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Dollars and sense: A primer for the novice in economic analyses (part II)
Ask an Expert Edited by Patricia W. Stone Patricia W. Stone, PhD, MPH, RN, C, is Assistant Professor and Associate Director of the Center of Research and EvidenceBased Practice at the University of Rochester School of Nursing and Department of Community and Preventive Medicine, Rochester, NY 14642.
Dollars and Sense: A Primer for the Novice in Economic Analyses (Part II)
W
HEN CONSIDERING the use of resources to include in a specific economic evaluation, it is important to consider the perspective of the analysis. An economic analysis may be motivated by the desire to inform policy decisions relevant to specific institutions or individuals. In this case, the perspective of primary interest may be that of a managed care organization, hospital, employer, state health department, or other party. An economic evaluation conducted from the perspective of the hospital may not wish to consider costs (or savings) associated with caregiving in the home. However, an analysis from the perspective of the managed care organization may wish to consider home health nurses, but not family caregiving. The societal perspective incorporates all costs and all health effects regardless of who incurs them. All of these analyses are valid, however, the societal perspective is the most comprehensive and is recommended when the goal of the analysis is to inform broad base resource allocation decisions (Gold, Siegel, Russell, & Weinstein, 1996). The perspective and time horizon of the analysis are important factors to consider in economic evaluations of nursing services. In some instances, professional nursing services affect long-term patient outcomes (such as the impact of inpatient education on outpatient health services). In other Copyright © 2001 by W.B. Saunders Company 0897-1897/01/1402-0010$35.00/0 doi:10.1053/apnr.2001.22379
110
instances, perhaps by default, a substitute for professional nursing services may be the informal caregiving provided by friends and family. Economic evaluations conducted from the societal perspective may be more apt to capture these real costs. No matter what perspective the economic evaluation is conducted from, brainstorming regarding the relevant resources used is a useful approach to determine which resources to include. In this brainstorming session, think in terms of the cost “ingredients” that are needed for the interventions that are under analysis, as well as other resources which the interventions are likely to affect (Drummond et al., 1997). Once all the cost ingredients are identified, discussions about which costs are most relevant and which are important to measure can take place. Moreover, the perspective of the analysis will drive the decisions about which cost component to include. Once the consumption of resources has been estimated, the resource must be assigned a dollar value. Economists use the term opportunity costs to describe the value of the next best alternative use of the resources. Determining the actual opportunity cost of a resource is difficult. Some general guidelines follow for assigning a dollar value to a resource. Generally, market prices (or charges) do not equate to costs. This is especially true for charges associated with health care settings, due to institutional cost “shifting.” Health care delivery institu-
Applied Nursing Research, Vol. 14, No. 2 (May), 2001: pp 110-112
DOLLARS AND SENSE (PART II)
tions have prices that they use when sending bills to patients. However, many payers (such as large insurance organizations) do not pay these charges. Rather, the parties negotiate payment for services rendered based on the cost of the service and allowed profit margins (even for not-for-profit institutions). Cost shifting is the practice of allocating higher costs to departments, organizations, or patient groups that receive (or pay) higher reimbursements in relation to the cost to provide the service. Therefore, an adjustment to these prices occurs. A common source of valuation for hospital costs is the hospital’s cost-accounting systems, which are easily accessed in most institutions. Cost-accounting systems are developed by finance departments to assist administrative decision-making and are based on past accounting studies and algorithms. If a cost-accounting system is available, it is usually easy to determine the specific direct health care cost components, such as variable costs (e.g., staffing and supplies) and fixed overhead costs (e.g., rent and percentage of administration costs). A decision must be made regarding the treatment of fixed overhead costs. Whether or not to include fixed overhead costs should be based on the opportunity costs of these resources. The question to consider is: would this overhead be used for another purpose, if the program being evaluated were not in place? All hospitals calculate cost-to-charge ratios (CCRs) for federal reimbursement. A CCR is calculated by dividing the total costs in that cost center by the total charges for the same resource. CCRs are recognized as a gross adjustment to charges, that is, better than using charges alone, but not as accurate as cost-accounting systems. Of note, the use of CCR, by default, includes fixed overhead costs. Published sources, such as the Health Insurance Association of America (HIAA) and governmental fee schedules, are also sources often used to assign a dollar value to diagnosis related groups (DRGs) and Current Procedural Terminology (CPT) codes. When measuring the incremental effects in a cost-effectiveness analysis, the standard single outcome measure of health, dollars per life-year ($/ LY) gained, is often used because it is applicable across health care situations. Consequently, in the-
