Determining the cost of a clinical intervention ... - Wiley Online Library

METHODS ARTICLE

Determining the Cost of a Clinical Intervention Through the Use of Shadow Pricing Hirsch S. Ruchlin, Elena B. Elkin, C. Ronald MacKenzie, Pamela Williams-Russo, and John I? Allegrante Introduction Concern about effectiveness, quality of care, and cost has spawned the outcomes movement (1,2). As defined by Guadagnoli and McNeil (3), outcomes research involves not only investigations of the link between medical care and outcomes, but also establishing which types of systems of care deliver a better quality of care. Calls for documenting effectiveness have been issued by leaders in medicine for many years (4-6). The need to prove effectiveness and contain costs has become so acute that it has recently been suggested that today’s environment dictates that policy makers adopt a systematic approach to assure that health care expenditures are contained at levels society judges to be reasonable (7). With all its recognized pitfalls (2,3), Supported by a clinical sciences grant from the Arthritis Foundation and, in part, by a Multipurpose Arthritis and Musculoskeletal Diseases Center Grant (NIAMSD 2P60 AR38520-EEHSR Project #4) from NIAMS. Hirsch S. Ruchlin, PhD, Departments of Medicine and Public Health, Cornell University Medical College, and the Program in Clinical Epidemiology and Health Services Research, Cornell University Graduate School of Medical Sciences, Elena B. Elkin, BS, Department of Public Health, Cornell University Medical College, C. Ronald MacKenzie, MD, Department of Medicine, Cornell University Medical College, and Pamela Williams-Russo,MD, MPH, Department of Medicine, Cornell University Medical College, and the Program in Clinical Epidemiology and Health Services Research,Cornell LJniversity Graduate School of Medical Sciences; and John P. Allegrante, PhD, Division of Health Services, Sciences, and Education, Teachers College, Columbia University, New York, New York. Address correspondence to Hirsch S. Ruchlin, PhD, Cornell University Medical College, 1300 York Avenue, Box 4, New York, NY 10021.

Submitted for publication February 25, 1997; accepted in revised form March 11, 1997.

0 1997 by the American College of Rheumatology. 0893-7524/97/$5.00

outcomes research is viewed by many as the way to attain this desired result and is likely to proliferate. Clinical investigators often gather data by either abstracting information from medical records and/or using questionnaires to obtain information directly horn patients (8-12). It is virtually impossible to obtain the cost of care through these instruments as, at best, patient records only note facility charges, and given the prevalence of medical care coverage, patients usually do not know the charges for the care they received. Cost is an important outcome. Economists assert that the cost of any program is its opportunity cost, which is the value of the resources in their next best use (13). As the next best use is rarely known, conventional practice is to use the actual dollar expenditures as the best approximation of opportunity costs (14). All too often investigators use a facility’s charges as a proxy for cost (10,12,15-21). It is widely recognized that charges exceed cost (22-24). This is due in no small part to the fact that Medicare’s reimbursement of overall hospital cost in the pre-diagnosis-related group (DRG) era required the payment of the lesser of charges or cost. Within different areas (departments) of a hospital, charges may or may not exceed cost (25), and this is usually determined by its payor and/or service mix. With the exception of new services, hospital financial officers annually inflate their existing charges by a factor determined by the facility’s administration. It would not be surprising if current finance staff had no idea who had initially set the charge, or on what basis. Furthermore, as noted by Eisenberg (23), charges are often set by the marketplace or by regulation and may not reflect the true cost of providing a service or a product. Eisenberg also noted that charges do not differentiate between fixed and variable costs. The need 343

344 Ruchlin et a1

to generate surplus funds to pay for the cost of care for the uninsured or for those patients whose insurance does not fully cover costs (i.e., cross-subsidization) and for medical education and research (in teaching hospitals) motivates hospitals to have a charge structure where charges exceed cost. Physician, nursing home, and other provider charges (fees) also contain a crosssubsidization element to compensate for lower payments received from some patients. When prices (charges) are distorted, as they are in the United States medical care system, economic theory suggests that a proxying technique known as “shadow pricing” (e.g.,third-party reimbursement payments) be used to more accurately reflect true costs (26), and textbooks on economic evaluations in the health care field echo this recommendation (27,28). Examples of such use exist in the general medical literature. Eisenberg and Kitz (29) used hospital DRG rates, physician fees, and ancillary service charges as shadow prices in their analysis of outpatient antibiotic therapy for 0steomyelitis, and Lawrence et a1 (30) used a method identical to the one outlined here for hospital payments and professional fees in evaluating the utility of preoperative urinalysis. This article seeks to explain how shadow prices can be developed and illustrates their application using data from an ongoing project that uses a multi-component intervention designed to improve the postoperative rehabilitation of elderly hip fracture patients (31).

