Healthcare Economics

Reducing adverse
events in hospitals

Effective Interventions



Adverse events, or medical errors, are a significant problem worldwide[1-3]. As health systems develop and evolve in the Middle East and in other developing nations, it would be prudent to build into these systems, early on, ways of tracking and addressing such errors[1, 3]. As many countries in the Middle East are currently preoccupied with developing the basic foundations of their healthcare infrastructures, it is understandable that enough attention might not be devoted to adverse events. However, creating processes to identify and reduce adverse events is best done during the early development of healthcare infrastructure. The cost of not doing so is tremendous, as discussed below, and analyzing adverse events in the United States (US) can provide useful lessons. Currently, the US is in the midst of modifying its reimbursement system to incentivize providers to prevent adverse events – e.g. the recent Affordable Care Act and other rules developed by Centers for Medicare and Medicaid Services (CMS) (see discussion below for details).

This article discusses adverse events in the US and how structuring the reimbursement system, within the framework of economic theory, can decrease adverse events, increase quality of patient care, and decrease costs at the same time. As appropriate to each country in the Middle East, all or some of the lessons learnt could be applicable.

Problem and Magnitude

Medical errors, also known as adverse events (AEs), are a substantial problem in hospitals – they cost approximately $22 billion and cause 98,000 deaths annually in the United States[4, 5]. Adverse events associated with surgical procedures and medication administration account for the majority of errors[4, 6].

Extensive literature – including the 1999 Institute of Medicine (IOM) report titled “To Err is Human” from the prestigious National Academy of Sciences – documents the serious consequences of AEs[2, 4, 5, 7, 8]. These AEs cause not only substantial financial loss (approximately $ 22 billion annually) but also temporary disability, permanent disability, and death[2, 4-6]. For example, medical errors kill approximately 98,000 people in the US every year[2, 4]. If any individual, regardless of socioeconomic or health insurance status, goes to a hospital today, either for admission or for a day-procedure, there is a greater than 9% chance that he/she will be the victim of a medical error[4]. These AEs can happen to anyone – and they do.

In addition to causing loss of money, limb, and life, AEs create profound emotional consequences. Taking your child, father, or spouse to the hospital for a simple, routine operation and coming back home with your loved one in a coffin, because the wrong dose of medicine was administered, is a shattering experience. In this day and age, such events occur 98,000 times a year. These many deaths would be equivalent to those caused by 20 Boeing 747 jumbo jets crashing every month and killing every passenger on board. If 20 Boeing 747 jumbo jets were indeed crashing every month, it is certain that the United States National Transportation Safety Board (NTSB) would immediately ground all Boeing 747s and provide the resources to take immediate action to fix the problem. The problem of AEs is similarly huge and effective action should be taken to combat this epidemic of preventable deaths. The application of Economic Efficiency theory, or striving for Pareto efficiency, could provide the necessary incentives to prevent AEs in the United States and the Middle East.

Theoretical Application

Pareto efficient allocation of resources is achieved when “the only way to make one individual (or more) better off is to make another individual (or more) worse off”[9, 10]. However, achieving Pareto efficiency requires the following stringent, market conditions: a) that both sellers/buyers fully understand the goods, b) that both are price- takers, and c) that all prices are known to all participants[9]. Clearly, health care transactions in the United States (US) and the Middle East, do not meet these conditions – and in such cases moving towards Pareto efficiency requires an external force[9, 10]. Thus the solution to adverse events (AEs) lies in two approaches. First, making all key players – patients, healthcare providers (healthcare teams and hospitals), and healthcare payers (private/government insurance) “better off”, and second, creating an external force that encourages critical players to decrease AEs.

AEs increase the cost of health care, but hospitals are adept at externalizing these costs[11] and thus consider implementation of the necessary quality improvement programs (QUIPs) that decrease AEs[12] an unnecessary financial burden. In fact, perversely, errors keep patients in hospitals longer and provide more revenue under the current fee-for-service model in the US. In the current climate, implementing QUIPs benefits patients and healthcare payers but makes healthcare providers “worse off”. However, now, two things are changing: first, reimbursement rules are beginning to penalize hospitals for AEs and second, there is clear evidence that QUIPs not only decrease AEs, but actually improve profits for hospitals[12, 13]. Thus, the solution lies in moving towards Pareto efficiency because now all three players can be made “better off” by instituting QUIPS and reducing AEs. Still, only 25% of the 6000 hospitals in the US engage in such QUIPs[13]. Thus, legislation (an external force) which imposes stricter penalties for AEs and requires QUIPS in all hospitals will provide the last nudge necessary for hospitals to decrease the epidemic of AEs in the US. It would be critical for countries in the Middle East to consider, early on, such penalties for excessive numbers of adverse events and to develop legislation that requires institution of QUIPs. If this is done early in the development of their respective healthcare systems it would be immensely beneficial.

Determinants of Adverse Events (AEs)

Crafting effective interventions that solve the public health problem of AEs requires an accurate knowledge of the determinants of AEs. A Conceptual Model (Figure 1) which describes antecedent, predictor, and mediating variables, provides a pictorial representation of determinants, causality, and interventions. The various components of QUIPs (such as safety culture, use of IT, etc.) are designated as the mediating variables[6, 12] while the pivotal predictor variable is the hospitals’ approach to AEs (in this case willingness to implement QUIPs). In turn, hospitals’ approach to address AEs is determined primarily by the antecedent variables delineated in Figure 1. These antecedent variables are the critical determinants and are mainly economic and political.

