Measuring and Estimating Costs

101 Measuring and Estimating Costs Cost, price, charge Types of costs Irs Perspectives of cost measurement pastostto futurecosttopresent tStandardization and discounting of cost Pat y Average, marginal, and incremental costs Sources of data for cost estimation to Rascati (Chapter 2) Lowerthentoeongiral charge renegotiated Price/charge vs. Allowable charge vs. Cost Eton y • Price/charge – this is the amount ‘listed’ by a provider (e.g., hospital, doctors) and charged to a payer (e.g., patients, managed care organization, Medicare) ―Often higher than the allowable charge ―Higher than the actual cost of the product or service • Allowable charge – this is the amount the payer has contracted to pay the provider ―Often lower than price/charge • Cost – this is what it actually costs the provider to provide the product or service ―harder to measure 4 A Types of costs • There are four main types of costs 1. 2. 3. 4. medication Direct medical costs spuperitaxi Direct non-medical costs abletowork Indirect costsToo lostproductivitynotbeing Intangible costs jut to example Depression Difficulttomessareconvertto 7 Types of costs 1. Direct Medical Costs • Direct medical costs are the most obvious costs related to inputs used directly to provide the treatment • Examples of direct medical costs include costs associated with: 1. 2. 3. 4. 5. 6. 7. Provider services/visits (pharmacists, physicians, nurses) Emergency department visits Hospitalizations Drugs Medication administration and monitoring Medical equipment Diagnostic tests 8 Types of costs 2. Direct Non-Medical Costs • Direct non-medical costs are costs to patients and their families that are directly associated with treatments, but are not medical in nature • Examples of direct, non-medical costs include: 1. Cost of transportation to and from physician’s office visits, clinic, or hospital (e.g., car mileage/gas, bus/taxi fare) ow 2. Cost of food and lodging/hotels for patient or family during out-oftown treatment 3. Cost of child care services for the children of a patient 9 Types of costs 3. Indirect Costs • Indirect costs involves the costs that results from the loss of productivity due to illness or death ―Indirect benefits are savings from avoiding indirect costs →Increased earnings or productivity gains that occur due to a treatment or intervention • Examples of indirect costs include: 1. Lost productivity (or time off from work) for patient to receive treatment 2. Reduced productivity because of the effects of the disease or its treatment 3. Lost productivity for unpaid caregiver (spouse, family member, neighbor, friend) 4. Lost productivity due to premature mortality 10 Types of costs 4. Intangible Costs • Intangible costs reflects the patient’s level of pain and suffering due to an illness or the treatment of an illness in of intangible costs ―Intangible benefits are avoidance or alleviation →i.e., they are benefits that results from a reduction in pain and suffering related to a product or intervention ―These type of costs/benefits are the hardest to measure because it is difficult to place monetary value on them • Examples of intangible costs include costs associated with: 1. 2. 3. 4. Anxiety Chronic pain Loss of functioning Fatigue 11 Types of costs Example: Types of costs for a patient with schizophrenia • Direct medical costs • Medications • Outpatient/professional services • Inpatient services • Long term care • Direct non-medical costs • Law enforcement • Shelters • Indirect costs • Unemployment • Reduced productivity at work • Premature mortality (suicide) • Caregiver cost • Intangible costs • Pain and suffering of family members 12 thingtodo Erst no Perspective • The perspective of a study must be determined in order to determine what costs (direct, indirect, or intangible) are important to measure • Perspective is an economic term that describes whose costs are relevant based on the study purpose • The major types of perspectives taken in PE analyses include 1. Provider 2. Payer 3. Societal skin • The most common perspectives taken in PE literature are the provider and the payer perspectives 14 Study perspective 1. Provider perspective • Providers include hospitals, clinics, physicians, etc. ―This is a common perspective taken in PE literature ―Only direct costs (medical and non-medical) are usually measured ―For example: →cost of surgery incurred by a patient admitted to a hospital (direct, medical cost) →Cost of food and lodging/hotels for the patient’s family during the out-of-town surgical procedure (direct, non-medical cost) 15 Study perspective 2. Payer perspective • Examples of payers include patients, managed care organizations (MCOs), and government (e.g., Medicare, Medicaid, VA, etc.) ―The payer perspective is another common perspective taken in the PE literature ―Only direct costs (medical and non-medical) are usually