111
ory, results of different analyses can be aggregated, and resource allocation decisions may be informed across a variety of patient populations and settings. For example, if one analysis found the institution of a school-based health program to vaccinate children to cost $1,000/LY gained, and another analysis found opening a dialysis center to cost $50,000/LY gained, then funding the school health center may be considered the more cost-effective option. However, when $/LY is the outcome measure chosen, one year of life in an altered health state is considered equal to any other year of life. Although easy to understand, an outcome measure of $/LY considers only survival, not patient preferences, sub-optimal health states, or quality of life. Quality-adjusted life-year (QALY) is a single multidimensional measure of the quantity of life gained, weighted by the quality of that life. Depending on how the quality-adjustment is determined, patient preferences are directly or indirectly considered. Because dollars per QALY ($/QALY) is not disease specific and considers both quantity and quality of life, it may be a more ideal measure to inform health policy decisions than $/LY or dollars per case avoided. For these reasons $/QALY is recommended by the U.S. Public Health Service’s Panel on Cost-Effectiveness in Health and Medicine, when the goal of the analysis is to effect important resource allocation questions (Gold et al., 1996). In third world countries, health policy makers are using cost per disability-adjusted life year (DALY) gained to inform resource allocation decisions. In a recent comprehensive audit of $/QALY analyses (sometimes called cost-utility analyses) conducted over a 21-year period of time, only one analysis was published in a nursing journal (Chapman, Stone, Bell, Sanders, & Neumann, 2000). Nurses need to participate more actively in the conduct of economic evaluations concerning the care they provide. When the analysis is of a standard method and the outcome measure is a standard ratio, such as $/QALY, the results may make a strong argument to health policy decision makers concerning the funding and continued recognition of nurses as a cost-effective health care provider. Patricia W. Stone, PhD, MPH, RN, C Editor, Ask an Expert
112
STONE
REFERENCES Chapman, R.H. Stone, P.W., Sandberg, E., & Neumann, P.J. (2000). A comprehensive league table of cost-utility ratios and a sub-table of “panel-worthy” studies. Medical Decision Making, 20, 451-467. Drummond, M., O’Brien, B., Stoddart, G.L., & Torrance,
G.W. (1997). Methods for the economic evaluation of health care programmes (2nd ed.). Oxford, U.K.: Oxford University Press. Gold, M.R., Siegel, J.E., Russell, L.B., & Weinstein, M.C. (1996). Cost-effectiveness in health and medicine. New York: Oxford University Press.
Dollars and Sense: A Primer for the Novice in Economic Analyses (Part II)
W
HEN CONSIDERING the use of resources to include in a specific economic evaluation, it is important to consider the perspective of the analysis. An economic analysis may be motivated by the desire to inform policy decisions relevant to specific institutions or individuals. In this case, the perspective of primary interest may be that of a managed care organization, hospital, employer, state health department, or other party. An economic evaluation conducted from the perspective of the hospital may not wish to consider costs (or savings) associated with caregiving in the home. However, an analysis from the perspective of the managed care organization may wish to consider home health nurses, but not family caregiving. The societal perspective incorporates all costs and all health effects regardless of who incurs them. All of these analyses are valid, however, the societal perspective is the most comprehensive and is recommended when the goal of the analysis is to inform broad base resource allocation decisions (Gold, Siegel, Russell, & Weinstein, 1996). The perspective and time horizon of the analysis are important factors to consider in economic evaluations of nursing services. In some instances, professional nursing services affect long-term patient outcomes (such as the impact of inpatient education on outpatient health services). In other Copyright © 2001 by W.B. Saunders Company 0897-1897/01/1402-0010$35.00/0 doi:10.1053/apnr.2001.22379
110
instances, perhaps by default, a substitute for professional nursing services may be the informal caregiving provided by friends and family. Economic evaluations conducted from the societal perspective may be more apt to capture these real costs. No matter what perspective the economic evaluation is conducted from, brainstorming regarding the relevant resources used is a useful approach to determine which resources to include. In this brainstorming session, think in terms of the cost “ingredients” that are needed for the interventions that are under analysis, as well as other resources which the interventions are likely to affect (Drummond et al., 1997). Once all the cost ingredients are identified, discussions about which costs are most relevant and which are important to measure can take place. Moreover, the perspective of the analysis will drive the decisions about which cost component to include. Once the consumption of resources has been estimated, the resource must be assigned a dollar value. Economists use the term opportunity costs to describe the value of the next best alternative use of the resources. Determining the actual opportunity cost of a resource is difficult. Some general guidelines follow for assigning a dollar value to a resource. Generally, market prices (or charges) do not equate to costs. This is especially true for charges associated with health care settings, due to institutional cost “shifting.” Health care delivery institu-
