Methods of Calculating Costs 

Kevin D. Frick, PhDAssociate ProfessorD t t f H lth P li d Depar

tment 

of Health P

olicy and M 

anagemen

HERC Seminar 18 November 2009
Outline

• Cost is price times quantity• Basic Terms• Why measure costs? Why measure costs?• How to measure costs?• Empirical and modeling• Good sources on cost measurement
Cost is price times quantity

• Need data on prices and quantities• There are issues with obtaining both type• Price data may be specific to where the d

being collected or may represent charges 

th t f d ti than cos

ts o

f pro

duction

• Quantities may be difficult to track
Basic Terms

• Perspective—whose costs• Current year—dollar value after adjusting 

inflation

• Cash flow—costs experienced year by ye

multi l p e year program

• Present value—how much money is need

to fund a cash flow over time assuming thto fund a cash flow over time assuming th

interest can be earned on unspent money

• Total cost Total cost—all costs all costs• Incremental cost—additional costs of one 

intervention or program compared with anintervention or program compared with an
Why measure costs?

• Budgeting• Input into some type of economic evaluat
Budgeting—Things that are nee

• Costs from the perspective of the organiz

is bearing the costs

• Total costs in order to budget• Costs in current year’s currency in order t

h h t ll t how muc

h

to alloca

t

e

• Useful to know about “cash flow” in additi

using present value using present value
Inputs into economic evaluatio

types of evaluations• Budget impact• Cost of illness or burden of disease• Cost minimization• Cost effectiveness/Cost utility• Cost benefit• Cost consequence
Inputs into economic evaluatio

is needed• To know the perspective• Usually incremental costs• Usually present value
For what are economic evaluat

useful? • An input into the decision making process• If on a tight budget this may be the only o

important input into the decision making p

• Often economic considerations are just o

many i t i t th d i i ki inpu

ts in

to the 

decision making pro

since there are many things for which eco

cannot account cannot account

– Fairness, equity, disparities

• Economics can help to explain these witho

Economics can help to explain these witho

necessarily having an answer on how to wconsiderations in the decision making proc
How to measure costs

• Proxies for costs• Claims data• Cost accounting system• Micro-costing• Regression analysis
Proxies

• Do not have data directly related to the 

intervention or population that is being stu

eval td ua e

• Have data from a secondary source• Thi t s creates an approxi ti if 

imation if an appro

is all that is needed

• Usually at an early stage of studying an Usually at an early stage of studying an

intervention or program and making a dec

future implementation future implementation

• Allows us to look at average cost but doe

p p rovide much information on cross patienvariation
Example with Proxies—Slide 1

• Guided Care project

– Nurse patient navigator intervention– Nurse within a physician practice to coor

care for patients within the practice

• Aim is higher quality, less expensive care w

a burden on caregivers

• I l t d i th t Implemen

t

e

d in three sys

tems

– Tri-care, FFS, managed care

• Very challenging just to achieve similar m

of quantities using claims data with variab

coding and variable details coding and variable details
Example with Proxies—Slide 2

• Used CMS’s published data on average e

for a hospital day, a home care episode, a 

ph i i i it t hysician visit, e

tc.

• For the nurse patient navigator we used a

salary and benefits salary and benefits

• For the cost-benefit analysis we used a p

maximum caseload maximum caseload

• All results are approximations at best just 

some idea some idea

• Study to date has focused only on first eig

months of care with this s

ystem
Claims data

• If have one organization this can be fairly straightf• Tend to use paid amount rather than billed amoun• When have multiple claims data sources have to 

When have multiple claims data sources have to 

how claims are managed and paid

• Can use detail of claims to develop episodes of ca

• Difficult to try to look at care that is specifically rel

given disease so often measure all costs

• Can divide costs by different types (ER physician 

Can divide costs by different types (ER, physician

etc.)

• If payer pays a similar amount for all services of a 

it can be difficult to study across patient variation
Example with Claims Data-1

• Hospital at Home

– Provide care for community acquired pne

COPD, cellulitis, and congestive heart fawould need a hospital admission in the h

– Physician on call with required visits– Nursing care initially 24 hours per day– Send to hospital as needed for specific p–

