Impact of the value‐based purchasing program on hospital operations outcomes: An econometric analysis

• Author: Sriram Venkataraman,Jon Chilingerian,Aleda V. Roth,Seung Jun Lee,Gregory R. Heim
• Published date: 01 January 2020
• Date: 01 January 2020
• DOI: http://doi.org/10.1002/joom.1057

RESEARCH ARTICLE

Impact of the value-based purchasing program on hospital

operations outcomes: An econometric analysis

Seung Jun Lee

1

| Sriram Venkataraman

2

| Gregory R. Heim

3

|

Aleda V. Roth

4

| Jon Chilingerian

5

1

School of Business Administration, College

of Business and Economics, Chung-Ang

University, Seoul, Republic of Korea

2

Department of Management Science,

Moore School of Business, University of

South Carolina, Columbia, South Carolina

3

Department of Information and Operations

Management, Mays Business School, Texas

A&M University, College Station, Texas

4

Department of Management, College of

Business, Clemson University, Clemson,

South Carolina

5

The Heller School for Social Policy and

Management, Brandeis University,

Waltham, Massachusetts

Correspondence

Gregory R. Heim, Department of

Information and Operations Management,

Mays Business School, Texas A&M

University, College Station, TX 77843.

Email: gheim@mays.tamu.edu

Handling Editors: Anand Nair, Jeffery

Smith, and Anita Tucker

Abstract

The Hospital Value-Based Purchasing (VBP) Program, one of several federal regulations

mandated by the Patient Protection and Affordable Care Act, uses Medicare provider pay-

ment penalties and bonuses to encourage hospital administrators to improve performance

in four domains: clinical processes, patient outcomes, patient experiences, and efficiency.

Before VBP's launch, some practitioners claimed VBP would have little impact, while

others feared well-off hospitals would be unfairly rewarded at the expense of previously

poor-performing hospitals. We examine whether and how the VBP penalties affect aggre-

gate operating outcomes of healthcare providers in hospitals. Using secondary data, we

find empirical evidence that hospitals with prior-year VBP penalties exhibit positive asso-

ciations between the penalty magnitude and certain current-year care process improve-

ments. Over the prior year, penalized hospitals also tend to exhibit increased patient case

mix metrics, which should enhance revenue as a spillover effect. In a post hoc analysis,

we observe that bonus-receiving hospitals are less apt to exhibit subsequent performance

improvements for these same metrics. Our contributions result from theoretically framing

differences in hospital operating activities when facing the VBP Program's penalties as

well as empirically demonstrating consequences of the penalty's magnitude.

KEYWORDS

empirical, healthcare policy, hospital, service operations, value-based purchasing program

“…the notion of ‘value-based’healthcare. It's a

form of reimbursement to healthcare providers

that's tied to the quality of care and patient out-

comes. In other words, it rewards providers for effi-

ciency and effectiveness…Of course, the mere

desire to adopt a new approach to care doesn't

ensure success.”

Bowman (2018)

1|INTRODUCTION

Health policy makers and regulators in the United States are

experimenting with many new ways to improve health

system performance and enhance patient value (Naveh,

Katz-Navon, & Stern, 2005; Green, 2012: Averill, Fuller,

McCullough, & Hughes, 2016; Makary & Daniel, 2016).

This drive to improve performance has spawned innovative

regulatory policies seeking to encourage internal efficiency,

better outcomes, and positive patient experiences. For exam-

ple, the Centers for Medicare and Medicaid Services (CMS)

developed several value-based, pay-for-performance pro-

grams requiring physicians and hospitals to evaluate and

demonstrate service delivery effectiveness (CMS, 2018a).

Unique among the programs is the Hospital Value-Based

Purchasing Program (hereafter VBP), designed to motivate

better care and service provision for Medicare beneficiaries

Received: 1 December 2017 Revised: 12 July 2019 Accepted: 19 August 2019

DOI: 10.1002/joom.1057

J Oper Manag. 2020;66:151–175. wileyonlinelibrary.com/journal/joom © 2019 Association for Supply Chain Management, Inc. 151

by financially penalizing poorly performing hospitals while

providing bonuses to their higher performing counterparts

(Averill et al., 2016; Werner & Dudley, 2012). Yet, little is

known about how the “magnitude”of these penalties influ-

ences performance. Thus, we raise the following research

questions: Will VBP financial penalties result in a better-

managed hospital—one that creates more patient value with

respect to clinical processes, patient outcomes and experi-

ences, and overall efficiency? Or, are hospitals likely to

adopt alternate tactics to mitigate VBP penalty costs, such as

through work process standardization or diagnostic coding

that has potential spillover effects on the case mix

index (CMI)?

