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OBJECTIVES: To understand hospitals' approaches to spending reduction in commercial episode-based payment programs and inform incentive design. STUDY DESIGN: Qualitative arm of an explanatory sequential mixed-methods study involving semistructured interviews with hospital leaders participating in a statewide quality improvement collaborative with novel episode-based incentive payments introduced by the state's largest commercial payer. METHODS: We recruited 21 leaders from 8 purposively selected, diverse hospitals with both high and low performance. Video teleconference--based interviews followed a standardized protocol and addressed 4 domains: choice of clinical condition for evaluation, strategies for episode spending reduction, best practices for success in earning incentives, and barriers to achievement. Rapid qualitative analysis with purposeful data reduction was employed to generate a matrix of key themes within the study domains. RESULTS: Strategies were similar between high- and low-performing hospitals. When selecting conditions, some hospitals focused on areas of underperformance, aiming for improvement opportunities, whereas others chose conditions already achieving highest efficiency. Many tried to synergize with other ongoing improvement initiatives and clinical areas with established leaders and champions. Key strategies included data-driven improvement, care standardization, and protocol dissemination. Best practices for success included readmission prevention and postacute care spending containment. CONCLUSIONS: The findings highlighted hospitals' most common strategies and approaches, providing several insights into optimal design of commercial episode-based incentives: They must be lucrative enough to earn attention or consistent with larger federal programs; hospitals need opportunities to succeed through both improved performance and sustained excellence; and programs may incur malalignment between hospitals and credentialed physicians. [ABSTRACT FROM AUTHOR]