How to measure cost to deliver medical care: Micro-costing method
In this section we specifically focus on the micro-costing method. The micro-costing approaches provides accurate and relevant cost information which reflect the true costs to deliver care to the individual patient.
Micro-costing with time-driven Activity Based Costing (TDABC) is an innovative approach to measuring costs across an entire episode of care. Activity-based-costing is a well-known methods that has been increasingly adopted by health care. This method is useful to practitioners and researchers interested in improving the value their intervention delivers to patients or to demonstrate program sustainability. TDABC has been found to be very practical for estimating the costs of new interventions when there is no established estimate of costs.
Micro-costing methods or bottom-up costing offers a more precise cost estimation and can reflect the actual resources used as compared to gross-costing. The micro-costing estimation provides the true costs to the healthcare system of the intervention. Micro-costing can be used with cost-benefit or cost-effectiveness analysis studies.
a. When you would use micro-costing
i. Intervention or new treatment that does not have established average costs
ii. A study of within system procedure variation
ii. Clinical practice guideline development
b. Micro-costing steps
i. Process Mapping to capture current care delivery process from the provider’s perspective.
1. Each step reflects an activity in patient care delivery
2. Identify the resources (facility space & equipment) involved for the patient at each step
3. Identify any supplies used for the patient at each step
ii. Activity Measurement
1. Direct observation and measurement of health care resources used at the patient level (TDABC) OR
2. Cost of treating the individual with relative value unit (RVU) or work relative value unit (WRVU)
iii. Cost Calculation (TDABC costing template)
1. Calculate the capacity cost rate (CCR) for each resource
2. Calculate the total direct costs (personnel, equipment, space & supplies) of all the resources used over the cycle of care
3. Identify and allocate the indirect costs attributable to the cycle of care
Micro-costing resources and examples of TDABC
Direct measures of healthcare costs:
Smith, M. W., & Barnett, P. G. (2003). Direct measurement of health care costs. Medical care research and review, 60(3_suppl), 74S-91S.
Coberly, S. (2015). Relative Value Units (RVUs).
The application of healthcare system process improvement, a system application of valued-based care:
Lee, V. S., Kawamoto, K., Hess, R., Park, C., Young, J., Hunter, C., & Graves, K. K. (2016). Implementation of a value-driven outcomes program to identify high variability in clinical costs and outcomes and association with reduced cost and improved quality. Jama, 316(10), 1061-1072.
A general overview to help researchers and administrators better understand TDABC:
Kaplan, R. S., Witkowski, M., Abbott, M., Guzman, A. B., Higgins, L. D., Meara, J. G., & Wertheimer, S. (2014). Using Time‐Driven Activity‐Based Costing to Identify Value Improvement Opportunities in Healthcare. Journal of Healthcare Management, 59(6), 399-413.
Kaplan, Robert S. "Improving value with TDABC." Healthcare Financial Management, June 2014, p. 76+. Academic OneFile, Accessed 7 Nov. 2017.
A TDABC systematic literature review that explores why and how TDABC has been applied in healthcare settings:
Keel, G., Savage, C., Rafiq, M., & Mazzocato, P. (2017). Time-driven activity-based costing in health care: A systematic review of the literature. Health Policy.
Examples of TDABC in practice
An example of estimating the cost of two treatment options with time estimated from interviews not direct measurement. The paper provides a good depiction of the treatment process map:
Schutzer, M. E., Arthur, D. W., & Anscher, M. S. (2016). Time-driven activity-based costing: a comparative cost analysis of whole-breast radiotherapy versus balloon-based brachytherapy in the management of early-stage breast cancer. Journal of oncology practice, 12(5), e584-e593.
An example of application of TDABC in an outpatient radiology department with detailed process maps that illustrate personnel time for each step in the course of care:
Anzai, Y., Heilbrun, M. E., Haas, D., Boi, L., Moshre, K., Minoshima, S., & Lee, V. S. (2017). Dissecting Costs of CT Study: Application of TDABC (Time-driven Activity-based Costing) in a Tertiary Academic Center. Academic radiology, 24(2), 200-208.
An example of the application of TDABC in an emergency department setting. The paper includes a comparison the total costs for an episode of care by ratio costs to charges (RCC), a relative value unit (RVU) model, and TDABC:
Yun, B. J., Prabhakar, A. M., Warsh, J., Kaplan, R., Brennan, J., Dempsey, K. E., & Raja, A. S. (2016). Time-driven activity-based costing in emergency medicine. Annals of emergency medicine, 67(6), 765-772.
