NOTE: This article is the third in a series of 10 articles and is part of our Economic Evaluation in Healthcare 101 course. You can find a course overview and links to all 10 course modules here:

Measuring Costs in Healthcare

Cost measurement is a fundamental component of economic evaluation in healthcare. Accurate and comprehensive cost assessment ensures that decision-makers can allocate resources efficiently, compare alternative interventions, and design sustainable healthcare policies. Costs in healthcare can be broadly categorized into direct, indirect, and intangible costs, each reflecting different dimensions of resource consumption or burden. The method used to estimate these costs—micro-costing vs. gross-costing—also affects the precision and applicability of economic evaluations.

1. Direct Costs: Medical Resource Consumption

Direct costs refer to the actual monetary expenditures associated with healthcare services and interventions. These are the most visible and quantifiable components of cost and are typically incurred by healthcare providers, insurers, or patients.

Key components of direct medical costs include:

  1. Hospitalization (e.g., inpatient stays, ICU services, operating room charges)
  2. Medical treatments and procedures (e.g., surgeries, diagnostics, radiology)
  3. Pharmaceuticals and biologics (e.g., chemotherapy agents, vaccines)
  4. Outpatient visits and rehabilitation services
  5. Medical equipment and consumables

These costs are critical to budget impact analyses and cost-effectiveness analyses, where the total expenditure of a healthcare intervention must be compared to alternatives. Data sources for direct costs include hospital billing systems, administrative claims databases, and national health expenditure reports.

Reference: Drummond MF, Sculpher MJ, Claxton K, et al. (2015). Methods for the Economic Evaluation of Health Care Programmes, 4th ed.

2. Indirect Costs: Productivity and Informal Caregiving

Indirect costs represent the economic impact of disease or treatment on productivity and time, rather than direct medical spending. Though less visible than hospital bills, they often account for a significant proportion of the societal cost of illness.

Examples of indirect costs:

  1. Productivity losses due to morbidity or early retirement
  2. Absenteeism and presenteeism (working while ill)
  3. Informal caregiving provided by family or friends without compensation
  4. Mortality-related productivity losses (e.g., future earnings lost due to premature death)

These costs are particularly relevant for diseases affecting working-age populations (e.g., depression, diabetes, cancer) and are typically included in societal perspective evaluations, rather than payer-focused assessments.

To estimate indirect costs, methods such as the human capital approach (which values time based on wages) and the friction cost approach (which accounts for the time it takes to replace a worker) are used.

Reference: Krol M, Brouwer W. (2014). How to estimate productivity costs in economic evaluations. Pharmacoeconomics, 32(4), 335–344.

3. Intangible Costs: Pain, Suffering, and Psychological Burden

Intangible costs are the non-monetary burdens associated with illness or treatment—such as pain, emotional distress, and reduced quality of life. These are the most difficult to quantify, yet they significantly affect patient well-being and can influence treatment preferences and policy decisions.

Examples include:

  • Chronic pain and discomfort
  • Mental health impacts (e.g., anxiety, depression)
  • Loss of dignity or autonomy in terminal illness or disability

While these costs are not typically assigned a direct dollar value in cost-effectiveness studies, they are captured indirectly in utility measures like Quality-Adjusted Life Years (QALYs) or health state preferences derived from surveys using instruments such as the EQ-5D or SF-6D.

Reference: Brazier J, Ratcliffe J, Salomon JA, Tsuchiya A. (2017). Measuring and Valuing Health Benefits for Economic Evaluation, 2nd ed.

4. Approaches to Costing: Micro-costing vs. Gross-costing

The approach to costing influences the level of precision and resource intensity in economic evaluation.

Micro-costing (Bottom-Up Approach)

Micro-costing involves the itemization and valuation of each individual resource used in a healthcare intervention. This approach provides high accuracy, especially useful for:

  • New interventions or pilot programs
  • Rare or complex conditions with variable care pathways
  • Studies requiring detailed resource use breakdown

Example: A micro-costing study of cancer chemotherapy might include drug dosages, infusion chair time, antiemetics, lab tests, and staff salaries.

However, micro-costing is time-consuming and data-intensive, often requiring primary data collection or detailed hospital records.

Gross-costing (Top-Down Approach)

Gross-costing (also called top-down costing) uses average costs from aggregated data, such as Diagnosis-Related Groups (DRGs), hospital averages, or national tariffs.

This approach is:

  • Less precise, but easier to apply in large-scale evaluations
  • Ideal for population-level modeling or where resource use patterns are well established

Example: Using average costs per hospitalization for COPD exacerbation based on DRG data from national claims.

In practice, a hybrid approach may be used: micro-costing for key cost drivers, and gross-costing for routine or less variable components.

Reference: Tan SS, Rutten FFH, van Ineveld BM, et al. (2009). Comparing methodologies for the cost estimation of hospital services. European Journal of Health Economics, 10(1), 39–45.

Conclusion

Understanding and accurately measuring the diverse costs associated with healthcare interventions is fundamental to economic evaluation. While direct costs are the most visible and often the focus of payer-based analyses, indirect and intangible costs reflect the broader societal burden of illness. The choice between micro-costing and gross-costing methods should be guided by the evaluation’s purpose, data availability, and required precision. As the healthcare landscape becomes increasingly cost-conscious, comprehensive costing remains essential to delivering value-based care.

References

  • Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. (2015). Methods for the Economic Evaluation of Health Care Programmes, 4th ed. Oxford University Press.
  • Krol M, Brouwer W. (2014). How to estimate productivity costs in economic evaluations. Pharmacoeconomics, 32(4), 335–344.
  • Brazier J, Ratcliffe J, Salomon JA, Tsuchiya A. (2017). Measuring and Valuing Health Benefits for Economic Evaluation, 2nd ed. Oxford University Press.
  • Tan SS, Rutten FFH, van Ineveld BM, et al. (2009). Comparing methodologies for the cost estimation of hospital services. European Journal of Health Economics, 10(1), 39–45.
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