Hospitals that spend less money on pharmaceuticals also take better care of their patients.

That's one key finding from an in-depth analysis of finances and care quality at thousands of hospitals across the U.S., performed by analytics firm Thomson Reuters at the request of Modern Healthcare.

The results of the new analysis, experts say, fly in the face of a decade-old presumption that meeting quality-of-care mandates outlined in the landmark To Err Is Human report would make hospitals less profitable. The Thomson Reuters data show that hospitals with better records on patient safety and mortality spent significantly less than the average on drugs and supplies on a per-case basis.

“Fundamentally, I believe that quality is less expensive, and that with evidence-based practices we are able to reduce variation, hence driving out waste and increasing consistency,” says Jim Brown, president and CEO of Memorial Hermann Sugar Land (Texas), one of the high-performing hospitals cited in the study.

Hospitals on Thomson Reuters' 100 Top Hospitals list—which recognizes healthcare providers that turn a profit while providing high-quality care—spent an average of 6% less on pharmaceuticals than hospitals that didn't make the list.

Specifically, those on the 100 Top Hospitals list spent $987 a case for drugs, versus $1,051 for hospitals that didn't make the list. Memorial Hermann Sugar Land, to choose one example, spent an average of $902 on drugs per case. (The data on spending is adjusted to account for differences in patient severity.)

Susan DeVore, president and CEO of hospital-supply purchaser and quality-improvement firm Premier, says the findings mirror trends that her company has seen in its own three-year-running analysis of the relationship between hospital spending and care quality.

“Every time we drill down and mine the data, we can find proof points proving that improving quality lowers cost, so we think the business case is clear for improving quality,” DeVore says. “But it doesn't happen in a vacuum. People do have to invest in technology and people and processes.”

Premier's Quest collaborative project has found that the total inpatient cost per case rose 4% in the past three years at 200 high-performing hospitals in their study, while overall inpatient costs at U.S. hospitals have risen 21% during that same period. “There is a huge bending of the cost curve that occurs when you try to affect quality and performance,” she says.

Executives at high-performing health systems offered many explanations for their performance, citing everything from the cost savings that come from membership in a health system to the efficiency of team-based decisionmaking. In some cases, increased spending can yield future savings, as with electronic health-record systems, while other initiatives such as closed formularies and uniform clinical pathways can prevent wasteful spending from occurring.

However, the analysts at Thomson Reuters found two notable exceptions to their conclusions on how drug spending relates to care quality. First, hospitals that spent more on pharmaceuticals were better able to keep their patients from being readmitted to the hospital within 30 days for conditions such as pneumonia and heart attack.

Perhaps more puzzling, study authors found, is that when the patients are asked to give their opinions, they tended to rate their own satisfaction higher at hospitals that spent more on prescription drugs. That conclusion was based on comparisons of a hospital's Hospital Consumer Assessment of Healthcare Providers and Systems survey scores and its pharmacy usage.

Thomson Reuters noted in its report that the result “may reflect the fact that some of the HCAHPS survey instrument items ask about pain management and medication instructions from caregivers.”

David Foster, lead scientist at Thomson Reuters' Center for Healthcare Analytics, says it was not shocking that patients would show a preference for care that might deviate from best practices on efficiency or care quality.

“To me, it seems like a hospital that is using pharmaceuticals in a more liberal fashion might create an impression among patients that would be favorable to them,” Foster says. “I don't think the typical patient necessarily sees the value in using a generic product over a branded product.”

The Thomson Reuters study also looked at use of medical supplies, and it found the same trends as with pharmaceutical use: Hospitals that are more profitable and deliver better care also tend to spend less on supplies on a per-case basis. Specifically, facilities on Thomson Reuters' 100 Top Hospitals list spent an average of $1,955 a case on supplies, while the thousands of other hospitals that didn't make the list of high performers spent $2,239 a case—a 13% difference in spending. “Bad quality is expensive, and cost-effective quality can definitely lead to more-efficient and less costly care,” says Dr. Elizabeth Mort, vice president of quality and safety at Massachusetts General Hospital, Boston, which is on the 100 Top Hospitals list

When the Institute of Medicine published To Err Is Human in 1999, its finding that medical errors caused as many as 98,000 deaths a year was greeted by hospital executives in the context of another massive event in healthcare at the time: the Balanced Budget Act of 1997.

That law slashed Medicare rates and changed caring for government-insured patients from an overall profitable enterprise into a money-losing proposition. The change happened just as the the IOM went public with its startling argument that hospitals were actually causing thousands of deaths per year with poor-quality care.

