HERC: Measuring the Cost of a Program of Practice: Microcosting
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Measuring the Cost of a Program of Practice: Microcosting

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.

Common Direct Measurement Methods

Below are some common direct measurement methods. Each page includes background on common concerns when measuring in each area and resources for extra information.

Additional Resources

Microcost Methods for Determining VA Healthcare Costs:The purpose of this guidebook is to introduce researchers to microcosting, a set of related methods for determining the cost of healthcare. It explains microcost methods and provides guidance on using them with data produced by the Department of Veterans Affairs (VA), but many of the principles that are described apply to other healthcare systems.

Determining VA Capital Costs

Estimating Travel Costs

Estimating Caregiver Time

Measuring Staff Activities

Measuring Patient-Incurred Costs

Suggested References

HERC Bibliography of VA Cost Studies: Use Microcosting

Feldstein, M., Dicks-Mireaux, L., & Porterba, J. (1983). The Effective Tax Rate and the Pre-tax Rate of Return. J Public Econ, 21(2), 129-158.

Luce BR, Manning WG, Siegel JE. Estimating costs in cost-effectiveness analysis. In: Gold, M.R., Siegel J.E., Russell L.B., and Weinstein M.B., eds. Cost-effectiveness in health and medicine. New York: Oxford University Press, 1996.

Medicare Prospective Payment Commission ProPAC (1997). Medicare and the American healthcare System: Report to Congress. June 1997.

Phibbs CS, Luft HS. Correlation of travel time on roads versus straight line distance. Medical Care Research and Review 1995 Nov;52(4):532-542.

Rosenheck R, Frisman L, Neale M. Estimating the capital component of mental health care costs in the public sector. Administration and Policy in Mental Health 1994;21(6):493-509.

Russell LB. Completing costs: patients' time. Medical Care 2009 July;47(7 Suppl 1): S89-S93.

Smith MW and Barnett PG. Direct Measurement of health care costs. Medical Care Research and Review. 2003 Sep;60(3 Suppl):74S-91S.