Why surgical complications may actually hurt profits despite what you've just read.
If there is no financial incentive to reduce excess length of stay, why has every hospital spent the past 20 years trying to reduce it?
There's a high-profile and important paper in JAMA this week by Sunil Eappen and colleagues. The study looked at surgical discharges during 2010 from a single 12-hospital system and determined that admissions that included a surgical complication were associated with a higher profit (defined as the contribution margin) than admissions without complications. The authors concluded that this creates a disincentive for hospitals to prevent surgical complications since they might see reduced profits as a result. This is a very provocative finding and it's getting a lot of well-placed media attention, as you might expect. However, there is an important caveat with the study that I would like to highlight.
In the study the authors report that admissions with surgical complications result in $39,000 higher "profits" if the care is reimbursed via a private payer and $1800 if Medicare is the payer. However, as Dr. Reinhardt correctly noted in the editorial, "Allocating profit and loss is exquisitely sensitive to the many assumptions made in economic modeling and must be performed carefully to provide useful evidence about the financial ramifications of surgical complications and other services." His concern dealt mostly with how the authors allocated fixed costs in their calculations. My concern has to do with what the authors assumed happens to an empty bed once a patient is discharged in a US hospital.
This is what the authors assumed (and mentioned as a limitation): "We did not estimate the effect of 3 potential factors that could affect the hospital economics of surgical complications. First, the shorter lengths of stay of procedures without complications could benefit the small percentage of hospitals operating at full capacity because they might be able to admit additional patients with favorable insurance who were “crowded out.”" What this means is that they didn't include any profits that might be generated by an empty bed filled with a second (or third or fourth) patient. In the study, around 5% of patients developed a complication and stayed an excess of 11 days (at the median) - the mean would be higher.
Note: Based on recommendations of Johns Hopkins professor and retired CFO, Bill Ward, we focused on estimating the costs of HAI using return-on-investment calculations from filling empty beds that manifest through HAIs avoided in the Business-Case SHEA Guideline. In discussions he suggested that excess bed capacity is quickly taken off line and therefore doesn't impact economic evaluation to a large degree. If there is no financial incentive to reduce excess length of stay, why has every hospital spent the past 20 years trying to reduce length of stay?
The big question: Do you believe that 5% of beds in hospitals with high surgical volumes sit completely empty for almost two weeks? Of course, there is excess capacity in the US system, but the amount of excess capacity is most important here, not that it exists. You can't completely ignore profits from increased admissions. For example, if only one patient was admitted into a bed vacated by a "healthy" patient discharged at day three that would would have otherwise been occupied by a patient with a surgical complication discharged at day 14, the results of the study would be have been negated - i.e., it would have been a negative study. If more than one patient was admitted into an empty bed over 11 days, which seems likely at most high-volume hospitals, admissions with surgical patients with complications would result in reduced profits compared with admissions without complications. It would have been nice to see estimates of the excess capacity at the 12 hospitals under study.
A provocative study and wonderful analysis. However, as Dr. Reinhardt states, the study "provides important data on a pressing clinical and financial problem affecting hospitals" yet "much of this represents a shell game of how costs are allocated." I would add, and which profits are included or excluded.
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