Better Hospitals: The Effect of Patient Satisfaction on Hospital Financial Performance

Meeting patient needs is an essential driver of hospital performance, since it enhances customer loyalty, builds reputation, and increases utilization of hospital services. Under the Hospital Value-Based Purchasing Program (VBP), this link has been made explicit through the use of patient-reported satisfaction scores that are explicitly tied to Medicare reimbursements.[1]As a result, patient satisfaction scores--pertaining to factors as diverse as the level of noise throughout the night and the doctor’s bedside manner—have become an integral part of a patient’s visit to the hospital. Nevertheless, the extent to which patient-reported satisfaction metrics reflect meaningful (rather than subjective) aspects of patient experience, and thus capture value to patients and providers is unclear.

In this paper, we construct a new dataset on patient satisfaction scores, hospital financial outcomes, and a rich set of hospital and local market characteristics (combining CMS and American Hospital Association data) and show that patient satisfaction had a large causal effect on hospital financial performance between 2008 and 2014.  We use a differences-in-differences approach to show that compared to other hospitals in the same hospital referral region, a standard deviation (10%) increase in number of respondents rating hospitals as excellent increases net margin relative to bottom-ranked hospitals by 1.5%, operating margin by 1.3%, and return on assets by 0.1%.  Similarly, an increase of 10% in the number of respondents rating hospitals as moderate performers, increases net margin relative to bottom-ranked hospitals by 0.7% and return on assets by 0.03%. These effects persist even after controlling for a rich set of hospital and local area characteristics (including patient demographics, case, and payer mix), as well as for hospital fixed effects.

We also perform a series of falsification tests, and show that, for instance, satisfaction scores for measures unlikely to affect hospital performance (such as noise levels) are unrelated to financial outcomes. Furthermore, our results do not simply capture a mechanical effect stemming from the VBP payments—VBP incentives account for only 6% of the effect of satisfaction on net margins.

We also shed some lights on the mechanisms through which the effect of patient satisfaction affects financial performance. We show that the effect of patient satisfaction is relatively larger for revenue per adjusted patient day compared to expenses, suggesting that cost-cutting is not the main driver behind the results. Furthermore, we show that patient satisfaction scores pertaining to interactions with nurses have the strongest effects on financial outcomes, and that increasing the proportion of nurses in the staffing mix (keeping constant total FTEs and salaries) is a likely mechanism through which patient satisfaction affects hospital profitability.

Finally, we also conducted interviews with chief experience officers for a sample of hospitals in our sample, and the qualitative results are consistent with the quantitative analyses.

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[1] In FY2015, hospital annual base operating DRG payments are adjusted using a value-based multiplier that depends on performance in three domains of care: patient experience (30%); clinical experience (45%); and outcomes (25%).

See more of: Competition, Pricing, and Hospital Performance
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