VA utilization data may be combined with unit costs from non-VA sources to estimate the cost of patient care. This is referred to as the pseudo-bill method, because the itemized list of costs is analogous to a fee-for-service bill for healthcare services. To estimate costs in this way, the analyst needs data on the services utilized by the patient, and the cost of each service.
Itemized information on outpatient services can be obtained from the Medical SAS Outpatient File or the CDW Outpatient Domain in the VA Corporate Data Warehouse (CDW)/VINCI environment, as described below. These databases include the Current Procedures and Terminology (CPT) codes assigned to each outpatient encounter. The cost of providing this care can be estimated from Medicare reimbursement rates developed by the Centers for Medicare & Medicaid Services (CMS). Although Medicare does not reimburse for all services that have been assigned a CPT code, the analyst may still wish to assign a cost to care that Medicare does not pay for.
We first describe sources of data on VA outpatient care and methods for estimating the cost of outpatient procedures. These include employment of Medicare relative values, the use of non-Medicare values, and the types of assumptions that may be needed to find cost when neither source of relative values is available. We then consider "conversion factors," the rates which are used to convert a relative value to a reimbursement amount.
This discussion then turns to methods for finding the cost of acute hospital stays, and why a clinical cost function may be a more feasible method than a pseudo bill for finding this cost. Examples of studies that used the pseudo-bill method are given as references.
Sources of data on VA outpatient care
The most available sources of information on VA outpatient care are the Medical SAS Outpatient File, and the CDW Outpatient domain. The files from these databases includes a unique patient identifier, the date of service, the location of care (clinic stop), and the CPT codes assigned to the encounter. These files are available in the VA Corporate Data Warehouse (CDW)/VINCI environment. CDW Outpatient data is also available in the Observational Medical Outcomes Partnership (OMOP). Details on the contents of these data sources, and how to access them, may be found on the VHA Data Portal (VA intranet only: http://vaww.vhadataportal.med.va.gov/).
Outpatient visit data are also kept in the VistA data system at each VA medical center. This information is the source of the data in CDW. Since it is difficult to extract VistA, we recommend using CDW instead.
Outpatient laboratory data can be found in multiple VA data sources: MCA Laboratory (LAB) National Data Extract (NDE), CDW LabChem, OMOP, and VistA.
Laboratory utilization. Comprehensive laboratory utilization and cost data are available from the MCA Laboratory (LAB) National Data Extract (NDE). See the MCA NDE documentation on the VA intranet site for more details about the LAB NDE (http://vaww.dss.med.va.gov/nationalrptg/nr_extracts.asp).
Laboratory results. Lab results can be found in CDW Lab.Chem or OMOP. CDW Lab.Chem is a complete source for lab test results, but users will need to clean the data before use. The Observational Medical Outcomes Partnership (OMOP) common data model includes cleaned lab data, but not all lab data is available. The MCA LAR NDE, an additional source of lab result data, was discontinued beginning FY20.
Other laboratory data sources. Other lab data sources include the Medical SAS Outpatient Procedure file and VistA. The Medical SAS outpatient procedure file includes CPT codes for laboratory procedures, but it may not contain all information recorded in VistA. VistA is the source of much of the data found in databases such as the MCA NDEs and CDW. Through VistA, researchers can access lab data for individual patient records. See VIReC’s “VA Laboratory Data” page on the VA intranet for more information (https://vaww.virec.research.va.gov/Laboratory/Overview.htm).
The VA Pharmacy Benefits Management database includes information on pharmaceuticals dispensed to each VA outpatient, and the cost of the prescribed drugs. The cost estimate does not include the cost of dispensing. VA researchers cannot directly access the PBM file; they must make a request of the Pharmacy Benefits Management program. (Details on the contents of this file, and how to access it, may be found on the Pharmacy Data page.
The PBM data does not include the cost of dispensing pharmaceuticals. Medicaid pays pharmacies a fee of $2 to $5 per prescription to cover this cost. In 2019, based on findings from the VISTA drug file, the average per prescription dispensing cost for outpatient pharmacy was $17.17 per 30-day fill.
