HERC: Micro
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A challenging element of cost-effectiveness analysis is the proper measurement of costs. While frequently costs incurred by patients in VA-sponsored studies can be determined through HERC average cost estimates, Managerial Cost Accounting (MCA) data, non-VA data systems, or published sources, in some cases these will not provide enough information. Summary administrative data cannot identify an individual person or intervention, and there may be no published studies of new interventions or those unique to the VA. When existing sources are insufficient, researchers can gather data through surveys and personal observation. This is called direct measurement. Common methods of direct measurement include the following:

  • A rater observes staff members or patients to determine how much time is spent on the intervention
  • A staff member fills out a log of activities relating to the intervention
  • A patient completes a survey about time spent for direct care, transportation, and unpaid care at home
  • A supervisor fills out a survey, estimating the number of hours spent onthe intervention by each type of staff member (nurse, physician, social worker,etc.)

Researchers may use direct measurement alone or in combination with other methods. In some cases direct measurement will be the only available source of information on an intervention, as when the intervention is new or unique to the VA. However, researchers may choose to use direct measurement for elements most important to the study outcome, balancing the high cost against the high level of precision, while using a less precise method like average costing for elements that are not central to the intervention.

The Financial Management System (FMS) and the MCA can be used to find the cost of employing different types of VA staff. The cost of supplies, equipment, and other expenses must also be determined. Program volume is determined from administrative records, and average cost 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.

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Measuring Patient-Incurred Costs

Patients incur costs for care in several forms: payments for transportation, copayments for care itself, and the value of time. Time is spent traveling to, waiting for, and obtaining care. Here we present a brief discussion of how to measure these costs.


Transportation costs may be captured in several ways. In many cases it makes sense simply to survey patients directly about expenditures for public transportation or taxicabs. The average for a few visits may be used to estimate the cost of remaining trips. A second approach estimates costs based on the actual travel distance. Patients are surveyed to determine the number of miles traveled, and a cost is assigned at a constant rate per mile. A commonly used rate is published by the IRS. A related method involves measuring the straight-line distance between the patient’s home and the place of service, or between the centroids of the zip codes of the patient’s home and the place of service. For further discussion of this method, see Estimating Travel Costs. Finally, note that the VA reimburses patients for some care-related transportation. From a societal perspective, reimbursed travel expenses should not be counted as a patient cost. Reimbursements may also be captured through patient surveys.


Copayments do not apply to most categories of Veterans, although a limited number of VA patients do make some payment for their care. From a societal perspective the particular payer is not a significant issue; the total payment is the same regardless of how it is divided among VA, the patient, and third-party payers. In a budget impact analysis, however, where only the provider’s costs are counted, then copayments in theory should be regarded as an offsetting income for VA. A review of VA utilization data will indicate what proportion of people receiving a particular VA service is exempt from copayments.


Interventions have a time cost even when services are provided at no charge. Patients must spend time to wait for and receive an intervention and for transportation to and from the place where it is received. Time spent by patients carries an “opportunity cost” based on the notion that time is limited. Absent the intervention patients and others would use their time for other purposes. The time spent by caregivers is also valued.

Although the VA does not reimburse patients or caregivers for their time, a cost-effectiveness analysis from a societal perspective must take patients’ time costs into account. Russell (2009) makes a number of recommendations for valuing time costs based on the U.S. Public Health Care Task Force report (Luce et al. 1996). We summarize them here and refer readers to the two references for additional information.

  • Measure time spent in all health-related activities:
    • traveling to, waiting at, obtaining care at, and returning from a health care facility;
    • home care, such as from visiting nurses, home-health aides, family, or friends;
    • self-care, including procedures, reading, exercise, and any other activity related to health that would not be done in the absence of the condition.
  • Value the time of all persons at the average national hourly wage for people of the same sex and age. If patient time is an important part of the intervention, substitute the overall national hourly wage as a sensitivity analysis.