Keep pe so co o ab e a d y o a o d 

pe

rson comf

ortable

a

n

d tr

y t

o

a

v

oid

from the hospital

– Key is to understand how the claims for t

Key is to understand how the claims for t

hospital at home care were filed
Example with Claims Data-2

• Three systems

– One FFS, one HMO, on VA

• The VA did not have claims per se• The other two were anal

y y zed in a wa

y to 

them as equivalent as possible

• Look at amount paid

• Compare the total costs of the index epis

period with regular hospitalization and a p

with h it l t h ith

hospit

al a

t

home
Cost Accounting System

• Useful if there is a single organization as there is 

necessarily uniformity of the implementation of the

systems across organizations systems across organizations

• Need to apportion salaries, overhead, and other c

are not easily linked to single services

• Can also use an “ingredients” approach to link to 

individuals/services

• Sometimes use simple apportioning as a function 

Sometimes use simple apportioning as

a function 

• Other times use more complicated approaches th

interaction in different cost centers and link overhe

resources rather than just size resources rather than just size

• Can be used to study across patient variation
Cost Accounting Example

• VA involved in the home hospital study

– Complex step down cost accounting app

allocate resources to patients in the inter

• Could also be done if a single hospital we

viewed as an example for other hospitals

– Suppose Johns Hopkins Hospital had a n

intervention

• Should it be considered a good example• P h ki k Per

haps a new kios

k

-b d ti i 

base

d questionnaire 

individuals who present to an ED with dizz
Micro Costing

• Gathering detailed information on all resources

– Personnel time

– Supplies

– Mileage (if the intervention involves going into 

communit ) y

• How detailed?

– Use a PDA with time stamps by the minute Use a PDA with time stamps by the minute– Half hour intervals

• How much of a burden does this impose on those 

How much of a burden does this impose on those 

implementing the intervention?

• Good if service is new and there is no standard 

rei b t d i t t d i l i 

imbursement and we are interested in exploring 

service between patient variation
Micro Costing Example #1

• Sometimes the method of tracking person

follows a patient

• Preschool child screening for vision disor• Children were screened by different perso

usi diff t d i ing differen

t

devices

– Each child received multiple screenings

• Time stamp at each location where the ch

sheet was stamped at the start and end o

screening

• Easy compliance
Micro Costing Example #2

• RCT comparing two surgical interventions 

women with dysfunctional uterine bleedin

•

A 24 page form that asked about every ph

resident, scalpel, basin and other resourc

• T h i f ti Too muc

h in

formation

• Not good compliance

• Huge burden
Micro Costing Example #3

• In an international setting we simple aske

estimate time at the level of half a mornin

wh l i d th f th ft h

ole morning an

d the same 

for the after
Micro Costing Example #3

• Social work intervention with time stamps 

activities, particularly when calling clients

–

As long as the time stamp is more or less 

the information system there is high com

• Otherwise, asking staff to fill out time dow

minute is likely to be over burdensome
Micro Costing Example #4

• Study of nurses and community health wo

intervening with low income mothers

• Staff recorded time out and time in from e

home visit (and each unsuccessful attemp

• St ff d d ti th h St

aff recor

d

e

d time on the p

hone

• Staff recorded mileage

• Problem with multi-tasking
Micro Costing Example #5 

• Gathering data on pediatric asthma medic• Contacting many pharmacies around Balt• Incredible effort
Regression Analysis

• Often secondary analysis of a large data 

which a specific condition is identified

• Data are usually self-reported• Not necessarily good for understanding c

parti l t t t ticular 

trea

tmen

t

• Can be very useful for understanding the 

condition when looking at prevention of thcondition when looking at prevention of th

condition

• The level of detail available (total charges 

The level of detail available (total charges

costs, cost by category of service) varies stud

y to the next
Regression analysis example

• Cost of obesity has been studied using th

Medical Expenditure Panel Survey data

– Large national survey data set at AHRQ

• Compare people who are obese or overw

with people who are not

• Multivariable regression

•

Analyzing costs this way can be tricky as 

distributions are non-normal, there may b

zeros and the analytic techniques are nozeros, and the analytic techniques are no

straightforward
Cost Calculations Over Time

• If have old data, need to bring up to date 

inflation

– Overall consumer price index

– Medical care

– Region specific– Producer 

price index?

• For calculations of present value the tech

are well developed and are fairly straightf

with an spreadsheet program
Conclusions

• Many options on how to calculate costs• Many purposes for which costs can be ca• Choice of best method will depend on the 

purpose, the perspective, and the tradeof

b d th t ill b i d burden that will be imposed on research 

 s 
Empirical and Modeling

• Empirical costs are preferred for many re• There are some situations in which a com

of empirical data is used to generate a mothe model is the best information we have comparing costs of different interventions comparing costs of different interventions

• Modeling is viewed as acceptable• Usually part of a decision analysis model Usually part of

a decision analysis model
For an Excellent Overview

• Medical Care • July 2009 • Volume 47 • Issue (7 Suppl 1)• A collection of articles from a conference 

AHRQ to discuss costing methods and is