Alternatively, the MCA Pharmacy (PHA) NDE contains essentially the same information. The main difference is that the MCA NDE does not include the dosing instructions. But it does include full details about what was dispensed (exact drug, including pill size) and the cost of the medication. Details about this file are in the VIReC Research User Guide: Pharmacy Managerial Cost Accounting National Data Extract (PHA MCA NDE) (VA intranet only: https://vaww.virec.research.va.gov/RUGs/RUGs-Index.htm).
Determining the Relative Value of Outpatient Services
To find the cost of outpatient services, we recommend that Medicare reimbursement rates developed by CMS be used. Medicare regulations report a relative value for CPT codes for physician, anesthesiology, and laboratory procedures. A conversion factor translates these relative values into a reimbursement amount. This relative value is converted to a reimbursement rate by multiplying the relative value by a conversion factor. For the year 2020, Medicare pays physician and laboratory providers $36.0896 for each unit of relative value; anesthesiologists are reimbursed $22.2016 per unit.
Medicare has adopted the Resource Based Relative Value System to reimburse providers for services provided to Medicare patients. Care is characterized by a CPT code. Each CPT code has an associate set of relative values (RVUs), consisting of Facility, Physician Work, and Malpractice RVUs.
- Global Fees
The RVUs for some procedures reflect a global fee that reimburses the providers for the procedure, for visits that occur immediately before the procedure, and for visits after the procedure was performed. For each procedure, CMS indicates the length of the follow-up period that the global fee covers. Global fees give providers an incentive to be efficient, and use the minimal number of visits. The cost analyst has a different concern, wishing to adopt a method in which the cost estimate reflects the number of visits that occur before and after the procedure. For this reason, we recommend that the analyst not apply global fees, but whenever possible, apply separate RVUs for the procedure and the pre-procedure and post-procedure visits
- Facility vs. non-facility RVUs
CMS has created two sets of RVUs for the practice expense component of care. The standard payment is for office-based provider services. If the services is provided in a setting that meets the CMS definition of a "facility" (hospitals, ambulatory surgery centers, etc.) then the facility is eligible for a separate facility payment and this reduces the practice expenses component of many procedures. The difference is these two sets of RVUs is generally small, but it can be substantial for certain procedures. The relative values for each CPT code may be downloaded from the CMS web site. The analyst should apply the facility weights for care at VA medical centers. It is uncertain whether the office setting should be applied for care provided by VA satellite clinics, or whether VA databases provide sufficient information to determine where care is actually delivered.
When the facility weights are used for the provider payment, the facility payment should also be included in the pseudo-bill. When including facility payments, one must be careful to not double count payments, especially for images and non-surgical procedures such as cardiac tests.
Services Not Reimbursed by Medicare
Many of the CPT codes used by VA do not appear on the list of services that are reimbursable by Medicare. There are several reasons for this, including the following:
- Medicare does not pay for the service,
- the VA code is not specific,
- the VA code is out of date,
- the VA code is not a valid CPT code.
In general, we believe that a cost should be assigned to all services, even if they are not reimbursable by Medicare. It is the challenge of the analyst to make as few assumptions as possible in assigning the RVU (and thus estimate the cost). We consider each of these problems in turn.
- Gap Codes
There are some services which Medicare does not pay for. These services have a CPT code, but HCFA has not assigned them a relative value unit. These CPT codes are known as "gap codes." Relative values for these procedures were developed by the Cambridge Health Economics Group, a private firm that has been acquired by Ingenix. A book and an electronic file are available from this company.
