How Hospitals Respond to Value-based Payment

September 20, 2022

This week’s contributor is Yaa Akosa Antwi, an Assistant Professor of Economics and Management at the Johns Hopkins University Carey Business School. Her research focuses on understanding and quantifying how government policies and economic incentives affect health outcomes and the functioning of health care markets. Yaa is a member of the 2022 Tradeoffs Research Council.

Over the years, the Centers for Medicare and Medicaid Services (CMS) has developed programs to pay for some health care services on the basis of value rather than volume. These “pay-for-performance” programs have grown increasingly popular across health care, but evidence is still limited on to what extent they’ve actually achieved their goals of pushing hospitals to provide more efficient, quality care. 

A new study recently accepted at the American Journal of Health Economics looked at how different types of hospitals responded to financial incentives under one pay-for-performance program: the Hospital Value-Based Purchasing (HVBP) Program, which was launched in 2013. The study’s authors — Edward C. Norton, Emily J. Lawton and Jun Li — looked at the impact of financial incentives on four measures: survival for acute myocardial infarction (AMI); survival for congestive heart failure (CHF); survival for pneumonia (PN) and Medicare spending per beneficiary (MSPB).

The researchers found:

  • Hospitals did respond to financial incentives, but there was variation in which measures different types of hospitals were most responsive to.
  • For one set of incentives in the program, teaching hospitals were more responsive to survival for AMI and for-profit hospitals had a strong response to survival for CHF, among other differences.
  • The responses of safety-net and non-safety net hospitals were similar.
  • Hospitals in very competitive markets made greater improvements on all three health outcomes compared to other hospitals. 

These findings were consistent with prior research from the same authors showing hospitals are generally pretty good at improving quality if it will lead to more money in their pockets. The most important finding to me, however, is the final one: Because competition drives hospitals to improve quality of care in response to the program, it’s possible that consolidation in hospital markets may inhibit the effectiveness of value-based programs.

This study also has limitations. First, the results only apply to the period (2015-2018) and quality measures studied and may not be generalizable to other years or quality measures. Second, it did not evaluate whether benefits from quality improvements exceeded the cost of the program.

Still, the research offers important insights that could help policymakers push hospitals to improve their quality of care. It suggests that pay-for-performance may be an effective strategy and that even small incentives could lead to improved quality. But only if hospitals are unable to achieve dominance in their markets. 

Want Research Corner delivered to your inbox every Tuesday? Sign up for our weekly newsletter!