How to work out costs of health care
An essential element of commissioning health care is concerned with the costs of services so that a contract can be drawn up between the commissioner or purchaser of the service and the provider. The cost of a service provided by a health care organisation can be derived via two main approaches:
- Itemised or bottom-up costing (all elements of the service are costed and the price equals the sum of the actual costs incurred)
- Aggregate or top-down costing (costs incurred at an organisational level are then apportioned subjectively to various services provided).
NHS contracting for acute hospital care
Contracting for hospital services was initially based on block contracts—ie, a block of money for a block of activity. The risk to the hospital was that a rise in activity resulted in a rise in costs, irrespective of how much was paid. To reduce this risk, ceilings and floors were applied to block contracts with agreements on cost and volume over and above these limits. This transferred some of the risk to NHS commissioners.
These early contracts and costs did not address variations in condition severity and treatment intensity—also known as casemix. Payment adjusted for casemix was first developed in Yale using grouped data known as DRGs (diagnostic related groups). 1
Healthcare resource groups (HRGs)
Healthcare resource groups (HRGs) are the UK equivalent of DRGs. The definition of HRGs is based on clinical codes, admission method, age of patient and comorbidities. 2 HRGs have been iteratively developed over 20 years and the current set (HRG version 3.5) has just over 550 HRGs. These cover the majority of medical specialties.
HRGs are a means of aggregating health data into groups of interventions that are of a similar cost and of a similar nature and complexity. Hospital admission data is recorded using diagnostic and procedure codes. These codes are then grouped into HRGs by software known as the HRG Grouper. The HRG groups inform payment of hospitals under the methodology known as payment by results (PbR), as each HRG has a nationally fixed tariff. 3
How are HRGs costed?
The nationally fixed tariff for each HRG is based on a number of parameters—including length of stay. One of the criticisms of HRG version 3.5 is that the groups were not developed to be used for funding. However, despite these concerns, the national tariff is the cost, and there is little point debating how they are derived as these are nationally fixed and the means of funding acute hospital care.
The real impact of HRGs and a national tariff is twofold:
- It explicitly places an incentive to collect data accurately, as poorly coded data result in a lower tariff or no payment
- It enables cost comparisons after casemix differences have been taken into account.
This paper will now describe how HRGs can be used along with current guidance from the Department of Health. 4
What is covered by HRG version 3.5?
Table 1 describes the current scope of PbR using HRG version 3.5. 5 Some of the terms used are expanded in Table 2.
Table 1. PbR tariff structure in 2007/08.
| Admitted patients | Outpatients | A&E | |
| Currency | V3.5 HRG spell | Attendance by specialty or outpatient procedure | Attendance |
| Structure | Tariff for: electives; non-electives; differential tariffs for emergency admissions; single tariff for day cases and inpatients combined; and short-stay emergencies | Tariff for: first attendance; follow up attendance; and nine specified procedures* | Tariff for: high cost attendance; standard attendance; combined minor A&E/minor injuries unit attendance; and differential tariffs for reductions in activity |
| Specialised service adjustements | Top-up payment for specific specialised children’s activity and exclusions** | Separate tariff for children in some specialties and exclusions** | Not applicable |
| Outliers | Long stay outlier payment triggered at predetermined length of stay (dependent on HRG): per diem rate specific to HRG | No outlier policy | No outlier policy |
| Flexibilities | Unbundling of care pathway subject to local agreement; local ‘pass though’ payments for new technology; and emergency readmissions- local arrangements for determining appropriate reimbursement and criteria | Unbundling of care pathway subject to local agreement; procedures carried out in outpatient setting; local ‘pass though’ payments for new technology; and multi-professional outpatient attendances | No flexibilities |
Table 2. PbR terms used in costing HRGs.
| Term | Description |
| Spell | An admission. The spell length is time in days from admission date to discharge date. Spells are sometimes called finished hospital stay (FHS) and should not be confused with finished consultant episode (FCE). |
| Spell duration | The length of an admission in days; sometimes known as length of stay (LOS) |
| Electives | Non emergency admissions generally have lower costs when compared to emergency admissions. |
| Outliers | Events that have unusual characteristics. In relation to HRGs these usually are admissions where the LOS (i.e. length of admission) is longer than expected. The expected range of LOS for a given HRG is defined by values known as trimpoints. |
| Upper trimpoint | A statistically derived length of stay that denotes the upper end of a range of expected length of stays for an admission with a given HRG |
| Excess bed days | The number of additional days of an admission for a given HRG over and above the trimpoint. It is derived mathematically as follows: spell duration – upper trim point for a specific HRG = excess bed days. Excess bed days are only calculated when the spell duration is greater than the upper trim point. |
| Per diem cost | A cost per day specific for a given HRGs that is used to calculate the additional cost for outliers. The total cost of the outliers is as follows: HRG tariff + (per diem cost x excess bed days [> 0]) = total cost |
| Top up payments | Additional payments that are factored into the HRGs based on a number of parameters – esp children’s services. Specialised services have unique HRGs and costs. These include bone marrow transplants, cystic fibrosis, renal transplant, chemotherapy, burns, and radiotherapy. There are specific HRGs for regular outpatient attenders and pathology. |
| Outpatients | New referrals are paid a higher tariff to follow-up referrals. A follow-up referral is a referral to the same medical clinic (not midwifery) within a six month period. Outpatient tariffs have been augmented in 2007/8 for certain procedures; colposcopy, epidural injections (for non obstetric pain services), fine needle biopsy of breast, flexible sigmoidoscopy, laser destruction of skin lesion, needle biopsy of prostate, hysteroscopy, rigid sigmoidoscopy, and subcutaneous injection/introduction of substance into skin. |
| A&E | Accident and emergency contracts have developed from block contracts to more differentiated tariffs dependent on case severity, i.e. high cost, standard cost, and minor injuries. |
| Short stays | Patients admitted for short length of stay cost the hospital less than the full tariff price. This has been mathematically adjusted by a short stay discount that is specific to certain HRGs where the length of stay is less than 2 days. |
| Market forces factors | Additional tops for providers in high cost areas such as London. |
| Flexibility | This is applied where locally agreed tariffs are used instead of the national tariffs. There are many variations on this and for further details the national guidance as well as local commissioning plans need to be scrutinised. |
Box 1 describes two admissions, their HRGs and how the actual cost is derived. The method below shows how the basic costs are calculated for most admissions. Top-up payments have not been used for clarity and brevity.
