Researchers suggest that financial incentives are needed to improve performance.

Medical errors cost $17 billion to $29 billion per year, but hospitals have little incentive to improve patient safety because they shift the cost to other payers, a Commonwealth Fund-supported study says.

The study, “Who Pays for Medical Errors? An Analysis of Adverse Event Costs, the Medical Liability System, and Incentives for Patient Safety Improvement” (Journal of Empirical Legal Studies, Dec. 2007), looked at data from 14,732 discharge records from 24 hospitals in Utah and Colorado in 1992. Researchers wanted to determine whether hospitals could benefit financially by investing in safer practices and systems.

Hospitals paid an average of $238 of injury-related costs for every patient admitted that year, but they passed on an average of $1,775 in injury-related costs per admission, the study says.

The study found that hospitals passed on 78 percent of the costs of all injuries and 70 percent of the costs of negligent injuries to outside parties, such as Medicare. The percentage of costs that were passed on varied from 0 to 97 percent, the study says. The costs for errors that were paid by hospitals included malpractice insurance premiums and the costs of extra inpatient care they were unable to recoup.

The researchers considered all the costs that the tort liability system may impose on hospitals: inpatient and outpatient care expenses, lost income and household production, future medical expenses, burial costs for fatal injuries, and non-economic losses such as pain and suffering.

Researchers noted 465 adverse events due to medical management, including 127 events due to negligence, with an estimated total cost of about $439 million. The average cost per injury was $58,766 for all adverse events and $113,280 for the negligent injuries, the study shows.

The study’s authors suggested methods to reform hospitals’ payment practices: Healthcare purchasers could recognize and reward hospitals that demonstrate better safety standards, and they could refuse to reimburse hospitals for the costs associated with certain adverse events. For example, the study says, the Centers for Medicare & Medicaid Services has recently announced that it will limit payment for “never events,” identified by the National Quality Forum as events that should never happen, like surgery performed on the wrong body part.

The study recommends another prod for hospitals to improve safety -- reform the law so more injured patients can sue. “Today, only a small percentage of patients affected by medical errors actually receive compensation through the medical liability system,” the researchers say.