How Patient Safety Can Turn Liability Reserves Into Hospital Margin

A patient at risk for a fall attempted to walk to the bathroom on his own, after waiting a long time for a nurse to respond to a call light. He fell backwards, hit his head, and sustained a traumatic brain injury due to this patient safety lapse. Not having the resources to treat this type of injury onsite, the hospital airlifted him to a regional academic medical center, where he died.

The responsibility for the cost of care resulting from the accident fell to the hospital where the fall occurred. The hospital could not collect insurance reimbursement on more than $50,000 of costs related to the treatment of a healthcare-acquired condition because the incident fell into the category of a defined “never event”; a patient safety failure. The man’s family also sued the hospital for this patient safety lapse.

Across the nation, preventable costs stemming from healthcare-acquired conditions and infections (HAIs and HACs) occur regularly, generating non-reimbursable expenses that must be covered by a hospitals’ professional liability insurance reserve.

Dollars placed in reserve are dollars unavailable for patient care or community programs

This reserve, set aside each year according to actuarial recommendation, can easily amount to hundreds of millions of dollars a year, as the recommendation is often set at or around $2,860 per occupied bed per day, per year (AON/ASHRM, 2018). So say your actuarial team proposes placing $200 million into your reserve. That’s $200 million you can’t spend on patient care. That’s $200 million that you can’t drive back into community benefit. It’s $200 million of essentially lost margin because of the connection between a hospital’s patient safety lapses and professional liability exposure. Yet, it’s a connection that few hospital leaders acknowledge or understand.

The amount of capital a hospital places into its professional liability insurance reserves can be directly linked to patient safety lapses. If these lapses are decreased, guess what happens? The amount required to be placed reserve goes down, margins improve, and more money is available for patient care and community programs that improve health.

In most conversations we’re having lately, the Vitalacy team is including an analysis of costs that can be reduced through better patient safety. We can identify those costs, segregate them, shine a bright blue light on them and say, “These are not unapproachable costs; these are not sunk costs; they are, in fact, excess costs. These are costs that, when directly addressed, improve care quality and yield immediate financial benefit.”

By reducing the incidence of HAIs and HACs, you can move dollars directly to margin

By reducing the incidence of HAIs and HACs through patient safety improvements, an organization can move dollars from its professional liability insurance reserve directly to margin.

Opportunities for cost reductions don’t end there. The impact of each patient safety lapse persists within a healthcare organization for many years because of the way actuarial formulas work. One HAC can have a multiple-year impact on reserve calculations, especially since legal action is often taken against hospitals in these circumstances.

In my opinion, it is vital that hospital CEOs, COOs and CFOs; patient safety and quality officers; and line operations managers understand the direct connection between patient safety and financial reserves and that these senior leaders be evaluated on their ability to save money on the reserve calculation, which can be found in every balance sheet and income statement that’s published. I can show you exactly where it is.

It’s also vital that a conversation about this issue occurs with the organization’s governance structure. How reserves are calculated, projected and accounted for typically emanates from the finance committee of the board.

The Vitalacy Patient Safety Platform enables healthcare organizations to achieve better patient care by observing events leading to HAIs and HACs such as patient falls, pressure ulcers and deep vein thrombosis (DVT). By electronically monitoring nurse rounding, hand hygiene compliance and nurse fatigue, the platform can help organizations to overcome patient safety challenges by building a strong patient safety culture that reduces HAIs, HACs and associated liability costs.

Learn more about Vitalacy at www.vitalacy.com.

Paul Gallese is the chief operating officer of Vitalacy, Inc.

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