- Unspecified Procedures
CPT codes for unspecified procedures, typically ending with the digits "99", do not have a Relative Value Unit assigned to them. Among the top 30 CPT codes used by VA are the following unspecified codes for laboratory tests:
85999 - Unlisted hematology and coagulation procedure
84999 - Unlisted chemistry procedure
83999 - Unlisted miscellaneous pathology test
The analyst can assign an RVU by assuming that the unlisted code represents a typical procedure of its type. Thus the RVU would be the weighted mean RVU of the procedures of that type, with the weight the relative frequency the procedure is used by VA. Using this method we would assign an RVU to 85999 "Unlisted hematology and coagulation procedures", based on the VA weighted mean RVU for hematology and coagulation procedures, that is, all procedures reported in the range of CPT codes 85002-85810.
Other CPT Codes without RVUs
For some procedures, no RVU is available. For example, 99078, Group Health Education, is among the top 30 most frequently used CPT codes by VA, but it does not have a Medicare or a gap RVU. The analyst could use the RVU of a similar CPT code, or assign the mean RVU of all CPT codes used in the that clinic stop.
Some VA services are characterized by an invalid CPT code. Although a healthcare payer would reject the bill for such a service, the analyst may want to include the cost of this care in a pseudo bill. For frequently used codes, the analyst should check the code to see why it is invalid. For example, code 90724 was one of the top 30 codes used by VA in 1998, has been deleted, and has been supplanted by a series of new codes for influenza vaccine, 90657-90660. All of these new codes have been assigned the same gap code relative value unit.
If the VA assigned CPT code appears to be entirely invalid, the analyst can drop the code from consideration, or assign the mean RVU of all CPT codes used in the that clinic stop.
Determining the Conversion Factors
There are a number of issues to be considered in applying conversion factors to estimating the reimbursement for a relative value unit. These include:
- Geographic Adjustment
Medicare provides separate geographic adjustment factors for the physician services, malpractice, and the facility component. These adjustments can be used to estimate costs in a given region. Alternatively, a national average can be used. The national average geographic adjustment factor is approximately one.
- Professional and technical component
For some laboratory and radiology services, the RVUs are split into professional (physician) and technical components. This allows fees to be split between the provider and interpreter of the test. Care must be taken in apply these components to avoid double counting the RVU and associated reimbursement.
- Non-Physician providers
CMS has established slightly different payment rates for non-physician providers; an accurate pseudo bill may wish to reflect these differences.
In addition, the analyst may wish to adjust the conversion factor to reflect differences between VA costs and Medicare reimbursement. This additional adjustment is analogous to the cost-to-charge ratio, with the total Medicare reimbursement for all services provided by that VA department representing its "charges," and it costs, from a source like the MCA Cost NDEs, representing the costs.
For more information, see the section, Cost of Physician Services for Inpatients.
It is very difficult to create a pseudo-bill for VA hospital stays. VA does not thoroughly document medical procedures provided to inpatients, nor does it assign CPT codes to physician services provided to inpatients. A list of many of the resources used in an inpatient stay can be extracted from the VISTA system, but there are gaps in what is covered. Information on inpatient laboratory and pharmacy utilization in VISTA may be incomplete. Additional information about services provided in VA hospital stays can be found in the Surgical and Procedures databases in the VA Patient Treatment File. Data include most surgical procedures, and some medical procedures, recorded as ICD-9 procedure codes. After 10/1/2015, VA started using ICD-10 codes.
If a list of resources is obtained for a VA hospital stay, there is still the problem of finding the appropriate charges for each item on the list. Charges from a non-VA hospital could be used only if the items listed are directly comparable. It will be difficult to create a resource list for a VA hospital with a level of detail that corresponds to the charge schedule of a non-VA hospital. There are no relative values associated with ICD-9 procedure codes. Strong assumptions must be made to convert ICD-9 procedures to a CPT codes; the CPT system has a much finer level of detail, with many CPT codes associated with a single ICD-9 procedure code.
Two studies from the United Kingdom have determined that hospital costs can be accurately measured with a reduced list of utilization measures. A study of community and home-based psychiatric care found that 5 out of 21 measures accounted for more than 90% of the costs (Knapp & Beecham, 1993) . A study of colorectal cancer found that 4 out of 14 types of utilization accounted for 91.6% of total costs (Whynes & Walker, 1995) . These studies suggest that a full pseudo bill may not be necessary, and that a reduced list of utilization may be used to determine hospital costs, if the markers of resource use are chosen appropriately.
