Hospitals and health systems are under growing financial stress. OBBBA and changes to IPPS (Inpatient Prospective Payment System) are expected to result in aggressive payment reductions. At the same time, private payers are increasing denials and narrowing definitions of medical necessity. Financial pressure is rising on every front.
Even well-performing systems are feeling it. Margins are slim. Staffing costs and burnout are up. And now, reimbursement is even harder to secure. What’s often missed is that hospitals have a way to address these pressures, improving quality outcomes.
Quality metrics are tied directly to value-based purchasing programs like the Hospital Readmissions Reduction Program (HRRP 30-day rule) and the Hospital Acquired Conditions (HAC) Reduction Program. If quality metrics slip, penalties increase. If they improve, some revenue can be protected or even gained. We’ve found that hospitals with higher quality, as rated by CMS Stars, tend to have higher operating margins, so these ideas translate into the real world.
The question isn’t just how do we cut costs? It’s how can we protect or grow revenue by improving quality?
Quality tied to payment
Here’s what hospitals are up against:
- HRRP penalties apply to hospitals with excess readmissions for certain conditions. The readmission period is tracked under the 30-day rule.
- HAC penalties reduce payments to hospitals with high rates of preventable harm—like infections or injuries that happened during care.
- Value-based Purchasing (VBP) offers incentives or penalties tied to outcomes.
These programs aren’t going away. In fact, they’re expanding. CMS is adding new quality indicators to reimbursement formulas, and commercial payers often follow suit.
Denials are rising—quality can help
Payment denials aren’t just a paperwork issue. They’re costing hospitals millions. In 2023, nearly 1 in 5 claims were denied on first submission. And denials for “lack of medical necessity” are among the top reasons.
Improved documentation, care coordination, and outcomes can all reduce denials. Quality improvement doesn’t just help avoid CMS penalties—it supports the entire revenue cycle.
The financial ROI of better quality
It can feel like quality improvement is just another cost. But the numbers tell a different story.
As mentioned above, hospitals with higher CMS Stars ratings tend to have higher operating margins. Why is that? Minimized penalties, maximized incentives, higher revenue per bed through better reputation, fewer denials for medical necessity, and perhaps, better overall efficiency in care delivery.
That makes sense. Fewer complications, shorter stays, and better care coordination all reduce costs. And fewer readmissions, infections, or documentation issues mean fewer penalties and denials.
Improving quality protects payment and improves efficiency. That’s what “return on quality” looks like in real terms.
Analytics tools that can help
You can’t fix what you can’t see. That’s why analytics tools are essential.
Midas Health Analytics is one example of a solution hospitals use to track, measure, and improve quality. It helps identify trends across the patient journey—like where readmissions spike or complications occur. It supports hospital teams in aligning their quality goals with clinical and financial priorities. Tracking and measuring quality in near real time allows improvements to be made before penalties occur.
The result? Fewer surprises. And a more targeted approach to quality that supports better margins. We often see Midas customers have better financial performance.
Where to focus now
If you’re trying to improve quality under pressure, start with what impacts payment the most.
- Readmissions. Look at your HRRP data. What conditions are driving excess readmissions? Are discharge instructions clear? Are follow-ups happening?
- Infections and harm. Review your HAC measures. Where do you see preventable conditions? Is there a pattern with certain procedures or units?
- Documentation. Train clinical staff on documentation that supports care quality and payment. This helps reduce denials for medical necessity.
- Star Ratings. Review your CMS Stars data. Pick one or two domains to focus on—like patient experience or outcomes.
You don’t need to fix everything at once. But you do need a strategy.
Final thoughts: quality isn’t extra; it’s the path forward
It’s easy to think of quality as an “add-on”—something separate from the operational work of running a hospital. But right now, it’s a highly effective way to respond to shrinking margins and payments.
Hospitals that make real improvements in quality are not just doing what’s right for patients. They’re protecting their finances.
Payment programs will keep evolving. Denials will keep coming. But a focused quality improvement strategy, supported by strong data and leadership, can make the difference between just surviving and staying sustainable.
