Medicare’s Value-Based Purchasing Program for Hospitals: Paying More to Low-Cost Hospitals That Provide Low Quality Care

Print Friendly

In 2012, the Centers for Medicare Medicaid Services (CMS) announced expansion of Medicare’s Value-Based Purchasing (VBP) Program for acute care hospitals.  Beginning in Fiscal Year 2015, and as mandated by Congress in the Affordable Care Act,[1] CMS would incorporate a new measure for “Medicare Spending Per Beneficiary.”  CMS suggested this efficiency measure would reward low-cost hospitals and enable “the public to recognize hospitals involved in providing high-quality care at a lower cost to Medicare.”[2]

Unfortunately, under the VBP Program that CMS implemented, low-cost hospitals were financially rewarded for simply being low-cost, regardless of the quality of care they provided.  Researchers analyzing VBP payments to hospitals in 2015 found that low-cost hospitals that provided poor quality of care nevertheless received bonus payments under the hospital VBP Program.[3] 

The issue of rewarding efficiency, regardless of quality, has assumed even greater significance in light of Congress’s expansion of efficiency incentives to post-acute providers in the Improving Medicare Post-Acute Care Transformation Act of 2014.

Medicare Spending Per Beneficiary Measure

On April 19, 2012, CMS added data to its Hospital Compare website to reflect hospitals’ Medicare Spending Per Beneficiary.[4]  CMS proposed to add this measure to the VBP Program as an Efficiency Measure in proposed rules[5] and incorporated the measure into final rules.[6] 

The measure is a claims-based measure based on Medicare Part A and B payments made for services provided to a beneficiary during a stay in an acute care hospital and the 30 days after discharge.[7]  CMS explains that the measure “provides an incentive for hospitals to build stronger relationships with and better understand the providers and suppliers that furnish care for their patients before and after an acute care hospitalization.”[8]

For FY 2015, payments to hospitals under the VBP Program were based on four domains, which were separately weighted:

  • Clinical processes of care, 20%
  • Patient experience of care (HCAHPS), 30%
  • Outcomes of care, 30%
  • Efficiency (Medicare Spending Per Beneficiary), 20%[9]

CMS explained the amount of weight it was giving to the efficiency domain in the first year of its use:

We believe that attributing significant weight to this domain is critical to ensuring that hospitals make efforts to provide effective care on an inpatient basis and build stronger relationships with the providers and suppliers who care for their patients before and after the hospitalization.[10]

Analysis of the Results

Researchers analyzing the VBP Program payments to hospitals in Fiscal Year 2015 found significant differences in the hospitals that received bonuses.  “With the addition of the spending measure and the corresponding decrease in the overall weight of quality measures, hospital quality became a less uniform predictor of bonuses and penalties.”[11]

Reviewing a sample of 2679 hospitals that were eligible to participate in the VBP Program in Fiscal Years 2014 and 2015, for which data were available,[12] the researchers found:

  • 17% of 1339 low-quality hospitals received bonus payments in 2015, compared to 0% of low-quality hospitals in 2014.[13] 
  • “The low-quality hospitals that received bonuses performed significantly worse on almost all measures of quality, compared to the medium- and high-quality hospitals that received bonuses.”[14]
  • There was “a weakly positive relationship between episode spending and overall quality performance.”[15]
  • “High-spending hospitals had significantly higher rates of adherence to clinical processes for seven out of twelve measures.  Outcomes were slightly better at high-spending hospitals compared to low-spending hospitals.”[16]
  • “[T]he best performers in the VBP program (low-spending or high-quality) had the largest bonuses (0.75 percent and 0.94 percent, respectively).”[17]

The researchers expressed concern with the program’s paying bonuses to low-quality hospitals and looked at other CMS VBP Programs.  The physician VBP program makes low-quality physicians ineligible for bonuses, regardless of how low their spending is, and makes high-cost physicians similarly ineligible for bonuses, regardless of how high their quality is.[18]  The Medicare Shared Savings Program provides financial rewards only to Accountable Care Organizations that meet “both quality performance standards and expenditure benchmarks.”[19]

The researchers suggest that either of these approaches “would eliminate rewards to low-quality hospitals and limit the incentives hospitals currently have to trade reductions in spending for improvements in quality.”[20]  Alternatively, CMS could require minimum performance thresholds, separately, for each domain.

