Surgical complications reduce patients’ quality of life and survival. As exhibit 11.2 shows, surgical complications also increase hospital length of stay, readmission rates, and costs. Such complications can significantly reduce profitability, especially in bundled payment, capitated, or other value-based payment environments.

Hospitals are sometimes paid more when patients experience complications (although Medicare has ended reimbursement for some clinical shortcomings). Because incremental revenues are highly visible and incremental costs due to complications are not, hospital administrators may think that clinical shortcomings are not eroding margins. Michard and colleagues (2015) conclude that implementing goal-directed fluid therapy (which significantly reduces complications) would return $2.50 to $4.00 for each dollar invested. In this case, improving quality is highly profitable.

Poor quality reduces hospital profits, even if it substantially increases payments by insurers. And poor quality is a terrible strategy in both the short run and the long run. For example, Gutacker and colleagues (2016) conclude that the elasticity of hospital demand with respect to a typical health gain (measured by the Oxford Hip Score) is 1.4, and the demand elasticities for readmission and mortality rates are −0.02 and −0.004. Poor quality leads to market share losses, and this effect is likely to become larger as insurers increasingly use cost and quality data to try to steer patients to efficient, effective, safe providers (Avalere Health 2017).

Discussion Questions

• Is there other evidence that providers profit from improving quality?

• What is Medicare currently doing to measure quality? Safety? Efficiency?

• What are private health plans currently doing to measure quality? Safety? Efficiency?

• What are Medicaid plans currently doing to measure quality? Safety? Efficiency?

• How large are the potential effects on hospital profits of Medicare’s value-based payments?

• How large are the potential effects on physician profits of Medicare’s value-based payments?

• How will value-based payments from private insurers affect profits?

• How could better quality not cost more?

• What is inefficiency in healthcare? How common is it?

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EXHIBIT 11.2 Surgeries With and Without Complications Gastrectomy Vascular bypass Esophagectomy Length of Stay Readmission Rate With Without With Without 12.7 4 6 13 2 3 9 21.3 18.5 Cost With Without 5.2 $27,794 $12,641 14.1 $31,979 $16,849 15.4 $67,924 $37,382