Hospital executives at the time complained loudly that government and private payers and managed-care companies were taking away revenue at the same time that the public clamored for investments to make hospitals safer through greater staffing and process automation (May 28, 2001 supplement, p. 4).

The result, as quality observers often note, has been a fitful approach to quality improvement, as healthcare providers weigh the stark realities of their balance sheets against the more generalized findings on patient safety and satisfaction.

But with more than a decade's worth of experiments and experience now in hand, experts can use the data to back up their claims that better care is also often cheaper.

The data show that it's not only possible to reduce cost while improving quality, but the two trends should go hand-in-hand. And one of the clearest links between cost and quality is system membership.

It has long been observed that most hospitals on Thomson Reuters 100 Top Hospitals list belong to systems. They made up 75% in the most recent analysis, compared with the 61% of hospitals that didn't make the 100 Top list.

But this year's analysis of the figures also showed that system hospitals tend to spend less on pharmaceuticals. Hospitals in systems spent an average of $884 a case on drugs, while stand-alone hospitals spent $955 a case, the Thomson Reuters data show. Proponents of system membership have always used buying power as one of their key arguments, and interviews found that smaller hospitals do indeed benefit from bulk-quantity pricing through their central system procurement offices.

However, something else is at work. Because while hospitals in systems spent less on drugs than stand-alones, that difference all but vanishes when researchers look at supplies. System hospitals spent only $29 a case less than stand-alones on supplies, a difference that Thomson Reuters called not statistically significant in the scope of healthcare spending.

Robin Brown, CEO of Scripps Green Hospital in La Jolla, Calif., also on the 100 Top Hospitals list, says high-quality hospitals and systems put an emphasis on smart execution of healthcare, which starts with good organizational design. For example, he says one of the keys to quality performance at Scripps Green has been its adoption of the hospital-intensivist model, in which physicians with critical-care specialties exclusively manage the intensive-care unit. The result is homogeneity of care inside what has traditionally been one of the most resource-intensive areas in hospitals.

In 2008, the quality-improvement organization Leapfrog Group estimated that if all hospitals adopted the intensivist staffing model, they would recoup more than $4 billion in savings while preventing thousands of deaths through better-coordinated care.

“It's not about smart doctors, it's more about structure and design,” Scripps' Brown says. He also touched a theme that almost everyone interviewed mentioned—the need for decisionmaking by teams instead of individual physicians.

Mort at Massachusetts General says her facility's long-running antibiotic-management protocol saves money while preserving care by ensuring that physicians use medical evidence in their prescribing decisions.

Though it may be tempting for doctors to use the newest and most expensive antimicrobial, it's rarely justified when the initial lab results come back. That's why physicians who want to use more-expensive antibiotics have to consult a hospital infection-control expert for permission first.

She points out another less obvious benefit of the team-based approach: By putting clinicians in contact to discuss evidence-based practices on a wide variety of topics, doctors end up educating one another on the latest medicine in the process.

“The cost scrutiny is coupled with medical scrutiny. When you try to get a handle on cost, you also expose opportunities to make a quality decision,” she says. “If you're using all of our resources to make the most cost-effective (decision on) antibiotics, you're probably also using the resources to make sure you're giving the patient the right drug.”

Memorial Hermann Sugar Land's Jim Brown describes how small councils of physicians drawn from across Memorial Hermann Healthcare System's physician groups meet regularly to develop and update systemwide clinical guidelines and pathways.

As a system, Memorial Hermann uses its 20 Clinical Programs Councils, or CPCs, to develop the guidelines for its closed formulary, which Brown says supports uniform prescribing while maximizing corporate buying power.

Opened in 2006, Memorial Hermann Sugar Land is part of the systemwide electronic medical record, which doesn't allow doctors to prescribe outside the formulary without a formal appeal to the appropriate clinical council. The hospital also has an automated pharmaceutical-dispensing system, which cuts down on pharmacy errors. Both systems had steep initial investments, but Brown says they pay for themselves by increasing medical consistency and reducing potential errors—a statement borne out by the hospital's comparatively low costs, as measured by Thomson Reuters.

Minimizing the influence of industry sales tactics on the hospital to keep down costs is another goal of the protocols and automated systems, but Memorial Hermann goes one step further: It requires company representatives to make appointments and carry visitor badges with them at all times on-site at hospitals. “We don't have vendors camped out in our surgery lounge if they're not actively engaged in a case,” Jim Brown says. “We have prevented our ORs and cath labs from being a sales site.”