Exploring the Relationship Between Quality and Cost in Hospital Data

CMS has recently released its 5-star hospital compare ratings with the distribution shown in Table 1. The ratings are based upon metrics in five areas: Mortality (22%), Safety (22%), Readmission (22%), Patient Experience (22%), and Timely and Effective Care (12%).

These quality metrics are important because Medicare does pay hospitals based on quality through several programs. These programs are part of an effort to improve healthcare outcomes and ensure that patients receive high-quality care. Some of the key initiatives include:

1. Hospital Value-Based Purchasing (VBP) Program: This program rewards acute care hospitals with incentive payments for the quality of care they provide to Medicare patients. Hospitals are measured on various quality measures, such as mortality and complications, healthcare associated infections, patient experience, Patient safety, and efficiency.
2. Hospital Readmissions Reduction Program (HRRP): Under this program, Medicare reduces payments to hospitals with excess readmissions for certain conditions. The goal is to encourage hospitals to improve the quality of care during the initial hospital stay and ensure better post-discharge planning.
3. Hospital-Acquired Condition (HAC) Reduction Program: This program aims to reduce the incidence of hospital-acquired conditions by penalizing hospitals that rank in the worst-performing quartile for certain HACs. The program targets conditions that are considered preventable with proper care.
4. Quality Reporting Programs: Hospitals are required to report various quality measures to Medicare. The data collected through these programs help in benchmarking performance and identifying areas for improvement.

These initiatives are part of Medicare’s broader strategy to transition from volume-based to value-based care, focusing on the quality and outcomes of healthcare services rather than the quantity. Implicit in the push to relate quality and payment is an assumption that improvements in quality can be realized with little or no increase in cost of care. While there have been some past studies of the quality-cost relationship, none have been conclusive. In this short article we will relate specific performance metrics to CMS’s 5-star ratings.

Table 1 provides a comparison of the 1,522 CMS rated hospitals that we were able to obtain 2023 Medicare data with the 2,847 hospitals rated by CMS. The distribution of hospitals in the data set appears like the distribution in the CMS report which should make the results valid for the larger CMS file.

Table 2 shows average values for the Hospital Cost Index^TM (HCI) for each of the 5-star categories. The HCI provides a composite measure of a hospital’s relative costliness for both inpatient and outpatient encounters adjusting for both case mix and cost of living differences. There is a clear relationship between the star rating and cost; hospitals with higher quality ratings have lower costs per encounter after adjusting for both case mix and cost of living. Table 2 also provides additional relationships between the 5-star quality ratings and selected cost influencing variables. Two of the more significant relationships are Medicaid volumes and relative size. Higher quality rated hospitals are larger with lower percentages of Medicaid patients. Larger hospitals may be able to realize greater economies of scale than smaller hospitals while higher relative volumes of Medicaid patients may indicate patients who have postponed medical care and therefore have higher degrees of complications and comorbidities. There are other explanations, and we are simply identifying existing associations which may or may not be causal.

Table 3 examines the possible impact of teaching status upon quality and cost. Both teaching and nonteaching hospitals have similar representation in each of the five quality categories, e.g., 13.4% of teaching hospitals have a 5-star rating and 12.3% of nonteaching hospitals have a 5-star rating. There is however a much larger variation in cost between lower rated teaching hospitals and top-quality rated teaching hospitals, e.g., an HCI of 123.2 for one star teaching hospitals compared to an HCI of 100.6 for five star rated teaching hospitals. The variance in HCI values between one star nonteaching and 5-star nonteaching hospitals was much smaller, 105.4 to 102.8.  Lower quality rated teaching hospitals also have higher costs that similar rated nonteaching hospitals. While the expectation was for teaching hospitals to have higher overall costs, this did not appear to be true for the higher quality rated hospitals.

Table 4 provides data showing cost quality relationships by ownership and control classifications. Hospitals designated as government show higher costs for each quality rating category and they also have lower representation in the higher quality ratings. Proprietary hospitals also have less representation in the higher quality rating categories, but their Hospital Cost Index values are the lowest for all five quality rating categories. There is also slight variation in cost between quality ratings. Voluntary hospitals have the highest representation in the higher quality rating categories, and they also have a clear pattern of decreasing costs with improving quality.

Summary

The data presented in this paper suggest that there is a favorable relationship between the quality of care and the cost of delivering that care. Hospitals that received higher quality scores from CMS did exhibit lower costs per encounter of care after adjusting for both case mix and cost of living. We also documented that larger hospitals with lower percentages of Medicaid patients were more likely to receive higher CMS quality ratings and have lower costs. The relationship between cost and quality in teaching and non-teaching hospitals were similar except teaching hospitals had higher costs in the lower quality score categories. Ownership and control variations in quality and cost were present. Government and Proprietary hospitals had lower representation in the higher quality scores compared to Voluntary hospitals. Proprietary hospitals had lower costs compared to both Government and Voluntary hospitals but exhibited little variation across quality ratings.

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