Concept: Hospital Costing: Using the 2009 Cost List for Manitoba Hospital Services

Introduction

This concept contains information presented in the MCHP deliverable The Direct Cost of Hospitalizations in Manitoba, 2005/06 by Finlayson et al. (2009). The concept briefly describes the key terms, data sources, methods and findings of the report, and also provides information on the Cost List(s) that resulted from this work. NOTE: For an overview of general costing methods (sources of data, types of costs, and approaches) and the methods of costing specific health services (hospitals, physicians, home care, personal care homes and pharmaceutical/prescription drugs) that have been used in MCHP research over time, please see the Costing Methods: An Overview of Costing Health Services in Manitoba concept.

The Direct Cost of Hospitalizations in Manitoba, 2005/06 deliverable has two purposes:


1. to provide a list of the cost of hospital inpatient and day surgery services in Manitoba, and
   
2. to present a value of hospital services that may be used for economic evaluations such as cost-effectiveness or cost-benefit analysis.

Several important highlights of this cost list include:


• the cost list is developed using the Case Mix Group (CMG™) patient classification system;
  
• the approach is similar (but not identical) to the method used by the Canadian Institute for Health Information (CIHI) and Hay Group where hospital workload measures are used to allocate costs to hospital inpatients;
  
• only direct costs are used in developing the cost list; and
  
• the list develops measures for three different types of hospitals: teaching, urban community, and other.

Key Terms Used in Costing

The report uses some key costing terms. The definitions for these terms can be found in the MCHP on-line Glossary by clicking on the links below:


• Cost Per Weighted Case (CPWC)
  
• Case Mix Groups (CMG™)
  
• Day Procedure Group (DPG™)
  
• Direct Costs of Inpatient Care
  
• Management Information System (MIS)
  
• Resource Intensity Weights (RIW™)
  
• Total Weighted Cases (TWC)

Data Sources

The two key data sources used in developing the cost list are listed below. For more information, click on the links provided.


• Management Information System (MIS) Data - financial and statistical data for this report are from the 2005/06 fiscal year. For a brief description of MIS, please see the glossary term Management Information System (MIS), and
  
• Hospital Abstracts Data - data for this report include all discharges from a Manitoba hospital during the 2005/06 and 2006/07 fiscal years.

Methods

This section describes the methods that were used to develop the average Cost Per Weighted Case (CPWC), and the resulting CPWC for each type of hospital. Producing a cost list for hospital services requires the development of the CPWC. The CPWC is calculated by simply dividing the direct costs of inpatient care (or the inputs) by the Total Weighted Cases (TWC), which could be considered the output of hospitals. The formula for determining the CPWC is:


CPWC = Direct Inpatient Costs / Total Weighted Cases

Identifying Direct Costs of Inpatient Care

The method to identify direct costs of inpatient care follows the approach taken by CIHI/Hay Group for calculating the direct costs of inpatient care. This involves utilizing various workload measures to determine the proportion of all costs attributable to inpatients. First, net costs (direct costs net of recoveries) and statistics were broken down into several work functions, including: Inpatient Acute Care, Operating Room, Outpatient Services, Community Services, Emergency Department, Inpatient Long Term Care, Inpatient Rehabilitation, Day Care, Patient Food Services, Patient Transport, Diagnostic and Therapeutic Services, Diagnostic and Therapeutic Services Administration, Laboratory Administration, and Other.

The CIHI/Hay Group methodology applies the workload distribution approach at a very precise level (e.g., an individual department). The data reported by the majority of Manitoba hospitals were insufficient to support this approach throughout the province. As a result MHCP researchers aggregated workload and costs.

This involved reviewing various statistical reports to determine the most accurate indicators for the proportion of expenditures associated with inpatient care. If this information is insufficient, a default value is used. The proportion of expenditures attributable to inpatient services is then multiplied by the net expenses of the fourteen work function areas. These values are then summed to determine the total direct inpatient cost for a hospital.

Detailed information on the calculation of direct inpatient costs is provided in Appendix 1 of the report by Finlayson et al. (2009).

Costs Not Included

There are a number of costs reported by hospitals that are not included in the direct cost of inpatient care. These include:


• physician services,
  
• research,
  
• education and training,
  
• community services,
  
• ambulatory care,
  
• capital costs, and
  
• administration and support services.

For a detailed description of the costs not included in direct inpatient costs, please see section 3.1.2.1 - Costs Not Included of the report.

Determining the Total Weighted Cases (TWC)

For each person discharged from a hospital, CIHI assigns a Resource Intensity Weight (RIW™) to each case. The RIW reflects the relative amount of resources (i.e.: the cost of care) for each individual - people who receive more complex (and costly) care would receive a RIW that is higher than those who receive less complex care. Detailed information on how a RIW is assigned to cases is available from CIHI.

In order to determine what is produced by all hospitals, the RIW that is assigned to each discharge is summed. This produces the denominator, the total weighted cases (TWC), for calculating the CPWC.

In-Year Adjustment

Issues arise in calculating the TWC because of the timing of patients discharged from hospital. For example, if a person is admitted to hospital one year and discharged the next, we know nothing about their hospitalization until the next year. Similarly, if a person is discharged early in the year of interest but had much of their stay in a previous year, all of the weight would be assigned to a year in which there were relatively few costs.