Methods Methodologic considerations. Costs that are avoided by an intervention are the “benefits” that are measured in a cost-benefit or cost-effectiveness analysis. As with a cost analysis, which is sometimes referred to as a cost-identification analysis, the calculation of costs that are avoided should be done from a marginal perspective, that is, the cost for treating the last patient. It is this amount that is expended or saved by changes in service volume. One must also discount all costs incurred beyond the base year to account for the dual impacts of inflation and time preference. Rationally, one always values an event in the present more than one in the future. Discounting is accomplished by calculating the present value of future costs. Stated in mathematical terms, if c = cost, 1: = the discount rate, and t = time period, the present value is c/(l+r)I. Costs are usually grouped into 3 major categories: direct medical care costs, direct non-medical care costs, and indirect costs resulting from morbidity and mortality. Direct medical costs encompass inpatient and outpatient hospital care, emergency department care,

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care provided in a rehabilitation center, nursing home care, physician care rendered in an inpatient or ambulatory setting, diagnostic and therapeutic ancillary service care, medications, and medically related durable equipment (medical supplies). Direct non-medical care costs encompass community-based social supports (provided formally by paid care providers and/or informally by family or friends) and such items as transportation and lodging. Indirect costs reflect productivity losses sustained due to mortality or morbidity. Cost analyses can be conducted from various perspectives: those of an insurance carrier or public entitlement program, those of the care provider, and those of the patient. While each of these perspectives are important, economists and policy makers prefer the adoption of a societal perspective (24), which is defined as the aggregate of the 3 perspectives just noted. Studies occasionally appear that adopt a Medicare or another entitlement or third-party payor perspective, and this may result from the fact that the organization supporting the research is only interested in costs that it incurs (25,32-34). When this is the case, the investigators should note this limitation and try, if possible, to estimate what the excluded costs would be. Calculation of a shadow price. To overcome the problem inherent in using charges, the selected shadow price should be cost based. Under the assumption made by economists that opportunity costs are best reflected by actual expenditures, payments made by third-party reimbursement entities are often used as cost proxies. The third-party reimbursement system selected as the basis for the shadow pricing should be determined by the age of the population in the intervention. As our intervention is targeted to people over the age of 65, Medicare payments were selected as the shadow price. We elected to use 1995 cost data throughout our study; hence, information specific to 1995 is used in this article. At its inception, Medicare payments presumably reflected true costs; the passage of time and fiscal constraints, however, have loosened this relationship. Nevertheless, most providers of care to the elderly accept Medicare, and this prompts its use as a measure of the expenditures incurred for care. When Medicare payment rates are used, the investigator must also account for annual deductible (which, in 1995, was $716 for Part A, which covers institutional care, and $100 for Part B, which covers physician and other health professional care) and copayment requirements, and for balance billing beyond the Medicare-approved fee that is allowed in the state where the program exists, as these are costs borne by the patient. These costs must be included to obtain total societal costs. Excluded ser-

