Promoting Excellence : Cost Accounting Recommendations to the Field : Appendix A: Overview of Cost Accounting Methods

Resource Costing Methods

The most common method of costing in evaluative studies is termed "the resource costing approach." This approach involves collecting service units — typically at one institution, with all the institutional biases of how services are measured, and applying institution—specific costs (typically government payments) to the service units. A common criticism of the "resource costing approach" is its failure to capture units of medical care services in consistent and meaningful ways.[1]

Price Adjustment Methods

An alternative to resource costing is "the price adjustment approach." This method compares the monetary estimates of resources used, after adjustment for price level differences between countries, and over time, to standard current values. In order to attempt pooling of cost estimates, analysts must at least be certain as to which "secondary" cost estimates represent opportunity costs, charges or average costs.[2]

In the U.S., the "price adjustment approach" underlies the use of Medicare Cost-to-Charge Ratios (CCR). Costs are estimated using the CCR approach by multiplying the number of units of each procedure billed by its Medicare charge and CCR and then summing these costs. Some health care organizations have begun to invest in sophisticated cost-accounting systems (CAS) that are capable of providing procedure-specific cost estimates, usually based on relative value units; these systems often rely on billing data to obtain service units.

A few studies have used a combination of Medicare CCR and CAS methods to estimate costs.[3,4] In these studies, the CAS was for hospital costs only, with Medicare reimbursement (rather than institution costs), being used for professional services by using relative value units and a conversion factor from the Medicare Fee Schedule.

To overcome the issues of inaccurately (or non-transparently) measuring resource units, it is becoming more common in clinical trials to develop case report forms to capture all study end points, including medical service use. These studies then translate medical service use into costs using standard charges or costs, or a series of representative data sets of cost, to charge ratios by medical service category.

For analyses with specific objectives, much less intensive measures might be employed. For example, one study only involved the differential cost of medical devices, and therefore only captured the cost of the device.[5] A number of investigations in the end-of-life arena have approached accounting from a hospital perspective, focusing on incremental hospital days/costs, and therefore only capture these data.[6,7,8,9]

No cost accounting study is perfect or can capture all direct costs and indirect economic impacts of illness and care. Studies of only one medical resource/cost item are often criticized - suggesting that the use of focused studies may not be well received. In fact, even studies that capture the total costs of medical care services are criticized for not capturing the indirect costs. For example, family expenses of end-of-life care are substantial and are not factored into most cost-analysis studies. (Chichinov HM. Kristjanson L. 1998). Very few studies have tried to capture all costs to enable adjustments of costs for selection processes that may influence resource use.[10]


End Notes

  1. Glimelius B, Hoffman K, Graf W, Haglund U, Nyren O, Pahlman L and Sjoden PO. "Cost-Effectiveness of Palliative Chemotherapy in Advanced Gastrointestinal Cancer." Annals of Oncology, 6(3): 267-274, 1995.

  2. Gold M, Siegel J, Russell L and Weinstein M (eds). Cost-Effectiveness in Health and Medicine. New York: Oxford University Press, 1996.

  3. Smith DG, Henley KS, Remmert CS, Hass SL, Campbell DA and McLaren ID. "A Cost Analysis of Alprostadil in Liver Transplantation." PharmacoEconomics, 9(6): 713-722, 1999.

  4. Hayman JA, Lash KA, Tao ML and Halman MA. "A Comparison of Two Methods for Estimating the Technical Costs of External Beam Radiation Therapy" International Journal of Radiation Oncology, Biology, Physics, 47(2): 461-467, 2000.

  5. O'Hanlon DM, Callanan K, Karat D, Crisp W and Griffin SM. "Outcome, Survival, and Costs in Patients Undergoing Intubation for Carcinoma of the Esophagus." American Journal of Surgery, 174(3): 316-319, 1997.

  6. Miller SC, Gozalo P and Mor V. "Hospice Enrollment and Hospitalization of Dying Nursing Home Patients." American Journal of Medicine, 111(1): 38-44, 2001.

  7. Aristides M and Shiell A. "The Effects on Hospital Use and Costs of a Domiciliary Palliative Care Nursing Service." Australian Health Review, 16(4): 405-413, 1993.

  8. Vinciguerra V, Degnan TJ, Budman DR, Brody RS, Moore T, Sciortino A and O'Connell M. "Comparative Cost Analysis of Home and Hospital Treatment." Progress in Clinical and Biological Research, 216: 155-164, 1986.

  9. Brooks CH. "The Potential Cost Savings of Hospice Care: A Review of the Literature." Health Matrix, 1(2): 49-53, 1983.

  10. Smith DG, Harlan LC and Hawthorne VM. "The Charges for ESRD Treatment of Diabetics." Journal of Clinical Epidemiology, 42(2): 111-118, 1989.

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Promoting Excellence in End-of-Life Care was a national program of the Robert Wood Johnson Foundation dedicated to long-term changes in health care institutions to substantially improve care for dying people and their families. Visit PromotingExcellence.org for more resources.

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