The Issue

The Medicare value-based purchasing (VBP) program is an initiative described in the Affordable Care Act whose purpose is to provide a practical means to reduce costs to the nation’s healthcare system while improving quality of care. Hospitals that achieve the highest total performance scores (TPSs) under this program’s scoring methodology can earn incentive payments for performance excellence.

Findings of a study suggest that a higher TPS under the program may correlate with higher expenditures on routine services that are likely to affect patient satisfaction. These findings imply that, at least with respect to certain routine services (e.g., “room and board” and “nursing services”;  maintenance and plant operations; laundry, housekeeping, and dietary), hospitals may actually need to spend more money to gain the level of patient satisfaction required to achieve a high TPS and thereby earn the program’s incentive payments.

It should be noted, however, that the focus of this study was entirely on nonclinical measures of VBP and routine care costs, so the study’s findings do not necessarily contradict findings of other studies indicating that improvement in clinical quality measures may result in cost reductions.


Medicare’s VBP program is designed to adjust a hospital’s payment on the basis of measureable quality indicators. Other payers are also exploring ways to adjust payment for care not only according to the services provided, but also according to the quality of those services. As more payers adopt these strategies and potentially more revenue is based upon such measures, it will become increasingly important for hospitals to understand and manage the relationships among their costs and the quality measures that impact their revenue. 

Under the VBP program, a hospital’s TPS is determined according to certain clinical practices and patient satisfaction surveys, as measured during a recent performance period and compared with a prior baseline period. Hospitals are familiar with these measures because they have been part of Hospital Inpatient Quality Reporting (IQR) program, which the Centers for Medicare & Medicaid Services introduced in FY05.

The study on which this article is based sought to correlate projected TPSs for hospitals under the VBP program with routine costs as reported by each hospital for the corresponding measurement periods. The study focused on routine service costs and common departmental costs because they are generally shared among all hospitals.

Action Steps for Providers

It will be increasingly important for hospitals to be mindful of their performance within payment systems focused on measuring the quality of care provided. Beyond financial impact, the potential for positive and negative publicity related to program performance also can have implications for any hospital. Hospitals may wish to compare their own TPS measurements and measures of patients’ experience of care alongside operating costs to understand how their own experiences compare with national observations. As hospitals become more experienced with the VBP program and begin adopting TPS measurements along with other management indicators, some may find ways to excel in providing measurably higher levels of quality cost-effectively.

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Publication Date: Monday, October 01, 2012

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