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vices (e.g., custodial care) and payment limits must be recognized. Examples of payment limits are visits to a surgeon within 3 months of the surgery, which are covered by the surgical global fee, and physician special charges for the interpretation of some ancillary tests, such as complete blood cell counts and biochemistry profiles, as payment for these services is considered to be part of the cost of doing such tests. Inpatient hospital care. Medicare reimburses hospitals for inpatient care based on a prospective payment system (PPS) using DRG codes that was implemented in 1983. Hospital-specific DRG payments can be calculated, if the name of the hospital used is known by the investigator. Hospital identification information is available from the Health Care Financing Administration (HCFA). Similarly, one can calculate a DRG payment for the specific admission, if the reason for it is known, or use an average DRG payment (which reflects the hospital’s overall case mix) for that hospital. The annual discharge-specificDRG data needed for this calculation are published in the Federal Register. The average hospital-wide DRG case mix value and the remaining information needed can be obtained from HCFA’s PPS-payment impact file. The 1996 file is currently available at no cost (as a “pilot project”) through the Internet (http:llwww.ssa.govlhcfa/statslpubfiles.htm1). (As the 1995 file must be purchased, and as payment changes from 1995 to 1996 were quite meager, we use the 1996 data as representing 1995 payments.) A multi-step process is needed to calculate the DRG payment (35). One begins by ascertaining the DRG national standard labor component pertinent to the hospital based on its location (e.g.,large urban area or other area) (step 1) and multiplying this value by the wage index for the geographic area in which the hospital is located (step 2). The product of this calculation is then added to the DRG nonlabor component, which reflects non-personnel-related costs (step 3). The product of this calculation (i.e., step 3) is then multiplied by the hospital-wide case mix index (step 4) or the dischargespecific DRG index, if known. The next step entails adjusting for outlier payments (step 5), followed by an adjustment for both treating a disproportionate share of poor patients and the indirect medical education add-on for teaching hospitals (if applicable) (step 6). The value obtained up to this point represents the operating cost component of the DRG payment. The next step entails calculating the capital component payment of the DRG rate that reimburses hospitals for the cost of major equipment use (step 7). HCFA is in the process of changing the capital payment from a retrospective basis to a prospective basis. This process began in 1992 and will be completed by the year 2002. For simplicity, it is easiest to assume that

Determining Cost Through Shadow Pricing 345

the full transition has already been completed (as most of its impact had already been felt by hospitals by 1995) and calculate the capital component as it will be paid in 2002. To do this, one begins with the standard capital component and multiplies it respectively by the capital wage and case mix indices, and then factors in the (capital) outlier and disproportionate share and indirect medical education adjustments. The final step, using this data set, entails adding the operating and capital cost components to obtain the total DRG payment (step 8). These steps are illustrated in Table 1. Teaching hospitals get a special payment for direct medical education costs, which also includes a payment for the cost of supervising physicians, an element not included in the PPS payment impact file. This rate, which is a function of the hospital’s size and the number of residents it trains, can be obtained from HCFA. It was initially set in 1984 and has been updated annually based on increases in the consumer price index for urban areas. It should be added into the DRG payment calculated by using the PPS-payment impact file. An alternative methodology for calculating a shadow price for hospital care is to use charge data and adjust them by the ratio of cost to charges applied to cost (RCCAC). Separate RCCAC ratios for operating and capital costs exist on the PPS-payment impact file. The problem with this technique is that the published RCCAC is a hospital-wide statistic. The preferable statistic would be a department-specific RCCAC, and it would be applied to charges generated by that department. Some researchers have been able to obtain and use such data (25). However, this information is considered to be very sensitive by hospitals in the current era of managed care and is not in the public domain. Even department-specific RCCAC data is deemed to be less accurate than department-specific relative value units, which some hospitals have developed (36), but these data are also not in the public domain. Physician payment. Physician care rendered in a community setting is reimbursed using the resourcebased relative value system (RBRVS) that was introduced by Medicare in 1992. HCFA annually publishes the total relative value units (RVU) index and its wage, practice expense, and malpractice cost components in the Federal Register (37). Each specific procedure performed by a physician has a HCFA common procedure coding system (HCPCS) which corresponds to one of the American Medical Association’s current procedural terminology (CPT) codes. Having selected the appropriate HCPCS code and ascertained its R W component values, one multiplies each of the RVUs by the geographic practice cost index for the area in which the service is given. The sum of these 3 values is then

