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

Costing MethodsMark W. Smith, PhDAssociate Director VA Health Economics Resource Center

Focusing QuestionWhat is the cost of a health care intervention?

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

Cost of Health CareOutside of health, most items that we purchase daily have a readily observable cost

Not true with health careInsurance buffers patient from true cost Charges, payments may not equal cost

Cost Estimation Approaches

Two general approaches to costing:MicrocostingAverage costing (gross costing)

Estimating Costs: Micro-costingDetermine each input, find its price, then sum (quantity*price) across all inputsDSS uses this approachResearchers use this approach in some circumstancesGold standard but resource intensive

Estimating Costs: Average CostingOver a long period, divide total cost by total units of care providedLess precise than micro-costing

Costing SpectrumDirect measurementPseudo-billReduced list costingCost regressionEstimate Medicare paymentAverage cost per daymicroaverage

Microcost method 1Direct Measurement

Direct MeasurementUsed to the find the cost of: interventionscare unique to VA (e.g., CSP 519)MethodMeasure staff activityFind labor costFind cost of supplies, capital, overhead

Finding Unit CostAverage cost Total program cost/number of unitsAssumes homogeneous productsRelative Values needed for heterogeneous productsFind Relative Value of each productFind cost per relative value unit (RVU)Use this to find cost of each product

Staff Activity AnalysisMethods of finding staff activitiesTrack staff activity in a log Estimate activity

Need not be comprehensive; can sample activity

Estimate labor costDirect Measurement

Characterizing Staff ActivitiesCost of patient care may include non-patient care time

Activities that produce several products may need to be included, depending on perspectivee.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 IncludeExclude development cost

Exclude research-related costs

Should measure when program fully implemented

Should measure at constant returns to scaleDirect Measurement

Direct vs. Indirect vs. OverheadDirect 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. OverheadIndirect: sometimes means overheadsometimes 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

DiscussionWhich of these should be included in the cost of an intervention? Non-salary benefits Secondary impact on other health care services Overhead costs

Other CostsSurvey or actual measure of supply costsAlternatives for overheadCost report dataStandard ratesAlternatives for capitalCost reportRental ratesDirect Measurement

Microcost method 2Pseudo-Bill

Pseudo-billItemize all services utilized/provided

Use schedule of cost/reimbursement for each service

Example: HERC outpatient costsItemized all CPT codesUsed relative value weights to assign costs to procedures

Microcost method 3Reduced List Costing

Reduced List CostingSome utilization items in pseudo-bill explain most of variation in coste.g., surgical procedures

Costing major items may be sufficient

Schedule of cost/reimbursement must be adjustede.g., new rate for surgical procedures that includes cost of laboratory services

Microcost method #4: Cost Regression

Cost RegressionDependent variable is charges or cost-adjusted charge from non-VA dataIndependent variables:Clinical informationDiagnosis Related GroupDiagnosisProceduresVital status at dischargeLength of stayDays of ICU careAnything that predicts cost and is in both datasets.

Transformation of Dependent VariableCost data are frequently skewedSkewed errors violates assumptions of Ordinary Least SquaresError terms not normally distributed with identical means and varianceTransformation Typical method: log of costCan make OLS assumptions more tenable

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

HERC Web Site FAQs E1. How do I estimate costs with a clinical cost function? http://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.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 ReimbursementsPart A -- Prospective Payment for Inpatient Stays

Part B -- Payment for Physician Services to Inpatients

Medicare Inpatient Facility PaymentDRG-based payments adjusted byDisproportionate share payments Indirect medical educationGeographic 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 paymentRequires 6-digit hospital PPS (identifier)DRGAdmission 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 listMultiple CPTs assigned to a single group-APCSome 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 MeasurementAssumptionsActivity survey and payroll data are representativeMay assume all utilization uses the same amount of resources

AdvantagesUseful to determine cost of a program that is unique to VA

Disadvantages Limited to small number of programsCant find indirect costsCant find total health care cost

Pseudo-billAssumptionsSchedule of charges reflects relative resource useCost-adjusted charges reflect VA costs

AdvantagesCaptures effect of intervention on pattern of care within an encounter

Disadvantages Expense of obtaining detailed utilization data

Reduced List CostingAssumptionsItems on reduced list are sufficient to capture variation in resource useCost of items on reduced list is accurate

AdvantagesRequires less data than pseudo-bill

DisadvantagesNeeds to find data on cost associated with items on reduced list

Cost RegressionAssumptionsCost-adjusted charges accurately reflect resource useThe 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 paymentsAssumptionsMedicare payments reflect average cost for a population; your sample is generalizableRVU captures effect of intervention on resources used

Advantage: easy to understand

DisadvantagesAccuracy limited VA may have different cost structures from average non-VA facilitiesInpatient: doesnt reflect variation in resources beyond DRG (or LOS)

Combining MethodsNo single method may fill all needs, even within a single study

Hybrid method may be bestDirect method or pseudo-bill on utilization most affected by interventionCost regression or Medicare payment for other utilization

Discussion CSP 519 compares Separate PTSD and smoking cessation visits Combined PTSD and smoking cessation visits

What are some costs that you could estimate by an average-costing approach? Is there anything that might need to be measured directly?

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 sessionWednesday, 5/16/2006, 2 p.m. ETEstimating the Cost of Health Care: VA CostsPaul Barnett, PhD

Reading for next session:M Gold et al. Cost-Effectiveness in Health and Medicinepp. 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