HERC: Comparing VA vs. Non-VA Costs
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Comparing VA vs. Non-VA Costs

Comparing Medical/Surgical Stays in the VA to Non-VA Stays

It may be of interest to researchers and others to compare VA stays with non-VA stays.  While options include comparing VA discharge records from the PTF Main file or the MCA Discharge file to non-VA inpatient data, such as the Medicare or HCUP, you would be comparing apples and oranges. The reason is quite simple: VA and commercial hospitals define a hospital discharge differently.

Consider Joe, an older veteran, who is admitted into a medical bedsection/treating specialty with a broken hip. During the stay, Joe gets surgery, spends a few days in the ICU, recovers some more in medicine and then spends some time in the nursing home before Joe is discharged to home. If Joe received this care in the VA, all of the care is included in a single discharge record. But if Joe was admitted to a commercial hospital instead, he would not be transferred from medicine to nursing home. Rather Joe would be discharged from the medical/surgical hospital. Joe’s care in a nursing home would be captured in a separate discharge record. Commercial hospitals would have two discharge records for Joe, whereas the VA reported this information in one record.

If you want to compare VA discharges to non-VA discharges, you will need to reorganize the VA data. We have developed a SAS program that uses the VA bedsection files and outputs a medical-surgical discharge file that is more comparable with non-VA data files (e.g., Medicare’s Medpar or the HCUP data). The program performs a number of functions, such as recalculating length of stay, identifying the highest DRG weight from multiple bedsections, and calculating number of days spent in intensive care (ICU). The SAS code is available upon request.


Comparing VA Costs to the Cost of Non-VA Providers

There are a number of reasons to compare the cost of VA care to the costs of other providers. VA users often obtain additional care outside the VA system through Medicare, Medicaid, or other forms of insurance. This “dual use” is particularly common among veterans eligible for Medicare. A natural question, therefore, is how VA costs compare to those of Medicare-funded services. Policy makers are also interested in learning whether it is more efficient for VA to make or buy the health care services that it provides to veterans, and whether VA is operating as efficiently as non-VA hospitals.

Comparison of VA Cost to Medicare Reimbursement

The most thorough study comparing the relative cost of VA provided care was an HSR&D study that compared actual VA costs at six VA medical centers to the hypothetical fee-for-service payments for the same services that would have been paid by Medicare. The final report (Nugent, 2004) found that VA was providing care at a lower cost. Details from this study appeared as a series of papers in a special supplement of Medical Care in 2003. The overview paper for the papers in this supplement is cited below (Nugent, 2003). The supplement includes papers with detailed comparisons for difference services, including acute hospital stays, outpatient care, nursing home, and other types of care.

Evaluation of VA Pharmacy Costs

It has been estimated that VA’s Pharmacy Benefits Management (PBM) program saved VA $1.5 billion between 1995 and 1999 (Sales, 2005). VA prices for 20 medications commonly used by seniors are lower even than those negotiated by private PBM companies for the Medicare Prescription Drug Plan (Families USA, 2005).

Other Comparisons of VA Costs

A review of the literature comparing VA to non-VA costs (Hendricks, 1999) found no evidence that VA costs were higher than the private sector. Most studies have noted the difficulty in comparing costs between systems in which the patients served and the scope of services provided are so different.

There do not appear to be any more recent comparisons between VA and non-VA costs. VA costs, the case-mix of patients served, and the scope of benefits have shifted rapidly in the last decade. Eligibility reform led to doubling of the VA patient population. The VA appropriation increased more slowly, but increased substantially in the last few years. The implications of these changes on the VA costs relative to the non-VA sector have not been studied.


Comparison of VA and Medicare Costs

Decision makers and researchers often want to compare the costs of Veterans Administration (VA) facilities to non-VA providers. Medicare is the largest health care payer in the U.S., and data on Medicare-funded health services are publically available and nationally representative, so it is the most frequently used benchmark for cost comparisons. This page describes Medicare and VA cost data, the differences between these data, and what can be done to make them more comparable.

Medicare Cost Data

Reimbursements

One estimate of the cost of Medicare-sponsored services is the total Medicare reimbursement paid to the provider. This amount is also referred to as the Medicare-allowed payment. The total reimbursement is distinct from the amount that Medicare pays the provider because it includes both the payment by Medicare and the copayments and deductibles made by the patient. In this document when we refer to the Medicare reimbursement, we mean the total amount paid by both patient and sponsor. The total Medicare reimbursement represents the cost of care from the perspective of the health care sponsor.

