Financial Performance and Patient Safety in Hospitals

Presenter: Nakcheon Choi, Boston University

Abstract

This paper suggests a theoretical model of hospital’s investment decision under asymmetric adjustment costs to interrogate the effect of financial performance on patient safety in hospitals. The model predicts that patient safety outcomes react asymmetrically to financial performance in financially well performing hospitals and poorly performing hospitals. Bad performance does deteriorate patient safety, while good performance does not improve the patient safety in hospitals.
The prediction is tested empirically using a seemingly uncorrelated regression model. 2005 National Inpatient Sample data set with 6 hospital level patient safety indicators, three surgery related indicators and three general indicators, collected and developed by Agency for Healthcare Research and Quality is used for empirical analysis together with 2000 - 2005 American Hospital Association annual surveys and 2000 – 2004 hospital finance data sets from Centers for Medicare and Medicaid Services. To fully utilize the available information from multiple year explanatory variables, financial performance is decomposed into a five year average and the deviation of the one year lagged value from the average. This allows me to distinguish short-run effects and long-run effects of financial performance on patient safety in hospitals.
The empirical analysis shows that in the short run, negative financial performance measured by the negative deviation from the five year average deteriorates patient safety in surgery and that positive financial performance measured by the positive deviation from the five year average does not guarantee an improvement in patient safety either in surgery or in general. But, it does not show any significant results on the effects of short-run negative financial performance on patient safety in general. The average financial performance is positively associated with general indicators but not with surgery related indicators, which means that chronically better performing hospitals show higher rate of preventable adverse events in general. Hospitals’ response to the financial disturbance is different based on their ownership. The empirical results on the effects of financial performance are distinct especially in investor owned hospitals. The general indicators are affected by both hospital characteristics and market characteristics, while the operation related ones are affected only by hospital characteristics.