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multiplied by the HCFA-designatedannual conversion factor. Separate conversion factors exist for primary care services, other medical services, and surgical services. The conversion factor is determined annually by 3 elements: changes in the Medicare Economic Index compiled by HCFA; changes for meeting, exceeding, or falling short of the volume performance standard set for the prior year; and any legislative adjustments mandated by Congress. Medicare pays 80% of the RBRVS fee, and the patient pays the remaining 20% (the copayment). Emergency department (ED) care. Use of the emergency department facilities is paid for by Medicare Part A. Medicare pays 80% of the hospital charge subject to a maximum “reasonable” rate; the patient pays the remaining 20%. The Medicare billing code for the use of the ED is 99284. The examination performed by the physician in the ED is billed under Part B; and ancillary services provided in the ED which have Part B payments are billed separately by their own CPT code. A separate payment for emergency room care is made only if the patient is not admitted to the hospital. If the ED use leads to an immediate admission there is no extra payment (i.e.,the regular DRG payment covers this care). Therapies and ancillary services. Physical, occupational, and speech therapy that are provided as part of the inpatient stay are included in the inpatient DRG payment. When they are provided on an outpatient basis, they are reimbursed by CPT code in a fashion identical to that noted for the ED. The same rule applies for all ancillary services that are provided on an outpatient basis. Medications. Medical Economics annually publishes a book, commonly referred to as the “Red Book’, that lists the average wholesale price and the direct price of every prescription and over-the-counter drug sold by its dosage (38). Most pharmacies in our area base their price on the average wholesale price of the drug. One can make an assumption as to the dosage and amount prescribed at each renewal time and use the average wholesale price, with the addition of a realistic mark-up and dispensing fee (39,40). Nursing home care. Medicare pays facilities a resident-specific per diem rate based on the patient’s Resource Utilization Group, Version I11 (RUG-111) classification. The RUG system is based on a clinical hierarchy designating patient need. There are currently 28 RUG categories (41). Medicare pays only for skilled nursing care that is considered to be medically necessary to rehabilitate a patient. After the first 20 days of each nursing home admission, Medicare requires a 20% copayment and a daily deductible, which was $89.50 in 1995. Medicare covers 100 days of skilled

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nursing care per admission. Once those days have elapsed, patients must pay for care on their own, or spend down (i-e.,use up their existing funds) to Medicaid eligibility. Thus, Medicaid payments become a relevant shadow price for nursing home care beyond 100 days per admission. In New York, Medicaid negotiates a per diem rate with each facility based on the facility’s average case mix in the last 3 months. If the patient still pays for Part B Medicare coverage once they are in the nursing home, or if the state pays for it on their behalf (as is the practice in New York), Medicare is billed separately for all medical care by non-staff physicians who are considered consultants and therapies that it covers while the patient is still on Medicaid. However, no extra payment is made for physician care rendered by staff physicians, as their costs are part of the negotiated per diem rate. As Medicare will not pay for custodial care, the patients must pay for such care out-of-pocket until they qualify for Medicaid. While the Medicaid rate may be below the Medicare rate, despite the current Federal requirement that it be “reasonable and adequate”, nursing homes will accept it as the patient’s payment once the person has spent down to Medicaid. The alternative, once the patient is admitted, is to treat the patient for free. If facility-specific Medicare and Medicaid payments cannot be obtained, data on state average Medicare (41) and Medicaid nursing home payments (42) are published periodically by HCFA or independent researchers in HCFA’s journal, Health Care Financing Review. Community support services. Social support services such as home health care are often needed by many patients, especially the elderly, to help them with activities of daily living. Such care is not covered by Medicare, although it may be by Medicaid. For a nonMedicaid population, we suggest that investigators survey a number of local social agencies for the prevailing hourly rate for such care performed by home health aides. Morbidity and mortality costs. Economic theory dictates that productivity losses incurred due to an illness be valued at a person’s prevailing wage (43,44). Data on a person’s earnings can be obtained via a questionnaire; if such data are not given respondents are usually willing to indicate their occupation and industry. Average median weekly earnings by industry are published annually in the January issue of the US Department of Labor, Bureau of Labor Statistics Employment and Earnings journal. The data are sex specific, but not age specific. Age-specific earnings data are available from the 1990 Census and can be used to develop an age adjustment factor to be applied to the data reported in Employment and Earnings. Under this approach, elderly people who are retired


