Micro-cost Methods of Finding VA Costs

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Micro-cost Methods of Finding VA Costs

• Mark W. Smith, PhD
• Paul G. Barnett, PhD
• HERC Economics Course
• March 16, 2005

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Methods described in this talk

• Direct measurement
• Pseudo-bill
• Reduced list costing
• Clinical cost function
• Estimate Medicare inpatient payment

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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

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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

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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

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Staff Activity Analysis for Treatment Innovations

• Should not include development cost
• Should measure when program fully implemented,
  e.g., with typical productivity

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Other costs

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

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Finding VA labor cost

• Data Sources
• VA Payroll System PAID
• VA General Ledger Financial Management System
  (FMS)
• DSS ALBCC reports

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PAID

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

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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.

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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

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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

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FY2003 Salaries for Selected Job Categories
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Recommendations

• Caution! Do not double count payroll!
• Use either payroll analysis (BOC 1000-1099) or
  personnel services (BOC 1100-1199).
• Activity surveys should use job categories found
  in VA data.

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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
• www.herc.research.med.va.gov/pubs.htm

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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

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Method 2 Pseudo-bill

• Itemize all services utilized
• Use schedule of cost/reimbursement for each
  service

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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

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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

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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

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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

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Correcting Re-transformation Bias

• Model of form
• Cannot simulate cost for XXO by taking exponent
  of fitted regression

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Retransformation bias

• The expected value of cost is

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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, 605-610.

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References for Retransformation

• Manning WG, Mullahy J. Estimating log models to
  transform or not to transform? J Health Econ 2001
  Jul20(4)461-94.
• Basu A, Manning WG, Mullahy J. Comparing
  alternative models log vs Cox proportional
  hazard? Health Economics 2004 Aug13(8)749-65.
• See HERC web site FAQ response
  www.herc.research.med.va.gov/faqE2_retransformatio
  n.pdf

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Method 5 Estimating Medicare inpatient
reimbursements

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

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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

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Estimate of 1996 Medicare payments for inpatient
care
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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 www.cms.hhs.gov/providers/pricer/pricdnld
  .aspinp
• Provider IDs www.cms.hhs.gov/providers/hipps/ipps
  pufs.asppsf

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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 www.herc.research.med.va.gov/Pubs.htm

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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

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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 (6210-01). Washington
  D.C. The Urban Institute

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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 200360(3
  Suppl.)124S-141S.

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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?

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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
• Cant find indirect costs
• Cant find total health care cost

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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

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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

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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

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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 doesnt reflect variation in resources
  beyond DRG (or LOS)

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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

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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 (herc_at_med.va.gov)

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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.)