Concept: Costing Methods: An Overview of Costing Health Services in Manitoba

Concept Description

Last Updated: 2017-10-12


1 - Costing Methods

1.1 - Sources of Expenditure Data

1.2 - Types of Cost Data

1.3 - Approaches to Costing Health Services

1.3.1 - Micro-Costing (Bottom-Up)

    This approach requires the researcher to identify and specify all of the resources that are used by individual patients. This type of costing requires detailed knowledge of the treatment and services provided to individual patients. All of the actual costs of the individual's treatment and services are assigned to that one case. For example, calculating the micro-costs for an intensive care unit (ICU) stay requires identifying dollar values for drugs and supplies used in treating the patient, identification and calculation of the nursing costs involved, cost of physician services provided, cost of equipment, and any other costs that can be contributed to the individual ICU stay. In this approach, the cost of similar cases may vary because of a small difference in the treatment and/or services provided.

    In Manitoba, a micro-costing approach can be applied to physician and drug data because this data is collected on an individual basis. However, micro-costing has not been implemented for hospital, home care or personal home care data because the accounting systems for these services do not collect cost data for individual patients. For more information about the use of the micro-costing method see Jacobs et al. (1999).

1.3.2 - Standard Costing (Top Down)

    This approach is commonly referred to as "average" costing because the method takes total health care expenditures and divides it by a measure of total services provided (the output) to determine a cost per patient (Jacobs et al, 1999). A simple formula illustrates this method:
    Average cost = total expenditure ÷ total output

    For example, if a hospital spends $2,000,000 treating all patients and 2,000 patients are treated, then the average cost per case is $1,000.

    Two different methods of standard costing have been used at MCHP:

    1. Per Diem Costs - Per diem costs can be calculated by dividing the total expenditure for services by the total number of days of service to give an average cost per day. In general, per diem costs are considered a poor estimate of individual resource utilization because no adjustments are made for differences in patient or provider characteristics, which are likely to affect resource utilization. However, certain economic analyses, such as a population-based perspective, may appropriately use per diem costs, particularly when differences in user characteristics are not important or more suitable data are not available. This approach has been used for costing hospital, personal care home and home care services. See Wall et al. (1994) and Finlayson et al. (2010) for examples using per diem costing methods.

    2. Case Mix Costing - With case mix costing, patients are divided into clinically meaningful groups that are expected to use similar amounts of hospital resources. The case mix system assigns a "relative" weight to patient cases and assumes a standard consumption of resources among similar cases. In some methods, adjustments are made for atypical cases, the complexity/severity of the case, and the age range of different cases.

      Two different case mix systems have been used over time in the Manitoba data: Case Mix Groups (CMGs™) and Diagnosis Related Groups (DRGs™) or Refined Diagnosis Related Groups (RDRGs™). More recent work uses the CMG™ case mix system. Detailed information about the CMG™ and DRG™ case mix systems can be found in the following concepts:

      The following steps outline a general approach to determining the "relative" cost of hospital inpatient and day procedure services:

      1. Identify the relative weight (RW) of individual cases, and sum the total weight for all cases. For CMGs™ and Day Procedure Groups (DPGs™), the relative weight is referred to as the Resource Intensity Weight (RIW™). For RDRGs™, the relative weight is referred to as the Relative Case Weight (RCW).
      2. Identify the total expenditure associated with the services, using either a micro-costing or standard costing approach. Decide whether the direct costs, indirect costs, or full costs will be included, based on the source of data and what the research requires.
      3. Calculate the average cost per weighted case (CWC) using the following formula:
        CWC = Total Expenditure ÷ Sum of All Weights (inpatient and day procedures)

      4. Identify the cost of a individual case using the following formula:
        Cost of Case = CWC * RW of the case
      Case mix costing methods have been widely used for costing hospital services in MCHP research (Shanahan et al. (1994), (1996), and (1997); Mustard & Derksen (1997); Jacobs et al. (1999); and Finlayson et al. (2007), (2009)). Information related to the methods used in these research projects is presented in the section titled Costing Hospital Services.

1.4 - Which Method is Appropriate ?

2 - Costing Specific Health Services

2.1 - Costing Hospital Services

2.1.1 - Cost Lists

    Over time, MCHP has developed two cost lists that provide detailed cost information on hospital inpatient and day surgery services. The most recent was developed in 2009 using the CMG™ case mix system. The first cost list was developed in 1999 using the RDRG™ case mix system. The lists identify a standard cost for a specific patient case mix classification, which provides an average cost for services, and does not necessarily represent the actual cost of the services received by an individual. Adjustments to these standard costs can be made for atypical cases, severity of cases, and for the age of the patient depending on the type of hospital abstracts data that is available for use. The development of these costs lists provides valuable information that can be used for economic evaluations throughout Canada.

    The 2009 Cost List
    In Finlayson et al. (2009), the 2009 cost list was developed using MIS financial and statistical data from the 2005/06 fiscal year and hospital abstracts data from the 2005/06 and 2006/07 fiscal years. The abstracts data uses the Case Mix Groups (CMG™) case mix data, including complexity, provided by CIHI. The cost list focuses on the direct cost for inpatients and hospital day surgery cases and identifies the "average" cost for over 550 different categories/groups of CMGs™ and DPGs™. Information presented in the inpatient cost list includes: the total number of cases, average length of stay (LOS), and the average cost per case for typical cases for each of three different age categories and by complexity level, for atypical cases and for all similar cases combined. Another cost list is presented for DPGs™ that includes the number of cases, cost per case, and the total cost for each DPG™. The research also presents a cost per weighted case (CPWC) for three different types of hospitals (teaching, urban community, and other) in Manitoba.

    For more detailed information, see the Hospital Costing: Using the 2009 Cost List for Manitoba Hospital Services concept, or review the full report titled The Direct Cost of Hospitalizations in Manitoba, 2005/06 by Finlayson et al., (2009).

    The 1999 Cost List

    In Jacobs et al. (1999), the 1999 cost list was developed using hospital data from fiscal years 1993/94 and 1994/1995 and Maryland cost data from 1991/1992. This list reports standard costs for inpatient hospital care by type of case and type of hospital (e.g., chronic and long term care hospitals) and for hospital outpatient/day surgery procedures using the Refined Diagnosis Related Groups (RDRG™) case mix classification system.

    For more detailed information, see the Costing Using the 1999 Cost List for Manitoba Health Services concept, or review the full report titled Cost List for Manitoba Health Services by Jacobs et al., (1999).

2.1.2 - Using Cost Per Weighted Case (CPWC) / Cost of a Standard Hospital Stay (CSHS) Values

2.1.3 - Other Hospital Costing Research

2.2 - Costing Physician Services

2.3 - Costing Home Care Services

2.4 - Costing Personal Care Home (PCH) Services

2.5 - Costing Pharmaceuticals/Prescription Drugs

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