and hence do not work have no value placed on their productivity losses (45). This is not a major problem if the intervention is only applied to the elderly; but it is a problem when interventions including both working and nonworking populations are evaluated vis-A-vis each other. Rather than value the productivity losses of elderly people at a zero wage, the investigator can elect to impute a wage to these people in a way discussed in the next section. A second potential problem with this approach is that homemakers (individuals who absent themselves from the labor market to take care of children and/or a home) have no market earnings. Economists recognize this deficit, and a methodology was developed to proxy the value of such services at market wages (46). Informal care. Care provided by friends and family represents an opportunity cost to the people providing such care. If the care is provided by someone who is in the workforce and had to take time off from work to provide the care, it should be valued according to the methodology noted in the “Morbidity and mortality cost” section. If the care is provided by someone who is not in the labor force, one can value this time as if it were being provided by a person hired in the labor market and use the costs data obtained for community social services to impute the value of such care. Alternately, one can use the federal (or state) minimum wage as a proxy for volunteer time. This statistic can also be used to value the productivity losses sustained by the elderly. Given the controversy surrounding the cost of informal care and the productivity losses of nonworkers, one can omit these costs in a sensitivity analysis, which implicitly assumes a zero cost for such care. Types of economic analyses. The cost of interventions that do not entail the provision of direct medical services, such as intervention programs designed to enhance self-efficacy, are ascertained by conducting a work sampling (sometimes referred to as a time and motion) analysis (47). An example of such an analysis conducted for our project was reported elsewhere (31). The shadow pricing technique described here can be used for both cost-benefit and cost-effectiveness analysis. Remembering that benefits (savings) are costs that are avoided, one conducts a cost-benefit analysis by summing the costs incurred by the intervention and control groups, and subtracting the costs incurred by the intervention group from that incurred by the control group, if one hypothesizes that the intervention yields economic benefits. One then divides the value of the benefits by the cost of the intervention to obtain the cost-benefit ratio. Represented in simplified equation form, program benefits (savings) are defined as B

Determining Cost Through Shadow Pricing

347

= MCC,-MCCi, where B = discounted program benefits, MCC, = discounted total expenditures of patients in the control group, and MCC, = discounted total expenditures of patients in the intervention group, Cost-effectiveness analyses include direct medical costs, side effects attributed to the intervention, and reduced productivity losses in their cost estimates. As noted by Weinstein and Stason (48), the numerator is where A defined as AC=AC,,+AC,,-AC,,,+AC,,,,,, represents the incremental (net) change, C,, = all direct medical and health care costs, C,, = health care costs = associated with any side effects of treatment, Cmorb savings due to prevention or alleviation of disease (and hence is entered with a minus sign), and Crxnle= costs of treating diseases that would not have occurred if the patient had not lived longer as a result of the original treatment. Use of this last cost is controversial, and many analysts choose to omit it from their analysis, as it implies that society saves money when people die prematurely. The denominator notes changes in the selected outcome measures, with or without a “quality” adjustment that accounts for side effects such as pain. Different investigators have their own preferences for using either cost-benefit or cost-effectiveness analysis. The strength of cost-benefit analysis is that it yields a cost-benefit ratio with a critical value of one. If this ratio is exceeded, benefits exceed costs; if not, costs exceed benefits. The simplicity of this statistic is appealing to some investigators and policy makers. However, many clinicians are uncomfortable with valuing morbidity and mortality losses by a person’s earnings. Cost-effectiveness analysis avoids this step, and clinical measures are used as the basis of effectiveness.This measure can be a straightforward statistic (e.g., number of life-years saved), or a statistic that embodies an adjustment for quality issues (e.g., quality-adjusted lifeyears saved), or a non-mortality related measure (e.g., improvement in general health status). A drawback of cost-effectiveness analysis is the absence of a “gold standard’ cost-effectiveness statistic that can be used to decide if the intervention has economic merit.

