Are Readmissions Profitable?


Note: This post takes the financial perspective of hospitals on readmissions. There are many other important clinical and ethical aspects related to readmissions that will not be covered in this analysis due to the specific economic focus.

When companies present medical technologies that can improve quality of care and avoid readmissions, it is not uncommon to hear remarks from hospitals such as, “We are paid to treat readmitted patients, there is no strong economic value in reducing re-hospitalizations.”

So we must ask ourselves: do hospitals actually profit when patients have to be readmitted?

The answer in most cases is: probably not.

Back to the Medieval Period

When looking at the history of Europe, hospitals and hotels were the same institution designed to receive travelers and provide aid to their medical needs.

Nowadays, both institutions receive “visitors” that stay for a certain period of time and demand services. The visitors generate revenues, such as hotel fees or medical payments/reimbursement. There is also a limited number of beds and both institutions maintain minimum admission rates to maximize efficiencies.

However, while hotels have an accurate overview of the guest costs, most hospitals do not have a clear idea about the individual costs associated with each of their patients. Instead, hospitals typically only know how much they receive to provide treatment.

If hospitals only know how much they receive to treat a patient and are not sure about the costs of treatment, such institutions cannot accurately predict margins for a certain patient.

30 to 45 days after discharge

To simplify, hospitals receive a certain payment (typically reimbursement) to cover patient treatment costs, of which 85-90% is used to directly cover expenses. This leaves the hospital with a profit margin of only 10-15%.

Now, what if patients become more expensive? For example, what if they present complications and need to be readmitted after discharge?

In England and Germany, hospitals do not receive a second payment if a patient is readmitted for the same condition within 30 days after discharge. In other markets, this period is 45 days.

For example, let’s imagine a patient that is hospitalized in Germany to receive a Coronary Artery Bypass Graft (CABG). The patient is treated, stays in the hospital as expected and then is discharged to return home.

15 days after discharge there is a complication (i.e. vein graft failure) that requires the patient to be readmitted to the hospital. The German hospital that will treat the patient again will not receive any additional payment and the original 10-15% margins will disappear as the hospital incurs financial losses.

Now, what if the readmission occurs after this period? What are the economic implications?

Late readmission

Patients that are readmitted for the same condition after 30-45 days will typically receive the same payment levels as before. At least in theory, the financial situation will be the same. In fact, not really.

There is an important detail: the readmitted patient is not the same as before.

Patients that require repeat treatment are usually in a worse condition than when they were when first hospitalized. This means hospitals will need to perform additional procedures that are not fully covered by the reimbursement tariffs or payments.

Thus, hospitals and physicians that claim they make the same margins when late readmission occurs, forgot to consider that such patients are usually more expensive than first-time patients.

Avoiding late readmissions actually frees up hospital beds and capacity to treat lower-cost patients without changing the payment/reimbursement levels. As a result, hospitals can maintain their revenues while reducing costs, thus leading to better margins.

Should we educate hospitals then?

Hospital managers and controllers are highly educated in their fields and certainly capable of analyzing case-by-case to identify the true costs of readmissions. They just do not have the time to do it every day, for every case.

Hospitals need companies to understand how medical technologies will impact their business models. Therefore, companies can act as partners educating hospitals about their technologies, moving beyond being just a provider.

This is certainly not as simple as described here. However, there is strong value in reducing readmissions, and medical companies should help hospitals and other providers to understand these economic benefits.

Hospital costs and margins are complex topics. Do you need to identify how your products can influence the business models of hospitals? Can you quantify the value of reducing readmissions? Contact us at [email protected], we look forward to your questions.