To account for this, we make an in-year adjustment that attempts to match the weights that are assigned to each case with the year in which the costs were incurred. This is the reason that two years of discharge data are used. Only the weights assigned to days in the relevant year are included.

Detailed information on the in-year adjustment process is provided in Appendix 2 of the report by Finlayson et al. (2009).

Findings - Cost Per Weighted Case (CPWC)

Based on the data and methods described above, the total direct cost of inpatient care in 2005/06 was $587,678,491.00 and the total of the in-year adjusted weighted cases was 198,980.09.

This results in a provincial CPWC of $2,953.45. Remember, the provincial CPWC represents the average cost for a standardized patient across all hospitals in the province.

CPWC By Hospital Type

There are circumstances under which researchers may want to have different costs for different types of hospitals. The table below provides the CPWC for three different types of hospitals: Teaching, Urban Community, and Other.

Type of Hospital	Direct Cost ($)	Adjusted Total Weighted Cases	CPWC ($)
Teaching Hospitals	$ 277,409,431	79,137	$ 3,505
Urban Community Hospitals	$ 179,209,609	67,629	$ 2,650
Other Hospitals	$ 131,059,451	52,214	$ 2,510

NOTE:

The two teaching hospitals include Health Sciences Centre and St. Boniface General Hospital in Winnipeg. The urban community hospitals include Brandon, and the Concordia, Grace, Seven Oaks, and Victoria hospitals in Winnipeg. The "other" category includes all other hospitals in Manitoba combined.

The Cost Lists

A cost list provides a standard cost for each type of case that receives care in a hospital in Manitoba. A standard cost refers to an average cost - similar cases will not necessarily cost exactly the same.

For a number of years CIHI has used a complexity overlay to assign weights to cases. This approach recognizes that even within a single CMG there may be varying costs. For example, it may be more costly to provide care to an older person than a younger one, and multiple co-morbidities may also increase the associated cost. Within each CMG (with a few exceptions), CIHI calculates a weight for three age groups (0 to 17 years, 18 to 69 years, and 70 years and over) and one of four complexity levels (CMG Plx). In some cases, complexity is not assigned. The complexity levels are:


1. No complexity
   
2. Complexity related to chronic condition(s)
   
3. Complexity related to serious/important condition(s)
   
4. Complexity related to potentially life-threatening condition(s)

The cost associated with a particular CMG/age group/complexity level is calculated by multiplying the provincial average direct cost per weighted case ($2,953.45) by the RIW that is assigned to that cell. There are many instances where there were no cases for a particular cell in 2005/06 - the value shows what the cost would be if there had been cases.

Cost List for Inpatient Services

The cost list is designed to be useful for a variety of audiences. For those who want a single number for a particular type of case, a weighted average has been calculated. This average is a function of the number of cases in each cell, the cost associated with that cell, and the total number of cases. The weighted average cost is calculated by multiplying the number of cases in each cell by the cost per case for the cell. The total cost for all cells is summed, and this total is divided by the total number of cases for the CMG.

In situations where there are five or fewer cases in a single cell, the number has not been reported, and is indicated by a "-". In some cases we combined groups (indicated by a "c" in both cells) or the suppression of one other cell in the CMG so that the cost per case and the total cost for CMG could be presented. These suppressed cases are, however, aggregated with all of the other cases when reporting the weighted average cost.

Click here to access the Cost List for Inpatient Hospital Services .

Cost List for Day Surgery

While the CPWC is calculated for inpatients, it can also be applied to day procedures (outpatient surgery). For day procedures, each case is classified into a Day Procedure Groups (DPG™). The cost is calculated by multiplying the weight that is assigned to the DPG by the CPWC value.

Click here to access the Cost List for DPGs .

Cautions / Limitations

There are several limitations in using the costing information presented in this deliverable.

The information presented in the report uses only the direct costs related to inpatient care. In some cases, particularly for economic analysis, it may be desirable to use the full cost of services provided. The full cost is simply the direct cost plus an amount for indirect costs. Indirect costs include activities such as administration, health records and plant maintenance. These are real costs associated with operating a hospital, but cannot be directly attributed to inpatient care.

In Finlayson et al. (2009), a provincial average for administrative and support services costs was calculated by taking the total expenses in this category as a proportion of the total direct costs used in the CPWC calculation. This rate was calculated at 19.9%, meaning that for every $1.00 of direct expense, $0.199 is incurred in indirect cost. Other costs not included as direct costs in this report could be calculated on a similar basis to come up with a full cost of patient care.

However, some costs are variable in relation to the direct costs of a case, and other costs are fixed - the cost is the same for all patients regardless of the direct cost. Investigators should use caution when using full costs in their research.

A second limitation of this approach is that it is dependent upon having complete and accurate statistical data that describe how, within a work function, workload is divided among various types of patients (e.g., acute inpatient, outpatient, long term care, day care). Calculating the total costs may be time consuming, particularly if the data must be validated prior to use.

A third limitation is the use of a standard cost for each case. While this will even out over a large group of patients, hospitals treating a larger number of complex conditions will have higher costs than other hospitals.