Calculating Average Health Care Costs of an Individual

Different Types of Health Care Costs

There are several types of health care costs. They are direct costs, indirect costs, intangible costs, opportunity cost, average cost, incremental cost and marginal cost.

We briefly review direct and indirect costs here and use colonoscopy as an example of how to calculate direct costs.

Direct costs include all costs directly related to the health care intervention under consideration. Direct costs have two components (i) direct medical costs such costs of drugs, tests and procedures and salaries of nurses and doctors and (ii) direct non-medical costs such as cost of transportation of patients.

One way of calculating direct costs is using health care coding systems. One of the most popular coding systems is the CPT code set, where CPT stands for Current Procedural Terminology. The CPT code system describes in details medical, surgical and diagnostic services and is maintained by the American Medical Association. Any health care intervention performed on a patient will be assigned a CPT code by the health care provider and will be billed according to the CPT code of the procedure.

Indirect costs measures the impact of diseases or conditions on productivity. Often, health economists use gross earnings to estimate indirect costs.

Total health care cost is the sum of direct costs and indirect costs. For instance, the total health care cost of cancer in 2007 is $210 billion, of which, $77 billion is direct medical costs.

Cost of a Colonoscopy with and without Polypectomy

Another example is colorectal cancer screening by colonoscopy. According to the AHRQ report, the costs for colonoscopy without polypectomy can be calculated based on the following CPT codes

· 45378 (diagnostic colonoscopy),

· G0105 (colon screen in high risk individuals) and

· G0121 (colon cancer screening for non high risk individual).

Costs for colonoscopy with polypectomy or biopsy can be calculated based on the following CPT codes

· 45380 (colonoscopy and biopsy),

· 45381 (colonoscopy, submucous injection),

· 45382 (colonoscopy/control bleeding),

· 45383 (lesion removal colonoscopy – fulguration),

· 45384 (lesion removal colonoscopy-hot biopsy) and

· 45385 (lesion removal colonoscopy-snare polypectomy).

The total direct medical costs based on Medicare reimbursement for colonoscopy with and without polypectomy are $648.52 and $497.59, respectively. If you account for the indirect costs, the costs of colonoscopy with and without polypectomy are $794.94 and $979.98, respectively. Thus, polypectomy and/or biopsy adds $150-$180 to the cost of colonoscopy.

Other costs that are of interest in a cost-effectiness analysis are:

  • Opportunity cost, which represents the benefits of one or more interventions that we forgo, when we choose to spend the resources on other interventions. Opportunity cost underscores the fact that the resources are limited and we have to make choices.
  • Incremental cost is the cost difference between two interventions.


Zauber AG, Lansdorp-Vogelaar I, Wilschut J, Knudsen AB, van Ballegooijen M, Kuntz KM. Cost-effectiveness of DNA stool testing to screen for colorectal cancer: Report to AHRQ and CMS from the Cancer Intervention and Surveillance Modeling Network (CISNET) for MISCAN and SimCRC Models. December 20, 2007.Abailable from:

This post is part of the series: Health economics – The Primer

This series of articles will introduce readers to the emerging field of health economics. We will review how health economics influence decision making process in health care and the basic tools used in health economics.
  1. The Role of Health Economics
  2. Cost of Health Care
  3. Classification of Health Economic Analyses
  4. Health Economics Research: Cost Utility Analysis And More
  5. How Much Does a Healthy Year of Your Life Cost?