measured ―For example: → Reimbursement amount paid by MCOs or Medicare to the provider (hospital, doctors, etc.) for treatment →A patient’s out-of-pocket costs for drugs or treatment 16 Study perspective 3. Societal perspective • The societal perspective is suggested by economic theory to be the ‘most appropriate’ perspective to take ―However, it is difficult and time-consuming to estimate • The societal viewpoint is comprehensive and means that all costs and all benefits should be incorporated no matter who pays the costs or who receives the benefit • Efforts has been made to refocus the term as “health system perspective” (Garrison, 2010) • At the minimum, the types of costs that should be measured include 1. Direct costs (medical and non-medical)patient 2. Indirect costs (loss of productivity) employer, family, etc. (Garrison, 2010) • In addition to the costs, the utility of health states must be elicited from members of the public. Utility values are needed to calculate QALYs which is used in the CEA or CUA. The societal perspective is not a commonly taken perspective in PE literature 17 Timing Adjustments for Costs 1. Standardization-bringing past costs to the present 2. Discounting-bringing future costs to the present 18 Timing Adjustment for Costs • Before using cost values in PE study, they need to be adjusted for the influence of time • Two different concepts are employed: ―Standardization/adjustment →Bringing past costs to the present value →Magnitude of the cost increases when adjusting it from the past to its present value (e.g., from $200 in 2020 to $250 in 2024) ―Discounting →Bringing future cost estimate/projections to the present value →Magnitude of the cost decreases when bringing it from a future estimate to its present value (e.g., from projected $420 in 2027 to $350 in 2024) 19 Standardization/Adjustment • Costs should be adjusted if they are estimated from information that is one year or more before the current study (i.e., brought to the present value) • Also, costs obtained from different years within the same study should be standardized to a reference year (usually the current year, but could be any year) ―For example, you might want to compare treatment costs between patients who received care in different years such as in 2020 and 2024 →For a fair comparison, you should convert all the 2020 costs to their 2024 present value • The most common method employed is to adjust the costs using the medical consumer price index (MCPI) inflation rates • Cost adjustments in PE literature are inferred by phrases such as: ―‘costs were expressed in 2024 US dollars…’ 20 Standardization/adjustment 1. Non-constant inflation rates (e.g., adjusting 2013 cost to its 2015 value with different inflation rates in 2014 and 2015) 𝑤ℎ𝑒𝑟𝑒 𝐶𝑜𝑠𝑡 2015 𝑣𝑎𝑙𝑢𝑒 = 𝐶𝑜𝑠𝑡 ;𝑟 × 1+𝑟 × 1+𝑟 𝑟 ; 2. Constant inflation rates (e.g., adjusting 2013 cost to its 2015 value with same inflation rates in 2014 and 2015) 2015 𝑣𝑎𝑙𝑢𝑒 = 𝐶𝑜𝑠𝑡 × (1 + 𝑟) 𝑤ℎ𝑒𝑟𝑒 𝐶𝑜𝑠𝑡 ; ; 𝑟 = 𝑐𝑜𝑛𝑠𝑡𝑎𝑛𝑡 𝑖𝑛𝑓𝑙𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒; 𝑎𝑛𝑑 𝑡 = 𝑝𝑟𝑒𝑠𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 − 𝑦𝑒𝑎𝑟 𝑤ℎ𝑒𝑛 𝑐𝑜𝑠𝑡 𝑤𝑎𝑠 𝑚𝑒𝑎𝑠𝑢𝑟𝑒𝑑 𝑖. 𝑒. , 𝑡 = 2015 − 2013 = 2 21 Standardization/adjustment present past Question: Adjust a 2013 office visit cost of $200 to its 2015 value (given that the MCPI for 2014 and 2015 were 2.5% and 2.4%, respectively) • Different inflation rates: method 1 0025 0.027 2015 𝑣𝑎𝑙𝑢𝑒 = 𝐶𝑜𝑠𝑡 × 1 + 𝑟 × 1 + 𝑟 = $200 × 1 + 2014 𝑀𝐶𝑃𝐼 × 1 + 2015 𝑀𝐶𝑃𝐼 = $200 × 1 + 0.025 × 1 + 0.024 = $200 × 1.025 × 1.024 = $209.92 Interpretation: The initial office visit cost in 2013 ($200) has increased to $209.92 because of inflations in 2014 and 2015 ―In your study being conducted in 2015, you should use $209.92 as the cost value for the office visit and not $200. costyx19try I try a 209092 22 0 71 2511 Standardization/adjustment Question: Adjust a 2013 office visit cost of $200 to its 2015 value (given that the MCPI for 2014 and 2015 were 2.5% and 2.4%, respectively) Different inflation rates: method 2 This requires two steps: Step 1: Convert the 2013 cost ($200) to 2014 cost a. Multiply $200 by 2014 MCPI (2.5%) → $200 × 0.025 = $5 (extra cost due to inflation) b. Add $200 to the extra cost due to inflation → $200 + $5 = $205 (cost in 2014) 23 Standardization/adjustment Step 2: Convert the 2014 cost ($205) to its 2015 value a. Multiply $205 by the 2015 MCPI (2.4%) → $205 × 0.024 = $4.92 (extra cost due to inflation) b. Add $205 to the extra cost due to inflation → $205 + $4.92 = $209.92 (cost in 2015) • This is the same answer as in method 1: $200 × 1.025 × 1.024 = $209.92 24 Standardization/adjustment • Question: Adjust a 2013 office visit cost of $200 to its 2015 value given that the MCPI for 2014 and 2015 was constant at 2.4% 0.024 • Constant inflation rates 2015 𝑣𝑎𝑙𝑢𝑒 = 𝐶𝑜𝑠𝑡 × (1 + 𝑟) = $200 × (1 + 0.024) = $200 × (1.024) = $209.72 costy p rj