Finally, consider using prospective studies as an opportunity to advance our understanding of time valuation. For example, a study could directly measure time values through standard gamble, time-tradeoff, or contingent valuation surveys. There are also broader issues that remain unexplored, such as the relation of time spent in health care to choices of where to live and where to work, and how time costs affect patients’ choices among alternative treatments (Russell 2009).

Estimating Travel Costs

There are several methods of calculating transportation costs. The first step is to determine is how accurate the measure of transportation costs must be. The second step is to choose a method that is feasible and can produce the desired level of accuracy. When transportation costs are very small relative to intervention costs, a reasonably accurate estimate of transportation costs across patients should be sufficient, even if it is known to have error. What methods are feasible will depend on the data available. If transportation distance is directly reported on a study form, then no more information is necessary. If distance must be estimated, the patient's zip code will be needed. Having the full street address will allow the most accurate estimation.

Transportation: cost or quality adjustment?

There is controversy over whether patient time spent in obtaining medical care should be included as a cost, or in the quality adjustments made to the years of life of survival. Most often they are included as costs. The Public Health Task Force book on cost-effectiveness analysis (Luce et al., 1996) discusses the issue.

Components of transportation cost

Cost per mile

Patients may use public or private transportation. The cost of public transportation is the fare. The cost of private transportation is not observed and therefore must be estimated. The simplest method is to multiply the number of miles traveled by a reimbursement rate per mile, such as the amount allowed by the U.S. Internal Revenue Service for business expenses. The rate may be found by searching the agency's web site. In 2012 the rate was 55.5 cents/mile.

Using the IRS rate assumes that every mile costs the same, regardless of the number of miles traveled. The analyst must decide whether these assumptions are reasonable based on the study question and the geographic areas under consideration. Most patients will use the same mode of transportation, and thus incur the same expense for every trip. For this reason, it often suffices to capture transportation details only once. However, in studies where transportation costs are relatively large, or where modes of transportation may change, it may be necessary to collect data on each trip. The investigator should examine this issue carefully; collecting data on each trip can be costly and is usually unnecessary.

Calculating transportation distance or time

Transportation distance may be measured directly, or it may be inferred from travel time. Travel distance is easier to measure than time. The distance from a patient's residence to a health care facility is fixed, whereas travel time varies with the mode of transportation and traffic conditions. Public transportation, for instance, is often slower than private modes.

As noted earlier, the analyst should also calculate the value of time spent traveling to, and receiving care. If time is measured directly, then the remaining step is to assign a value to it. If distance is measured instead of time, then one must determine a typical time based on the distance traveled.

Geographic Information System (GIS) programs

Standardized transportation times are now available for many trips within the U.S. These calculations are derived from geographic information system (GIS) programs. GIS programs can estimate the actual transportation distance with greater accuracy, but there are also errors in these calculations. The distances that GIS programs estimate depend on which roads are included in the transportation network and the logic the program uses to determine transportation routes. GIS programs sometimes choose a route that a traveler with local area knowledge would not normally take.

Using a GIS program to calculate transportation time from a patient's residence to a health care facility requires the complete address for each patient, something unavailable in most secondary healthcare datasets. Furthermore, this level of detail is now harder to obtain, given the privacy requirements of the Health Insurance Portability and Accountability Act (HIPAA). If data on complete addresses are available, it doesn't require much effort to make full use of these data. Modern GIS programs will calculate both the transportation distance and the estimated transportation time between any two points in the U.S. and in many other countries.

If full addresses are not available, the patient's zip code of residence can be used to calculate transportation time with only a small loss of accuracy. In this case the starting point will be the population centroid of the zip code instead of the patient's home.

Many sources offer the latitude and longitude of the population centroid of each zip code within the U.S. VA users may obtain these data from the Planning Systems Support Group (PSSG) intranet page (Intranet-only: http://vaww.pssg.med.va.gov) The PSSG VAST data include a dataset with locations of all VA facilities and the distances from each zip code to the nearest VA inpatient and outpatient facilities. These data also map zip codes without area (zip codes that are only for post office boxes) to the enclosing zip codes.

