Hospital-acquired complications (HAC) are one of the most persistent and significant challenges in healthcare. They are costly, harmful to patients, and damaging to the reputation of hospitals and health systems. For health executives and healthcare leaders, reducing HACs is a primary objective, both a governance priority and a moral responsibility.
A recent study published in Health Policy by Slawomirski et al. appears to shed new light on the actual real-life impact financial penalties can have on reducing HACs. The research looks at the impact of Australia’s funding penalty for HACs, which was introduced in 2018.
What it found should change the way leaders think about safety, policy, and system design. Within three years of the policy’s introduction, HACs fell by 26%, equating to nearly 49,000 fewer patient harms each year.
The results are clear:
- HAC incidence decreased by 18.5 per 1,000 admissions
- The rate of admissions with at least one HAC dropped by 23%
- Each year, hospitals avoided an estimated 49,000 complications
This is more than a statistic. It’s quite compelling evidence that governance decisions at the system level can and do directly influence what happens at the patient’s bedside.
How Financial Penalties Shaped Behaviour
In 2018, the policy that was introduced across all hospitals was quite straightforward; hospitals received reduced funding for episodes of care where a hospital-acquired complication occurred. The Independent Health and Aged Care Pricing Authority (IHACPA) developed the model, adjusting for risk factors such as age, gender, and diagnosis.
For healthcare leaders, the message is not that penalties alone drive change. Rather, it’s that funding models send strong signals to organisations about what matters most. And when those signals are well-calibrated, they can shift behaviour at scale.
Why Implementation Was the Real Differentiator
What makes these findings particularly instructive is not just the outcome, but how the policy was introduced. Instead of rushing a blunt penalty into place, policymakers:
- Rolled it out in stages
- Built in risk-adjustment to ensure hospitals treating sicker patients were not unfairly penalised, and
- Aligned the initiative with broader safety and quality programs
This combination meant the reform was not perceived as punitive, but as part of a system-wide effort to improve care. For healthcare leaders, this is a reminder that the journey to execution is just as important as design. Even the best policy will falter if it isn’t implemented with care, fairness, and engagement.
The Leadership Lessons for Healthcare Executives
Incentives drive priorities.
Whether through penalties or rewards, funding models influence behaviour. Leaders need to anticipate how their organisations will respond to financial signals and align them with patient outcomes.
Data is a strategic asset.
The study relied on detailed administrative data from 20 million hospital admissions. Without robust, transparent data systems, tracking safety and quality at this scale would be impossible. Health leaders should view investment in data infrastructure as a foundation for improvement.
Culture sustains results.
Financial levers may spark change, but it is clinical engagement and organisational culture that embed it. Leaders must champion safety not only through policy but also through communication, visibility, and governance.
Implementation makes or breaks reform.
This case shows that when policies are risk-adjusted, staged, and aligned with broader goals, they can succeed. When they are blunt or rushed, they risk backlash and unintended consequences.
Connecting to the Bigger Picture: Value-Based Healthcare
Globally, health systems are rapidly moving toward value-based healthcare, where funding is tied to outcomes, not activity levels. The HAC penalty system is a clear example of this philosophy in practice. By directly linking reimbursement to patient harm, the system created financial accountability for safety.
But for healthcare leaders, the bigger lesson is more strategic: that value-based reforms are not just about money — they are about aligning every level of governance with the patient’s best interest. When funding, culture, and leadership converge on that goal, measurable improvements follow.
Safety as a Leadership Imperative
The 26% reduction in hospital-acquired complications is a reminder of what’s possible when policy, data, and leadership align. For healthcare executives, this is not just a story about penalties. It is a case study in how system-level decisions translate into safer care for tens of thousands of patients.
In the end, governance is not abstract. It is the difference between a complication that happens—and one that is prevented.
Understanding the Limitations
While the results from Slawomirski et al. are promising, it’s worth keeping in mind a few important caveats.
First, the study relies on hospital coding data, which isn’t always perfect. Some of the drop in complication rates could be due to better, or simply different, documentation rather than actual changes in patient care. There’s also a risk that financial penalties might lead to unintended behaviours, like avoiding higher-risk patients or shifting focus away from areas that aren’t penalised.
The study is observational, meaning it can’t definitively prove that the penalties caused the improvements. Other changes in the health system may have played a role too. And while the funding model adjusts for risk, it can’t fully account for the complexity of every patient or hospital.
Finally, the way the policy was rolled out varied slightly across states, and it’s still early days when it comes to understanding how sustainable the improvements really are.
That said, these limitations don’t take away from the core message. They simply remind us that smart policy needs to be backed by good data, strong leadership, and ongoing evaluation.
To understand your governance responsibilities as a healthcare leader or health board director, register for Australia’s first and only board directorship program that’s been designed specifically for healthcare boards, in partnership with the Australian Institute of Company Directors (AICD): Foundations of Directorship Health Variant Program.