An alternative to either the pseudo-bill or the reduced list cost estimate is to estimate a clinical cost-function. If a suitable source of non-VA data can be found, a function can be used to estimate the relationship between cost-adjusted charges and measures of utilization. Its parameters can be used to translate VA utilization data into a cost estimate. Its chief advantage is that it requires less VA data than is needed to prepare a pseudo-bill.
The cost function approach has been compared to an itemized pseudo-bill (Kukull et al., 1986) . It was found that a function that used days of stay, intensive care unit days, number of lab tests, and number of surgeries predicted 97.7% of the variance in these imputed charges.
Examples Applying Pseudo-Bills to Estimate VA Cost
The following studies are examples of where pseudo-bill methods are used to find the cost of VA healthcare. Non-VA data sources of relative value include the rate of charge rates of an affiliated university medical center (Schneiderman, Kronick, Kaplan, Anderson, & Langer, 1992; Wasson et al., 1992), the payment rates from a typical healthcare payer (Kessler, Kessler, & Myerburg, 1995), and the charge rates allowed by Medicare (Volicer et al., 1994; Wade et al., 1996; Wasson et al., 1992).
Hospital bills include the charges from the facility. Most physicians who provide care to hospitalized patients do not work for the hospital, and bill separately. The cost of physician services to inpatients are significant, and should not be ignored. Below we provide a method for estimating this cost. (This method is not needed for VA data, as both MCA and HERC average cost estimates include physician costs).
Physicians prepare bills to Medicare using Current Procedures and Terminology (CPT) codes. The Medicare fiscal intermediary confirms that the bill was appropriate and calculates a payment based on a system of relative values assigned to each code. The Medicare conversion factor provides about $35 per billed relative value unit.
Researchers may not have a copy of the physicians' bill, or have a list of all of the procedures provided during a stay. If the researcher knows the Diagnosis Related Group (DRG) assigned to the stay, the cost of physician services may be estimated. This method assumes that every patient assigned to a given DRG received exactly the same physician services. This assumption, while not perfect, is fairly reasonable as provision of additional physician services often results in the stay being assigned to a different, more expensive DRG.
Three studies provide useful information for estimating the cost of physician services based on DRG.
- Prior to 2008
- Miller ME, Welch WP. Analysis of Hospital Medical Staff Volume Performance Standards: Technical Report. Washington D.C.: The Urban Institute; 1993.
- Mitchell, JB, NT McCall, FT Burge, S Boyce, R Dittus, D Heck, M Parchman, L Iezzoni. Per Case Prospective Payment for Episodes of Hospital Care Health Economics Research, Inc. (1995) NTIS RB95-226023
- Post 2008
- Peterson C, Xu L, Florence C, Grosse SD, Annest JL. Professional fee ratios for US hospital discharge data. Med Care. 2015; 53: 840-9.
Estimating Costs of Physician Care to Inpatients Provided Prior to 2008
Here is how to use the relative values from these studies to find physician charges for inpatient stays. These studies found the mean charge for physician services associated with hospital stays in each DRG. They reported a relative value for each DRG, that is the mean charge for that DRG divided by the mean charges for all DRGs.
View the Excel spreadsheet with Miller and Welch's relative values. These values are from Appendix B of their report. The values are based on charges incurred only during the hospital stay. They are based on all stays in Miller and Welch's data; outlier stays were not trimmed from the dataset.
Miller and Welch reported the average charges for physician services of an inpatient stay in 1992 as $1,116. Thus, to find the charge for physician services in any given DRG, multiply the value in the spread sheet by $1,116.
