Healthcare Business News

Complicated margins

Surgical complications bring in more money: study

By Beth Kutscher
Posted: April 20, 2013 - 12:01 am ET

Hospitals earn higher profit margins when patients, particularly those with private insurance, experience surgical complications, according to a study in the Journal of the American Medical Association.

The authors say the study is the first to quantify how complications affect 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.

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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.

Yet Nancy Foster, vice president for quality and patient safety policy at the American Hospital Association, said the findings also show that, in many cases, hospitals still aren't recovering their costs for patient care.

For instance, Medicare patients who experienced a complication were actually costing hospitals money when fixed and variable costs were taken into account. While contribution margins (defined as revenue minus variable expenses) were $1,800 higher for Medicare patients with surgical complications, total margins (which factor in fixed expenses) decreased from -$5,500 to -$14,700. About 45% of the system's patients were Medicare beneficiaries while 40% had private insurance.

“They're losing money on these patients,” Foster said, noting that the average total margin for the system was actually a negative 6.4%. “I've been concerned that people think hospitals are profiting from mistakes.”

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.”

Foster, too, noted that making performance improvements can have a “deleterious effect” on the bottom line. “All the right things to do for patients have a financial cost for hospitals,” she said. “And yet the heroes of medicine are doing this every day.”

In an accompanying editorial, Uwe Reinhardt, of Princeton's Woodrow Wilson School of Public and International Affairs, noted 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. Reform proposals include bundling and risk-adjusted capitation rates and would help eliminate the financial incentives for complications, Reinhardt writes.

Other partners in 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.

Follow Beth Kutscher on Twitter: @MHbkutscher

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