For Veterans enrolled in VHA, the Planning Systems Support Group (PSSG) maintains a location file that is updated quarterly with information from the US Postal Service National Change of Address file. This file uses geo-coding to estimate travel distances and travel times to the nearest VA facility that provides primary, secondary, and tertiary care. Note, some Veterans will receive care at other facilities, so the distances from this file don’t necessarily correspond to the travel distance/time for specific clinical encounters. For more information about this file, visit the PSSG web site (Intranet-only: http://vaww.pssg.med.va.gov).

To avoid obtaining a distance of zero for patients who live in the same zip code as the provider's location, add a small distance to the patient's transportation. One method is to make an adjustment based on the area that the zip code encompasses, which is included in most zip code data files. Assuming that 0.5 times the square root of the area [sqrt (Az)] is an approximation of the radius of a zip code, and that the population will tend to cluster towards the population centroid, 0.125 times the square root of the area of the zip code is one possible adjustment:

Distance within a zip code = .125 * sqrt(Az)

This will avoid assigning any patient-provider pairs with a zero distance, while providing an adjustment to distance that is based on the area of each zip code.

Straight-line distance

A straight-line distance often provides sufficient information for estimating patient transportation costs. Phibbs and Luft (1995) found a very high correlation between straight-line distances and actual transportation times for transportation on a road network. They estimated regressions to predict transportation time from distance for distances less then 15 and 30 miles. The resulting formulas were:

For distance < 15 miles: Transportation time (minutes) = 2.75 + 1.78 * distance (miles)
For distance < 30 miles Transportation time (minutes) = 3.42 + 1.70 * distance (miles)

Transportation distance will be somewhat greater than straight-line distance. Based on available information, 1.4 appears to be an appropriate adjustment factor for the short trips that represent most transportation from home to health care providers.

Calculating distance between two points

The following is based on information from a web page, "What is the best way to calculate the distance between 2 points?" written by Robert Chamberlain of the Jet Propulsion Laboratory. The formula listed below is what Chamberlain considers as the most appropriate for computing patient transportation costs.

The actual calculation of the distance between two points can be a complex problem influenced by factors such as elevation, curvature of the Earth, and the fact that the Earth is not quite a sphere. The method below is an approximation that works quite well for points fairly close to each other, which is the typical application for transportation for health care.

Presuming a spherical Earth with radius R (see below), and the locations of the two points in spherical coordinates (longitude, latitude) are lon1, lat1 and lon2, lat2, then the Haversine Formula (Sinott 1984) will give mathematically and computationally exact results. The intermediate result c is the great circle distance in radians. The great circle distance d will be in the same units as R. We provide the inverse tangent version of the Haversine Formula:

dlon = lon2 - lon1
dlat = lat2 - lat1
a = (sin(dlat/2))^2 + cos(lat1) * cos(lat2) * (sin(dlon/2))^2
c = 2 * atan2( sqrt(a), sqrt(1-a) )
d = R * c

For R, use 3957 miles (6367 km), which is the radius of curvature at 30° latitude; the use of other possible values results in very small differences. Most computers require the arguments of trigonometric functions to be expressed in radians. To convert lon1, lat1 and lon2, lat2 from degrees, minutes, and seconds to radians, first convert them to decimal degrees. To convert decimal degrees to radians, multiply the number of degrees by:

pi/180 = 0.017453293 radians/degree.

Inverse trigonometric functions return results expressed in radians. To express c in decimal degrees, multiply the number of radians by

180/pi = 57.295780 degrees/radian

(But be sure to multiply the number of radians by R to get d.)