An example using micro-costing to quantify costs of managing recurrent urinary tract infections in women using a theoretical process map:
Gaitonde S, Malik RD, Zimmern PE. FINANCIAL BURDEN OF RECURRENT URINARY TRACT INFECTIONS IN WOMEN: A TIME-DRIVEN ACTIVITY-BASED COST ANALYSIS. Urology. 2019.
An example using micro-costing to quantify personnel costs and project operating list process improvements:
Basto J, Chahal R, Riedel B. Time-driven activity-based costing to model the utility of parallel induction redesign in high-turnover operating lists. Healthcare (Amsterdam, Netherlands). 2019.
An example using micro-costing to estimate the direct cost of monitoring and managing anticoagulation therapy. This example provides a great example of a very detailed process map:
Bobade RA, Helmers RA, Jaeger TM, Odell LJ, Haas DA, Kaplan RS. Time-driven activity-based cost analysis for outpatient anticoagulation therapy: direct costs in a primary care setting with optimal performance. Journal of medical economics. 2019:1-7.
An example of the use of TDABC to deliver adjuvant radiation therapy by constructing process maps and monetizing components of the process maps. This paper provides a validation of the TDABC results by comparing the TDABC findings to the 2018 Medicare Physician Fee Schedule reimbursement for adjuvant radiation therapy:
Ning MS, Klopp AH, Jhingran A, Lin LL, Eifel PJ, Vedam S, Lawyer AA, Olivieri ND, Guzman AB, Incalcaterra JR, Mesko SM, Pezzi TA, Boyce-Fappiano DR, Shaitelman SF, Frank SJ, Thaker NG. Quantifying institutional resource utilization of adjuvant brachytherapy and intensity-modulated radiation therapy for endometrial cancer via time-driven activity-based costing. Brachytherapy. 2019 Apr 13. pii: S1538-4721(19)30120-5. doi: 10.1016/j.brachy.2019.03.003. [Epub ahead of print]1
How to measure cost to deliver medical care: Gross-costing method
In this section we specifically focus on the gross-costing method. The gross-costing is a method of cost allocation that is simple, practical, and robust to geographical variation and can be used to estimate resource consumption and savings attributable to the intervention. Gross-costing is also referred to as macro or top-down costing and the results provide an estimate of the “typical” cost of the program or service. Gross-costing allocates a total budget to specific service, hospital stay or provider visits as compared to micro-costing which measure costs for the procedures and professional time.
a. When you would use gross-costing
i. The available data is secondary data, charge data, and even national average such as DRG.
ii. Aggregated or average unit costs per patient meets study needs.
b. Gross-costing steps
i. Identify the resources that will be consumed in the intervention or through the course of care (similar to process mapping used in micro-costing). The cost/resources that are included depend upon the perspective used for the study (societal vs. health care system vs. payer)
ii. Measure identified resources utilizations or the changes in resource used as a result of the intervention as compared to standard of care
iii. Valuation of resource utilization of direct and indirect cost associated with the program or service (e.g., RVUs or HCRIS).
Note: Direct and indirect cost are accounting terms. Generally, direct costs are charges that can be attributed to the program and examples include the costs of tests, drugs, supplies, and personnel, whereas indirect costs include costs such as overhead or cost allocation.
CMS maintained Medicare-certified institutional providers annual cost report. Information includes facility characteristics, utilization data, cost and charges by cost center (in total and for Medicare), Medicare settlement data, and financial data. Cost report data is also available for Skilled Nursing Facility, Home Health Agency, Renal Facility, Health Clinic, Hospice Cost Federally Qualified Health Clinic Cost Report, and Community Mental Health Center Cost Report.
MEDPAR files contain information on 100% of Medicare beneficiaries using inpatient hospital services. Data is available by state and then by Diagnosis Related Groups (DRGs). A hospital inpatient discharge is assigned to a DRG based upon diagnosis, surgery, patient age, discharge destination, and sex. Information includes total charges, covered charges, Medicare reimbursement, total days, number of discharges and average total days.
Schousboe, J. T., Paudel, M. L., Taylor, B. C., Mau, L.-W., Virnig, B. A., Ensrud, K. E., & Dowd, B. E. (2014). Estimation of Standardized Hospital Costs from Medicare Claims That Reflect Resource Requirements for Care: Impact for Cohort Studies Linked to Medicare Claims. Health Services Research, 49(3), 929–949.