STEPHEN DUCKETT. A hospital win-win: improving care and saving money.

Aug 24, 2018

Every day we hear stories about innovation in health care – new drugs, new machines and new tests that will help us live longer. We have got used to thinking that any improvements in health care will come at a price – often a big one, given the years of development and testing needed to bring the innovation to market.

But that is not the whole picture. Another way to improve health care is to provide safer care – and safer care will actually save us money.

Complications cost the Australian hospital system more than $5 billion a year; hospital-acquired infections alone cost about $1 billion of that. Not all complications can be avoided, but some hospitals do much better than others. If we improved care in all our hospitals – public and private – so the rate of complications was brought down to the complication rate achieved in the best 10 per cent of hospitals, then 250,000 more people would leave hospital each year free of complications.

And a new Grattan Institute report, Safer care saves money, shows that getting the complication rate in all our hospitals down to that achieved in the best 10 per cent  of hospitals would save $1.5 billion each year – enough to treat another 300,000 patients.

Reducing complication rates will help each hospital too.

Public hospitals now get paid based on their activity – a rate for each patient, which varies depending on the patient’s diagnosis and procedures. For some patients, hospitals get more money for treating a sicker patient even if the patient became sicker because of a complication suffered in the hospital. But the Grattan Institute report shows that the additional costs the hospital has to meet because of the complication – such as a longer stay in hospital and additional treatments – are always greater than the extra revenue the hospital receives because of the complication. In other words, reducing complications is in the hospital’s financial interest.

So what needs to change to ensure hospitals do more to improve the safety and quality of patient care? 

Most importantly, hospitals and doctors need to know where they stand. Most hospitals probably don’t know how their complication rates compare with their peers. They certainly don’t know the expected cost of treating complications, compared to the expected revenues for the hospital. Without that information, hospitals can’t develop business cases to invest money in improving care. State governments should give public hospitals – and the public – information on the estimated cost of and revenue from complications.

Private health insurers also benefit from lower complication rates: their costs and future premiums fall. So insurers should increase pressure on hospitals and surgeons to improve their safety performance, by making information on complication rates available to their members, either directly or through GPs.

The Commonwealth and state governments have recently introduced a system of financial incentives related to hospitals’ performance on a select range of hospital-acquired complications. It might be a good idea, but the system is poorly designed. It is opaque, concentrates on only a small minority of complications, and imposes no effective penalty on states with high complication rates. Hospital managers find the system confusing, and some doctors regard it as a disguised ‘money grab’.

If financial incentives are used, they should focus on all complications and be targeted to the specific situation of each particular hospital. Private health insurers are well-placed to do this in their contracts with private hospitals. Indemnity insurers could do it with both public and private hospitals.

Hospital costs in Australia are large and growing. The Grattan Institute report shows that there are policies and processes that could save significant dollars by providing safer care. Hospitals win. Taxpayers win. Insurers win and, most importantly, the patient wins too.

What are we waiting for?

Stephen Duckett is Health Program Director at the Grattan Institute. Safer care saves money can be read at

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