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Association Between Medicare’s Mandatory Hospital Value-Based Purchasing Program and Cost Inefficiency

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Abstract

Background

The Patient Protection and Affordable Care Act instituted pay-for-performance programs, including Hospital Value-Based Purchasing (HVBP), designed to encourage hospital quality and efficiency.

Objective and Method

While these programs have been evaluated with respect to their implications for care quality and financial viability, this is the first study to assess the relationship between hospitals’ cost inefficiency and their participation in the programs. We estimate a translog specification of a stochastic cost frontier with controls for participation in the HVBP program and clinical and outcome quality for California hospitals for 2012–2015.

Results

The program-participation indicators’ parameters imply that participants were more cost inefficient than their peers. Further, the estimated coefficients for summary process of care quality indexes for three health conditions (acute myocardial infarction, pneumonia, and heart failure) suggest that higher quality scores are associated with increased operating costs.

Conclusion

The estimated coefficients for the outcome quality variables suggest that future determination of HVBP payment adjustments, which will depend solely on mortality rates as measures of clinical care quality, may not only be aligned with increasing healthcare quality but also reducing healthcare costs.

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Notes

  1. The percentage of hospitals penalized by the HVBP was 15% higher than the national average of 53% [29].

  2. The distribution of the deterministic error has only a small effect on estimated hospital cost inefficiency [40, 41].

  3. Kaiser Foundation hospitals are not required to report certain financial information [46].

  4. The results of the estimation do not depend on the input price chosen for normalization.

  5. The DSH Index, assigned by CMS, is calculated as: (Medicare Supplemental Security Income Days/Total Medicare Days) + (Medicaid, Non-Medicare Days/Total Patient Days).

  6. In the estimation of the DEA cost efficiency scores it is necessary to control for the fact that these scores are between 0 and 1. To do so, we treated these scores as fractional data and used least-squares regression with logit transformation of the dependent variable [69, 70].

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Data:

Hospital financial reports can be publicly accessed at the System for Integrated Electronic Reporting and Auditing website (Office of Statewide Health Planning and Development, California): https://siera.oshpd.ca.gov/FinancialDisclosure.aspx.

Quality measures can be publicly accessed at Hospital Compare: https://data.medicare.gov/data/archives/hospital-compare.

Hospital participation in the Hospital Value-Based purchasing program can be publicly accessed at the Centers for Medicare and Medicaid Services website: https://www.cms.gov/Medicare/Quality-Initiatives-Patient-Assessment-Instruments/hospital-value-based-purchasing/index.html.

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Authors and Affiliations

  1. Department of Economics, Eastern Washington University, 311 Patterson Hall, Cheney, WA, 99004-2429, USA

    Germán M. Izón & Chelsea A. Pardini

  2. Department of Economics, Washington State University, Pullman, WA, 99164, USA

    Chelsea A. Pardini

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  1. Germán M. Izón
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Contributions

Germán Izón contributed in the specification, estimation of models, and interpretation of the results. Chelsea Pardini contributed in the collection of data and in the interpretation of the empirical results. Both authors were involved in drafting and revision of the manuscript.

Corresponding author

Correspondence to Germán M. Izón.

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Funding

This study did not receive any funding.

Conflict of interest

Germán M. Izón and Chelsea A. Pardini declare that they have no conflicts of interest.

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Izón, G.M., Pardini, C.A. Association Between Medicare’s Mandatory Hospital Value-Based Purchasing Program and Cost Inefficiency. Appl Health Econ Health Policy 16, 79–90 (2018). https://doi.org/10.1007/s40258-017-0357-3

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