It is possible to estimate the mean charge using more contemporary conversion factors. The 1992 mean charge of $1,116 was found by multiplying the Medicare 1992 conversion factor of $31.001 by 36, the mean number of Medicare Relative Value Units billed by physicians in the Miller and Welch data. Other conversion factors might be substituted, as follows:
|Year||Conversion Factor||Mean Physician Charge|
Miller and Welch analyzed charges for physician services from 1987 data. Physician practice patterns have undoubtedly changed since then. Several new DRG's are not represented in the Miller and Welch data.For estimates of costs beginning 2008, please see the next section “Estimating Costs of Physician Care to Inpatients Post 2008.”
These reports provide information on the average physician payment associated with each DRG. The payments may be adjusted. For example, the mean payment might be adjusted for differences in length of stay. The typical Medicare payment for a daily physician visit to an inpatient is $51; this adjustment could be applied for the number of days that the stay deviated from the national mean length of stay for that DRG.
Estimating Costs of Physician Care to Inpatients Post 2008
In 2015, Peterson et al published an update of the Miller and Welch study (Peterson C, Xu L, Florence C, Grosse SD, Annest JL. Professional fee ratios for US hospital discharge data. Med Care. 2015; 53: 840-9). Instead of a single RVU for each DRG, they provide separate RVUs for commercial insurance and Medicaid by year and clinical classification. See the supplementary materials in the Peterson publication for resources to calculate the cost of physician services.
The Agency for Healthcare Research and Quality (AHRQ) provides a number of various databases from which to access information to obtain acute hospital care cost.
The Medical Expenditure Panel Survey (MEPS)
MEPS is the third part of a set of national surveys gathering information since 1996 on health care services used, frequency of use, cost of services, sources of payment, and insurance coverage. MEPS is co-sponsored by the Agency for Healthcare Research and Quality (AHRQ) and the National Center for Health Statistics (NCHS).
Data from various components have been collected through a combination of computer-assisted in-person interviews, telephone interviews, and mailed surveys.
- Household Component (HC) provides information on an individual and household level including demographics, health conditions, health status, use of medical care services, charges and payments, access to medical care, satisfaction with care, health insurance coverage, income, and employment.
- Medical Provider Component (MPC) contains information from medical providers identified by household data.
- Health Insurance Component (IC) consists of information on employer, union, and private health insurance plans.
- Nursing Home Component (NHC) contains information from a national survey of nursing homes, providing information on characteristics, health care use, and expenditures of nursing home residents and facilities.
The HC, MPC, and IC can be linked to provide comprehensive data that can estimate the level and distribution of healthcare use and expenditures.
These data can be used to:
- make estimates of medical utilization and expenditures; and
- identify costs, including consumers' out-of-pocket costs.
Note - Data cannot be used to estimate the frequency of treatment or costs associated with particular treatments.
Advantage of new MEPS:
- It is unique in being able to link data with individuals and households (demographics, health status, employment, income, etc.) to health care use, expenditures, sources of payment, health insurance status, etc.
- Longitudinal analyses - ongoing longitudinal survey allows study of behavior-modeling, health care use, and expenses over time.
- It is the only national survey that provides a foundation for estimating the impact of changes in payment sources and insurance coverage on different economic groups or populations of particular interest.
Other questions that can be answered on MEPS:
- How many veterans are covered by private insurance?
- Where do veterans get their medical care?
- What are their out-of-pocket costs for health care?
The Healthcare Cost and Utilization Project (HCUP)
HCUP consists of 2 database sources. The State Inpatient Database (SID) contains information from all hospitals and all discharges from 22 states. The Nationwide Inpatient Sample (NIS), contains information from a sample of hospitals selected from states in the SID. It includes all discharges from the sampled hospitals.
Data consist of 3 types of data elements:
- Measures of health care use and expenditures among the elderly, poor, children, minorities, unemployed, uninsured, and nursing homes.
- Hospital characteristics - identifiers that can be linked to AHAAS, characteristics of hospitals used for sample AHA data
- Weights to produce national, regional, and state estimates.
