BOSTON, April 16, 2013—Hospitals’ profit margins are higher when patients covered by Medicare or private insurance experience a surgical complication, according to new research by The Boston Consulting Group (BCG) and a group of partnering health-care institutions. The findings will be published tomorrow in a peer-reviewed article in JAMA, The Journal of the American Medical Association.
The study, the first of its kind aimed at quantifying the impact of surgical complications on hospital finances, analyzed a broad set of data on inpatient procedures.
The article is based on a study that BCG conducted in collaboration with Texas Health Resources and Ariadne Labs, a joint center for health systems innovation at Brigham and Women’s Hospital and Harvard School of Public Health. Analyzing more than 34,000 surgical inpatient procedures, the authors found that privately insured surgical patients who had one or more complications provided hospitals with a 330 percent higher profit margin than those who had no complications. Medicare patients with one or more complications produced a 190 percent higher margin. Therefore, efforts by hospital managers to reduce surgical complications could substantially hurt their hospital’s financial performance.
“This research provides dramatic evidence that hospitals lack financial incentives to invest in improving surgical quality,” said Barry Rosenberg, MD, a Chicago-based BCG partner in the firm’s Health Care practice and a coauthor of the study. “Policymakers talk about paying for performance, but instead Medicare and private payers are rewarding hospitals for complications. The U.S. health-care system is paying for harm.”
“It’s been known that hospitals are not rewarded for quality, but it hadn’t been recognized exactly how much more money they make when harm is done,” said author Atul Gawande, MD, a director of Ariadne Labs, professor at Harvard School of Public Health, and surgeon at Brigham and Women’s Hospital in Boston. “This clearly indicates that health care payment reform is necessary. Hospitals should financially gain—not lose—by reducing harm.”
U.S. health expenditures for surgical procedures, currently estimated at $400 billion annually, are expected to grow faster than the economy over the next ten years.
To measure the impact of complications on hospital profitability, the study used administrative data (health-insurance billing data) to evaluate the net revenues, fixed costs, and variable costs associated with 34,256 surgical inpatient procedures at a nonprofit, 12-hospital system in the southern U.S. during 2010. A total of 1,820 patients who had at least one complication were identified.
Other major findings of the research include the following:
Average revenue per patient with one or more complications was $30,500 higher than for patients with no complications ($49,400 versus $18,900).
For patients with private insurance, the contribution margin per patient (defined as revenues minus variable costs) with complications was $39,000 higher than the margin per patient with no complications. Total margin (defined as revenues minus variable and fixed costs) increased from $11,000 to $36,600 when complications occurred.
For patients with Medicare, the contribution margin per patient was $1,800 higher when complications occurred. Total margin decreased from –$5,500 to –$14,700 when a complication occurred. As long as the contribution margin is positive and there is hospital and operating room capacity, a hospital is financially motivated to provide care, even if total margin is negative.
David Sadoff, a Houston-based BCG partner who leads the firm’s Provider practice in North America and is a coauthor of the study, noted that leading hospital systems around the world are migrating to value-based and outcome-driven health systems to improve quality. “Reducing the cost and incidence of surgical complications is obviously of paramount importance to patients,” he said. “Hospitals should not be penalized financially for improving outcomes.”
BCG’s Health Care practice works with payers, providers, and biopharma and medtech companies. Its work with providers includes leading hospital systems and academic medical centers, and addresses such issues as performance improvement, physician engagement, strategy, and post-merger integration.
A copy of the article, “The Relationship Between Occurrence of Surgical Complications and Hospital Finances,” can be obtained from the JAMA website at http://jama.jamanetwork.com/journal.aspx.
To arrange an interview with one of the authors, please contact Madeleine Desmond at +212 446-2856 or firstname.lastname@example.org.