Hospital Quality Improvements: Added Cost or Cost Savers

What is the relationship between hospital costs CMS quality rating?


At the time of this writing Medicare has provided incentive payments for improvements in hospital inpatient quality to approximately 3,000 acute care hospitals through its Value Based Purchasing (VBP) program. A number of commercial payers have also introduced VBP programs for payment to their participating hospitals. The unanswered question is do improvements in quality come at a cost, or do they actually reduce cost. While there have been many prior studies, those studies varied in their definition of both cost and quality. Some studies reference cost to the patient while others review cost to the hospital. The studies also used different metrics for defining quality.

In this short blog, we will take a look at the relationship between costs incurred by the hospital and the quality rating provided by CMS in Hospital Compare at their website. Hospitals receive an overall star rating from 1 to5. The overall star rating includes a variety of the more than 100 measures CMS publicly reports, divided into 5 measure groups or categories: Mortality, Safety of Care, Readmission, Patient Experience, and Timely & Effective Care. We have pulled the 2021-star ratings reported for short term acute care hospitals. It should be noted that much of this data relied upon three years of reporting 2016 to 2019. We next pulled cost metrics for those hospitals from 2020 Medicare cost reports. Merging those two data bases provided us with 2,762 hospitals. The quality and cost metrics are shown below.

(5 being the highest score)

The table shows that there is a reduction in cost for hospitals with higher quality scores. For example, hospitals with the poorest star rating (1) had a median Hospital Cost Index (HCI) value of 103.2 which was 5 percent above the HCI value of 98.5 for hospitals with a 5-star quality score. The largest variance in the HCI values occurs when the quality score improves from 1 to 2. While cost reductions take place in other quality score changes the variance is much smaller.

The HCI is a metric that combines values for the average cost per discharge indexed to the US average and the average cost per outpatient visit which is also indexed to the US average. Both of these metrics are also adjusted for both case mix variation and cost of living differences.

We also included another metric for hospital cost, Cost per Equivalent Discharge (CPED), to further assess the relationship between quality and cost. The results were a mirror image of the variation observed when the HCI metric was used as the measure of hospital cost. Hospitals with the lowest quality rating had the highest CPED which was 9 percent above hospitals with 2-star rating. While variation between other quality scores showed reduced costs with higher quality scores, the variation was smaller.

Given these results, the question that needs answered is why are costs higher for the lowest quality rated hospitals? The table below shows median net patient revenue and median number of inpatient discharges for each Hospital Compare star rating. The data suggests that the largest hospitals are more likely to have the lowest quality rating. Further, the data suggests that hospitals with higher volumes of inpatient discharges are more likely to have lower Hospital Compare quality ratings. When we ran a simple correlation between quality scores and either net patient revenue or inpatient discharges, we found that both were highly correlated, but inpatient discharges had a higher correlation coefficient (.64) compared to net patient revenue (.56).

(5 being the highest score)

While this is a preliminary analysis, there are several key findings. First, larger hospitals –especially those with high volumes of inpatient care-have lower Hospital Compare quality scores. Second, hospitals with the lowest Hospital Compare quality score do have higher levels of cost but variation is much less across the remaining 4 quality levels. One possible explanation for these findings might be a bias in the Hospital Compare quality scoring methodology. A higher percentage of the Hospital Compare quality score is related to inpatient procedures. If larger hospitals treat more severely ill patients, it is possible that the Hospital Compare quality score might not recognize severity of care variation. For example, would death rates for pneumonia patients be higher for larger referral hospitals who might be receiving more severely ill patients? If this is true, larger hospitals might have lower scores in this area.

Have questions about this or want to learn more? Let us know!


See You At The HMFA Annual Conference June 2022!

Cleverley + Associates Will Attend the HFMA Annual Conference

We’re headed to HFMA’s Annual Conference in Denver, Colorado. Bryan Gordon, our Senior Regional Account Executive will be presenting on Price Transparency, the history of regulation, what hospitals are facing now, and what might be next.

The HFMA’s Annual Conference is a three-day-long, interactive forum where attendees can learn about new solutions, best practices, and trends that can help drive performance improvement and achieve measurable results.

It is the premier event for healthcare financial management professionals in the United States and Canada. Cleverley + Associates has been a proud part of this conference since its inception. Our team is excited to attend and help other attendees provide value to their communities by improving their revenue cycle, budgeting, decision support, and finance operations.

Price Transparency is a growing bipartisan concern, and year after year hospitals navigate new guidelines and expectations from congress as well as local governments. We’re excited to see our old friends and make new connections, hear how the industry has adjusted to recent changes in regulations, and see how we might be able to help your facility accomplish your goals.

Feel free to swing by and visit the Cleverley and Associates booth (#522) to get more information about Price Transparency as well as their other consulting and data analytics services. Representatives at the booth will help you be ready for anything, whether it’s an appointment to take a look at your Price Transparency strategy, or one of our free umbrellas!

Why Do Hospitals Charge Payers Different Rates?

How Do We Compare Payment Rates Across Health Plans and Hospitals?

Recently we were asked by a hospital client to address three common questions they hear from the public regarding price transparency. We’ve already answered “Why do Hospitals Offer Lower rates to Some Payers?” and “What Is The Relationship Between Insurance Contracts and What Members Pay?” so let’s look at “Why do Hospitals Offer Lower Rates to Some Payers?”

Comparison of payment rates across health plans is a complex process because of the large number of contractual provisions and it is often difficult, if not impossible, to conclude that one health plan has more favorable terms. While this statement is true, there are factors that can and do create difference in payment terms across health plans.

