How hospitals avoid penalties for making patients sick

The U.S. Centers for Disease Control estimates that about 4% of hospital patients -- more than 1 million people a year -- acquire serious and often life-threatening infections during the course of being treated. One study estimated that hospital-acquired conditions contributed to more than 98,000 deaths in 2002 alone. The CDC estimates that the direct economic cost of those infections is between $28 billion and $34 billion a year.

Starting in 2008, Medicare stopped reimbursing hospitals for hospital-acquired infections. The idea was to hit careless hospitals where it hurt and give them a financial incentive to clean up their act.

Unfortunately, the evidence so far suggests that the penalties have had little impact.

Now, a study led by Mohsen Bayati at Stanford Graduate School of Business offers an explanation: Instead of spurring tighter standards of care, the penalties are prompting hospitals to simply "upcode" their records and claim that patients were already infected at the time they were admitted.

Upcoding -- or assigning an inaccurate billing code, usually to increase reimbursement -- is difficult to track, except through auditing, because hospital claims for reimbursement don't include laboratory and nursing reports from a patient's stay. But the researchers were able to estimate how often hospitals changed their records by comparing data from states that require very strict reporting of hospital-acquired infections with data from states that have weak reporting requirements.

They found that hospitals in weakly regulated states reported substantially lower rates of hospital-acquired infections as well as higher rates of infections that were "present on admission." Those differences couldn't be explained by differences in patient demographics or other factors. In other words, hospitals that didn't have to be as transparent about in-house mishaps were in fact reporting fewer of them.

Using conservative assumptions, the researchers estimate that they found 11,000 cases of upcoded infections per year -- about $200 million in unwarranted payments -- in a sampling of about 492,000 Medicare patients who had hospital stays between 2009 and 2010.

In itself, $200 million is a drop in the bucket. The real cost, says Bayati, is that the non-payment policy isn't providing the incentive for hospitals to reduce the huge losses that stem from unnecessary illness and death. Indeed, he argues, the penalties may be creating the false impression that the policy is working and that hospital standards of care are higher than they really are.

That insight runs counter to the conventional wisdom among health care reform advocates. Some advocacy groups have pushed for even tougher financial penalties, and Congress has moved in that direction. A section of President Obama's 2010 Affordable Care Act authorizes the federal government to reduce Medicare reimbursement rates by 1% for hospitals that rank in the top quartile for hospital-acquired conditions, or HACs. Those regulations became effective in 2014.

But those stronger penalties are based on an assumption that the reported rates are accurate. In fact, however, one implication of the new study is that hospitals with higher reported rates may actually be the better ones -- those that are more truthful in their reporting and possibly have higher standards of care.

"Medicare's current plan to increase penalties through the HAC Reduction Program does not address these concerns, and may in fact exacerbate the problem since hospitals with high HAC rates will face even greater financial pressure to engage in upcoding," the researchers write.

Bayati and his colleagues -- Hamsa Bastani, a PhD candidate at Stanford's Electrical Engineering Department; and Joel Goh, a former Stanford graduate student who is now a Harvard Business School professor -- argue that a more effective solution is to increase the mandatory reporting and expand the use of targeted auditing. Hospitals showed much less evidence of upcoding when states required detailed reporting that included the patient's identity, the impact of the infection, and its root cause.

The researchers caution that it's not enough to simply have a system for reporting adverse events, because some reporting systems are so lax that they have almost no impact at all. The key is to require enough information, and auditing, that upcoding becomes impractical.

"The more data a state has regarding the circumstances of an adverse event, the harder it is for a provider to be untruthful," the researchers argue in their paper.

As Supreme Court Justice Louis Brandeis wrote a century ago, "Sunlight is said to be the best of disinfectants."

See more information at: https://www.gsb.stanford.edu/faculty-research/working-papers/evidence-strategic-behavior-medicare-claims-reporting