The economic determinants have thus far wielded influence on hospitals mainly through the reimbursement system (government insurance, private insurance). This system provides no financial incentives for the hospitals to reduce AEs. The Joint Commission (JC) of the United States realized in 1986 that QUIPs were necessary to decrease the significant morbidity and mortality associated with AEs[14]. However, in the absence of any financial incentives and guiding legislation, the hospitals have had no reason to address the problem of AEs. In fact, hospitals actually have an economic incentive not to implement such QUIPs for two reasons. First, hospitals are very adept at externalizing (to third party payers) the extra costs incurred by AEs (e.g. costs due to increased length of stay, extra medications, increased morbidity and mortality, etc.)[11]. Second, keeping patients in the hospital longer because they suffer an AE means even more revenue for the hospital under the fee-for-service reimbursement system. In effect, the hospitals are being financially rewarded for AEs[11, 13]. Thus, the reimbursement system, a major economic determinant of hospitals’ reluctance to reduce AEs, is too lax and permissive. It came to be that way because of the strong political lobbies of the healthcare industry.

The political determinants of AEs are complicated and healthcare legislation, some parts of which affect AEs, has historically been very contentious in the United States[15]. These political debates are steered by ideological fervour and parochial interests of strong political lobbies such as the American Medical Association (AMA), Health Insurance Association of America (HIAA) or American Health Insurance Association (AHIA), and the American Hospital Association (AHA), to name a few[15]. The cumulative result of these political forces was legislation which created a healthcare system that provided more financial rewards for delivering more “health care” – regardless of the quality of health care being delivered. Predictably, this also led to an exponential rise in healthcare costs and, as a respected historian has pointed out, “a better way to exponentially inflate the cost of health care could not have been devised”[15]. As an example, between 1965 and 1970, federal and state health expenditure increased at a staggeringly, unsustainable rate of 20.8% per year[15, 16]. In a nutshell, the medical profession and allied stakeholders historically lobbied aggressively for legislation that provided public aid to health care, but without public control, without regard to any systematic control on quality of care provided, and without reasonable limits on reimbursement[15, 16]. Clearly, these political forces had much to gain from the status quo.

Multiple factors such as the increasing US debt, relative decrease in tax revenues, cuts in Medicare and other federal programs, and the realization by private health insurance that their model is in fact broken, eventually created a political climate that allowed passage of the Patient Protection and Affordable Care Act (PPACA) – part of which attempts to link reimbursement to patient outcomes and funds studies on quality outcomes[17, 18]. Thus, political forces, manifested by legislation and regulations, are now beginning to support demands that hospitals should provide good quality care without taking advantage of the reimbursement system. Countries in the Middle East that are developing their healthcare infrastructures are, currently, in a position to avoid all these costly experiments by creating a reimbursement system that incentivizes providers to minimize adverse events, improve patient safety, and decrease costs.


The linkage of some reimbursements to quality of care by CMS, only within the past two years, was a good start, but had no significant “bite” to it – reflected by the fact that only 25% of the 6000 hospitals have thus far implemented QUIPs[13]. The Office of the Inspector General has drawn attention to this lack of interest by hospitals[17] and has urged CMS and legislators to provide more compelling incentives for hospitals to comply in order to decrease AEs, save lives, and save money.

If CMS reimbursement rules were stricter, hospitals would be unable to externalize the extra costs of AEs, thus making it attractive to implement QUIPs. As it turns out, recent and very good scientific evidence indicates that decreasing AEs not only saves lives but also increases revenues for the hospital[12, 13]. Thus, hospitals now have a financial incentive to address AEs. Now, all three players, patients, hospitals, and payers can benefit from the implementation of QUIPs. However, a century of resistance to change by the medical profession and allied stake holders has created a political and economic inertia that slows down progress in adequately addressing patient safety (AEs). It would be apparent to the most cursory observer that it is illogical for hospitals to not implement QUIPs if hospitals, and all other players, benefit financially and save lives at the same time. A stride towards Pareto efficiency is indeed possible.

Thus the following is proposed for countries in the Middle East: 1) Pass legislation requiring all hospitals to institute QUIPs within a short but reasonable period of time. This will address inertia and the political determinants. 2) Change the reimbursement system and stop paying for patients who suffer AEs and reward the reduction of AEs. The compelling quadriad of decreased AEs, saved lives, increased revenues for hospitals, and saving of public monies should convince legislators and payers to implement these stricter regulations, which will represent a turning point in the evolution of health care not only in countries in the Middle East, but any other country developing its healthcare infrastructure.

Arby Khan, MD, FACS, MBA served as the Deputy National Director
for Surgery for the United States Veterans Health Administration, which
oversees 151 hospitals and more than 1000 outpatient clinics. Dr Khan is a
regular contributor to Middle East Health. He has written on a range of subjects
– such as Human Resources management in hospitals, Change Management
in GCC hospitals, Brain Death and Hospital Resource Management
and organ transplant-related legislation, among others – with a view
to improving healthcare in the UAE and the wider region. He is a multiorgan
Transplant Surgeon and Immunologist and has successfully started,
from the ground up, two multiorgan transplantation programmes – one in
the United States and one in Abu Dhabi. He is the author of many clinical
and basic immunology papers, and has been educated, trained and employed
variously at University of California - Berkeley, McGill University, University
of California - San Francisco, Harvard Medical School, Yale University

- Graduate School of Immunobiology, University of Pittsburgh - Starzl
Transplantation Institute, University of Vermont - School of Medicine, and
Columbia University (NY). He also holds an MBA, with Distinction, from
London Business School.

– The views expressed in this article are those of the author and do not
necessarily represent the views of the institutions for which Dr Khan has
worked or currently works.

 Date of upload: 17th Jan 2014


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