Searching for the Best Yardstick: Cost of Quality Improvements in the U.S. Hospital Industry

Management Science, Forthcoming.

72 Pages Posted: 14 Jul 2021 Last revised: 2 Mar 2023

See all articles by Jong Myeong Lim

Jong Myeong Lim

University of Miami - Department of Management Science

Ken Moon

University of Pennsylvania - The Wharton School

Sergei Savin

University of Pennsylvania - Operations, Information and Decisions Department

Date Written: July 12, 2021

Abstract

The Hospital Value-Based Purchasing (VBP) Program is Medicare’s implementation of yardstick incentives applied to hospitals in the U.S. Under the VBP Program, 2% of all Medicare payments to hospitals, estimated to be US$1.9B in fiscal year 2021, are withheld and redistributed based on their relative performance in the quality of delivered care. We develop a dynamic mean-field equilibrium model in which hospitals are engaged in a repeated competition under yardstick incentives. Using structural estimation methods, we recover key parameters that govern hospitals’ decisions to invest in quality improvement, including the financial and non-financial costs and uncertain outcomes of investment. By dynamically solving for hospitals’ individually optimal investment policies, we estimate the trajectory of quality improvements for each hospital, including its investment decisions and quality levels throughout the implementation of the VBP Program. Our counterfactual analyses explore the benefits, on the one hand, of modifying the overall size of the yardstick incentives and, on the other hand, of implementing a more focused program tailored to hospital type. We find that increasing the size of the incentives from 2% to 4% would have resulted in an additional quality investment of US$1.2B from 2011 to 2018, leading to a 3.3% reduction in the average rate of central line-associated bloodstream infections (CLABSI). Applying yardstick incentives to the tailored hospital peer groups, even without changing the size of the incentives, can lead to an average reduction of 1.4% in the rate of CLABSI among groups of hospitals associated with the highest costs of quality investment.

Note: Funding: Support from the Claude Marion Endowed Faculty Scholar Award of the Wharton School
Competing interests statement: None to declare.

Keywords: structural estimation, performance-based incentives, hospital regulation

Suggested Citation

Lim, Jong Myeong and Moon, Ken and Savin, Sergei, Searching for the Best Yardstick: Cost of Quality Improvements in the U.S. Hospital Industry (July 12, 2021). Management Science, Forthcoming., Available at SSRN: https://ssrn.com/abstract=3885132 or http://dx.doi.org/10.2139/ssrn.3885132

Jong Myeong Lim (Contact Author)

University of Miami - Department of Management Science ( email )

Coral Gables, FL
United States

Ken Moon

University of Pennsylvania - The Wharton School ( email )

Jon M. Huntsman Hall
3730 Walnut St.
Philadelphia, PA 19104-6365
United States

Sergei Savin

University of Pennsylvania - Operations, Information and Decisions Department ( email )

3730 Walnut Street
546 Jon M. Huntsman Hall
Philadelphia, PA 19104-5340
United States

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