L. P., Mcphee, S. J. & Pasick, R. J. (2007) The costs of an outreach intervention for lowincome women with abnormal Pap smears, Prev Chronic Dis, 4, A11.

Wagner TH, Goldstein MK. Behavioral interventions and cost-effectiveness analysis. Prev Med 2004;39:1208-14.

33
Outreach workers

 A local county hospital routinely 

performs Pap smears in the ED. 

 Problem: Low rates of follow-up among 

abnormal Pap smears (~30% follow-up) 

 Question: what is the cost of using an 

outreach worker to improve follow-up? 

34
Objective 

 We evaluated the cost-effectiveness of 

usual care (a mailed postal reminder) 

with a tailored outreach intervention 

compared to usual care alone.

 Does CEA vary by disease risk? 

35
Study Overview

 Randomized, controlled trial

 Usual care: notified by telephone or mail, 

depending on the degree of abnormality. 

Provided intervention after 6 months. 

 Intervention: Usual care plus outreach 

and tailored individual counseling

 Estimated costs using direct measurement 

36
Methods 

 Method 1: Sum all the intervention costs and 

divide by number of participants (easy)

 Method 2: Estimate the cost of the intervention 

for each patient (hard)

 If you want to ask, “was the intervention more 

cost-effective for subgroups?”, then you need 

to use method 2? 

37
Unit Costs (2002 dollars)

Intervention 

 (n=178) 

 Usual care 

(n=170) 

Outreach worker costs $142 $0 

Travel costs at $.365 per mile $4 $0 

Office space and supplies $28 $0 

Outreach worker quality assurance $19 $0 

Usual care $1 $1.00 

Subtotal $47 $0 

Patient Travel Costs for Follow-up $19 $9.9 

Total unit cost from societal perspective $214 $10.9 

Cost to add intervention from provider perspective $194 $0 

38
Effectiveness 

Abnormal Pap Follow-up at Highland Hospital

non-OB Patients

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 > 12

Months since Initial Pap

Cumulative % Followed Up

Intervention Control
Cost per follow-up 

Cost

Incremental 

cost

Probability 

of follow-up

Incremental 

follow-up

Incremental cost

per follow-up

Overall

Control $77 0.32

Intervention $355 $278 0.61 0.29 $959 

Bootstrapped 95% CI (787-1367)

By severity

ASCUS/AGUS $75 0.32

$347 $272 0.57 0.25 $1,090

LGSIL $74 0.30 (813-1658)

$374 $300 0.64 0.34 $882

HGSIL $105 0.43 (579-4584)

$405 $300 0.87 0.44 $681

(486-1989)

40
 The MIT robot can assist the patient 

to initiate movement towards the 

target. 

 The robot can “guide” the 

movement, making certain that the 

patient is practicing the movement 

the correct way.

 As the patient gains movement 

control, the robot provides less 

assistance and continually challenges 

the patient.

 The robot provides quantifiable 

feedback on progress and 

performance. 

www.interactive-motion.com/technology.htm

41

Example 2: Estimating cost of 

using robots for stroke rehab

Wagner TH, Lo AC, Peduzzi P, et al. An economic analysis of robot-assisted therapy for long-term upper-limb impairment after stroke. 

Stroke. 2011;42(9):2630-2632.
Robot Costs

 Robot

– $230,750 purchase price 

– Need to include financing (6.015%)

– Robot needs overhead– a room, separate circuit

– Annual maintenance contract ($15,000 in yrs 2-5)

– Depreciates over a 5 year-life span

 Net present cost for 5 years of robot therapy 

$422,532

42
Costs per Rehab Unit

 A site could offer 7 session per robot 

– Each session lasts 75 minutes

– 2 patients per session (using different components)

 Number of slots over five years: 21,500

 Robot cost per session: $19.65 

 Therapists run the robot: $120 per session

 Total cost per robot session: ~$140

43
Results 

Robot (n=49) ICT (n=50) UC (n=28)

Average SD Average SD Average SD

Intervention costs

Per session $140 $218 

 Robot cost per session $20 -- -- -- -- --

 Therapist cost per session $120 -- $218 -- -- --

Average number of completed sessions 32.8 8.2 32.1 8.0 0 0 

Travel costs $561 $596 $389 $372 0 0 

Average intervention cost $5,152 $1,421 $7,382 $1,845 0 0 

Note: Robot therapy is significant less expensive than ICT (p<0.001) 

ICT is intensive comparison therapy

44
Resources 

 Converting time into money

– Smith M, Barnett P, Phibbs C, Wagner T, Yu W. Micro-cost methods of determining VA 

health care costs: Health Economics Resource Center, VA Palo Alto, Menlo Park CA.; 

2005.

– Smith M, Cheng A. A Guide to Estimating Wages of VHA Employees - FY2008 Update. 

Menlo Park CA: Health Economics Resource Center; 2010.

 Converting travel distance into money. 

– Phibbs CS, Luft HS. Correlation of travel time on roads versus straight line distance. 

Med Care Res Rev. 1995;52(4):532-542.

– $.19 per mile travel reimbursement is US tax code for health care 

reimbursement http://www.irs.gov/newsroom/article/0,,id=232017,00.html 

– PSSG has VAST dataset on travel times (VA intranet site) http://vaww.pssg.med.va.gov/ 

 Caregiver costs (if needed)

– US Bureau of Labor Statistics http://www.bls.gov/oco/ocos326.htm 

– Russell LB. Completing costs: patients’ time. Med Care. Jul 2009;47(7 Suppl 1):S89-93.

45
Resources 

 When we estimate the cost of labor, we need to add employee benefits 

(30%) and overhead (the “back office” components of an organization that 

keep it running such as HR and IT)

 Calculating overhead costs

– 33%-- Arthur Andersen. The costs of research: examining patterns of expenditures across research 

sectors.

 http://www.aau.edu/WorkArea/DownloadAsset.aspx?id=2842. 

– Estimating overhead costs empirically

 Barnett PG, Berger M. Indirect Costs of Specialized VA Mental Health Treatment. Technical Report 6. Menlo Park: 

Health Economics Resource Center; 2003.

 Barnett P, Berger M. Cost of Positron Emission Tomography: Method for Determining Indirect Cost. Technical Report 5. 

Menlo Park: Health Economics Resource Center; 2003.

 

46
Questions 

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Next HERC Course

May 7, 2014 

VA Costs: HERC versus DSS

Jean Yoon, Ph.D. 

Todd Wagner, Ph.D. 

48