The annual bill for surgical procedures in the U.S. is currently estimated at $400 billion and is expected to grow faster than the economy over the next decade. A significant contributor to this mounting figure are surgical complications—events that cause patients harm and also drive costs upward. As released in this year’s April issue of JAMA, The Journal of the American Medical Association, recent research from The Boston Consulting Group and several partnering health care institutions shows that surgeries are more profitable for hospitals when surgical complications arise. This troubling conclusion is problematic for the U.S. health care system and especially the hospitals that are fighting to make surgery safer. David Sadoff, a leader in BCG’s provider practice and a coauthor of the JAMA article explains why.
Does the research show that although they are not caused intentionally, surgical complications ultimately add to a hospital’s bottom line?
We analyzed more than 34,000 surgical inpatient procedures and 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.
Our research shows this is yet another example of the fee-for-service model in the U.S. health care system creating the wrong incentives. We are penalizing hospitals that do the right thing: those that lower the incidence of complications make less money from most payers.
Why did BCG undertake this research?
Over the past year, BCG has worked closely with a major regional hospital system in the U.S. in its efforts to improve surgical quality and to change the culture of its operating rooms. One of the focuses of this work has been developing and implementing Safe Surgery checklists. Our partners in the effort have included those behind the global Safe Surgery initiative—Atul Gawande and the team at Ariadne Labs, a joint center for health systems innovation at Brigham and Women’s Hospital and Harvard School of Public Health.
Through the checklist-implementation efforts, we wanted to understand the financial impact of reducing the incidence of complications, and the data took us in a surprising direction. Our client was and continues to be committed to doing the right thing by reducing surgical complications, but they also wanted to understand the economic impact underlying current payer-reimbursement models.
What new finding did this research reveal to the health care community?
The existence of backward incentives in the fee-for-service model should not be surprising to anyone in the provider or payer sectors. I suspect that many in the sectors had intuition consistent with these findings. But until now, no one had ever done a thorough proof to validate whether these financial penalties actually held true for surgical complications in such a holistic way.
It took a fair bit of analytical rigor to get this right and meet the standards of a publication such as JAMA. Our study used administrative data (health-insurance billing data) to evaluate the net revenues, fixed costs, and variable costs associated with more than 34,000 surgical inpatient procedures at our client’s hospital system. We identified a basket of ten surgical complications—ranging from an infection at the surgery site to cardiac arrest—and used diagnosis codes to develop an algorithm for determining which complications were surgically related and not present on initial admission to the hospital.
The findings were striking. For patients with private insurance, the contribution margin (defined as revenues minus variable costs) per patient with complications was $39,000 higher than the margin per patient without complications. For patients with Medicare, the contribution margin per patient was $1,800 higher when complications occurred.
If your initial engagement focused on improving quality, what comes next, given the implications on hospital finances?
It seems that our research struck a nerve and is hopefully contributing to the national—and international—debate on the importance of investing in outcome-driven health systems that pay for quality and value. Specifically, hospitals should not be penalized financially for improving outcomes. In the U.S., policymakers talk extensively about paying for performance, but in this instance we’ve found that payers are actually paying less for performance—and paying more for underperformance.
Given all the national dialog on payment reform, this finding certainly should be incorporated in the value payment arrangements that payers and providers are developing. Payers and providers should consider modifying their payment structures to reward the right behaviors and to share the value that is created when providers make the necessary investments to reduce complications. Given the savings that payers realize when complications are reduced, forward-thinking payers may even go so far as to share in the investment cost that hospitals have to make when implementing safe surgery programs.
What are the implications of these findings on value-based health care efforts?
One of my coauthors has said that physicians and hospital systems regularly look in the mirror and realize that even for all the improvements they’re making, there is still so much work to do. He’s right, but given the stakes, we feel that aligning incentives to drive even better performance with respect to surgical complications should be a key part of value-based health care efforts. It’s of paramount importance to patients, who always deserve the best possible care.
ABOUT BOSTON CONSULTING GROUP
Boston Consulting Group partners with leaders in business and society to tackle their most important challenges and capture their greatest opportunities. BCG was the pioneer in business strategy when it was founded in 1963. Today, we work closely with clients to embrace a transformational approach aimed at benefiting all stakeholders—empowering organizations to grow, build sustainable competitive advantage, and drive positive societal impact.
Our diverse, global teams bring deep industry and functional expertise and a range of perspectives that question the status quo and spark change. BCG delivers solutions through leading-edge management consulting, technology and design, and corporate and digital ventures. We work in a uniquely collaborative model across the firm and throughout all levels of the client organization, fueled by the goal of helping our clients thrive and enabling them to make the world a better place.
© Boston Consulting Group 2023. All rights reserved.
For information or permission to reprint, please contact BCG at email@example.com. To find the latest BCG content and register to receive e-alerts on this topic or others, please visit bcg.com. Follow Boston Consulting Group on Facebook and X (formerly Twitter).