Better patient care at high-quality hospitals may save medicare money and bolster episode-based payment models

US policy makers are making efforts to simultaneously improve the quality of and reduce spending on health care through alternative payment models such as bundled payment. Bundled payment models are predicated on the theory that aligning financial incentives for all providers across an episode of care will lower health care spending while improving quality. Whether this is true remains unknown. Using national Medicare fee-for-service claims for the period 2011-12 and data on hospital quality, we evaluated how thirty- and ninety-day episode- based spending were related to two validated measures of surgical quality- patient satisfaction and surgical mortality. We found that patients who had major surgery at high-quality hospitals cost Medicare less than those who had surgery at low-quality institutions, for both thirty- and ninetyday periods. The difference in Medicare spending between low- and highquality hospitals was driven primarily by postacute care, which accounted for 59.5 percent of the difference in thirty-day episode spending, and readmissions, which accounted for 19.9 percent. These findings suggest that efforts to achieve value through bundled payment should focus on improving care at low-quality hospitals and reducing unnecessary use of postacute care.