Using average cost methods to estimate encounter-level costs for medical-surgical stays in the VA

The U.S. Department of Veterans Affairs (VA) maintains discharge abstracts, but these do not include cost information. This article describes the methods the authors used to estimate the costs of VA medical-surgical hospitalizations in fiscal years 1998 to 2000. They estimated a cost regression with 1996 Medicare data restricted to veterans receiving VA care in an earlier year. The regression accounted for approximately 74 percent of the variance in cost-adjusted charges, and it proved to be robust to outliers and the year of input data. The beta coefficients from the cost regression were used to impute costs of VA medical-surgical hospital discharges. The estimated aggregate costs were reconciled with VA budget allocations. In addition to the direct medical costs, their cost estimates include indirect costs and physician services; both of these were allocated in proportion to direct costs. They discuss the method's limitations and application in other health care systems.