Other Considerations

There may be transportation costs that are not captured by travel distance alone. These include costs that do not vary with distance, such as parking fees, bridge tolls, and road tolls, and specialized modes of transportation that may be required by persons with disabilities. The analyst should work with clinicians and study site teams to determine whether these will apply. Such information can be gathered from patients using survey forms.

Estimating Caregiver Time

VA patients frequently receive some form of care from unpaid caregivers, typically family members. These services have an economic value that should be measured when determining the total cost of care.

The only way to learn about caregiver time is through direct measurement. Caregivers can be surveyed in person, by telephone, or by mail. If caregiving is likely to last over many weeks, if possible it is advisable to supply caregivers with activity logs to fill out. The goal is to determine the total time spent on the patient due to the condition under study. This includes time spent providing care, time spent on the person's behalf, and time spent accompanying the patient to medical appointments. In some cases the condition of interest may not necessitate any extra time above and beyond what the patient would have received absent the condition. In that case there would be no extra (or incremental) cost due to this condition.

The next step is to assign a value to caregivers' time. If the person is employed, a reasonable measure is his or her hourly wage. This information can be requested on a survey or in person. To find hourly earnings, divide the annual earnings by 2088 for full-time workers. For part-time workers, multiply the average hours per week times the number of weeks worked per year to determine the hours worked per year, and then divide total earnings by that amount.

If the caregiver is not employed or refuses to divulge earnings information, it will be necessary to find another reasonable value. Much unpaid caregiving consists of household chores, light medical procedures, and accompanying patients to medical appointments. One option is to assign the average cost of a home health aide. The U.S. Bureau of Labor Statistics (BLS) develops monthly statistics on average wages for hundreds of occupation classes. "Home health care services," job class 6216, had an average hourly pay rate of $16.63 per hour in September, 2010. (For data on other months, visit the BLS web site. Mouse over Tables and Charts on the left, then choose Employment and Earnings Tables and look under Seasonally Adjusted Data.) Although local or regional wages would be more accurate for a specific locale, using a national average will increase the external validity of the result. In sum, to determine the value of unpaid caregivers' time, you will need to collect the following information:

  • Number of hours spent giving care beyond what would occur in the absence of the condition under study.
  • If employed, one of these: a) hourly earnings rate; b) for full-time workers, total annual earnings; c) for part-time workers, total hours worked per year (or month, or week) and total dollars earned for the same time period.

As with any direct measurement procedure, it is good practice to carry out sensitivity analyses. Try changing the wage rate used, for example, and see how much your final result changes. When reporting results, include a statement about the sensitivity.

Measuring Staff Activities

When existing sources are insufficient, researchers can gather data through surveys and personal observation. This is called direct measurement.

Level of Analysis

The costs of an intervention may be analyzed at many different levels: the cost per intervention, per clinic visit or hospital stay, per patient contact, per day, and so on. The choice of analysis level should be guided by the researcher's ability to collect data with accuracy and precision, and by the cost of data collection.


Time and Motion Study

In this approach, the analyst directly observes the staff members and keeps track of the time spent on each activity throughout the day. Observing staff members can yield very precise results. Variation in staff activities may necessitate the calculation of an average day based on a random sample of many days.This can be costly because observers must be paid for their time both in training and in data collection.

Activity Logs

A second approach is to have employees keep daily activity logs for a sample of survey dates. The staff members record activities during each 30-minute interval of work (or 15-minute, 10-minute, etc.) and characterize whether the activities involved the intervention being studied, or some other activity. As with time-and-motion studies, accuracy and precision can be high but training is essential. Time logs carry additional administrative burdens as well: developing and pre-testing the survey instrument with allowance for staff members' input, training staff members to use the logs, and following up to ensure that logs are completed and gathered. It may be necessary to survey program managers beforehand to learn which staff members will need to complete logs.

It may not be necessary to use activity logs for every day of an intervention, particularly if it extends for weeks or months. A random sample of days will suffice, but the sampling frame must be designed with care. If an intervention becomes less intensive over time, for instance, basing an estimate on activity logs from the early days of the intervention would lead to an overestimate of total time spent.