Box 1
Patient 1
A 90 year old lady is admitted as an emergency and during her stay, her diagnostic and procedural codes are grouped to HRG E22 (Ischaemic Heart Disease without intervention >69 or with critical care) which has a £1923 tariff, a 16 day trimpoint (the expected length of stay) and a £170 perdiem cost. Her 20 day admission thereby incurs an additional 4 excess bed days (ie 20 – 16) at £170 per day. The actual cost is:
- £1923 for the HRG
- + £170 x 4 for the 4 excess bed days
- = £2603 total.
Elective admissions have lower trim points, average length of stay and thereby tariffs. Similar differences in cost apply to condition severity, age, procedural severity, and the presence of complications or comorbidities.
Patient 2
A 59 year old man is admitted as an elective admission. During his stay, his diagnostic and procedural codes are grouped to HRG E23 (Ischaemic Heart Disease without intervention <70 without critical care) which has a £1247 tariff, a 2 day trimpoint and a £178 perdiem cost. He remains in hospital for 1 day but this HRG has a short stay tariff reduction. As his length of stay is less than 2 days, the short stay reduced tariff of £516 applies.
There are many more subtle changes in costing algorithms that have been indicated above but are fully described elsewhere. 5 The author recommends that a discussion with commissioning or finance colleagues is useful way of understanding casemix and HRG costs. These approaches to costing are often embedded in databases. The author recommends the use of spreadsheets to calculate HRG costs.
Cost weights
One last use of HRGs relates to cost weights. This is a relatively simple but very powerful means of comparing casemix severity using the ratio of costs relative to the average. Hospitals, departments and consultants can use cost weights to standardise their comparisons of casemix.
HRG4
The next version of the HRGs (HRG4) is due to be launched in April 2007. It uses the latest version of OPCS codes (OPCS4.3) and has 1200 HRGs. The reference costing exercise will take place during 2007/08 and HRG4 will become the basis of the new national tariff in the financial year 2008/09. The reference costs will be derived from actual NHS cost data.
The next version of the HRGs (HRG4) is due to be launched in April 2007. It uses the latest version of OPCS codes (OPCS4.3) and has about 1400 HRGs. The reference costing exercise will take place during 2006-2007. Department of Health documents suggest that it is the intention to use HRG4 as the basis of the new national tariff in the financial year 2009/2010. The reference costs will be derived from actual NHS cost data.
The full documentation of HRG4 has been released and is available at External Link . There are a number of improvements over HRGv3.5:
- Increased clinical coverage, including diagnostic imaging, chemotherapy, radiotherapy, critical care, and rehabilitation
- Complications and comorbidities, improved to better reflect variations in severity and complexity and their impact on resource use
- Unbundling, to handle high cost drugs and other high cost elements of care; this will improve the performance of HRGs so that they can better represent activity and costs
- Setting independence. This enables comparisons and costing of HRGs irrespective of where they are provided (hospital, clinic, GP surgery). This doesn’t cover primary care eg GMS services.
Further information can be found on the NHS Information Centre website ( External Link ).
References
- Fetter RB, Thompson JD, Mills RE. A system for cost and reimbursement control in hospitals. Yale J Biol Med. 1976;49:123-136.
- Sanderson HF, Anthony P, Mountney LM. Healthcare Resource Groups: version 2. J Pub Health Med. 1995;17:349-354.
- NHS Executive. Reference costs: a consultation document. 1998.
- Department of Health. Payment by results (PbR) in 2007-08. Available at http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/DH_062914 (accessed on 19 April 2007).
- Department of Health. Payment by results guidance 2007-08. Available at http://www.dh.gov.uk/en/Publicationsandstatistics/Publications/PublicationsPolicyAndGuidance/DH_063684 (accessed on 19 April 2007).
Contributors
Khesh Sidhu
Commissioning
Khesh Sidhu became a Public Health Medicine Consultant in 1993 and after working as CEO and Medical Director of a large independent provider in Oxford, he joined Sandwell Primary Care Trust as Consultant in Public Health Medicine in 2003. Khesh has always had an interest in computing, in particular database design, programming and analysis. He was closely involved with the development of Healthcare Resource Groups (HRGs) and has a particular interest in researching differences in casemix and unusual patterns of spend. His other interests include the link between commissioning and public health (on which he has produced a number of seminal reports) and palliative care and the NHS.