HERC - Resources - FAQ - Finding and Using Healthcare Data

I. Finding and Using Healthcare Data

5. How do I cost adjust changes from private hospital data?

Often we want to analyze charge data from utilization databases, like the Healthcare Cost and Utilization Project (HCUP) or Medicare. Yet, it is generally known that in health and medicine, charges rarely equal costs. In most cases, charges are greater than costs. However, the degree to which charges exceed costs is not completely random. Hospitals and medical centers are somewhat idiosyncratic in how they generate bills.

Hence, we want to adjust the charges for two reasons:

to deflate charges so that they more closely reflect costs, and
to remove hospital specific idiosyncracies.

The ratio of costs to charges (RCC), described in detail below, is one way of making this adjustment.

Adjusting charges with the RCC leverages information that every hospital annually reports to Medicare in the Medicare Cost Report. The Medicare Cost Report is a very large report that hospitals are required to complete if they want to receive Medicare reimbursements.

Step 1

In the Medicare Cost Report, there are variables for each hospital's total charges and total costs. In the most recent Medicare Cost Report (PPS version 13), the field for charges is 2135 and the field for costs is 2138. We extracted these fields along with the hospital's Medicare identification number (PPS number). In the resulting dataset, hereafter called PPSext, each row is a different hospital and there are three columns of data: the PPS number, total charges and total costs.

Step 2

With the PPSext dataset from Step 1, the next step is to divide total costs by total charges. Recall that charges are usually, but not always, bigger than costs. The quotient (i.e., the result of dividing one number by another) is the ratio of costs to charges (RCC).

Step 3

The RCC is just a ratio, usually between 0.5 and 1.0. To actually adjust charges, you must link the PPSext dataset with the charge data. For example, if you want to use the RCC to adjust charges in a dataset such as the HCUP dataset, you must first crosswalk the RCC dataset to the HCUP dataset. This can be a complicated process, especially for crosswalking the HCUP to Medicare. Once you have crosswalked the files, then multiply charges by the RCC. Recall that the RCC is a hospital-specific adjustment. In other words, within any given hospital the RCC will be constant. Often researchers want a department specific RCC. This is even more complicated and more prone to errors.