Presat past 2015 2013 200 T t o 024 209.72 25 Adjustment Textbook Example 26 Discounting • Discounting is needed if costs are estimated based on dollars that will be spent or saved in future years ―Discounting means bringing the value of future costs/benefits to the present value • Money received today is worth more than the same amount of money received in the future ―For example, $1,000 in 2025 may only be worth $800 today (2024) ―Thus, money promised in the future has less value than money received today • Modifications are estimated using a discount rate (similar to inflation rate) ―generally between 3-5% for health care interventions • The present value (PV) of future expenditures (or savings) is then estimated 27 Discounting • There are two ways to discount the cost: Method 1: Cost is assessed (or valued) at the beginning of each year ―Discounting starts from Year 2 →Year 1 cost is not discounted (has the same value) Method 2: Cost is assessed (or valued) at the end of each year ―Discounting starts from Year 1 • There will be a range of years and you need to calculate the total discounted cost over these years 28 Discounting-beginning of each year Method 1: cost assessed at the beginning of each year PV = ( ) PV=present value c = costs (or benefits) r = constant discount rate per year t = number of years in the future (= future year−current year) 29 Discounting-beginning of each year 0.037 • Question: Based on a 3.7% discount rate per year, what is the 2024 present value for a drug that is projected to cost $30,000 in 2028. Assume costs are assessed (valued) at the beginning of each year Method 1: cost assessed or valued at the beginning of each year 2024 PV = ( ) =( . , ) = , ( . ) = , . = $25,951.56 Note: When cost is valued at the beginning of each year, the cost for the present year (first year=2024) is not discounted. Discounting occurs from the beginning of subsequent years 2025, 2026, 2027, and 2028; thus t=4) It It 30 8 4 0.037 Discounting-end of each year Method 2: cost assessed at the end of each year PV = ( ) PV= present value c = costs (or benefits) r = constant discount rate per year t = number of years in the future (= future year−current year) 31 Discounting-end of each year • Question: Based on a 3.7% discount rate per year, what is the 2024 present value for a drug that is projected to cost $30,000 in 2028. Assume costs are assessed (valued) at the end of each year Method 2: cost assessed or valued at the end of each year 2024 PV = ( ) =( , . = ) , ( . ) = , . = $25,020.85 Note: When cost is valued at the end of each year, the cost for the present year (2024) is discounted; also, discounting occurs for subsequent years of 2025, 2026, 2027 and 2028; thus t+1=4+1=5) Pu gu 7 25616.55 32 Fates preset Summary: adjustment and discounting • Adjustment is multiplication of costs by the inflation factor (1 + 𝑟) ―Usually, inflation rate is assumed to be constant each year ―It converts past costs into present value ―Monetary figure increases (for example $200 in 2017 may increase to $215 in 2021) • Discounting is division of costs by the discount factor (1 + 𝑟) or (1 + 𝑟) ―Inflation rate is assumed to be constant each year ―It converts future costs into present value ―Monetary figure decreases (for example, $300 in 2023 may decrease to $270 in 2021) 33 Where do the cost information come from? Medical records, clinical trials, claims records, RED BOOK, Physicians’ fee reference Resources for estimating direct medical costs • Direct medical costs can be estimated in several ways, including: 1. Direct measurement during a clinical study 2. Retrospective data collection • Medical records (EHR) • Reimbursement claims data (e.g., MarketScan data) 3. Various standard lists of costs (average wholesale price, Physician’s Fee Reference) 35 Drug costs 1. Average Wholesale Price (AWP) ―AWP is the average list price that a manufacturer suggests wholesalers should charge pharmacies/retailers ―It is considered the “list price” or “sticker price” for medications ―Drug costs are often estimated using the AWP because they are more readily available →Available in sources such as the RED BOOK (published by Truven Health Analytics) ―One major disadvantage of AWP is overestimation of drug costs →AWP is higher than the actual drug acquisition costs (i.e., what pharmacies, institutions, and insurance companies actually pay for obtaining the medication) →The AWP has moved so far from the actual acquisition costs of drugs that it is no longer considered useful 36 Drug costs É Cost (WAC)so BettertonAWI 2. Wholesale Acquisition ―WAC is an estimate of the price paid by the wholesaler or a direct purchaser for drugs purchased from a manufacturer before any discounts, rebates, purchasing allowances, or other forms of economic considerations ―It is a more precise estimate of the costs of drugs than AWP ―It is only available for a fee to