Technical Report 32: Costing Methods Used in VA Research, 1980-2012
Suggested CitationGehlert E, Jacobs J, Barnett PG. Costing Methods Used in VA Research, 1980-2012. Technical Report 32. Health Economics Resource Center, VA Palo Alto Health Care System, U.S. Department of Veterans Affairs. October 2016.
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1. Overview
The Health Economics Resource Center (HERC) of the U.S. Department of Veterans Affairs (VA) reviewed peer-reviewed publications to determine the methods and data sources used in studies of VA health care costs between 1980 and 2012. The review identified the number of published papers that used four principal methods of costing available to VA researchers and examined how practices differed in the last five years of the research that was reviewed. The review generated a bibliography of publications that used each of the four methods. The goal of this review was to identify priorities for HERC strategic planning.
HERC Average cost estimates. Comprehensive estimates of the cost of VA health services first became available in 1999 with the creation of the HERC average cost database. Prior to this time, each VA economic study had to develop its own estimate of the cost of VA care. HERC finds the expected Medicare cost of each service according to characteristics recorded in administrative data and adjusts these estimates so that they sum to the aggregate of VA health care expenditures. HERC named these data the average cost database, as they represent the national average cost of producing each service, given the characteristics recorded in administrative data. These estimates rely on measures of relative value developed for payments from the U.S. Medicare program. HERC produces estimates of the cost of inpatient stays and outpatient visits, and an annual person-level tally of costs incurred in different settings. The HERC data do not include prescriptions dispensed to outpatients.
MCA Activity based costing. VA uses activity based cost allocation, the Managerial Cost Accounting (MCA) system, to estimate the cost of every health system product and service. Staff activity, expenditures, and workload data are tracked to the level of production unit, and combined with a system of relative values to estimate costs of intermediate products (e.g. specific type of x-ray or lab test, visit to a certain clinic, or day of stay in a particular hospital unit). The cost of each encounter and each stay is found by summing all of the intermediate products used in caring for that patient. The first national data extracts from this system, which was then called Decision Support System, were released in 2000. The MCA cost estimates reflect differences between facilities in the cost of labor, supplies, and other input, as well as their efficiency in producing care. There are MCA data for each inpatient stay, outpatient visit, and prescription fill.
Micro-costing. When new health care interventions are developed, their cost is most often measured directly, as there is no established reimbursement or past record to be tracked in the activity based costing system. Direct measurement involves tabulation of the cost of staff time, supplies, and other input in a method known as micro-costing. Other methods of micro-costing include the pseudo bill method, which combines VA utilization with some measure of unit cost, and the regression method, where non-VA data have been used as parameters to estimate the cost of VA provided services.
Community care. Some care that VA provides to veterans is purchased from community providers. VA documents these purchases in a database of paid claims. In the early years of this review, this purchased care accounted for a small proportion of the total VA health care expenditures and was often ignored. In more recent years, VA spent more than 10% of its health care expenditures on this type of care. Community care was formerly called “fee basis care,” and more recently, “purchased care.”
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The full content of this technical report is available on the VA intranet only. VA employees, please visit this page at https://vaww.herc.research.va.gov/include/page.asp?id=technical-report-costing-methods. All others, please email herc@va.gov for a copy of the report.
Last Updated: April 1, 2025