NIS contains information on over 100 clinical and non-clinical variables about hospital stays:
- 1st degree and 2nd degree diagnosis
- 1st degree and 2nd degree procedures
- admission & discharge status
- patient demographics
- expected payment source
- total charges
- length of stay
- hospital characteristics(ownership, size, teaching status)
The database promotes comparative studies of health care services including:
- use and cost of hospital services
- medical practice variation
- health care cost inflation
- hospital finance distress
- analyses of states and communities
- medical treatment effectiveness
- length of stay
- quality of care
- impact of health policy changes
- access to care
- diffusion of medical technology
- utilization of health services by special population
- Is an unique and powerful database of hospital inpatient stays.
- Can be used to identify, track, and analyze national trends in health care utilization, access, charges, quality and outcomes.
- Is the largest all-payer inpatient care database in the U.S.
- Is the only national hospital database with charge information on all patients - regardless of payer, including those covered by Medicare, Medicaid, private insurance, and the uninsured.
NIS information can be used to determine:
- The association between patient outcomes and volume-specific high-tech hospital procedures.
- How to do alternative cardiac procedures compared in terms of patient costs and outcomes.
- Racial differences in utilization, outcome, or cost experience of hospital health plans compared with national trends.
The NIS is available as a CD-ROM in ASCII format for use with SAS & SPSS.
HIV Cost & Services Utilization Study (HCSUS)
HCSUS is the first major research effort to collect information on a nationally representative sample of people in care for HIV infection. HSCUS examines costs of care, utilization of health care services, access to health care, quality of health care, quality of life, unmet needs for medical and non-medical services, social support, satisfaction with medical care, and knowledge of HIV therapies.
HCSUS will examine:
- cost, use, and quality of care
- access to care
- unmet need for care
- QOL (Quality of Life)
- Social Support
- Knowledge of HIV
- Clinical Outcomes
- Mental Health
- Relationship of these variables to provider type and patient characteristics
Kessler, D. K., Kessler, K. M., & Myerburg, R. J. (1995). Ambulatory electrocardiography: a cost per management decision analysis. Arch Intern Med, 155(2), 165-9.
Knapp, M., & Beecham, J. (1993). Reduced list costings: examination of an informed short cut in mental health research. Health Econ, 2(4), 313-22.
Kukull, W. A., Koepsell, T. D., Conrad, D. A., Immanuel, V., Prodzinski, J., & Franz, C. (1986). Rapid estimation of hospitalization charges from a brief medical record review: evaluation of a multivariate prediction model. Med Care, 24(10), 961-6.
Miller M.E., Welch W.P. (1993). Analysis of Hospital Medical Staff Volume Performance Standards: Technical Report. Washington D.C.: The Urban Institute.
Peterson C., Xu L., Florence C, Grosse SD, Annest JL. (2015). Professional fee ratios for US hospital discharge data. Med Care, 53, 840-9.
Schneiderman, L. J., Kronick, R., Kaplan, R. M., Anderson, J. P., & Langer, R. D. (1992). Effects of offering advance directives on medical treatments and costs. Ann Intern Med, 117(7), 599-606.
Volicer, L., Collard, A., Hurley, A., Bishop, C., Kern, D., & Karon, S. (1994). Impact of special care unit for patients with advanced Alzheimer's disease on patients' discomfort and costs. J Am Geriatr Soc, 42(6), 597-603.
Wade, T. P., Virgo, K. S., Li, M. J., Callander, P. W., Longo, W. E., & Johnson, F. E. (1996). Outcomes after detection of metastatic carcinoma of the colon and rectum in a national hospital system. J Am Coll Surg, 182(4), 353-61.
Wasson, J., Gaudette, C., Whaley, F., Sauvigne, A., Baribeau, P., & Welch, H. G. (1992). Telephone care as a substitute for routine clinic follow-up. Jama, 267(13), 1788-93.
Whynes, D. K., & Walker, A. R. (1995). On approximations in treatment costing. Health Econ, 4(1), 31-9.
Last updated: April 20, 2021