Geography, Not Quality, Drives Hospital Reimbursement

location, location, negotiation…

Commercial reimbursement rates for hospital services vary widely across the United States, contributing to significant differences in healthcare costs across regions and providers. Historically, negotiated prices between hospitals and commercial payers have been considered proprietary, limiting visibility into the factors that influence reimbursement variation. However, in 2022, legislation under the Transparency in Coverage (TiC) ruling became enforceable, requiring commercial payers to publicly publish contracted rates with each contracted provider. This mandate fundamentally altered the reimbursement landscape, enabling, for the first time, systematic, large-scale analysis of negotiated rates across payers, providers, and geographies. However, data availability has surpassed our ability to interpret it. Knowing that rates vary does not explain why they vary, nor does it identify the structural and market conditions that drive those differences.

Despite decades of effort to link hospital reimbursement to care quality, commercial payers do not appear to reward it. Theoretically, hospital characteristics such as size, staffing levels, trauma designation, and teaching status should influence negotiating leverage with payers. Similarly, geographic factors such as population size, income level, and economic distress may reflect underlying market dynamics that shape reimbursement. However, the relative contribution of hospital characteristics compared to broader geographic and market factors remains poorly understood. Moreover, characteristics that confer theoretical leverage do not necessarily translate into realized reimbursement advantages; payers may be more responsive to market conditions than to individual hospital attributes.

The stakes here aren’t just academic. Reimbursement directly allows a hospital to keep a service line open, recruit a specialist, or staff a unit adequately. When reimbursement is inadequate, those are the first things to go, and patients feel it directly: longer travel distances, delayed care, fewer options close to home. Understanding what actually drives reimbursement variation matters because it tells us whether the current system is rewarding the things we want it to reward, quality, capacity, complexity of care, or something else entirely.

Using hospital data linked to the newly available TiC negotiated rates, we compared what happens when you weigh hospital characteristics (bed count, staffing, teaching status, safety grade) against where a hospital sits geographically and how economically distressed its surrounding community is. Spanning over 1,000 general acute care hospitals nationwide, one signal dominated everything else: geography.

What isn’t rewarded

Bed count, teaching status, residency program presence, and hospital safety grade — none of it moved the needle on reimbursement. Safety grade in particular is worth sitting with: it’s a direct, independently audited measure of hospital quality, and it had no relationship to what a hospital gets paid. If payers aren’t pricing in quality or structural investment, what are they pricing in?

Mostly, location. Rural hospitals were paid meaningfully less than urban ones, even after controlling for everything else. Hospitals in more economically distressed communities were paid less too. State-level geographic factors alone explained more of the variation in hospital reimbursement than any hospital characteristic we measured, combined.

There’s one exception: hospitals with more physician staffing did command higher rates, even though nursing staffing didn’t. That’s probably not a true quality signal either — it’s more likely a proxy for case mix intensity and the fact that high-volume specialists tend to concentrate in the same well-resourced markets that already get paid more for geographic reasons.

What financial incentive is there to be elite?

That’s really the question this raises. When so much of reimbursement is driven solely by geography, what financial incentive exists for a hospital to invest in being excellent? Value-based payment reform has largely bet on the idea that market forces will eventually reward better care. This data says that bet isn’t paying off, at least not yet, at the hospital level.

The hospitals absorbing the cost of this are disproportionately the ones serving rural and economically distressed communities — the same hospitals already running on thin margins and already short-staffed. Their lower reimbursement isn’t a reflection of the care they deliver. It’s a reflection of the market they happen to be in. And when a hospital can’t sustain a service line because of underpayment, it shows up downstream as patients traveling farther, waiting longer, and presenting sicker by the time they’re finally seen.

Transparency in Coverage did what it was supposed to do: it made this visible. But visibility isn’t the same as accountability. The next step is using what transparency has revealed to actually build a system that rewards quality rather than ZIP code.

p.s. reach out for any of the stats/specific data and I’d love to chat