The Committee on the Quality of Health Care in America was established in 1998 by the Institute of Medicine (IOM), and its first report estimated that between 44,000 and 98,000 Americans die each year due as a result of medical mistakes, with an associated cost of $17–$29 billion (see To Err Is Human: Building a Safer Health Care System
, Kohn et al. 2000
). It is now 8 years after the IOM report and patient safety rates across the country remain high despite modest improvements in overall quality. Of the 40 core measures tracked by the “National Healthcare Quality Report” (2006)
, 26 showed improvements, two showed deterioration, and 12 showed no change between 2005 and 2006. However, the pace of change remains constant at a modest annual rate of improvement of 2.3 percent in overall quality. And, for the specific case of patient safety quality, the rate of adverse events declined by only 1 percent between 2000 and 2005 (“National Healthcare Quality Report 2007”
). This is far from the 50 percent reduction in medical errors that the IOM ambitiously recommended over a 5-year period.
A few very recent papers have addressed this issue at the national level. In one of the first papers on the topic, Zhan and Miller (2003)
estimated that national costs attributable to 18 types of adverse events in the hospital totaled $4.6 billion in 2000. Zhan et al. (2006)
found that, among Medicare patients, two thirds of the $300 million extra costs due to five adverse events were not covered by Medicare in 2002. This reveals that a reduction in medical errors could result in potentially large cost savings for hospitals. Similarly, Needleman et al. (2006)
found that improving nurse staffing ratios to reduce adverse events could avoid between $2.6 and $6.9 billion in 2002 costs.
These national studies are an improvement over older cost studies cited in the IOM report, which are based on small samples in three states (Johnson et al. 1992
; Thomas et al. 1999
). However, recent studies also have limitations. For example, all three studies (Zhan and Miller 2003
; Needleman et al. 2006
; Zhan et al. 2006
) only examine hospital costs and outcomes occurring within the initial hospitalization. Not included were postdischarge events like death, readmissions, ER visits, physician visits, and outpatient prescriptions, which may all add significantly to the total episodic costs of patient safety events.
Second, not only do these studies fail to calculate the costs of postdischarge events such as readmissions, but they also treat readmissions as if they were initial admissions because they apply their analyses to all hospital discharges. It is more appropriate to measure patient safety events as occurring only in an index surgery and then following their costs in subsequent readmissions. Grouping readmissions with index admissions can bias cost estimates because readmissions may be caused by patient safety events occurring during the index admission. In fact, the potential for this bias to occur can be large. In our data we find that among 92,640 surgery patients with 122,875 hospital admissions in 2002, only 77 percent of these admissions were index surgeries. The remaining 23 percent were either readmissions or medical hospitalizations without surgery. Unfortunately, the aforementioned studies incorrectly treat these 23 percent of admissions as if they were index admissions, biasing any cost estimate of patient safety events.
Third, these studies use a limited measurement of inpatient costs. For example, they only include the hospital costs of the initial stay. They do not include the physician costs of the initial hospital stay. Moreover, these papers estimate hospital costs using hospital-level cost-to-charge ratios applied to patient-level charges. This can lead to imprecise estimates of costs. It is preferable to examine transacted payments rather than hospital costs because hospital costs are to a large extent an artifact of accounting convention and historical accident. Indeed, many older hospitals have depreciated their facilities and thus do not report capital costs related to their facilities even though the economic cost of their facilities is not zero. Actual transacted payments from insurers are not only more accurate than costs, but they are often much higher than hospital costs. Indeed, the private payer payment-to-cost ratio for all hospitals was 1.18 in 2003 (MedPAC 2005
). Moreover, as Schmidek and Weeks (2005)
emphasize, often the business case for patient safety must be made—not from the point of view of the hospitals—but from the view of the purchasers (insurers), because they are the ones who have the most leverage to stimulate hospitals to enhance patient safety. Thus, more studies need to examine costs in terms of insurer-transacted payments, not only hospital costs.
In this paper, we address these limitations using national insurance claims data with transacted payments from insurers. Moreover, to capture the full episodic costs of patient safety problems, we track patient outcomes and utilization for 3 months after the patient safety event. We include all hospital and readmissions payments, physician payments, outpatient payments, and prescription drug payments. We find that the costs of patient safety events are considerably higher when we include postdischarge costs following the initial hospitalization.