Applied Nursing Research, Vol. 14, No. 2 (May), 2001: pp 110-112
DOLLARS AND SENSE (PART II)
tions have prices that they use when sending bills to patients. However, many payers (such as large insurance organizations) do not pay these charges. Rather, the parties negotiate payment for services rendered based on the cost of the service and allowed profit margins (even for not-for-profit institutions). Cost shifting is the practice of allocating higher costs to departments, organizations, or patient groups that receive (or pay) higher reimbursements in relation to the cost to provide the service. Therefore, an adjustment to these prices occurs. A common source of valuation for hospital costs is the hospital’s cost-accounting systems, which are easily accessed in most institutions. Cost-accounting systems are developed by finance departments to assist administrative decision-making and are based on past accounting studies and algorithms. If a cost-accounting system is available, it is usually easy to determine the specific direct health care cost components, such as variable costs (e.g., staffing and supplies) and fixed overhead costs (e.g., rent and percentage of administration costs). A decision must be made regarding the treatment of fixed overhead costs. Whether or not to include fixed overhead costs should be based on the opportunity costs of these resources. The question to consider is: would this overhead be used for another purpose, if the program being evaluated were not in place? All hospitals calculate cost-to-charge ratios (CCRs) for federal reimbursement. A CCR is calculated by dividing the total costs in that cost center by the total charges for the same resource. CCRs are recognized as a gross adjustment to charges, that is, better than using charges alone, but not as accurate as cost-accounting systems. Of note, the use of CCR, by default, includes fixed overhead costs. Published sources, such as the Health Insurance Association of America (HIAA) and governmental fee schedules, are also sources often used to assign a dollar value to diagnosis related groups (DRGs) and Current Procedural Terminology (CPT) codes. When measuring the incremental effects in a cost-effectiveness analysis, the standard single outcome measure of health, dollars per life-year ($/ LY) gained, is often used because it is applicable across health care situations. Consequently, in the-
111
ory, results of different analyses can be aggregated, and resource allocation decisions may be informed across a variety of patient populations and settings. For example, if one analysis found the institution of a school-based health program to vaccinate children to cost $1,000/LY gained, and another analysis found opening a dialysis center to cost $50,000/LY gained, then funding the school health center may be considered the more cost-effective option. However, when $/LY is the outcome measure chosen, one year of life in an altered health state is considered equal to any other year of life. Although easy to understand, an outcome measure of $/LY considers only survival, not patient preferences, sub-optimal health states, or quality of life. Quality-adjusted life-year (QALY) is a single multidimensional measure of the quantity of life gained, weighted by the quality of that life. Depending on how the quality-adjustment is determined, patient preferences are directly or indirectly considered. Because dollars per QALY ($/QALY) is not disease specific and considers both quantity and quality of life, it may be a more ideal measure to inform health policy decisions than $/LY or dollars per case avoided. For these reasons $/QALY is recommended by the U.S. Public Health Service’s Panel on Cost-Effectiveness in Health and Medicine, when the goal of the analysis is to effect important resource allocation questions (Gold et al., 1996). In third world countries, health policy makers are using cost per disability-adjusted life year (DALY) gained to inform resource allocation decisions. In a recent comprehensive audit of $/QALY analyses (sometimes called cost-utility analyses) conducted over a 21-year period of time, only one analysis was published in a nursing journal (Chapman, Stone, Bell, Sanders, & Neumann, 2000). Nurses need to participate more actively in the conduct of economic evaluations concerning the care they provide. When the analysis is of a standard method and the outcome measure is a standard ratio, such as $/QALY, the results may make a strong argument to health policy decision makers concerning the funding and continued recognition of nurses as a cost-effective health care provider. Patricia W. Stone, PhD, MPH, RN, C Editor, Ask an Expert
112
STONE
REFERENCES Chapman, R.H. Stone, P.W., Sandberg, E., & Neumann, P.J. (2000). A comprehensive league table of cost-utility ratios and a sub-table of “panel-worthy” studies. Medical Decision Making, 20, 451-467. Drummond, M., O’Brien, B., Stoddart, G.L., & Torrance,
G.W. (1997). Methods for the economic evaluation of health care programmes (2nd ed.). Oxford, U.K.: Oxford University Press. Gold, M.R., Siegel, J.E., Russell, L.B., & Weinstein, M.C. (1996). Cost-effectiveness in health and medicine. New York: Oxford University Press.