Payments for surgical complications: With a scalpel or a meat ax?

When you bring your car to a mechanic and there is a complication, when something goes wrong with the procedure they say they are going to do, you don’t expect to pay for it, at least if it is their fault, and if you know it. Say that in repairing one part of the engine, they cut a hose in another part; you wouldn’t expect to be financially responsible for fixing it. You’d think that they should absorb the cost, but of course it might unlikely that you would know whether the complication was their fault (sloppy work) or unpredictable, maybe a pre-existing problem that they hadn’t anticipated. On the other hand, if they fix your brakes or transmission and a few days later they fail, you do expect them to repair it for no cost to you.

The relationship between payment and surgical procedures done on your body in the hospital is more complex. First of all, just as with your car, complications happen. Sometime they are the result of “operator error”, whether mechanic or surgeon, but most of the time they occur with a predictable (but hopefully low) frequency. And, like with your car, some people have higher risk of complications because they are in worse shape. And one of (although certainly not the only) the predictors of being worse shape is, just as with cars, the age of the patient. Therefore, it is important to consider the risk (and potential seriousness) of complications and weigh it against the potential benefit from the surgery.

Secondly, payment for surgery (as for all hospital activities, and to some degree all medical activities) is bewildering and incomprehensible to health economists, not to mention doctors and regular people. With your car, you get a bill for “parts” and for “labor”; if you think you’re overcharged, you go somewhere else next time. In medicine, and particularly in hospitals, “charges” for procedures are a largely mythical but definitely inflated number that bears only a little relationship to the costs the hospital incurs, and is almost never the amount that is paid. Different insurers (private, Medicare, Medicaid, “self-pay”) pay different amounts; big insurance companies can bargain down the rates that they pay, government programs such as Medicare and Medicaid set their rates, and the uninsured are the only ones who get a bill for the whole set of charges (of course, they can rarely pay them, but are often bankrupted or have their credit ruined in the process). (See Bargaining down the medical bills, March 15, 2009, or the experience of health journalist Frank Lalli trying to find out what his medicine would cost, “A health insurance detective story”, NY Times December 2, 2012, and covered in my blog post “Medicare: Consumer choice or choosing your poison? How about coverage for everyone?”, December 15, 2012.)

So, do hospitals make or lose money when there are complications to surgery? The answer is “it depends on who’s paying”. In a recent JAMA, Relationship Between Occurrence of Surgical Complications and Hospital Finances[1], Sunil Eappen and colleagues from the Harvard School of Public Health (including, as last and corresponding author, Atul A. Gawande, the surgeon whose New Yorker essays I have discussed several times) examined this question in a large hospital system in the southeast US whose “inpatient surgical payer mix (Medicare, 45%; private, 40%; Medicaid, 4%; and self-pay, 6%) was comparable to that of an average US hospital in 2010 (Medicare, 40%; private, 41%; Medicaid, 9%; and self-pay, 5%)”. Their study found that “…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. As a result, the payer mix will determine the overall economics of surgical complications for a given hospital."

Definitions  of Costs and Margins  (from Eappen, et al.)

Variable costs: Costs that vary with patient  volume (ie, supplies and nurse staffing).

Fixed costs: Costs that do not vary with patient volume (ie, costs for the hospital building, utilities, and maintenance).

Total margin: Revenue minus variable costs and fixed costs.

Contribution margin: Revenue minus variable costs. These are revenues available to offset fixed costs.

This absolutely does not mean that in these hospitals, or any hospital, surgical complications are seen as desirable. It does mean that, when the complications happen, the hospitals make money (their “contribution margin” toward fixed costs goes up – see the box which I have reproduced from the article for explanations of terms) if the patients are privately insured or covered by Medicare and lose money if the patients are covered by Medicaid or self-pay. It provides another example of why hospitals see some patients as “more desirable” based upon their insurance coverage, and illustrates how flawed this system is.

The study by Eappen was done on data from 2010, and there have been some changes since then. Medicare no longer pays for the treatment of complications (surgical or medical) that it has identified as preventable and that did not exist on admission (such as new bed sores or blood clots). It will soon go further and not pay for readmissions to the hospital within a certain period of time, whether or not the readmission is for the same problem. So, to carry on the car analogy, not only will they not pay again if your brakes fail after they’ve been “fixed”, they also won’t pay if you have to bring your car back because it needs transmission work. The latter may be as inappropriate for people as for cars; with time multiple things break down, not always related. With a car, we may sell or junk it; with a person we usually try to treat it. Our high-tech medical system can often get a person from the brink of death to “well enough” to go home or a skilled-care facility, but the same problem or another recurs and requires readmission. And, of course, since this is Medicare, all of our patients over 65 covered by this program now become “less desirable”; it means that, even more than before, hospitals will compete for patients with private insurance coverage.

This is no way to fix the problem. The first step has to be to put everyone in the same boat, to have a universal health insurance system, so that no patient is “more” or “less” desirable from a financial standpoint based upon their insurance coverage. Second, hospitals should not be paid on a “per case” basis or have a charge structure that no one understands. They should not have to seek out “well-insured” patients to cover their actual costs (fixed and variable) or put aside money for purchase of new capital equipment. In Canada, hospitals receive a global yearly payment for operating costs (and capital expenses are considered separately), and can thus make treatment decisions based on best meeting the needs of the patient, rather than “readmissions good” (we make money) or “readmissions bad” (we lose money. It is rather parallel to capitated payments for physicians, which I have discussed (recently, for example, Gaming the system: Integration of healthcare services can just raise costs, not quality, December 1, 2012), allowing physicians to treat patients in person, by phone or email, with long visits or short, depending upon what is most appropriate rather than which has the greatest reimbursement.

Of course, like capitated payments to physicians, hospital global budgets need to be adequate to cover costs and incent efficient but effective performance. A well-designed structure for payment that minimizes “gaming” the system no longer works when it is grossly underfunded. An open and transparent system of funding is most likely to permit cost savings where appropriate and not “across the board” (which is almost always wrong); it encourages the use of a scalpel rather than a meat ax.

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[1] Eappen S, Relationship Between Occurrence of Surgical Complications and Hospital Finances, JAMA 2013;309(15):1599-1606.