The Medicare reimbursement rate often reflects policy decisions about reimbursement and may not necessarily represent the value of the goods, labor, and capital used to produce the service. Medicare provides greater reimbursement to physicians for an hour spent providing a procedure than for an hour spent in evaluation and management based on greater perceived intensity of effort for procedures as determined by skill, effort, judgment, and stress.

Medicare reimbursement rates differ by setting and region. For example, the reimbursement for a given hospital stay is higher at a teaching hospital than at a community hospital that does not train medical residents. Medicare rates are greater in geographic areas that have higher labor costs or greater malpractice insurance premiums. As a result, the analyst must consider which reimbursement rate is appropriate for the chosen study.

Cost-Adjusted Charges

An alternative to provider reimbursement is the cost-adjusted charge. The total charges incurred by the patient are obtained from a hospital bill. These charges can be adjusted by the ratio of cost-to-charges obtained from the hospital cost report. This cost-adjusted charge is regarded as a useful proxy for the actual cost of care from the perspective of the hospital.

The cost-adjusted charge does not necessarily equal the reimbursement to the provider. Medicare reimburses hospitals on a flat rate based on diagnosis (Diagnostic Related Group) and the hospital’s characteristics, so the cost-adjusted charge may be greater or less than this amount.

Types of Cost Comparison Studies

These are several reasons to compare VA costs to Medicare cost, and the purpose of the study may determine which Medicare benchmark should be chosen.

  • Make or buy decisions
    The analyst may wish to learn if it is cheaper for VA to provide the service or purchase it from non-VA providers at Medicare payment rates. In this case, the appropriate benchmark is Medicare reimbursement to the provider.
  • Technical efficiency
    Other studies may wish to learn if VA provides a given service with similar technical efficiency at similar cost as a non-VA provider. If charges for the same service stay can be found in Medicare data, the cost-adjusted charges may represent an appropriate benchmark.
  • Generalizability
    Cost-effectiveness research evaluates whether a health care innovation generates sufficient value to justify its cost. VA studies can be more informative if they can be generalized using non-VA costs. Although the research takes place within VA, the analyst may wish to estimate what the intervention would have cost if it had been provided outside the VA in order to make inferences about what is cost effective in the health care system at large. Reimbursements or cost-adjusted charges might be used for this purpose.

VA Cost Data

VA uses an activity-based costing system called Managerial Cost Accounting (MCA; formerly Decision Support System (DSS)) to allocate its actual expenses to specific hospital stays and outpatient encounters. The MCA National Data Extracts are databases with the cost of each inpatient stay, outpatient visit, and dispensed prescription provided by VA.

There are a number of differences between MCA data and Medicare. Here we focus on the comparison between MCA costs and Medicare reimbursements. Cost-adjusted charges are not available for all services although they are available for hospital-provided services, such as the hospital portion for an inpatient stay or the hospital component of outpatient services such as an ambulatory surgery or visits to a hospital clinic. It is not possible to obtain cost-adjusted charges for visits to an office-based physician or for physician services provided to patients in a hospital, as physicians do not prepare cost reports. It is possible to use cost-adjusted charges in lieu of allowed payment for the hospital component of services, and many of the same issues about comparability must be addressed.

Inpatient Comparisons

There are several key differences between MCA cost and Medicare reimbursement for inpatient care:

  • Definition of a hospital stay
    A single record of care in the MCA Discharge system may include care provided in different facilities, for example, treatment in a nursing home and acute care hospital. The MCA Treating Specialty file contains separate records for each treating specialty, so there are separate records for the nursing home and acute care hospital. In the Medicare system, this would also be regarded as two separate stays.
  • Provider cost
    MCA includes the facility and physician costs. Medicare reimburses the physician and facility separately. It is not appropriate to compare MCA cost to the Medicare-allowed payment to the hospital, as the latter does not include physician services, which may account for as much as 20% of the reimbursement for an inpatient stay. If the MCA estimate is used for comparison, both facility and physician allowable payments from Medicare must be included in the benchmark. With some strong assumptions, it may be possible to estimate the MCA cost of an inpatient stay exclusive of the physician cost to compare it to the Medicare hospital reimbursement exclusive of physician reimbursements.
  • Capital cost
    Capital depreciation is included in the MCA system, but the cost of financing VA capital acquisitions is not since the cost of borrowing to make capital purchases is not incurred by VA but by the Department of Treasury. In contrast, Medicare reimburses facilities the entire cost of capital including the interest on loans taken out to make capital purchases. Capital may account for up to 5% of Medicare reimbursement to hospitals.
  • Teaching cost
    Both MCA costs and Medicare reimbursements reflect the effect of graduate medical education and other teaching costs. However, teaching intensity is higher in VA hospitals, on average, than in Medicare hospitals.

