Measuring performance in healthcare remains a challenge. The use of health outcomes rather than structure and process indicators is considered as the way forward, but outcome-based results risk being biased by selection. Accounting for such selection bias is more difficult in settings with small-sized providers and low chances of resident health improvement, like in the case of nursing homes. In this paper we (i) measure the health outcomes of Dutch nursing homes in terms of mortality and avoidable hospitalizations among residents, (ii) we adopt a novel approach to test for selection bias and (iii) we examine the relationship between outcomes and other nursing home quality indicators and characteristics. Using administrative data from more than 110,000 residents, we estimate the performance of the 849 largest nursing homes in the Netherlands in the period 2015–2019. Controlling for an extensive set of observable case-mix variables, we first test for the presence of selection bias using a distance-based instrumental variable. We do not find any evidence for such a structural bias. While the wide confidence intervals of the estimates display considerable imprecision, our results do reveal substantial differences between top and bottom performing nursing homes. Because the outcome-based estimates turn out to be only weakly correlated with other quality indicators, we conclude that our mortality and avoidable hospitalization-based indicators provide important complementary information. When small sample issues and case-mix differences are adequately accounted for, outcome-based indicators can provide useful policy guidance for quality improvement in nursing homes.