Illustration The major medical care elements that are expected to be used in our project include hospital care, nursing home and rehabilitation care, physical therapy, some ancillary services (such as x-rays), medications, and community-based services. The calculation of some of the shadow prices that will be used for such services are presented below. Inpatient hospital care. An example of the DRG payment that our hospital would receive for treating a hip

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348 Ruchlin et a1

Table 1. Total hospital payment for hip fracture (diagnosis-relatedgroup [DRG] relative weight Description of calculation

Actual calculation

-Step 1Ascertain DRG national standard labor component (large urban hospital). -Step 2 Multiply above by wage index for geographic area. S t e p 3 Add above product to DRG nonlabor component. S t e p 4 Multiply above by discharge-specific DRG index. S t e p 5 Multiply above by outlier adjustment rate. S t e p 6 Multiply above by rate for disproportionate share and indirect medical education. Operating cost component of DRG payment -Step 7 Multiply DRG standard capital amount by capital wage and case mix indices, capital outlier, disproportionate share, and indirect medical education adjustments. Capital cost component of DRG payment -Step 8 Add operating cost and capital cost components Total DRG payment

fracture patient (DRG 211) appears in Table 1. Following the steps outlined in the Methods section, total operating and capital cost payments of $10,097.67 and $872.23, respectively, would be received by the hospital for this care, yielding a total DRG payment exclusive of the payment for direct medical education of $10,969.90. In addition, the hospital would receive $1,477.73 for the cost of direct graduate medical education and supervising physicians.

Physician care. Estimates were calculated for two CPT codes. The h s t is 99212 which, as described in the CPT manual, covers an office or other outpatient evaluation and management of an established patient, and requires 2 of the following 3 components: a problem-focused history, a problem-focused examination, and straightforward medical decision making. Usually the problems are self-limiting or minor, and the physician typically spends 10 minutes face-to-facewith the Table 2. 1995 payments under Medicare resource-based relative value system* Relative value unit CPT codet

w

P

M

Payment

0.38 1.07

0.28 0.49

0.02 0.04

$29.37 $67.55

0.45 0.21

0.13 0.16

0.02 0.01

$23.76 $15.62

0.62

0.29

0.04

$38.44

Physician care 99212 99283

Physical therapy 97110 97541

X-ray 78300

* Geographic practice cost index-Manhattan: work (W)-1.077; practice (P)-1.307; malpractice (M)-1.596. Conversion factor: primary c a r e 36.382; other medical-34.616.

t CPT

=

current procedural terminology.

= 1.2893)

$2,709.42 * 1.3852 $3,753.09 1,085.29 $4,838.38 1.2893 $6,238.12 * 1.060254 $6,613.99 1.526714

+

*

*

$388.13

* 1.249994

Subtotal $2,709.42 $3,753.09 $4,838.38 $6,238.12 $6,613.99 $10,097.67 $10,097.67 $872.23

* 1.2893 * 1.094755 * 1.27372 $10,097.67

+ $872.23

$872.23 $10,969.90 $10,969.90

patient and/or family. All physicians, regardless of medical specialty, have to bill under this code for this type of care. The second CPT code is 99283, and it encompasses an emergency department visit for the evaluation and management of a patient that requires the following 3 components: a problem-focused history, a problem-focused examination, and medical decision making of moderate complexity. The 1995 Medicare RBRVS payments for these two services, together with the relevant data needed to calculate them, are presented in Table 2. Following the steps outlined in the Methods section, and using the geographic cost indices pertinent to Manhattan and the primary care conversion factor (both services are considered primary care by HCFA), one arrives at the payment values presented in the top panel of the table. They are $29.37 for the office visit and $67.55 for the emergency department visit.

Physical therapy. Two physical therapy CPT codes are listed in the middle of Table 2. They are 97110 (the code used at our facility for therapeutic exercise) and 97541 (which is for training in activities of daily living [ADL]).It is stated in the CPT manual that each of these procedures should take 30 minutes. Following the same mathematical steps that were used to calculate the physician payments, but substituting the other medical care conversion factor for the primary care one, 1995 Medicare payments for these two therapies are $23.76 and $15.62, respectively. Ancillary services. Similar calculations were performed for a one-area bone or joint imaging, CPT 78300, which is considered to be a non-primary care procedure. Its 1995 Medicare payment to the physician under Part B is $38.44. A separate Part A payment would


also be made for the use of the equipment in taking this x-ray. Medications. A patient is taking two medications: Darvocet-N50 and Coumadin (5 mg). The average 1995 wholesale price for these two drugs, assuming that 100 capsules are dispensed per prescription, was $27.85 and $54.78, respectively. Adding a $2.50 dispensing fee yields a total cost for these two drugs of $30.35 and $57.28.

