Chapter 3: Types of costs and their measurement
We continue our analysis of costs within the context of CM and focus on how to measure these costs. We know that ‘cost’ means opportunity cost; but this cost comes in many forms, in particular, marginal, average, overhead, sunk and joint. It is MC cost that is most useful for evaluation purposes. However, often we have information only on AC. Worse still, we are usually faced with hospital or physician charges that may not even reflect AC. After presenting the main cost concepts, we examine the link between markets and costs. Market prices are often used to value resource inputs in health care. We shall see that only competitive market prices can be used for this valuation purpose. The next section examines in detail the relation between charges and costs, highlighting the use and misuse of the hospital cost-to-charge ratio. Then we explain the need for cost standardization when making any form of economic evaluation. The applications cover the two main cost components in health care: hospital and physician services.
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