Using Generalized Linear Models to Assess Medical Care Costs

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Medical expenditure data typically exhibit certain characteristics that must be accounted for when deriving cost estimates. First, it is common for a small percentage of patients to incur extremely high costs compared to other patients, resulting in a distribution of expenses that is highly skewed to the right. Second, the assumption of homoscedasticity (constant variance) is often violated because expense data exhibit variability that increases as the mean expense increases. In this paper, we describe the use of the generalized linear model for estimating costs, and discuss several advantages that this technique has over traditional methods of cost analysis. We provide an example, applying this technique to the problem of determining an incidence-based estimate of the cost of care for patients with diabetes who suffer a stroke.