the public/researchers trying to estimate drug costs • Notes: ―AWP and WAC are prices that are published in commercial drug pricing compendia by private companies, such as First Databank and Medi-Span, based on pricing information reported by manufacturers ―Neither AWP nor WAC are necessarily based on actual sales transactions Video: How prescription drug rebates work- https://www.kff.org/medicare/video/prescription-drugrebates-explained/ 37 Drug costs 3. The National Average Drug Acquisition Cost (NADAC) ―NADAC provides the average drug market prices paid in the United States as provided periodically by the Centers for Medicare and Medicaid Services (CMS) →CMS survey randomly selected retail community pharmacy prices nationwide • Bottom-line: Researchers should be clear about the source(s) they use to estimate drug costs to enhance comparability of studies as the source estimates can vary widely 38 Physician/medical services • These include costs related to physician’s office visits, lab services, surgeries, etc. ―It involves the concept of “price/charge” vs. ‘allowable charge’ ―Providers have a list of charges for these types of services, but payers usually pay less than this “list price” • Common sources for determining costs (by a researcher) include: 1. Physicians’ Fee Reference (book published by Wasserman Medical Publishers) 2. Physicians’ Fee Schedule (freely available on Centers for Medicare and Medicaid, CMS website) 39 Hospitalization costs • The precision of estimates may vary widely for studies that include hospital costs as part of their evaluation • Four types of estimating hospitalization costs (from least precise to most precise) include: 1. Per diem perdy Complex 2. Disease-specific per diem rat reimbrusmat are of med pay man 3. Diagnosis-related groups (DRGs) 4. Micro-costing Balancew practicality andpresisress 40 Hospitalization costs 1. Per diem (per day) • For each day a patient is in the hospital, an average cost per day for all types of hospitalizations is used as a multiplier • In per diem, the same amount of reimbursement rate is paid irrespective of the cause of hospitalization ―For example, if the average reimbursement for hospitalization is set at $2,000 per day, a 3-day stay for cardiac bypass surgery are reimbursed at the same rate as a 3-day stay for appendicitis (3 days × $2,000 = $6,000) • Per diem is the least precise method of estimating hospital costs 41 Hospitalization costs 2. Disease-specific per diem • Here, the average cost per day of hospitalization depends on the nature of the specific disease • Higher cost weight is given to more severe disease and/or procedures ―For example, a 3-day stay for cardiac bypass surgery ($10,000 per day = $30,000 for 3 days) are reimbursed at a higher rate than a 3-day stay for appendicitis ($1,500 per day = $4,500 for 3 days) 42 Hospitalization costs 3. Diagnosis-related groups (DRGs) • DRGs are principal diagnoses that are grouped together and are expected to require similar amounts of hospital resources in the delivery of care • DRGs are mostly used in reimbursement of Medicare payments to hospitals • Patients are assigned into one of >500 DRGs based on ICD-9 principal diagnosis, principal procedures, age, sex, and comorbidities • A predetermined reimbursement amount is set according to each DRGs • The hospital then receives a predetermined fixed rate per discharge (i.e., per case) based on the patient’s DRG classification 43 Hospitalization costs DRGs 44 Hospitalization costs 4. Micro-costing • Micro-costing involves collecting information on each component of a hospitalization and summing up the individual costs • This is the most precise method of estimating cost, but it is also very tedious to accomplish ―You should balance accuracy with practicality →There may be difficulty obtaining cost data 45 Hospitalization costs Micro-costing put 7400318 Possible components of a coronary artery bypass graft (CABG) surgery Cost type Ward Operating room Medical or surgical supplies Intensive care unit Cardiac catheterization lab Laboratory services Pharmacy Anesthesia Intravenous therapy Transfusion Recovery room Electrocardiography Total Costs 4 500 Costs ($) 2027 2024 5,000 2,000 2,000 2,000 1,000 1,000 600 400 400 200 60 60 $14,720 46 Summary 9001740.023 9100261 704.91 • When determining costs: ―What is the perspective? →Is it provider (doctors, hospitals), payer (patient, managed care organization, government), or societal? ―Are relevant/realistic costs included? →Direct costs only (payer and provider perspectives) vs. taking a societal perspective which include measuring both direct and indirect costs ―Is discounting or cost adjustment appropriate? →Are you using cost data from past years (adjustment required), or are you projecting costs/benefit into the future (discounting required) ―Is sensitivity analysis conducted for uncertain values? 47