Hospitals International Health Care Systems Medicaid/Medicare

Costing Methods

How do hospitals estimate the cost of different inpatient stays?  A paper by Clement et al. (2009) reviews 3 techniques:

Microcosting. “With microcosting, a detailed list of each component of a patient’s care is created and costed separately for each facet of a patient’s hospitalization. Given the level of detail, microcosting is generally considered the ‘gold standard’ for costing inpatient stays.”  Direct and indirect (overhead) costs are allocated over the patient’s entire hospital stay. “…nursing hours, the electricity required to light the recovery room, the catheter implanted, the operator’s time, food costs, etc. are captured and detailed. Given its labor-intensive nature, microcosting is not implemented in many hospitals.”

Refined-grouper number
. Canada implemented the first DRGs in 1967.  “The system classifies patients into categories capturing cases of similar clinical, utilization, and length of stay characteristics. The categories were then further subdivided based on secondary diagnoses, sex, age, and discharge status creating DRGs.”

In 1983, Medicare adopted the the DRG system as a prospective payment instrument.  Later the rDRG was created.  The rDRG “applies a complication and comorbidity overlay to the DRG. Thus, the principal diagnoses group similar cases, as in the original DRG system, and the secondary diagnoses are used to subsequently classify cases into rDRG. In Alberta, a system based on rDRGs was used to group cases into groups comprising similar cases … The groupers are developed using a two-step process. First, based on the principal diagnosis or procedure code, cases are grouped together. Subsequently, cases are further grouped within the principal diagnosis group, based on secondary diagnoses and procedural codes. The two-step grouping process classifies cases into RGN that correspond to the rDRG grouping system.

A cost is developed by Alberta Health and Wellness (AHW) for each RGN using the microcosting data. A weighted average of each RGN cost across hospitals in Alberta is calculated and subsequently adjusted for the severity of case mixes within hospitals.”

. Introduced in Canada in 1983, CMGs constitute a Canadian grouping system that is analogous to, but different from the DRG system developed in the United States…Cases are classified into CMGs based on the most responsible diagnosis as opposed to the principal diagnosis used in the DRG methodology…Thus, CMGs attempt to capture the diagnosis responsible for the greatest proportion of the hospitalization instead of the admitting diagnosis. An ‘average patient cost’ is calculated from all the microcosting data…Each CMG is assigned a relative index weight (RIW) that represents the complexity of the case in comparison to the average patient. The average annual cost per admission can then be determined for specific CMGs…A cost for each hospitalization can then be estimated by multiplying the CMG-specific RIW by the average Canadian cost per case ($3,103 per case).”

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