To address these questions, we develop theory-based

hypotheses and draw upon several hospital-level data sets

that provide information about the VBP performance metrics

associated with process quality, patient experience, and

overall performance, along with related hospital information

and competitive environment data. The VBP Program is rev-

enue neutral and mandatory for all hospitals, public and pri-

vate, in the United States. Each year since 2013, CMS has

withheld a percentage of Medicare reimbursement dollars to

create an incentive funding pool for the bonuses. In 2018,

the VBP funding pool held an estimated $1.9 billion (CMS,

2018b). While hospital successes with value-based

healthcare are mounting, and the operational transformations

needed to achieve value-based aims are salient, some practi-

tioners claim only 10–20% of mandated hospitals have

responded with process changes that support VBP aims

(Bowman, 2018). Thus, our study investigates the conse-

quences of hospital VBP penalties based on their magnitude.

Understanding the magnitude of the penalties is essential for

three strategic reasons. First, due to the annual increases of

the VBP penalty and low hospital margins, VBP's financial

risk may creep up across time, and may become non-

negligible for U.S. hospital administrators. Were the policy

effective, hospital administrators would respond by

(a) improving operational and clinical quality and by

(b) reducing costs through lowering care process variation,

reducing medical errors, and increasing Medicare benefi-

ciary value. Such a strategy follows directly from classical

quality management theory (Batalden & Buchanan, 1989;

Berwick, Godfrey, & Roessner, 1991; Roth, 1993).

Second, conversely, unintended consequences of the

VBP penalty may reveal that some hospitals may avoid

future penalties by adjusting their administrative and/or

reimbursement systems (e.g., via upcoding or case mix

[Dafny, 2005; Silverman & Skinner, 2004]). Third, alterna-

tively, VBP may not incentivize hospitals to act. Administra-

tors may do little or nothing to meet the VBP goals, owing

to insufficient internal pressures, non-optimal decision-mak-

ing, or a culture of inertia (Figueroa, Tsugawa, Zheng,

Orav, & Jha, 2016; Muhlestein, Tu, de Lisle, & Merrill,

2016). A do-little strategy may be attributed to institutional

frictions (e.g., the rewards are not sufficient from taking any

actions). See Sacarny (2018) for examples of agency prob-

lems associated with the reporting of cardiac care procedures

to Medicare.

Healthcare professionals' skepticism about VBP's effects

on hospital performance (e.g., Rau, 2013) creates a need for

careful scrutiny of VBP's longitudinal operational impacts.

In response to previous government policies, healthcare

researchers have documented institutional and operational

actions (Carter, Newhouse, & Relles, 1990; Lloyd &

Rissing, 1985; McMahon & Smits, 1986; Rosenberg &

Browne, 2001). Ironically, doctors can respond to financial

uncertainty in ways that may worsen healthcare outcomes

(Smyth, 2016). Surgeons have modified treatment processes

in response to financial incentives (Schwartz & Tartter,

1998). Hospitals may react to penalties by tactically focusing

on complex patient cases and new patient sectors that pro-

vide better CMS remuneration (Baugh & Schuur, 2013).

Given this body of evidence, it is important to study whether

administrators address hospital VBP penalty magnitudes

through appropriate operational changes or through alternate

tactics. Healthcare policy makers, hospital administrators,

and taxpayers deserve to know how much of an effect the

VBP incentives have had on healthcare provider operations

and relevant stakeholders.

We subject to rigorous empirical scrutiny the extent to

which the magnitude of the VBP incentive influences hospi-

tal operations. Prior studies demonstrate that when

healthcare organizations are concerned with unavoidable

external pressures, they protect the clinical domain from the

uncertainties and contingencies of the regulatory and policy

environment (Ata, Killaly, Olsen, & Parker, 2013; Cook,

Shortell, Conrad, & Morrisey, 1983; Lee & Zenios, 2012;

Scott, Ruef, Mendel, & Caronna, 2000). Specific to VBP,

empirical studies find that hospital participation in VBP

(a) had no effect during VBP's initial implementation period

(Ryan, Burgess Jr, Pesko, Borden, & Dimick, 2015); (b) did

not improve patient mortality from 2008 to 2013 (Figueroa

et al., 2016); and (c) may decrease hospital cost efficiency

(Izón & Pardini, 2018). However, in review papers about

mandated pay-for-performance programs such as VBP, the

papers find econometric problems and inconsistent or weak

results (Mendelson et al., 2017).

Using longitudinal panel data analyses, we observe that

VBP financial penalty magnitudes are associated with subse-

quent hospital operations improvements. Yet, unexpectedly,

penalized hospitals also tend to exhibit subsequent increases

in the CMI metric, compared to non-penalized hospitals. It

is likely that a higher VBP penalty motivates hospitals to

tackle improving the accuracy of their coding, which

152 LEE ET AL.