Incentives for hospitals to reduce surgical complications

In my post on May 5, I discussed the apparently dismal economics of reducing hospital-acquired infections. I showed why hospitals may not have a financial incentive to reduce hospital-acquired infections.  However, because hospitals have a moral and ethical incentive to saves lives and to prevent suffering, they face a dilemma: by doing the right thing they suffer financially.  Sadly, many leaders in health care are not aware that they face this choice.

How to deal with the dilemma is described in an article entitled “The Impact On Hospitals Of Reducing Surgical Complications Suggests Many Will Need Shared Savings Program With Payers,” published by Health Affairs on October 17, 2012 as Web First, and to appear in the November print issue.  My co-authors are Warren Sandberg of the Vanderbilt School of Medicine in Nashville and Bill Weeks of the Geisel School of Medicine at Dartmouth College.  We demonstrate that, when you perform the hospital’s business case for reducing complications, you need to distinguish between situations in which the hospital’s inpatient caseload is growing and in which it’s not growing.

Let’s start with the “no growth” scenario, which is the one I described in my earlier post although I did not draw attention to the no-growth assumption.  You’ll recall that the hospital may suffer a negative cash flow because its small savings, mostly attributable to supplies and materials, may be swamped by the loss of reimbursement revenue  for the excess care associated with complications.  In this case, the payers clearly benefit from the hospital’s initiative in doing the right thing, while the hospital suffers a negative cash flow.

What happens in the “growth” scenario?  To arrive at the answer, first consider what happens in the surgical unit as the complication rate drops: Empty beds begin to appear as patients with complications are “converted” into patients without complications.  This capacity creation has been known and talked about, of course.  Our contribution is to show just how much extra capacity is created – it can be much more that you might think – and to put a dollar value on that capacity if the hospital is able to fill all those emptying beds.  It turns out that the financial payoff can be very attractive.  Using typical numbers for a hospital that performs 10,000 inpatient cases annually, the annual cash flow increase comes to over $1 million for each 1 percent drop in the complication rate.  For the numbers, assumptions and additional details, I encourage you to read the article, including its online appendix.

For hospitals whose inpatient volume is growing rapidly enough there’s no dilemma: Keep reducing complications and grow your revenue.  But most hospitals’ inpatient case load is unlikely to be growing.  They do indeed face a dilemma.  What should they do?  We recommend they negotiate an agreement with their payers to share in the gains.  Although our article doesn’t describe how to conduct the negotiations, it does describe how to arrive at the numbers that should serve as the basis for the talks.