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.

Gaming the system: Integration of healthcare services can just raise costs, not quality

My last blog post addressed the promises, and challenges, posed by the creation of integrated health care plans (or their new incarnation,Accountable Care Organizations, or ACOs, as defined by the Affordable Care Act, ACA), I summarized some of the good and the bad aspects of health care integration. The good often relate to the efficiency that can arise from a single organization which, in theory, can result in financial savings to both individuals and the health “system” as a whole. Unfortunately, this does not always happen, as demonstrated in the article “A hospital war reflects a bind for US doctors”, New York Times, December 1, 2012 (Nov 30 “online”; while in the “Business Pages” online, it is front page, even continued in the first section, in the print edition).

The article, by Julie Creswell and Reed Abelson, begins by focusing on the “picturesque” city of Boise, ID, where the two hospital systems in town have been buying up physician practices in order to more effectively “compete” with each other. St. Luke’s Health System, the larger, has been doing much more of the buying, so much so that the other, St. Alphonsus Regional Medical Center, is suing to prevent them “…from buying another physician practice group, arguing that the hospital’s dominance in the market was enabling it to drive up prices and to demand exclusive or preferential agreements with insurers.” Yes, driving up prices. They noted that the charge for colonoscopy has quadrupled and the charge for laboratory services is much higher. 

The CEO of St. Luke’s argues that not all prices have gone up, and, anyway, the ones that did were “underpriced” previously. This, of course, is hard to demonstrate in an industry where pricing is largely a fiction, where there are no “posted” prices and the charge to different payers varies enormously.  It is not like buying a car, where the dealer pays a certain amount to the manufacturer and you, as a customer, try to get them to charge you as close to what they paid as possible. Nor is it like buying a video game online as described in another Times article (“Retail frenzy: prices on the web change hourly”) in which you can find out if, for example, Target will respond to Amazon’s price cut by dropping its price even lower.

In health care, the “cost” to a provider (hospital or health system) includes both the “marginal cost” (what it actually costs to run that one more lab test or do that one more colonoscopy) and some percentage of their “fixed cost” for running the entire operation. Thus, ironically, by integrating and consolidating into a larger organization with a larger fixed cost, that overhead built into the price increases. The single lab test done by the health system lab has to pay part of the cost of that new MRI scanner and the technician that runs it and the super new invasive radiologist, while the price charged by the independent laboratory does not. Of course, the overall actual cost, in total, to all organizations may be going down, but the amount that the patient or their insurer pays for a low-cost test goes up!

This, as should be obvious, is not an issue limited to Boise. The Federal Trade Commission (FTC) has also gotten involved in investigations of pricing at St. Luke’s and other hospitals and health systems. The Times article quotes Jeffrey Perry, an assistant director in the FTC’s Bureau of Competition: “We’re seeing a lot more consolidation than we did 10 years ago….Historically, what we’ve seen with the consolidation in the health care industry is that prices go up, but quality does not improve.” Higher prices and the same (or lower) quality. Not exactly what we want to hear.

“Hospitals,” says Steve Messinger, president of ECG Management Consultants, an organization the Times indicated advises on physician acquisitions, “are constructing compensation in ways that are based on productivity and performance.”  Sadly, the “performance” piece only sometimes is tied to either quality of care for the patient or cost-effectiveness for the payer, but much more often to “productivity”, and particularly in how it increases revenues for the hospital. One of the ways that this can happen is by “churning” patient – increasing the number of admissions, for which hospitals get paid, but not keeping them too long because (since hospitals are paid by Medicare, at least, a fixed amount for a given diagnosis, based on a system called “DRGs”) shorter stays cost less and thus make the hospital more money. On the front end, the Office of the Inspector General of the Department of Health and Human Services is investigating whether hospitals are tying reimbursement of emergency physicians to how many patients they see per hour and the increasing the percent of ER patients who are admitted. Regarding “productivity”, one hospital noted that patients expect to be seen in a timely manner; of course, patients also expect to get appropriate and thorough care once seen, which can be inhibited by having to increase throughput. On the back end, there are several lawsuits from physicians charging that they receive bonuses if their patients are out of the hospital in less than 3 days. Now, no one wants to be in the hospital longer than necessary, and in fee-for-service payment structures there is financial incentive for doctors to keep their patients in longer as they can bill for each day, but no one wants to be rushed out of the hospital before they are well enough in order to meet a certain target length of admission.

Many of the worst “abuses” come from for-profit hospital or health care companies, such as some of those mentioned in the Times article. This is obvious; their incentive is to make money for shareholders, not to provide quality care except to the extent that it is necessary to make profits, and given the arcane nature of health care reimbursement, the association is not all that strong. Integrated health systems that have done a better job of decreasing costs and increasing quality, such as Kaiser, are usually not-for-profit. However, not-for-profit status is not a guarantee; especially when such hospitals have to compete with for-profits, they end up playing by the same rules. In addition, the Boards of Directors of non-profits are still looking at the bottom line, and are certainly not interested in losing money.

The key problem is the patchwork of rules and reimbursement systems that govern healthcare, and the opportunity for healthcare providers (hospitals, health systems, and even doctors – although they are, as the article points out, increasingly employees of those hospitals) to “game” the system, to find the holes, legal (or sometimes not) that permit them to make the most money. More admissions? Fewer readmissions? Shorter stays? More procedures? Higher prices for colonoscopies and lab tests? Whatever works for the bottom line, not for the highest quality of care of individual patients or communities.

This is nonsense. The goal should be to provide excellent health care, that which is needed by the patient and not more, at a reasonable price – and a price that can be identified. Our current payment system discourages that, and this is not right. The big, arguably necessary, step to a solution, is a single-payer (or highly regulated multi-payer) health system that provides hospitals with global budgets, not reimbursing per service item, while holding them responsible for providing quality health care to the patients in a particular community. Similarly, global (capitation) payments to physicians can permit them to rationally assign their time, staff, and resources to meeting patient needs in the most appropriate and effective manner. If a telephone call is all that is needed, why should someone take off a half-day of work to come in? Well, because that’s the only way doctors get paid, the current answer, goes away. If these global payments are combined into an integrated health system, perhaps we can have more results like Kaiser’s.

This would not solve all problems but it is the necessary if not sufficient starting point. And certainly, the profit driver is a major negative toward enhancing quality and limiting cost in healthcare.

Just thought I'd add this picture: