Hospitals Make Money from Complications – And Here’s Why

A new JAMA article (Relationship Between Occurrence of Surgical Complications and Hospital Finances) by a variety of health care wonks, including some of my former Boston Consulting Group colleagues, demonstrates that hospitals make more money when surgical patients have complications.

A new JAMA article (Relationship Between Occurrence of Surgical Complications and Hospital Finances) by a variety of health care wonks, including some of my former Boston Consulting Group colleagues, demonstrates that hospitals make more money when surgical patients have complications. The article is useful in that it documents the extent of the situation, but the situation is actually pretty obvious and well understood.

An author described work at a hospital to reduce surgical complications. According to the New York Times, “the team was stunned to realize that lowering the complication rates would actually cost the hospital money.”

Stunned?

In a fee-for-service model, hospitals get paid for what they do, not what outcomes are achieved. So if something goes wrong in surgery the hospital usually gets to bill for the ICU, another surgery, extra days in the hospital, etc. Unless those services are unprofitable, then of course the hospital will make more money from cases where those resources are used.

If a factory screws up its production process, it has to spend more money to rework the product, but it can’t sell the final goods for more money. If it messes up badly the work in process may need to be scrapped and the product can’t be sold at all. But a hospital can often charge for its rework (avoidable complications) and the scrap (deaths caused by errors).

I described the situation last year in Reducing surgical complications: How to make it happen faster.