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.”
2. Methods
The review searched PubMed, the database of the U.S. National Library of Medicine, for published studies that included in the title or abstract the words (COST* or ECONOMIC*) and (VETERAN*). The search included articles published between January 1, 1980 and September 27, 2012.
Papers were selected for abstraction if they reported on the cost of health care in the U.S. Department of Veterans Affairs and provided sufficient information to identify the costing method and data. The methods section of each paper was reviewed and the paper was assigned to one or more of the costing methods listed in Table 1. Abstraction was done by a Research Associate (EG), in consultation with a health economist (PB). The phrases used to assign studies to a category are described in Table 1.
| Method | Phrases |
|---|---|
| HERC average cost | HERC average cost data |
|
MCA activity based costing |
Decision Support System (DSS) |
| Micro-costing |
Time-and-motion studies |
| Community care |
Fee Basis care |
Studies were assigned to “average cost method” if it was indicated that the study used either the HERC method or a HERC dataset. The HERC outpatient datasets use a pseudo bill method, while medical- surgical inpatient costs are estimated by cost regression based on Diagnosis Related Group (DRG) weight and length of stay; other inpatient costs are estimating using average cost per day. Studies that used pseudo bill, cost regressions, or average cost per day were assigned to the micro-costing category unless they specifically referred to the HERC average cost method or the HERC databases.
The micro-costing method was broadly defined. It included direct measurement to find health costs, patient survey to find utilization to assign costs, use of reimbursement schedules, and cost estimates based on a count of visits, length of stay, or the DRG. These methods often employed VA datasets. The VA Financial Management System (FMS) and Personnel and Accounting Integrated Data System (PAID) and DSS ALB were used to assess labor costs for direct costing. Direct cost of medication was obtained from the Federal Supply Schedule (FSS) or the Pharmacy Benefits Management System (PBM); per capita cost estimates and per capita funding allocations were obtained from the VA Allocation Resource Center (ARC). Cost estimates were also based on aggregate expenditures reported in the VA Cost Distribution Report (CDR), an expense distribution system that was replaced by one component of MCA, the ALB.
3. Results
There were 415 studies that met the original search criteria, 160 from 1980-2007, and 255 from 2008-2012. There were 259 peer-reviewed publications the met inclusion criteria. There were 125 publications in the five years 2008-2012, compared to 134 publications in the prior 18 years. Nearly have of the papers selected for study were published in the last 5 years of the 23 year period.
The selected studies report on the cost of VA health services and provided sufficient information to assign them to one more of the costing methods. Table 2 characterizes the number of publications by method. Over the entire review period, micro-costing was the most frequently employed method (58.7%), followed by MCA activity based data (46.7%), HERC average cost data (16.2%), and use of community care claims (4.6%). These percentages sum to more than 100%, as a given study may employ more than one method.
Starting in 2008, MCA activity-based cost data became the most important source of cost data, and was used in 76.0% of included studies. MCA activity-based costing was used more often than the HERC average cost method in both time frames.
| VA Cost Method | 1980-2007 n (%) |
2008-2012 n (%) |
All n (%) |
|---|---|---|---|
| HERC Average Cost Data | 12(9.0%) | 31 (24.8%) | 42 (16.2%) |
| MCA Activity Based Costing | 26 (19.4%) | 95 (76.0%) | 121 (46.7%) |
| Micro-costing | 115 (85.8%) | 36 (28.8%) | 152 (58.7%) |
| Community Care | 1 (0.7%) | 11 (8.8%) | 12 (4.6%) |
| Total | 134 | 125 | 259 |
Table 3 cites the studies using each method in each time frame. Some studies are cited in more than one cell of the table.
| VA Cost Method | 1980-2007 | 2008-2012 |
|---|---|---|
| HERC Average Cost Data | 1-12 | 13-43 |
| MCA Activity Based Costing | 1,4,9,44-66 | 15-19,21,23,24,67-108, 30,36,37,41,42,109-148 |
| Micro-costing | 7,44-46,50-52,54,57,59-65,149-247 | 13,15,25,29,31,72,85-90,94,102,114,120-124,129,133,135,138,145,148,248-257 |
| Community Care | 236 | 34,35,38,41,96,141,144,145,148,236,258 |
4. Conclusions
The review identified costing methods used in 259 VA studies between 1980 and 2012. The studies were conducted over a wide range of clinical areas and using a range of costing methods. Nearly half of the studies were from the last 5 years of this 23 year long time period.
The activity based cost estimates in the MCA national data extracts have become the predominant method of determining VA health care costs in peer reviewed-publications. MCA data, and to a lesser extent the HERC average cost data, supplanted micro-costing methods.
Limitations. The scope of this review was limited to published articles indexed in PubMed. Article selection and abstraction for the period 1980-2007 was done in 2008. Articles published in 2008-2012 were abstracted four years later, in 2012. The abstraction of the more recent studies may have been more complete.
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Last Updated: March 19, 2024
