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Health Care Costs: Why Do They Increase? What Can We Do?

Improving Patient Safety


James Battles, Ph.D., Senior Service Fellow for Patient Safety, Center for Quality Improvement and Patient Safety (CQuIPS), Agency for Healthcare Research and Quality, Rockville, MD.

Charles McConnel, Ph.D., Associate Professor, Allied Health Sciences School University of Texas Southwestern Medical Center, Dallas, TX.

A 1999 Institute of Medicine (IOM) report, To Err is Human, estimated that between 44,000 and 98,000 people die each year from medical errors in hospitals alone, thus making medical errors the eighth leading cause of death in the United States. While not all medical errors are preventable, the IOM estimated that preventable errors cost the Nation about $17 billion annually in direct and indirect costs.

A medical error is defined as an error or omission of measurable consequence due to medical management of care provided to a patient.

Charles McConnel, Ph.D., explained that measuring the cost of errors involves estimating the normal medical costs of a victim's original illness plus the costs of additional service utilization and disability due to error. Direct costs include the costs for medical care for each adverse event, while indirect costs include the monetary values of estimated time lost from productive activities, at work or in the home.

McConnel highlighted two research studies illustrating the potential cost impact of medical errors:

  • A study conducted by Harvard University in 1984 estimated the additional cost for approximately 800 patients who experienced a medical error. Findings showed that medical errors increased overall costs (i.e., lost earnings, lost household production and medical care) by 23 percent.
  • 1992 study in Utah and Colorado estimated the incidence and national costs of all hospital-related adverse events and negligent adverse events. Findings showed that total national costs for preventable adverse events were estimated to be $17 billion (in 1996 dollars), of which $8.8 billion was attributable to additional health care costs.

According to McConnel, contemporary economic approaches to controlling health care costs such as capitation and prospective reimbursement create incentives to conserve resources and may have a positive influence on reducing medical errors. Capitation is a fixed fee for comprehensive care. Capitation in managed care consolidates insurance and provider functions, thereby redistributing risk.

This approach creates incentives to reduce medical errors because additional costs due to preventable error are not offset by additional revenue. Prospective reimbursement using diagnosis related groups (DRGs) allow a fixed payment for hospitalization, creating incentives to minimize the length of stay (LOS). However, under both capitation and DRGs, pressure exists for underutilization of treatment resources and complications associated with preventable errors create problematic reimbursement.

James Battles, Ph.D. summarized that medical errors are widespread and that preventable errors result in substantial societal costs. Medical errors are responsible for 20,000 to 40,000 preventable hospital deaths and $10 billion in avoidable costs each year. He noted that the public policy focus should be to encourage people to identify areas for potential error. A comprehensive cost-effective regimen should include economic incentives to reduce error risk, training to detect and report errors, and systematic adjustments to practice patterns.

Additional Resources

AHRQ Research in Action: Reducing and Preventing Adverse Drug Events to Decrease Hospital Costs. 2001 Mar, Issue #1.

Crossing the Quality Chasm: A New Health System for the 21st Century. National Academy Press; Washington, DC.: 2001.

Johnson WG, Brennan TA, Newhouse JP, et al. The economic consequences of medical injuries. Journal of the Medical Association. 1992; 267:2487-92.

Kohn, LT, Corrigan JM, Editors. To Err is Human: Building a Safer Health System. National Academy Press; Washington, DC.: 1999.

Thomas EJ, Studdert DM, Newhouse JP, et al. Costs of medical injuries in Utah and Colorado. Inquiry 1999, Fall;36:255-64.

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