The Relationship of Hospital Quality and Cost per Case in Hawaii

Article excerpt

One of the leading questions of our time is whether high-quality care leads to lower health care costs. Using data from Hawaii hospitals, this paper addresses the relationship of overall cost per case to a composite measure of the quality of inpatient care and a 30-day readmission rate. We found that low-cost hospitals tend to have the highest quality but the worst readmission performance. Change in quality and change in cost were also negatively correlated, but not statistically significant. We conclude that high-quality hospital care does not have to cost more, but that the dynamics of the readmission rate differ substantially from other quality dimensions.


The assumption that high-quality care will help control costs undergirds many of today's leading policy initiatives. In particular, pay-for-performance systems for physicians and hospitals generally have the dual objectives of improving the quality of care and reducing costs. Bundled payment and accountable care organizations also envision bending the cost curve while improving quality. And yet the evidence linking quality and costs is fairly limited, particularly for overall hospital quality and cost per case.

The Hawaii Medical Service Association (HMSA), or Blue Cross and Blue Shield of Hawaii, has been a leader in quality incentive payments. HMSA implemented one of the nation's first preferred provider organization (PPO) pay-for-performance systems covering all physician specialties in 1998, and followed with a hospital incentive program in 2000. The hospital program, known as the Hospital Quality and Service Recognition (HQSR) system, began with structural measures and has gradually extended into a variety of process and outcome measures. The system applies primarily to 13 acute care hospitals in Hawaii that contract with HMSA, and, on average, provides hospital rewards equal to about 2% of HMSA's inpatient payments. (1)

This paper aims to determine whether there is a link between quality of care, broadly measured, and inpatient cost per case, using evidence from Hawaii's acute care hospitals. We analyze this relationship in both static and dynamic terms.

Previous Research

Historically, studies addressing the relationship between cost and quality have focused on measures of per capita costs. The best known example is based on the pioneering work of Stephen Jencks in measuring hospital quality at the state level using Quality Improvement Organization measures (Jencks et al. 2000; Jencks, Huff, and Cuerdon 2003). A follow-up study using the Jencks quality data was the first to establish a negative correlation between costs and quality, specifically that the states with the lowest overall Medicare spending per beneficiary had among the highest overall quality rankings on 22 process measures (Baicker and Chandra 2004).

However, lower per capita costs for hospital care are likely driven primarily by lower utilization rather than lower unit costs. Hawaii provides an excellent example of this premise. The Baicker and Chandra study established that Hawaii's Medicare per capita costs are by far the lowest in the country, and another study from the same era showed that Hawaii's overall use of services for Medicare patients was the lowest in the country while its costs per unit of service were well above average (Ashby et al. 1996).

A pay-for-performance demonstration funded by the Centers for Medicare and Medicaid Services (CMS) and conducted by the Premier Alliance from 2003 through 2006 showed strong evidence of a link between quality improvement and reduced hospital costs (Premier Inc. 2008). The 250 hospitals participating in this project, known as the Hospital Quality Incentive Demonstration, achieved increases ranging from 37% to more than 300% in the median percentage of Medicare patients with perfect process scores across five clinical areas. At the same time, their average cost per case in the five clinical areas actually declined, with the decreases ranging from 4% to 12%. …