Unbiased Analysis of Today's Healthcare Issues

How much does a hospital stay cost?

Written By: Jason Shafrin - Oct• 01•12

A paper by Geue et al. (2012) attempts to answer this question by examining five different methods of estimating the cost of a continuous hospital stay (CIS). Each method is discussed below in more detail.

Costing Methods

HRGs based on English Tariff.  Since the 1990s, English hospitals have often used HRGs to cost hospital activities. “Healthcare resource groups (HRGs) are similar to DRGs, which were first developed in the USA in the early 1980s for Medicare to use as a prospective payment system for hospitals. HRGs are a measure of case mix, presenting standard groupings for clinically similar treatments, which consume a common set of health care resources. Based on procedure, diagnosis, LOS [length of stay], complications, co-morbidity, discharge method, age and gender, each patient record is grouped in an HRG and reflects one finished consultant episode.  Australia and many European countries have developed similar grouping systems, which are based on the Health Care Financing Administration system [now the Centers for Medicare and Medicaid Services] introduced in the USA but have been modified substantially to meet local requirements.”

The English tariff provides cost data for elective and non-elective hospital episodes and an additional per diem cost for very long stays that exceed the so-called ‘trim point’, which marks the expected LOS for each HRG.

HRGs based on Scottish National Tariff.  To develop a Scottish National Tariff (SNT), the SNT project group had exploited English reference costs. Cost data from the Scottish Costs Book was used to derive a unit cost per HRG. The approach involved deriving elative cost weights utilizing English costs and applying those weights to the Scottish cost basis. In other words, the authors use English costs to determine relative costs between HRGs and then use the Scottish cost data to calibrate the HRGs so that overall spending with HRGs matched observed spending form the Scottish data.  Other countries such as Denmark and Germany use a similar system where they do not calculate average prices for each DRG but calculate cost weights to define a ratio between treatment episodes. Providers negotiate the DRG base rate and the relative prices of other DRGs are fixed based on the calculated cost weights.

Per Diem.  Here  one simply sums the number of costs for a given provider or provider setting and divides by the length of stay.

Per Episode with fixed/variable cost split.  Variable costs are assigned to each bed day and fixed costs to each episode.  This approach assumes that there is some cost (e.g., nurses, linen) that varies based on whether the patient occupies a bed and other costs (i.e., medical treatment) that are relatively fixed for a given disease.  “To derive a percentage split between fixed and variable costs per episode, national average specialty costs were split into a fixed and variable component. This method generates a cost per episode based on individual LOS but will result in lower costs per episode on average than per diem costing and so circumvent overestimation of costs.”  The US Department of Veteran Affairs (VA) currently uses this system.

Per episode using national average length of stay.  This method uses national average costs per episode but does not distinguish between fixed and variable costs and does not account for the length of stay of an individual episode. “The rationale for the inclusion of this costing method is that if a representative sample were used to estimate costs, national averages should provide similar results to those obtained from more elaborate costing methods.”


Do the different costing methods produce different results? The answer is yes.

Whereas Method 1 estimates a mean cost of a continuous inpatient stay of £1993, method 3 estimates a mean cost per continuous inpatient stay of £3002.  The other 3 methods fall between these two extremes.  Mean costs that include an element of individual LOS [i.e., Method 3 (£3002) and Method 4 (£2764) are higher on average with a greater variance (£4505 and £3181 respectively versus variances under £2050 for the other three methods).


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