Healthcare Business News

Hospital profits higher with patient complications: study

By Beth Kutscher
Posted: April 16, 2013 - 4:00 pm ET

(Story updated with commentary April 17, 2013 at 1:02 p.m. ET)

Hospitals earn higher profit margins when their patients experience surgical complications, according to a study in the Journal of the American Medical Association .

The authors claim the study is the first to quantify how complications impact a hospital's bottom line and illustrate the challenge of pushing hospitals to improve outcomes when the current system still rewards more care over better care.

After looking at more than 34,000 inpatient surgical procedures, Dr. Sunil Eappen of Harvard Medical School and his co-authors found that profit margins were 330% higher when privately insured patients suffered at least one complication. Among Medicare patients, profit margins were 190% higher.

The patients were treated at a 12-hospital, not-for-profit system in the southern U.S. during 2010. A total of 1,820 patients, or 5.3%, suffered at least one surgical complication.

The average revenue for treating these patients was $49,400 compared with $18,900 for patients who did not face any adverse outcomes. The study accounted for a hospital's fixed and variable costs in providing care.

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“Hospitals are getting paid more when there's more work to do and more care provided,” said David Sadoff, a partner at Boston Consulting Group, a management consulting firm that co-authored and provided funding for the study.

While the complications in the study may not be “never events”—meaning a certain amount may still occur even under the best circumstances—“you can influence the risk of them happening,” Sadoff said.

The challenge then becomes balancing how to pay hospitals to take more precautions on the front-end while still providing some compensation when more care is required, he added.

Under the current prospective payment system, “The hospital bears all that energy for reducing that risk,” said Dr. Barry Rosenberg, a BCG partner and study co-author, while “all that benefit flows to Medicare and the private payer.”

In an accompanying editorial, Uwe Reinhardt, of Princeton's Woodrow Wilson School of Public and International Affairs, notes that the findings also contradict the “prevailing perspective that private payers are axiomatically assumed to be smarter payers than government-run Medicare.”

Medicare currently allows one payment per inpatient case. Current payment reform proposals include bundling and risk-adjusted capitation rates and would help eliminate the financial incentives for complications, Reinhardt writes.

Other partners on the study included Texas Health Resources and Ariadne Labs, a joint innovation center at Brigham and Women's Hospital and the Harvard School of Public Health.

Dr. Atul Gawande, a physician-journalist and director of Ariadne Labs, was one of the study's authors. Gawande, who wrote about improving quality of care in his book “The Checklist Manifesto,” said in a news release that results make a compelling case for payment reform so that hospitals aren't rewarded for poor outcomes.

Follow Beth Kutscher on Twitter: @MHbkutscher

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