Comparing VA Versus 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 inpatient stays with non-VA inpatient stays. While options include comparing VA discharge records from the Patient Treatment File (PTF) Main file or the Managerial Cost Accounting (MCA) Discharge file to non-VA inpatient data, such as the Medicare or Healthcare Cost and Utilization Project (HCUP) data, you would be comparing apples and oranges. The reason is quite simple: VA and commercial hospitals define a hospital discharge differently.

Consider this example where Joe, an older veteran, is admitted to a VA hospital in a medical bedsection/treating specialty with a broken hip. During the stay, Joe receives surgery, spends a few days in the ICU, recovers in a medical bedsection, and then spends some time in the nursing home before he is discharged to home. In the VA all of this care is reported in a single inpatient discharge record. However, if Joe was admitted to a commercial hospital instead, he would not be transferred from medicine to a nursing home. Rather, Joe would be discharged from the medical/surgical hospital, and his 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 stays (or discharges) to non-VA stays, you need to consider how to define inpatient stays with VA data. HERC developed methods to measure inpatient stays comparable with non-VA data (e.g., Medicare’s Medpar or the HCUP data) and created a SAS program that uses the VA bedsection files to create a medical-surgical discharge file. The program performs a number of functions, such as recalculating length of stay, identifying the highest diagnosis-related group (DRG) weight from multiple bedsections, and calculating number of days spent in intensive care (ICU). The SAS code is available upon request.

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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. The VA also purchases services in the community when certain access criteria such as travel distance, wait times, and availability of services by VA providers are met. Policymakers are 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 hospitals operate as efficiently as non-VA hospitals.

Comparison of VA Cost to Medicare Reimbursement

While few recent studies have been conducted comparing VA and non-VA costs of care, the most thorough study comparing the relative cost of VA and non-VA provided care looked at VA costs at six VA medical centers in 1999 in comparison to the hypothetical fee-for-service Medicare payments for the same services at that time. The final report (Nugent, 2004) found that VA provided 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 was 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

It is difficult to compare costs between systems in which the patients served and the scope of services provided are markedly different. 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. Since these early studies, few comparisons between VA and non-VA costs have been performed. 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 also shifted towards paying for more care from non-VA providers rather than providing it directly.  The implications of these changes on VA costs relative to the non-VA sector have not been studied.

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Comparison of VA and Medicare Costs

Decision makers and researchers often want to compare the costs of 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 costs, 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 research might take 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 called Decision Support System (DSS), to allocate its actual expenses to specific hospital stays and outpatient encounters. The MCA National Data Extracts are databases that report the cost of each inpatient stay, outpatient visit, and 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 file 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 negotiates 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.

VA and other Big 4 agencies pays significantly less for prescription drugs than other payers due to negotiated discounts. The Federal Supply Schedule (FSS) reports the drug prices for most federal agencies while the Big 4 prices are not always disclosed. Usual drug costs in the U.S. health care system such as Medicaid can be estimated at 121% of the FSS price. As an alternative, non-VA costs of drugs can be estimated by obtaining VA costs and multiplying by 152%, the amount by which Medicaid prices exceed VA prices. 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).

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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.

Last updated: April 17, 2023