Micro-cost Methods of Finding VA Costs Mark W. Smith, PhD Paul G. Barnett, PhD HERC Economics Course March 16, 2005

Methods described in this talk Direct measurement Pseudo-bill Reduced list costing Clinical cost function Estimate Medicare inpatient payment

Method # 1: Direct Measurement Used to the find the cost of: –innovative care –care unique to VA Method –Measure staff activity –Find labor cost –Find cost of supplies, capital, overhead

Staff activity analysis Methods of finding staff activities –Time and motion study –Individual staff keeps log of own activity –Individual estimates own activities –Supervisor estimates staff activities Need not be comprehensive; can sample activity

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

Staff Activity Analysis for Treatment Innovations Should not include development cost Should measure when program fully implemented, e.g., with typical productivity

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

Finding VA labor cost Data Sources: -VA Payroll System: PAID -VA General Ledger: Financial Management System (FMS) -DSS ALBCC reports

PAID VA Payroll data Detailed to the individual Confidential, requires special permission to gain access Useful when FMS and DSS have insufficient detail

Financial Management System (FMS) FMS reports cost and hours By Station (medical center) By Sub-Account –Approximately 72 personnel types –1081 Physicians, full-time –1061 Registered nurses –Contract expenses, supplies, etc.

DSS ALBCC ALBCC = Account Level Budgeter Cost Center Draws from FMS and DSS data. Unlike FMS, includes contract labor expenses Same sub-accounts as FMS Estimated wages are typically slightly less in ALBCC than in FMS

Finding Average Compensation FMS & DSS report all labor costs, incl. benefits and employer contributions to taxes We used the end-of-fiscal-year report (Sept.) to find average employee salaries Both DSS and FMS for comparison

FY2003 Salaries for Selected Job Categories

Recommendations Caution! Do not double count payroll! Use either payroll analysis (BOC ) or personnel services (BOC ). Activity surveys should use job categories found in VA data.

Resources Full FMS & DSS data at AAC. Summary data in KLFMenu. More on FMS in Volume IV of the “Blue Books” and HERC Technical Report #12 (Smith & Velez 2003) on the HERC web site:

Finding unit cost with direct measurement 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

Method # 2: Pseudo-bill Itemize all services utilized Use schedule of cost/reimbursement for each service

Method # 3: Reduced list cost Some utilization items in pseudo-bill explain most of variation in cost –E.g., laboratory tests correlate with number of surgical procedures Reduce list of utilization items may be sufficient Schedule of cost/reimbursement must be adjusted E.g., new rate for surgical procedures, including cost of laboratory

Method # 4: Cost Function Useful for estimating inpatient cost Function is used to simulate costs –Estimated from external data on cost and characteristics of stays (not from own study data) –Obtain characteristics of stay from own study –Apply function to estimate cost of stay –Advantage: fewer variables than a pseudo-bill Disadvantage: could have large error for individual bills

Cost function Dependent variable is cost-adjusted charge from non-VA data Typical independent variables: –Diagnosis Related Group (or HCCs, ADGs, etc.) –Diagnoses (1 or more binary vars.) –Procedures (1 or more binary vars.) –Vital status at discharge –Length of stay –Days of ICU care

Transformation of Dependent Variable Cost data skewed –Skewness violates assumptions of ordinary least squares (OLS) –Error terms not normally distributed with identical means and variance –Transformation Typical method: log of cost can make OLS assumptions more tenable

Correcting Re-transformation Bias Model of form Cannot simulate cost for X=X O by taking exponent of fitted regression

Retransformation bias The expected value of cost is:

Smearing estimator for log transformed regression The right term is the smearing estimator = the mean of the anti-log of the residuals –See: Duan, N. (1983) Smearing estimate: a nonparametric retransformation method, Journal of the American Statistical Association, 78,

References for Retransformation Manning WG, Mullahy J. Estimating log models: to transform or not to transform? J Health Econ 2001 Jul;20(4): Basu A, Manning WG, Mullahy J. Comparing alternative models: log vs Cox proportional hazard? Health Economics 2004 Aug;13(8): See HERC web site FAQ response:

Method # 5: Estimating Medicare inpatient reimbursements Part A -- Prospective Payment for Inpatient Stays Part B -- Payment for Physician Services to Inpatients

Medicare Facility Payment: Inpatient Standard payment for DRG of the stay, adjusted by –Disproportionate Share Provider payments –Medical education –Capital –Outlier –Geographic adjustments Medicare pays flat rate per DRG, regardless of length of stay Cost analysis may wish to capture effect of length of stay on cost

Estimate of 1996 Medicare payments for inpatient care

Prospective Payment System PC Pricer Computer application for calculating facility payment Requires –6-digit hospital PPS (identifier)- DRG –Admission and discharge dates (= LOS) Optional: cost outlier, patient transferred Incorporates adjustments for geography, teaching, disp. share, etc. New version each year Limitations –Excludes physician payment –Payment  economic cost Pricer: Provider IDs:

Medicare Facility Payment: Outpatient Payment based on CPT procedure codes Most CPTs assigned an Ambulatory Payment Classification (APC) group with an associated cost 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 See documentation for HERC Outpatient Average Cost data:

Medicare Provider Payment: Outpatient Medicare distinguishes (inpatient) facility-based providers from (outpatient) office-based providers We assume that all VA care is facility-based Sum of inpatient facility and provider payments typically exceeds single outpatient payment

Estimate Inpatient Physician Payment Urban Institute determined average Part B physician payment –Reported as RVU weights for each DRG –Miller, M. E., & Welch, W. P. (1993). Analysis of Hospital Medical Staff Volume Performance Standards: Technical Report ( ). Washington D.C.: The Urban Institute

Which method should I use? Direct measurement Pseudo-bill Reduced list costing Clinical cost-function Estimate Medicare inpatient payment Barnett PG. Determination of VA health care costs. Medical Care Research and Review 2003;60(3 Suppl.):124S-141S.

Criteria for selecting a micro-cost method Data available? [ consent, cost to obtain] Method feasible? [ time, cost, data granularity] Assumptions appropriate? Method accurate? –Will it capture the effect of the intervention on resource use?

Method #1: 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

Method #2: 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

Method #3: 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

Method #4: Cost Function 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

Method #5: Estimate Medicare payment Assumptions –Medicare payment reflect economic cost –Inpatient: DRG captures effect of intervention on resources used Advantage: easy to implement 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 function or Medicare payment for other utilization

Resources Medical Care Research and Review 2003 (vol. 60, no. 3 Suppl.) - Direct measurement - Pharmacy data - Choosing a method  Supplement available from HERC by request HERC web site: FAQ responses, technical reports HERC Help Desk

Resources Articles on estimating the private-sector cost of services provided by VA: - acute inpatient - outpatient services - specialized inpatient- VA providers - nursing home care- assistive devices Medical Care 2003 (vol. 41, no. 6 Suppl.)