The researchers conclude, “CMS should consider adding a minimum quality threshold to avoid

rewarding low-quality hospitals that are also low spending.”[21]

IMPACT Act Expands Use of Measure on Medicare Spending Per Beneficiary

The Improving Medicare Post-Acute Care Transformation Act of 2014 (IMPACT Act of 2014)[22] requires the Secretary to develop measures for post-acute providers, including skilled nursing facilities, inpatient rehabilitation hospitals, long-term care hospitals, and home health agencies, and explicitly includes as one measure “Resource use measures, including total estimated Medicare spending per beneficiary.”[23] 

Implementing this statutory directive, the Centers for Medicare Medicaid Services’ annual updates to Medicare reimbursement for Fiscal Year 2017 for the post-acute providers include proposed measures for Medicare spending per beneficiary.[24]


Value-Based Purchasing Programs have been promoted as ways to improve care in the health care system.  The hospital VBP Program added an independent goal – reducing spending. 

Advocates and policy-makers need to assure that the measures defining “value” in a VBP Program are worth promoting.  Paying more to hospitals that spend less on their patients but have poor outcomes makes little sense.

In light of the research findings with respect to hospitals, Congress and CMS need to reconsider expanding use of this measure to post-acute providers.  As recommended by the hospital researchers, they need, at least, to assure that quality is incorporated into any efficiency measures that are implemented.

July 6, 2016 – T. Edelman

[1] Section 3001 of the ACA, amending Social Security Act §1886(o)(2)(B)(ii), 42 U.S.C. §1395ww(o).
[2] 77 Fed. Reg. 53257, 53588 (Aug. 31, 2012),
[3] Anup Das, Edward C. Norton, David C. Miller, Andrew M. Ryan, John D. Birkmeyer, Lena M. Chen, “Adding A Spending Metric To Medicare’s Value-Based Purchasing Program Rewarded Low-Quality Hospitals,” Health Affairs 35, No. 5 (2016): 898-906 [hereafter “Adding A Spending Metric To Medicare’s Value-Based Purchasing Program Rewarded Low-Quality Hospitals].  An Abstract of the article is available at
[4] 77 Fed. Reg. 53257, 53588.
[5] 76 Fed. Reg. 25787, 23896-23897 (May 5, 2011),
[6] 77 Fed. Reg. 53257, 53583-535
[7] 76 Fed. Reg. 25,787, 25896.
[8] 77 red. Reg. 53257, 53585.
[9] 77 Fed. Reg. 53257, 53605.
[10] 77 Fed. Reg. 53257, 53606.
[11] “Adding A Spending Metric To Medicare’s Value-Based Purchasing Program Rewarded Low-Quality Hospitals,”supra note 2, at 902.
[12] Id. 899.
[13] “Adding A Spending Metric To Medicare’s Value-Based Purchasing Program Rewarded Low-Quality Hospitals,”supra note 2, at 898, 902.
[14] Id. 902.
[15] Id. 900.
[16] Id. 901.
[17] Id. 903.
[18] Id. 904.
[19] Id. 904.
[20] Id. 904.
[21] Id. 905.
[22] Pub. L. 113-185 (Oct. 6, 2014), 42 U.S.C. §1395lll.
[23] 42 U.S.C. §1395lll(d)(1)(A).
[24] The skilled nursing facility proposed rules are at 81 Fed. Reg.24229, 24258-24262 (Apr. 25, 2016),; inpatient rehabilitation hospitals, 81 Fed. Reg. 24177, 24197-24201 (Apr. 25, 2016),; long-term care hospitals, 81 Fed. Reg. 24945, 25216-25220 (Apr. 27, 2016),