Outpatient Services

Medicare reimbursement for outpatient care delivered in a facility (such as a hospital or ambulatory surgical center) includes payments to the physician and to the facility. The facility payment is nearly equal to the physician payment. As a result, total Medicare reimbursement is nearly twice as great for services provided at facilities than for the same services provided by an office-based physician.

Although some outpatient services can only be provided in a facility, a comparison between VA costs and Medicare reimbursement is significantly affected by the decision to use the facility or office-based reimbursement as the benchmark.

Outpatient pharmacy

It is difficult to compare pharmacy costs of VA to the Medicare system since VA has negotiated a lower acquisition cost for most drugs. In addition, MCA pharmacy costs also include substantial hospital overhead, which complicates pharmacy cost comparisons.

Medicare outpatient pharmacy costs are available for patients enrolled in Medicare Part D. The reimbursement amount to pharmacies and payments by patients are available for prescriptions covered under Medicare Part D in the Prescription Drug Event file. Part D drug reimbursement is negotiated between manufacturers, pharmacies, and the large number of Medicare prescription drug plans, so it can vary substantially by plan. The total cost of a drug (including costs by the plan and the patient) may be considerably less than the amount paid to pharmacies. Drug manufacturers provide significant rebates to prescription drug plans.

As an alternative, standard drug costs can be obtained from the Redbook’s list of average wholesale prices (AWP) by drug assuming some discount for Medicare. While Medicare discounts are not well known, it appears Medicaid programs pay pharmacies 85% of AWP, but when rebates are included, the net cost to Medicaid is 64% of AWP. In comparison, the VA negotiated price for brand name drugs is 42% of AWP. Medicare reimbursement amounts are also available separately for provider-administered drugs paid by Medicare under Part B (e.g. chemotherapy or drugs administered in a clinic).