Administrative costs: Specific administrative costs such as contract negotiation and claims payment can, and often do, vary by the size of health plan volume. Health plans with larger volumes will naturally incur lower costs per procedure than plans with lower volumes. Health plans with a historical record of claims denial or delayed payment might also have higher payment terms than a plan that has a lower rate of claim denials and a record of prompt payment.

Plan/Coverage design differences: The nature of specific plan provisions such as deductible and coinsurance terms affect payment terms. Plans with higher deductibles and coinsurance often result in unpaid patient responsibility amounts and may require higher payment to cover expected costs of treatment.

Patient population differences: The underlying risk pool of the health plan’s insured population may also affect payment terms. For example, a health plan with an older population might require higher payment terms because the intensity of services for specific procedures might be higher due to the greater presence of preexisting conditions.

Hospitals are in a unique position where what they are paid and how and when can vary dramatically between each person who walks through their door, even if they have the same insurance. There are a lot of factors in play as hospitals balance these differences.

To see how we answered the other questions click here:

What Is The Relationship Between Insurance Contracts and What Members Pay?

Why Hospitals Charge Payers Different Rates?

Have questions? You can contact us here.


Some Payers Pay Lower Rates. Why?

What Is The Relationship Between Insurance Contracts and What Members Pay?

Recently we were asked by a hospital client to address three common questions they hear from the public regarding price transparency. Last time we answered “Why do Hospitals Offer Lower rates to Some Payers?” Now we’ll look at “What Is The Relationship Between Insurance Contracts and What Members Pay?” and next we’ll investigate “Why Hospitals Charge Payers Different Rates?”

Patient responsibility amounts are based upon the contractual terms that the health plan and provider have negotiated, assuming that there is an actual contract in existence.  While these negotiated rates are an important determinant of patient payment responsibility, there are likely even more important elements that will impact what specific out-of-pocket payments will be for services.

Plan design will impact patient out-of-pocket payments – typically, with a cap:

The actual amount that a patient with commercial health insurance will be responsible to pay for any specific service is dependent upon several factors related to the specific terms of their plan coverage.  Two of the largest factors are deductible and coinsurance requirements.  Patients in high deductible plans will be required to make payments to the health provider until their deductible is met.  A coinsurance payment may also be required until the maximum allowable cost provision in their coverage has been met. Once deductible and coinsurance provisions are met, patients typically are no longer responsible for additional payments as the health plan will pay remaining balances.

Two patients receive care in a hospital. Why might their rates differ?

Health plans determine what services and providers are covered and that can impact patient payment.

Health plans may also deny coverage for services that they deem to be medically unnecessary.  In these cases the patient would be responsible for those denied services.  Typically, health plans will discuss this with patients prior to care, however, it’s always advisable to confirm coverage with the health plan and your provider prior to care, if possible.  In addition, the specific healthcare providers included in the health plan’s network will also have an effect on patient responsibility amounts.  A patient who selects a provider that is deemed out of network will often face higher deductible and/or coinsurance payment requirements.

Patients who are concerned about possible out of pocket payments should utilize the hospital’s cost estimator tool – or contact the hospital’s patient financial advisors – to get a more accurate estimate of patient required payments.

Hospitals are in a unique position where what they are paid and how can vary dramatically between each person who walks through their door, even if they have the same insurance. There are a lot of factors in play as hospitals balance these differences.

We’ll look at why hospitals charge payers different rates next time.


To read “Why do Hospitals Offer Lower Rates to Some Payers?” click here.


Have questions? You can contact us here.

Why do Hospitals Offer Lower Rates to Some Payers?

We Answer Questions About Hospital Payer Rates

Recently we were asked by a hospital client to address three common questions they hear from the public regarding price transparency. So, in our next three blog posts we’ll answer the following questions:

For our first question, let’s look at why hospitals offer lower rates to some payers.

Actual payment terms that are negotiated between a health care provider and a health plan are the result of many underlying economic and social objectives. The difference between some payers, which can be dramatic, is sometimes presented as evidence of wrongdoing, but it’s the result of hospitals balancing their budgets, based on previously negotiated terms that are the result of many complex economic and social pressures and limitations.

Governmental payment is less than cost for most procedures.

Hospitals must make up this deficit. It’s a unique challenge for the industry. Most hospitals provide more than 50% of their services to governmental clients (Medicare and Medicaid). Uninsured patients, or those with high deductibles, pay a very small percentage of their treatment. To continue providing care, pay their nurses and doctors, and invest in their facilities and equipment hospitals must make up this cost differential from insured payers.

Medicine doctor and stethoscope working on digital tablet.

Providers and payers enter into unique agreements that reflect the needs of that payer’s patient population.

Commercial health plans have variation in their payment rates. There may be several hundred, or more, specific payment terms in any individual contract. One commercial contract may have lower rates for imaging procedures but higher rates for outpatient surgery than another plan. These differences in payment can be negotiated to reflect the needs of a specific payer’s patient population and the number of patients that utilize those services. Because of the large number of services provided by a hospital, it is very difficult to determine whether overall payment rates are higher or lower in one commercial plan compared to another.

Payment differences result from the different types of services each patient utilizes during their care.

The intensity of service provided may also create payment variation between plans that may not be real. Patients with the same commercial contractual payment terms may experience payment variation due to the intensity of service, e.g. time in the operating room or length of stay at the hospital.

Hospitals continue to work diligently to maintain the balance between serving their community and investing in their continued existence. These three variables may help explain why patients may see dramatic differences in payment.

Hospitals are in a unique position where what they are paid and how they are paid can vary dramatically between each person who walks through their door, even if they have the same insurance. There are a lot of factors in play as hospitals balance these differences.

We’ll look at the relationship between insurance contracts and what members pay next week.

Have questions? You can contact us here.