Manager Survey

A third method for gathering staff data is to survey managers. The surveys can collect two types of information: the number of full-time-equivalent employees involved in the intervention, and the number of hours spent on the intervention per day or per week. In order to calculate staff compensation costs accurately, separate responses should be obtained for each category of employee involved: registered nurses, physicians, lab technicians, and so on.

Manager surveys are common because they take less time to prepare or complete. A single manager can report on activities of many staff members, and so another advantage is the relatively small number of people who must be surveyed. The primary drawback of manager surveys is a relative lack of accuracy and precision. Managers may have a good sense of the number of days spent on the intervention in a week, for example, but probably will not be accurate at the level of hours or half-hours. The quality of data from manager surveys depends on the effort of the mangers themselves. Manager surveys are not advisable when high precision is needed or when many managers would have to be surveyed to cover the actions of all staff members involved.

Combining Methods

It is often advisable to use two or more methods in the same study to limit resources needed to estimate costs while obtaining an acceptable level of precision and accuracy. For example, an analyst might use staff surveys or study logs to determine the number of times an intervention occurs. Precise time estimates for the intervention would then be obtained by directly observing staff members on a small number of days.

Calculating Employment Costs

Once time spent on an activity has been determined, the next step is to assign a cost to that time. Although hourly or annual earnings may be obtained through surveys, they will not be accurate guides to the total employment cost. Benefits, taxes, and time spent on overhead activities are all parts of the true employment cost; yet employees may have little information on costs incurred by their employer.

It is straightforward to determine hourly employment costs. The first step is to determine annual labor costs, including both wages and benefits, assuming a 40-hour workweek. To find the raw hourly cost, divide the annual cost by 2088, the number of hours in a 52-week work year. The raw figure includes time spent on activities other than patient care such as vacation, sick leave, and administrative work. Because such non-applied time must be spent in support of carrying out an intervention, it is necessary to adjust the hourly cost to reflect this extra cost. For additional information, see the HERC micro-cost guidebook and the section, "Cost of Employing Specific VA Staff".

Other Costs

The costs of supplies and equipment may be gathered through manager surveys or by contacting manufacturers. Two factors should be kept in mind when obtaining supply costs: supply and equipment costs may fall if a new intervention is widely adopted, and the list price of a good may greatly overstate the cost of supplies and equipment because large providers like VA frequently negotiate substantial discounts.

VA capital costs through FY2004 were available in the Cost Distribution Report (CDR), which provided the depreciation on VA buildings and equipment, but omitted the cost of financing (Barnett 1999). The CDR has been replaced by the Monthly Program Cost Report (MPCR). It is not reconciled to reliable data sources and thus should be treated with caution. VA employees may access CDR and MPCR data through the Austin Information Technology Center (AITC), formerly known as the Austin Automation Center.

One must also account for the cost of space. The value of the next-best alternative use of a building can be determined by the cost of renting similar facilities or by the replacement cost of the VA facilities used in the study. Estimates of land values and rental rates for medical office space may be obtained from real estate agents or other local sources. The replacement cost of current VA facilities may be estimated through a combination of VA financial data and proprietary commercial data (Rosenheck, Frisman, and Neale 1994).

Accuracy and Precision

Accuracy in gathering data is an important consideration. Even small errors in reporting can accumulate if many separate people take part in the intervention. If an activity log requests staff members to list tasks in 15-minute intervals, how will they record interventions that take 5, 10 or 20 minutes? Total intervention time will be underestimated if they round down to the nearest 15-minute interval or overestimated if they round up. Small individual errors can become large if the same upward or downward bias is repeated many times. Solutions include using a more precise measurement system that collects data in 5-minute intervals, using direct observation by a third party who can note the exact time spent, and asking staff members to tally which actions occurred and then assigning each action an average time based on a few direct observations.

