B. Overview of VA Cost Methods

1. Which method should I use to find VA costs?

VA researchers and analysts have several methods to estimate the cost of healthcare encounters. These alternatives include micro-cost methods, average costing, and the using the Decision Support System. The method that is used depends on the goals of the study, the degree of accuracy required, and the resources available. As VA does not routinely prepare patient bills, VA does not have a charge database that can be used to estimate costs. Jump to an overview of cost methods.

Micro-Cost Methods

This method includes three approaches: Direct measurement, preparation of pseudo-bills, and estimation of a cost function.

Direct measurement

Direct measurement is used to determine the cost of new interventions and programs unique to VA. Inputs such as staff time and supply costs are directly measured to develop a precise cost estimate. The time of each type of staff is estimated and its cost determined from accounting data, such as VA Financial Management System (FMS) data. The analyst may directly observe staff time, have staff keep diaries of their activities, or survey managers. The cost of supplies, equipment, and other expenses must also be determined. Program volume is determined from administrative records, and the average cost is estimated. When units of service are not homogenous, unit costs may be estimated by an accounting approach, by applying estimates of the relative cost of each service, or via an econometric approach.

Pseudo bill

The pseudo-bill method combines VA utilization data with unit costs from non-VA sources to estimate the cost of patient care. This is commonly referred to as the pseudo-bill method, because the itemized list of costs is analogous to a fee-for-service hospital bill. The unit cost of each item may be estimated by using Medicare reimbursement rates, the charge rates of an affiliated university medical center, or some other non-VA sector source.

Cost function

The cost function method requires detailed cost and utilization data for a specific, non-VA service to simulate the cost of a comparable VA service. If suitable non-VA data are available, a function can be estimated using cost-adjusted charges as the dependent variable and information about the encounter as the independent variable. VA costs are simulated using VA utilization data and the function's parameters. Its chief advantage is that it requires less data than is needed to prepare a pseudo-bill, making it a more economical way of micro-costing.

Decision Support System

The Decision Support System (DSS) is a computerized cost-allocation system adopted by VA. DSS staff are undertaking the difficult task of allocating costs to VA healthcare products and patients' stays. DSS is an extremely useful source of VA cost information. Validation is an important step in the use of DSS data. To date, validation work with DSS suggests that analysts should not rely exclusively on DSS cost estimates.

Average cost methods

This method combines relative values derived from non-VA cost datasets, VA utilization data, and department costs obtained from the VA Decision Support System (DSS). Every encounter with the same characteristics is assumed to cost the same. Average cost estimates are needed because detailed micro-costing is too time-consuming and laborious a method to apply it to all possible healthcare utilization. In many studies, and for some of the healthcare utilization in nearly every study, an "average cost method" can be used. HERC has refined average cost methods to estimate the cost of all VA health encounters since October 1, 1998. The cost of acute medical and surgical care is estimated using measures of relative value estimated from a cost-function created from Veterans' stays in Medicare hospitals. The cost of long-term care reflects estimates of the relative resource use associated with case-mix measures from period assessment of VA long-term care patients. The cost of outpatient visits is estimated using the payments from Medicare and other payers as a measure of relative value.

Which method is best?

The best method to use depends on the level of accuracy required, and the levels of resources available (jump to Table B1.1 listing the advantages and disadvantages of each method). Micro-costing methods are accurate, but expensive to employ. Average cost methods are easier to undertake, but the cost estimate may not fully reflect how the intervention affects the resources used in providing care. In fact, it is often appropriate to use mixed methodologies in the same study. Usually one uses a micro-cost method to estimate the cost of care associated with an intervention or the issue under study, and a simpler average cost method to find the cost of other unrelated care.

The analyst must consider whether the assumptions used to create average cost estimates are appropriate to all utilization data within the study; for example, whether the intervention might affect the cost of hospitals stays in a way that will not be captured by the DRG or length of stay, or whether it will effect the cost of ambulatory visits in a way that will not be captured by the relative value units associated with CPT codes.

Estimates of outpatient costs based on average cost methods do not reflect the cost of prescription drugs. The cost of prescriptions may be found in the DSS national data extracts, or they may be compiled from the Pharmacy Benefits Management database.

It is uncertain if the VA national outpatient utilization databases include all outpatient care. It is possible that they understate laboratory tests and prosthetic supplies. If this is true, then analysts who need an estimate that reflects this type of utilization must turn to micro-costing. Orders for laboratory tests must be extracted from the VISTA system. Prosthetics data are kept in a national prosthetics database.

Table B1.1 - Overview of Cost Methods

Method	Source of Data	Assumptions	Advantages/Disadvantages
Pseudo-bill	Detailed utilization data Schedule of charges adjusted for cost	Schedule of charges reflects relative resource use Cost-adjusted charges reflect VA costs	Pro: Captures effect of intervention on pattern of care within an encounter. Con: Expense of obtaining detailed utilization data Charge schedule may not represent VA costs.
Cost function based on non-VA data	Previous study with cost-adjusted charges and detailed utilization Reduced list of utilization measures previously identified as important	Same as for pseudo-bill The relationship between cost and utilization is the same in the current study as in the previous study	Pro: Less effort to obtain reduced list of utilization measures than to prepare a pseudo-bill. Con: Must have detailed data from a prior study, may result in error or bias.
Direct measurement	Staff activity analysis Payroll data on labor cost Estimate of supply costs	May assume all utilization uses the same amount of resources	Pro: Useful to determine cost of a program that is unique to VA. Con: Limited to small number of programs, can't find indirect costs, can't find total healthcare cost.
HERC average cost per inpatient day for psychiatric, rehabilitation, and long-term care	Patient Treatment File and aggregate cost from DSS.	All inpatient days have equal cost	Pro: Simple, may be accurate for psychiatric and rehabilitation stays. Con: Doesn't capture case-mix variation in long-term care.
HERC average cost of acute medical and surgical stays	Patient Treatment File and aggregate cost from DSS Relative Values from Analysis of Cost of Veterans' Medicare Stays	VA use of resources for different diagnoses and lengths of stay are the same as for non-VA hospitals	Pro: Avoids bias of assuming all days of equal cost, can estimate cost from administrative data. Con: Only appropriate for acute medical and surgical stays. Not sensitive to all sources of variation in resource use cost.
Average cost per clinic visit	Outpatient Care file and aggregate cost from DSS	All visits have the same cost	Pro: Can estimate cost from administrative data Con: Does not capture variation in ambulatory care cost
HERC outpatient average cost method	Outpatient Care File and aggregate cost from DSS	All visits with the same CPT codes have the same cost	Pro: Can estimate cost from administrative data Con: Assumes that VA characterizes care with appropriate CPT codes, and that non-VA charge schedules represent VA relative cost of production.
Decision Support System	DSS national extract or DSS production data	DSS accurately assigns costs, finds relative value units, and identifies utilization	Pro: Staff at each facility develop estimates of department costs, products and encounters. Con: Needs to be validated, some known problems.