Nursing home care. The average 1995 Medicare RUG-I11reimbursement for a patient classified as needing medium intensity rehabilitation in New York City was $157.56. As the rehabilitation period should only be about 3 weeks, no Medicaid funding will be needed by our study population. Community-based social services. A survey of social service agencies located on the upper east-side of Manhattan revealed a wide range of hourly payments for assistance with ADLs. The range was fiom $8/hour to over $15/how, depending on whether the care was obtained from a person hired directly by the patient or from someone referred by an agency. We elected a $11.50/hour rate as representing the median payment in this area, and used this rate to value the number of hours of ADL assistance reported by our study subjects. The federal minimum wage in 1995 was $4.25, and it can be used to value informal care, that is, care rendered at no direct cost by family and/or friends. Alternately, one can elect to use the $11.50 “market” hourly rate.

Discussion Medicare payment rates were used in our illustration, as they are the most appropriate ones for our study population. Studies that include a non-elderly population may wish to substitute payment rates established by traditional fee-for-service or point-of-service plans that are offered by managed care contracts issued by Blue Cross/Blue Shield or any of the numerous commercial insurance companies that sell medical care insurance. Medicaid payment rates can be used for programs targeted at a Medicaid population; they are in the public domain. Furthermore, disproportionate share, direct and indirect medical education payments are relevant in our setting, but may not be elsewhere. If hospitals do not engage in residency program training or do not treat patients without health insurance, these payments should be excluded. Data indicating that Medicare and Medicaid payments are below private pay rates exist in published


sources. Data published by the Prospective Payment Assessment Commission indicate that, for 1992, Medicare and Medicaid payments covered only 89% and 93%, respectively, of what hospitals spent on their patient loads (49),and therefore underestimate true costs. The Prospective Payment Review Commission reported that in 1995 Medicare paid roughly 68% of average private payer rates (50).Future changes in Medicare or Medicaid arising from new fiscal constraints may exacerbate this situation. As noted earlier, the true costs of hospital care are known only by the institutions themselves, who in an era of increased managed care, have every incentive to keep this information from entering the public domain. Private pay rates are clearly higher due to the “cross-subsidization” noted previously. If the investigator wishes, adjustments for these differentials can be made as part of the study’s sensitivity analyses. Shadow pricing can also be used to value the cost of care provided in a staff or group-model health maintenance organization, which does not use fee-for-service payments. All that is needed in such settings are data on the kind of services provided-information that has been made available to some researchers (51). Investigators must also be sensitive to the fact that physicians sometimes forgive the required coinsurance payment (52).This is a problem that investigatorsmay confront with any third-party payment system selected as the basis for a shadow price. As the theory that underlies the use of shadow prices posits that actual expenditures are an acceptable measure of opportunity costs, using 100% of the third-party payment may overstate actual expenditures. If data can be collected on such forgiveness, then adjustments can be made for this phenomenon. In the absence of such data, various assumptions can be made about the prevalence of this phenomenon and its impact assessed through sensitivity analyses. The same point applies to the use of balance billing under Medicare. Economic theory dictates that marginal rather than average costs be used. The shadow prices used in this study are average payments. Marginal cost estimates for DRGs or for RBRVS values are nonexistent, although at times “natural experiments” exist which allow the investigator to infer the marginal cost element of a payment (29). Without undertaking substantial new research to ascertain marginal payments, most economic studies use average payments, but this decision should be made clear in a study’smethods section. A recognized shortcoming of most economic analyses is the omission of intangible costs such as pain, anxiety, and uncertainty. For example, a recent article comparing the management of patients after a n acute myocardial infarction in Canada and the US concluded

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that the Canadian patients suffered from less angina (53). Such a finding would be noted in any discussion of an economic analysis, hut not valued in dollar terms. Cost-effectiveness analysis could capture this benefit if the outcome is quality-adjusted life-years. There is an economic methodology known as the willingnessto-pay approach that captures noneconomic benefits (54), but problems exist in gathering such information, and this technique is rarely used in actual program analyses. By utilizing shadow prices, researchers can provide more realistic cost estimates than by simply using charges. These estimates can then b e integrated with outcome data for use in either cost-benefit or costeffectiveness analyses (55).

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