Table 1: Comparing Inpatient Costs in MCA and Medicare
INPATIENT
TREATMENT
VA Managerial Cost Accounting (MCA) Medicare Reimbursement Payments
  • Cost determination
  • Activity-based cost allocation system.
  • Costs based on VA-specific Relative Value Units (RVU) used to produce separate products that comprise encounter.
  • Reflects actual costs incurred by VA.
  • Each admission is assigned to a Diagnosis-Related Group (DRG).
  • Fixed payment based on diagnosis.
  • DRGs do not take into account procedures or length of stay differences.
  • Reimbursement may be lower than actual cost of care incurred by provider.
  • Data Source
  • MCA Treating Specialty file (TRT)
  • MCA Discharge file (DISCH)
  • MedPAR Hospitalization file
  • Inpatient Standard Analytic File
  • Record
  • DISCH: One record per inpatient stay that begins with admission and ends with discharge.
    • One record can involve multiple facilities.
  • TRT: One record per treating specialty per month
  • Inpatient: One record per each discharge
  • MedPAR: One record per each claim
  • Inpatient stay begins with admission to a unique facility.
  • If a patient is transferred, then there will be multiple records.
  • Facility types
  • Acute care hospitals, rehabilitation facilities, nursing homes, psychiatric hospitals, substance abuse facilities, domiciliary.
  • A single stay may include multiple facilities.
  • Acute care hospitals, skilled nursing facilities.
  • Only one facility per record.
  • Provider costs/expenses/ services
  • Includes physician and other provider costs.
  • Includes payments for anesthesiologists. Physicians are reimbursed separately from facilities under Medicare physician fee schedule.
  • Geographic variation in costs
  • RVU’s reflect cost differences across regions.
  • Payments do not vary within DRG, but there is a geographic adjustment to the reimbursement.
  • Capital costs
  • Depreciation is included.
  • Capital financing costs are not included.
  • DRG-based fixed payment per hospitalization.
  • Depreciation and capital costs are included.
  • Payment limits may be below actual capital costs.
  • Indirect costs
  • Includes hospital administrative costs and VA central office/national center operating costs.
  • Includes hospital administrative costs.
  • Physician malpractice liability
  • Not included.
  • Not included.
  • Inpatient pharmacy costs
  • Included.
  • Included under DRG.
  • Teaching Status
  • Included, most VA hospitals are teaching facilities.
  • Included, but Medicare hospitals have lower average teaching costs.
Table 2: Comparing Outpatient Costs in MCA and Medicare
OUTPATIENT
TREATMENT
VA Managerial Cost Accounting (MCA) Medicare Reimbursement
Payments to Facility-Based
Providers
Medicare Reimbursement
Payments to Office-Based
Providers
  • Cost determination
  • Activity-based cost allocation system.
  • Costs based on VA-specific Relative Value Units (RVU) used to produce separate products that comprise encounter.
  • Facility costs based on Ambulatory Payment Classification (APC) groups, similar to DRGs.
  • Medicare physician fee schedule is set by a relative value scale for services provided.
  • Medicare physician fee schedule is set by a relative value scale for services provided.
  • Fee schedule for office-based physician slightly higher to compensate for the practice expense.
  • Record
  • One record per clinic stop per visit day
  • One record per revenue center per visit day
  • One record per Health Care Procedure Classification Code per visit day
  • Data Source
  • Outpatient MCA
  • Outpatient Files
  • Carrier Files
  • Facility types
  • Outpatient care clinics, emergency care, home-based care, domiciliary care, day hospital treatment, phone care.
  • Hospital-based clinics, skilled nursing facilities, comprehensive outpatient rehabilitation facilities, community mental health centers, rural health clinics, renal dialysis facilities.
  • Individual physician offices.
  • Provider costs/expenses/ services
  • Includes physician and other provider costs.
  • Physicians reimbursed separately from facilities under Medicare physician fee schedule.
  • Fee schedule for office-based physician slightly higher to compensate for the practice expense.
  • Geographic variation in costs
  • RVU’s reflect cost differences across regions.
  • APCs adjusted for geographic location. Physician payments adjusted by a set of Geographic Practice Cost Indices (GPCI’s).
  • Physician payments adjusted by a set of Geographic Practice Cost Indices (GPCI’s).
  • Capital costs
  • Financing costs excluded.
  • Included in APC, up to a limit.
  • Included in physician fee schedule as practice expense.
  • Indirect costs
  • Includes hospital administrative costs and VA central office/ national center operating costs.
  • Included, up to a limit.
  • Included, up to a limit.
  • Physician malpractice liability
  • Not included.
  • Malpractice component included in provider payment.
  • Malpractice component included in provider payment.
  • Teaching Status
  • Included, most VA hospitals are teaching facilities.
  • Not included.
  • Not included.
Table 3: Comparing Pharmacy Costs in MCA and Medicare
OUTPATIENT
PHARMACY
VA Managerial Cost Accounting (MCA) Medicare Reimbursement Payments
  • Cost determination
  • Detailed cost for each prescription. Includes supply and dispensing costs.
  • Reimbursement to insurers and patient payments amounts for each prescription filled under Medicare Part D. Medicare Part D costs include ingredient cost, dispensing fee, sales tax, and patient pay amount, plan amount. Provider administered drugs are paid by Medicare under Part B, e.g. chemotherapy, drugs injected in clinic.
  • Data Source
  • MCA Pharmacy
  • Part D Drug Event (PDE) File for each drug claim. The Redbook for average wholesale price of drugs can also be adjusted for discount.

References

Nugent, G.N., Hendricks, A., Nugent, L.B., Render, M.L. Value for taxpayers' dollars: what VA care would cost at medicare prices. Medical Care Research and Review 2004;61, 495-508.

Nugent, G., Hendricks, A. Estimating private sector values for VA health care: an overview. Medical Care 2003;41, II2-10.

Sales, M.M., Cunningham, F.E., Glassman, P.A., Valentino, M.A., Good, C.B. Pharmacy benefits management in the Veterans Health Administration: 1995 to 2003. American Journal of Managed Care 2005;11, 104-112.