The Relationship Between CMS Star Ratings and Financial Improvement

By Deb Jones, Senior Director, Insights Strategy at Tendo

In today’s healthcare environment, hospital quality of care and financial success are more interconnected than ever. One key driver of this relationship is the Centers for Medicare & Medicaid Services (CMS) Star Rating. For short-term acute care hospitals, this rating, which is released annually and ranges from one to five stars, serves as a publicly reported measure of quality. The rating evaluates several core components of quality care: patient experience, clinical outcomes, safety, and efficiency. Beyond being a measure of quality, the CMS Star Rating also has a measurable impact on financial performance.

Beyond serving as a quality benchmark, the CMS Star Rating has a direct financial impact. Higher ratings can lead to stronger payer negotiations, increased patient volume, and higher reimbursements, while lower ratings can result in financial penalties and lost revenue opportunities. Given the financial pressures hospitals face today, optimizing documentation and quality metrics is essential to maintaining both high standards of care and a healthy bottom line.

Why CMS Star Ratings Matter Financially

Hospitals with higher star ratings typically see several key financial benefits. Studies have shown that higher-rated hospitals tend to have higher patient volumes, particularly for elective procedures, which are often more profitable. Consumers perceive four or five-star hospitals as safer and more trustworthy, driving their care decisions accordingly. Additionally, consumers in general are more savvy than ever, using online tools and public data to guide purchasing decisions, and healthcare is no exception. Just as shoppers rely on reviews and ratings for major purchases, patients increasingly treat hospital ratings as an essential part of choosing where to receive care.

Additionally, CMS Star Ratings are considered by commercial payers when developing preferred networks or negotiating value-based contracts. A hospital with a higher rating is more likely to be included in preferred networks, leading to higher patient volumes and stronger negotiating positions.

The Link Between Quality and Cost Control

The core components that determine a hospital’s CMS Star Rating, including mortality rates, readmission rates, complication rates, and patient safety indicators, are also directly tied to financial performance. Reducing complications and readmissions not only boosts star ratings but also lowers costly penalties from CMS programs such as the Hospital Readmissions Reduction Program (HRRP) and the Hospital-Acquired Condition Reduction Program (HACRP).

In addition, accurate clinical documentation and appropriate risk adjustment are critical to both star rating accuracy and revenue optimization; capturing severity through proper documentation can lead to improved Diagnosis-Related Group (DRG) assignments and, in turn, higher reimbursement for the care provided.

In other words, investments in clinical quality and documentation improvements often have dual returns: they improve the hospital’s public quality profile while directly reducing avoidable costs. In the long term, this creates a more efficient financial model with fewer wasted resources and greater predictability.

Market Share and Competitive Advantage

Higher-rated hospitals are positioned more favorably in competitive markets. In urban and suburban areas with multiple healthcare choices, the CMS Star Rating can act as a differentiator. Hospitals with top ratings attract not only more patients but also more talented physicians and nurses, fueling further improvements in both care delivery and financial strength.

Furthermore, hospitals with higher ratings tend to attract greater philanthropic support and grant funding. Foundations and donors prefer to associate with institutions recognized for excellence, providing additional resources for innovation and capital projects.

Conclusion

The CMS Star Rating for is more than just a measure of clinical performance,  it’s a financial lever. Hospitals that invest in quality improvement initiatives, clinical documentation accuracy, patient safety, and experience management are likely to see stronger ratings and, as a result, financial improvement.

The relationship is cyclical: better performance leads to higher ratings, which leads to stronger financial outcomes, allowing for reinvestment in patient care and operational efficiency. In today’s healthcare landscape, pursuing a higher CMS Star Rating isn’t just about recognition; it’s a smart financial strategy that forward-thinking hospitals can’t afford to ignore.

References

Centers for Medicare & Medicaid Services (CMS).

Overall Hospital Quality Star Rating Methodology.

Available at: https://www.cms.gov 

Centers for Medicare & Medicaid Services (CMS).
Hospital Readmissions Reduction Program (HRRP).
Available at: https://www.cms.gov/medicare/payment/prospective-payment-systems/acute-inpatient-pps/hospital-readmissions-reduction-program-hrrp

Centers for Medicare & Medicaid Services (CMS).
Hospital-Acquired Condition (HAC) Reduction Program.
Available at: https://www.cms.gov/medicare/medicare-fee-for-service-payment/acuteinpatientpps/hac-reduction-program

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