The level of precision needed in data collection will depend on the intervention. Consider an intervention that takes 15 minutes to perform. In an outpatient setting it may be sufficient to use a survey that records time in 15-minute intervals. The overhead cost of surgery suites is typically billed by the minute, however, and so for surgical interventions the instrument would need to record time at the minute level. Billing methods are thus a second guide when designing survey instruments.

The Comparator

In a cost-effectiveness analysis an intervention will be measured against a comparator, whether "usual care" or another new treatment. This highlights the need to clearly define the production process of the intervention, the steps taken by each person involved and the expected amount of time devoted to each. Staff time for the intervention and comparator arms must be measured in similarly accurate and precise ways. Researchers must scrutinize data collection methods to avoid bias that might favor one treatment arm, given possible incentives for patients or providers.

Joint Production

In some instances a single product is produced simultaneously with other products. Consider the time of a nurse involved in a clinical research trial. Suppose that patient care activities unrelated to a research protocol take up 25% of the nurse's time; activities which benefit both research and patient care take 50% time; and activities only needed for the research protocol take the remaining 25%. An analyst could justifiably assign as little as 25% or as much 75% of the costs of this time to research. Which figure is appropriate depends on the question being asked. For example, the percentage of time that would be released if research activities ceased is only 25%.

Additional Information

The HERC web site features several documents with information on direct measurement: the HERC guidebook to micro-costing, an article by Barnett published in a 2003 supplement to Medical Care Research and Review, and an article by Barnett from a 2009 supplement to Medical Care.

Cost of Employing Specific VA Staff

CDW Disclaimer

VA data, including HERC data, are currently in transition to the VA Corporate Data Warehouse (CDW), a national VA data repository. The National Data Systems (NDS) oversees the request and approval process through the Data Access Request Tracker (DART) system. For more information on data available at CDW and the current request procedures, please see the VHA Data Portal (Intranet-only: http://vaww.vhadataportal.med.va.gov).

This FAQ briefly describes the four sources of employment costs: Federal salary schedules, the VA general ledger (FMS), the Managerial Cost Accounting (MCA), and the VA payroll system (PAID). It also explains the creation and use of applied hourly compensation rates.

Employment Cost Sources

Federal Schedule

If an employee's grade and step is known, the gross annual salary may be obtained from Federal salary schedules. These schedules are available on the Office of Personnel Management (OPM) web site. Note, in addition to a general wage table, the OPM web site also has tables for the geographic adjustment of wages.Employers also pay taxes, contribute to insurance premiums, and make other benefit payments. Researchers at the Palo Alto VA medical center estimate that these additional costs equal 30% of salary. Thus a reasonable estimate of annual employment costs is 130% of the gross annual salary.


A more precise estimate may be obtained from the Financial Management System (FMS), also known as the VA general ledger. FMS reports all labor costs including benefits and employer contributions to taxes. Because FMS tallies the number of hours worked, the average cost per hour of work can also be determined.

Employment hours and costs may be determined separately by facility and occupation type (also known as the Budget Object Code, or BOC). Data are reported separately for each VA facility, allowing researchers to determine local costs in addition to national averages. The data are also divided into scores of BOCs, of which 72 values refer to different occupation types. For example, BOC 1081 represents full-time physicians and BOC 1061 represents registered nurses. By limiting the range of BOCs, researchers may determine costs for particular occupation types. FMS lacks specificity in some staffing codes, particularly for administrative personnel. A diverse group of administrative employees with a wide range of salaries is represented by a single code.

FMS data are stored by the Austin Information Technology Center (AITC) and may be accessed through special computer accounts. Accounts are approved locally through the Information Security Officer (ISO) at each medical center. VIREC has prepared a tutorial on using AITC files. See the HERC guidebook on FMS which lists relevant files with variable names and formats.

