Paying a Premium: How Patient Complexity
Affects Costs and Profit Margins
Paul A. Taheri, MD,* David A. Butz, PhD,† and Lazar J. Greenfield, MD*
From the *Division of Trauma Services, Department of Surgery, University of Michigan Health System, and the †Section of
Business Economics, University of Michigan Business School, Ann Arbor, Michigan
Objective and Background
Tertiary medical centers continue to be under extreme pres-
sure to deliver high-complexity care, but paradoxically there is
considerable pressure within these institutions to reduce their
emphasis on tertiary care and refocus their efforts to develop
a more community-like practice. The genesis of this pressure
is the perceived profitability of routine surgical activity when
compared with more complex care. The purpose of this study
is to assess how the total cost and profit (loss) margin can
vary for an entire trauma service. The authors also evaluate
payments for specific trauma-related diagnostic-related
groups (DRGs) and analyze how hospital margins were af-
fected based on mortality outcome.
Materials and Methods
The authors analyzed the actual cost of all trauma discharges
(n ? 692) at their level I trauma center for fiscal year 1997.
Data were obtained from the trauma registry and the hospital
cost accounting system. Total cost was defined as the sum of
the variable, fixed, and indirect costs associated with each
patient. Margin was defined as expected payments minus
total cost. The entire population and all DRGs with 10 or more
patients were stratified based on survival outcome, Injury Se-
verity Score, insurance status, and length of stay. The mean
total costs for survivors and nonsurvivors within these various
categories and their margins were evaluated.
The profit margin on nonsurvivors was $5898 greater than for
survivors, even though the mean total cost for nonsurvivors
was $28,821 greater. Within the fixed fee arrangement, ap-
proximately 44% of transfers had a negative margin. Both
survivors and nonsurvivors become increasingly profitable out
to 20 days and subsequently become unprofitable beyond 21
days, but nonsurvivors were more profitable than survivors.
There is a wide variance in both the costs and margins within
trauma-related DRGs. The DRG payment system dispropor-
tionately reimburses providers for nonsurvivors, even though
on average they are more costly. Because payers are likely to
engage in portfolio management, patients can be transferred
between hospitals based on the contractual relationship be-
tween the payer and the provider. This payment system po-
tentially allows payers to act strategically, sending relatively
low-cost patients to hospitals where they use fee-for-service
reimbursement and high-cost patients to hospitals where their
reimbursement is contractually capped. Although specific to
the authors’ trauma center and its payer mix, these data
demonstrate the profitability of maintaining a level I trauma
center and preserving the mission of delivering care to the
Tertiary medical centers continue to accept and treat
highly complex patients. In fact, university-based medical
centers are often thought of as “the last stop” for many of
these patients. Although these centers benefit from the ed-
ucational challenges presented by the most severely injured,
the persistent transfer of high-acuity patients into the uni-
versity system can place the tertiary medical center in a
difficult situation within the community referral base. Al-
though medically obligated to accept all patients regardless
of acuity, it is the more complex cases that potentially
compromise the economic position of the tertiary institu-
tion. This perceived economic compromise results from the
belief that the most severely injured are not only the most
costly but are also among the riskiest patients financially
and the least well reimbursed. The cost of treating these
Presented at the 110th Annual Meeting of the Southern Surgical Associa-
tion, December 6–9, 1998, The Breakers, West Palm Beach, Florida.
Correspondence: Paul A. Taheri, MD, Division of Trauma, Burn and
Emergency Surgery, University of Michigan Medical Center, 1500 E.
Medical Center Dr., Ann Arbor, MI 48109-0033.
Accepted for publication December 1998.
ANNALS OF SURGERY
Vol. 229, No. 6, 807–814
© 1999 Lippincott Williams & Wilkins, Inc.
based on insurance status. Actually, what our position is, I think it
is important that we know so that we have an understanding of
what kind of resources we will need from a budgeting perspective
year to year. And, as well, it also can protect us from the admin-
istrator setting up transfer centers which may actually deflect
nonpaying or poorly reimbursed patients.
Dr. Rhodes’ question regarding some of the incentives and some
of the heterogeneity of the population: there is a large variability in
costs within DRGs, and it is precisely for that, because DRG is sort
of a wastebasket diagnosis, there are 467 of these, and there is
variability by which patients funnel into them.
In fact, polytrauma patients who undergo a tracheostomy, re-
gardless of having a head injury, long bone fractures, or what-
have-you, all funnel into the same DRG, which is actually a
particularly lucrative DRG for the hospital. So there is variation
within each of these DRG populations.
And to quickly address Dr. Root’s comments, I think that the
role of auto insurance in Michigan is a pivotal one; it sort of gives
us a second-hit theory. What the hospital does is go to the primary
insurer first to get a certain percentage of the reimbursement. And
once they use up that resource, they move right on to the auto
insurer and hit them up for a second piece of the charge for the
patient. So we are lucky in that sense in Michigan. And I don’t
know the exact number of patients who had no-fault insurance.
But, again, our patient population is about 94% blunt, so it is a
predominant number of our patient population.
Taheri and Others
Ann. Surg.●June 1999