Relationship Between Occurrence of Surgical Complications and Hospital Finances

By Sunil Eappen, MD; Bennett H. Lane, MS; Barry Rosenberg, MD, MBA; Stuart A. Lipsitz, ScD; David Sadoff, BA; Dave Matheson, JD, MBA; William R. Berry, MD, MPA, MPH; Mark Lester, MD, MBA; Atul A. Gawande, MD, MPH
JAMA, April 17, 2013

We found that under private insurance and Medicare, which cover the majority of US patients, the occurrence of surgical complications was associated with higher hospital contribution margins. Depending on payer mix, efforts to reduce surgical complications may result in worsened near-term financial performance.

The financial effects of surgical complications varied considerably by payer type. Complications were associated with more than $30 000 greater contribution margin per privately insured patient ($16 936 vs $55 953) compared with less than $2000 per Medicare patient ($1880 vs $3629). In contrast, for Medicaid and self-pay procedures, those with complications were associated with significantly lower contribution margins than those without complications.


Making Surgical Complications Pay

By Uwe E. Reinhardt, PhD
Editorial, April 17, 2013, JAMA

In this issue of JAMA, Eappen et al reach the troublesome but not surprising conclusion that hospitals in the United States can profit handsomely from postsurgical complications, even if the hospitals could avoid them.

Under the federal Medicare program, payment for all of the services involved in hospital inpatient treatment has been bundled since the mid-1980s into 1 payment per inpatient case categorized into 1 of 745 distinct diagnosis related groups (DRGs) of cases, which are categorized by adjustments for complications and comorbidities. This approach has made Medicare a pioneer in payment reform that has since been copied worldwide.

According to the authors’ propensity-adjusted estimates, a patient with 1 or more complications results in a $39 017 (95% CI, $20 069-$50 394) greater contribution margin than a patient without complications if the care is reimbursed by a private payer. In contrast, for Medicare, the gain in complication-related contribution margins is only $1749 (95% CI, $976-$3287). This observation contradicts the prevailing perspective that private insurers are axiomatically assumed to be smarter payers than government-run Medicare. However, if, as the authors imply, many of the observed postsurgical complications were avoidable, then perhaps Medicare should more appropriately be considered a smarter payer than private insurers. By having moved to the bundled DRG payments for inpatient care as early as the mid-1980s, Medicare appears to have largely avoided rewarding hospitals financially for avoidable mistakes.

However, the data reported by the authors appear different for the state-run Medicaid programs. Essentially, Medicaid did not even cover the hospital’s variable costs of treating Medicaid patients. Suggesting to the public that fellow citizens receiving Medicaid have adequate health insurance but then not covering even the clinicians’ and hospitals’ variable costs of treating those patients might warrant the label of “government-initiated Medicaid fraud.”

In reporting this JAMA article on surgical complications and hospital finances, headlines throughout the nation are stating that hospitals profit from surgical errors. The story that should be reported is that private insurers have been richly rewarding hospitals for surgical complications, whereas Medicare has largely avoided paying these rewards.

Specifically, private insurers pay an average of $39,000 more for surgical complications whereas Medicare pays only $1,700 extra. Obviously the government has done a much better job than the private sector in ensuring value in our health care purchasing, not to mention providing incentives to improve performance.

The government isn’t always right, as the Medicaid program demonstrates. Being chronically underfunded, Uwe Reinhardt suggests that the resulting underpayments “might warrant the label of ‘government-initiated Medicaid fraud.'”

Medicare’s prospective payment system using DRGs (745 diagnosis-related groups) has improved payment levels, but it still provides an incentive for the provision of excess care. There is a better way. Hospitals should receive global budgets based on legitimate costs, just as our fire and police departments are budgeted. Periodic re-budgeting will compensate for changing medical and community requirements. Of course, incentives catering to passive investors should be removed by converting all hospitals to nonprofit status.

Global budgeting for hospitals is just one of the features of the single payer model of reform as advocated by Physicians for a National Health Program, all of which together would result in an affordable system of high-quality care for everyone. We should go for it.