Managerial Cost Accounting Extracts

The Managerial Cost Accounting (MCA; formerly Decision Support System (DSS)) is a utilization and cost database system implemented at every VA facility. Extracts from the local MCA systems are combined to create a set of National Data Extracts (NDEs). The NDE for inpatient and outpatient care contains both labor workload (hours) and expenditures. These figures may be used to calculate average wages. As with FMS, the MCA NDE data are available by facility and by BOC.

HERC staff have prepared a technical report on determining wages for VA employees. It describes how to access FMS and MCA data through the VISN Support Services Center (VSSC) web site, also called the "KLF Menu". A table in a supplemental document shows average annual and hourly wages by BOC for fiscal years 2000-2008. This work was continued in the HERC guidebook "Researcher's Guide to Estimating VHA Labor Costs", including a supplemental Excel file comparing hourly wages by BOC for fiscal years 2000-2016.

HERC staff have also prepared a guidebook that provides information on how the MCA Account Level Budgeter (ALB) National Data Extract (NDE) is created, how to access the ALB, and describes variables in the ALB.


The VA payroll system, PAID (Personnel and Accounting Integrated Data), has specific information on payroll and human resources characteristics of every VA employee. Among many data elements unique to PAID are highest educational degree, immigrant status, and T&L (time and leave) code that identifies the specific department or section in which the employee works. PAID data are highly confidential. Access to them is strictly controlled and not guaranteed. Investigators with a demonstrable need for PAID data and very strong data-security procedures may request access; contact HERC for further information. See the guidebook on PAID data.

Applied Time versus Total Time

We can divide an employee's total hours at work into applied time spent on direct patient care and related activities, and overhead time for administrative tasks unrelated to care (e.g., serving on institutional committees), sick leave, annual leave, holidays, training, and any continuing medical education (CME) that occurs during scheduled work hours. We may refer to the ratio of applied time to total time as the applied rate. There are 261 weekdays in a year, and thus someone who has 26 days of overhead time has an applied rate of about 90%. If there are 8 hours per workday, a 90% applied rate corresponds to 1879.2 hours of applied time out of 2088 total hours.

The applied rate plays a role in figuring staffing costs. The cost of staff time is meant to measure an employer's cost of performing the intervention. Interventions always constitute applied time. If nurses have an average applied rate of 90%, then in theory no more than 90% of a nurse's time could be spent on an intervention. When figuring the cost of an intervention, therefore, one must calculate the hourly applied cost, equal to the total annual cost divided by the total number of applied hours:

Hourly applied cost = total annual cost / total applied hours

The applied cost simply recognizes that employees spend time on overhead activities like sick leave and administrative work. As a result, less than 100% of a person's time can be spent doing clinical work. Suppose that a VA registered nurse has a 90% applied rate and a total annual cost of $71,500. If she works 2088 hours per year, her hourly total and applied costs will be as follows:

Hourly total cost = total annual cost / total hours
= 71500 / 2088 = $34.24
Hourly applied cost = total annual cost / total applied hours
= 71500 / (2088*0.90) = $38.05

The actual applied rate varies by person due to differences in annual leave and sick leave, supervisory duties, and other factors. Full-time regular VA employees are generally eligible for at least 13 days of annual leave and 10 Federal holidays, yielding a maximum applied rate of approximately 91% if all leave is taken. Registered nurses earn more annual leave, however, and many states require physicians and nurses to undertake as many as 50 hours of CME per year. Thus an applied rate of 85-90% for non-medical staff and 80-85% for licensed medical staff is more realistic. A survey of staff members concerning their applied rate when at work would provide more accurate estimates but might not generalize to other VA facilities or sites outside the VA.

Published analyses must state clearly what applied rate was assumed for each type of employee in the analysis. A brief explanation of the distinction between hourly total cost and hourly applied cost will benefit readers unfamiliar with the concept of applied rates.

