Hospital Profits Higher When Surgical Patients Develop Complications

By Debra Gordon

By Debra Gordon

In yet another sign of just how dysfunctional and Kafkaesque our healthcare system has become, consider a study recently published in the Journal of the American Medical Association.

Researchers conducted a retrospective analysis of data for all inpatient surgical discharges during 2010 from a 12-hospital system to compare costs, revenues, and contribution margins (revenue minus variable costs, representing financial resources available to pay fixed costs) between patients who developed surgical complications and those who didn’t. For the record, the greater the positive contribution margins, the better the hospital is doing financially.

Bottom line: hospitals earned more—a lot more—on patients with surgical complications. Although patients with 1 or more complications incurred higher costs, those with private insurance were also associated with a contribution margin (profit) of $39,017 each; those with Medicare, a contribution margin of $1,749 each. Looking just at margins (revenues minus fixed and variable costs), patients with private insurance who had 1 or more complication brought in $25,000 more than those without complications, although Medicare, Medicaid, and private pay patients brought in less.

So, I ask you, where is the incentive for hospitals to improve the quality of their care to reduce surgical complications?

Now, I’m not suggesting that surgeons are deliberately introducing complications or not providing the best care they can. However, numerous studies find that performance improvement and reengineering efforts can reduce  the rate of surgical complications. They also show that when hospitals face a financial penalty for complications (such as hospital-acquired pneumonia) or readmissions, they figure out a way to reduce or prevent them.

But we’re not incentivizing hospitals to take those steps when it comes to surgical complications.

My primary frustration is with the commercial payers. Their reimbursement rates ranged from 100% to 250% of Medicare rates. If we had a single-payer system, of course, everyone would get the same fee for the same diagnosis-related group (DRG) (with adjustment for severity mix and geographic location, of course).

The authors of this study offer 2 suggestions for addressing the problem: bundle the average cost of complications into the DRG payment for surgical procedures, and/or limit the hospital’s ability to upcode the surgery when complications occur.

What do you think we should do?