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Estimating measurement error when annualizing health care costs
Ariel Linden1, Steven J Samuels
1Linden Consulting Group, Ann Arbor, Michigan, USA; Department of Health Policy & Management, School of Public Health, University of Michigan, Ann Arbor, Michigan, USA.
Journal of Evaluation in Clinical Practice
|August 1, 2012
Summary
Health insurers annualizing healthcare costs from partial data introduces significant measurement errors. Alternative methods are recommended to improve cost metric accuracy for better decision-making.
Area of Science:
- Health economics
- Health services research
- Biostatistics
Background:
- Health insurers use cost annualization to estimate yearly healthcare expenditures.
- This practice is crucial for reporting, identifying high-cost individuals, and evaluating health management programs.
- However, extrapolating yearly costs from less than 12 months of data may introduce measurement errors.
Purpose of the Study:
- To systematically estimate the measurement error associated with the annualization of healthcare costs.
- To assess the accuracy of annualized cost predictions across different insured populations.
Main Methods:
- A retrospective observational study design was employed using longitudinal claims data.
- Data from three distinct insured populations were analyzed: Medicare managed care, public employees, and a self-insured employer.
- Accuracy was evaluated by calculating absolute error (AE) and absolute percentage error (APE) between actual and predicted annual costs.
Main Results:
- Even with 11 months of data, mean AE ranged from $400 to $2700, and mean APE was between 9.6% and 11.0%.
- Measurement accuracy significantly decreased as the number of months of available data reduced.
- Substantial measurement errors were observed due to the inherent unpredictability of monthly healthcare costs.
Conclusions:
- Annualizing healthcare costs from incomplete data can lead to considerable measurement errors.
- The study highlights the need for improved methods to ensure accurate cost metrics for informed decision-making in healthcare management.
- Alternative approaches to cost annualization are proposed for insurers to enhance measurement accuracy.
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