Determining VA Capital Costs

Capital-- the cost of buildings and equipment-- is an important part of healthcare costs. In 1997, capital payments made up 11.1% of the Medicare payments to U.S. hospitals covered by the Prospective Payment System (Medicare ProPAC, 1997). Economic analysis must consider this cost, which includes both depreciation and financing.

To estimate the cost of capital needed for a specific intervention, an analyst can estimate the rental cost of capital by finding comparable leasing costs. An equipment manufacturer can be asked for the annual cost of leasing the equipment, including the cost of maintenance support. A commercial real estate rental agency can be asked for information on the monthly cost of leasing medical office space.

A more specific method of finding the rental cost of capital requires information on the acquisition cost of the equipment, the length of its useful life (L), and the real rate of return (r). The useful lifetimes for capital goods are described in the regulations of the U.S. Internal Revenue Service. These are used to calculate depreciation for taxation purposes. The lifetime of equipment generally ranges from 3 to 10 years. Buildings are depreciated over a 30 year lifetime. The real rate of return on U.S. capital has been found to be 11.5% (Feldstein, Dicks-Mireaux, & Porterba, 1983).

A simple approach to find the rental cost of a single piece of equipment would be to calculate the payment on a loan to acquire the equipment over its lifetime. This could be done using the PMT function in MS Excel.

The more exact approach is to find the real (inflation adjusted) rental cost of capital. The rental cost (C) is this rental rate (R) multiplied by the real value of the capital stock (K). The capital stock is the acquisition price, less the cumulative depreciation. By real capital stock, it is meant that the value of the capital stock has been adjusted for inflation. It is transformed from a nominal value to a real value by adjusting for inflation, that is, multiplying the nominal value by the base year price index and dividing by the current year price index.

To find the "rental rate" for capital (R) requires information on the rate of return (r), the lifetime of the capital good (L), and the price index for the year in question (P). The formula for the rental rate is:

Formula for rental rate

where e is the base of the natural logarithm (~2.71828).

VA capital costs

VA accounting of assets only considers the purchase price, not the cost of financing a purchase. This is because the financing cost is borne by another Federal Agency. VA calculates the depreciation of assets, but does not estimate the cost of financing their acquisition. The U.S. Treasury Department sells bonds to raise money to make these purchases. The treasury pays interest on these bonds--an economic cost that should not be ignored.

VA assets data

The VA budget for major capital purchases is separate from its operating budget for medical care. VA maintains a database of capital acquisitions, called the Fixed Asset Package. These data can only be accessed by VA researchers who obtain appropriate permission. They are kept as a text file at the national VA computer center in Austin, Texas. This file is periodically distributed on CD-ROM to VA financial officers. The database includes the name of the assets, when they were purchased, where they are located, their useful lifetime, their current year's depreciation, and the balance of their remaining undepreciated value. The Fixed Asset database is the source of the annual depreciation costs used to find MCA costs.

Finding the Budget of a VA Medical Center

If you wish to find the expenditures of the medical care appropriation for past years, you should tabulate the Financial Management System (FMS) or the MCA Account Level Budget Center Cost Center (ALBCC) database. Tabulations are easily accessed from the VISN Support Service Center MCA reports page.

Past year expenditures

Total expenditures by station for past years can be obtained from the summary VA general ledger, the FMS system. The FMS gives total expenditures for each medical center, including the medical care appropriation, as well as other VA funds, e.g., research funds.

The best source of information by patient care department is available from MCA. Department level costs are available from ALBCC. It is also possible to find the mean cost of each outpatient clinic (characterized by three digit MCA identifier, the clinic stop), and the mean cost of days spent in each type of inpatient unit (characterized by two digit MCAtreating specialty code, also known as the bedsection). This information is easily obtained from VSSC reports.

Current and Next Year's Allocations

The current and next year's allocation of medical care appropriation to each network is found at the Allocation Resource Center website (Intranet-only: http://vaww.arc.med.va.gov).

The networks office or the fiscal office of a medical center would be able to provide anticipated expenditures (budget) at the facility level.


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