Report: Offering Hospitals Incentives Through Medicaid to Improve Quality, Reduce Costs, are Effective


A new study by Ann Arbor’s University of Michigan shows that incentives for hospitals to improve their quality and reduce costs are effective. Hospitals that participate in such programs benefit not only from direct payment from patients’ treatments but also the good scores they get from patients on the treatment they receive.

“Hospitals traditionally think that how much they get paid by Medicare is just the predetermined payment for a patient with a particular condition,” says Edward Norton, professor of health management and policy at the U-M School of Public Health and professor of economics at the College of Literature, Sciences, and the Arts.

However, if an elderly patient comes to a hospital because of a heart attack, Medicare will reimburse the hospital for the visit and pay an additional amount when hospitals do well on a variety of quality measures, says Norton. The total reimbursement depends on how the patient affects all of the quality measures and how that changes the hospital combined score. This ultimately affects the financial payments to the hospitals in the future.

Norton, a member of the U-M Institute for Healthcare Policy and Innovation, and colleagues used data from the Hospital Value-based Purchasing Program, a national program that rewards or penalizes hospitals based on their quality and episode-based costs. It also incentivizes integration between hospitals and post-acute care providers.

“We found that hospitals improved their performance over time in the areas where they have the highest incentives to improve care, and that integrated hospitals responded more than non-integrated hospitals,” says Norton.

“If a patient does really well, they’re happy, they go home, they don’t die, they’re not readmitted, the hospital’s measures improve, and the hospital will make more money in the future.

“So, the total reimbursement for that patient is higher. If, on the other hand, the patient has a bad experience, doesn’t get proper care, they spend a lot of money and then die within 30 days, all the measures get worse, and the hospital is penalized financially, possibly even enough that the hospitals could lose money overall.”

The study also showed there is a wide range of financial incentives.

“For a lot of patients, there are actually no financial incentives to do better,” says Norton. “But for some patients and some measures, it can be up to tens of thousands of dollars, so some hospitals have a large financial incentive to do better.

“When hospitals have a larger financial incentive to improve, they’re more likely to improve. And that’s really important because the whole premise of this program is to have a financial reward for doing better.”

The study is published in the September issue of the Journal of Health Economics. It was co-authored by U-M researchers Jun Li, Anup Das, and Lena Chen.

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