Health Business Blog

In normal industries when someone makes a mistake it has negative financial consequences. When a factory damages a widget during the manufacturing process, the company can’t sell the final product and has to absorb the labor, material and capital costs of the wasted efforts. To survive in a competitive industry factories focus on increasing first-pass yield, reducing scrap, and pursuing initiatives such as six sigma to virtually eliminate defects. Factories with low yields and high defect rates go out of business. That’s capitalism and it works.

Health care is a lot different. If a hospital or physician makes an error, they can typically bill for the work involved in making that error. Not only that –they can also bill for the work involved in correcting the mistake or mitigating the damage! Unlike sub-par factories, hospitals with low yields and high defects can be just as profitable or more profitable than hospitals that perform much better. And thanks to the complexity of health care and lack of solid measurement and reporting, such performance may be obscured from the general public and even from hospital management itself.

Medicare started trying to change this situation over the last couple of years, announcing it would stop paying for “never events” –big mistakes that everyone agrees should never happen. Examples include wrong-side surgery and wrong-patient surgery. These are quite rare so the financial impact on a hospital wouldn’t be great. However it set the precedent. Private payers such as Aetna followed along and these policies are now fairly common.

I’m glad to see that Aetna is now taking the next step: forcing providers to lose all the revenue associated with caring for the affected patients for the three most egregious kinds of errors. Aetna is also making the providers take a number of reporting steps when such events occur. Those requirements may get more attention but I don’t think they matter that much.

It will be interesting to see where things go from here. How many patients will be affected? Will Aetna expand the policy beyond the most serious events?

The true test of Aetna’s policy and others like it will be whether it causes the financial performance of high and low performing hospitals to diverge. If so that will be a good thing: the introduction of tried and true market forces to health care, driving quality up and costs down.

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