Each year, CMS evaluates approximately 3,000 acute care hospitals participating in HVBP on their performance in prior years on a series of quality and efficiency measures. Prior to the HVBP program, hospitals received slightly higher Medicare payments for submitting data on measures within CMS’s public Inpatient Quality Reporting (IQR). Beginning in fiscal year 2013, the HVBP program provided new bonuses and penalties that were based on each hospital’s performance on a subset of these measures. Each individual hospital’s performance is calculated for each measure within a domain using a baseline period and a performance period, both of which are in prior years. For each of the HVBP measures, CMS considers both the results of a hospital’s absolute performance— awarding achievement points if performance on a measure was at or above the median for all participating hospitals—and improvements in its performance over time—awarding improvement points if current performance had improved. CMS uses the higher of these points as the hospital’s score on each measure. Related measures are grouped into specific performance categories, called domains. The domain scores are weighted to develop a total performance score for each hospital. The measures that constitute each domain, the number of domains, and the weighting of the domain scores have changed over the years of the program (see table 1). In fiscal year 2013, HVBP had two quality domains—clinical processes and patient experience; by 2017, two additional quality domains—patient outcomes and safety—and one efficiency domain were added to the program. By law, the HVBP program is budget neutral, which means that the total amount of payment increases, or bonuses, awarded to hospitals deemed to provide higher quality of care must equal the total amount of payment reductions, or penalties, applied to hospitals deemed to provide lower quality of care. To fund the HVBP program, CMS first applies an initial fixed percentage reduction to the amount of each hospital’s Medicare reimbursements for its patients that fiscal year. The initial percentage reduction was 1 percent in fiscal year 2013 and has grown by 0.25 percent each year to the maximum of 2 percent for fiscal year 2017 and beyond, as specified in PPACA. CMS determines each hospital’s payment adjustment based on the hospital’s total performance score relative to all participating hospitals. Hospitals with payment adjustments that exceed the initial reduction receive a net increase, or bonus. Hospitals with a payment adjustment less than the initial reduction have a net decrease, or a penalty. (For two hypothetical examples using the initial percentage reduction for fiscal year 2017, see fig. 1.) These payment adjustments are applied to the inpatient Medicare payment for each discharged patient throughout the upcoming fiscal year. In October 2015, we reported on certain HVBP performance measures prior to and after the implementation of the HVBP program. We found that trends in performance for many of these measures were unchanged since the implementation of the HVBP program. This report included information from interviews with officials from selected hospitals who noted that the HVBP program reinforced ongoing quality improvement efforts but did not lead to major changes in focus. Hospital officials also indicated that there were patient population and community barriers to their quality improvement efforts. In a related report on the HVBP program, HHS noted challenges that rural hospitals face that affect their performance on quality measures and the reliability of their outcome measurements, including lower occupancy rates, higher percentages of uncompensated care, and lower operating margins than urban hospitals. Safety net hospitals generally had lower median quality domain scores in comparison to all hospitals, while small rural and small urban hospitals generally scored higher on quality and efficiency domains during fiscal years 2013 through 2017. Median scores for each of the separate quality domains—clinical processes, patient experience, patient outcomes, and safety—were consistently lower for safety net hospitals and were generally higher for small rural and small urban hospitals than for hospitals overall during fiscal years 2013 through 2017. Specifically, for the four quality domains, we found the following: Clinical processes: The clinical processes median domain scores— which summarize measures for preventive or routine care—were lower for safety net hospitals and generally higher for small urban hospitals than for all hospitals during fiscal years 2013 through 2017. Median clinical processes scores for small rural hospitals were generally lower—between 4 and 9 percent—than for hospitals overall in fiscal years 2013 through 2015 (see fig. 2). Patient experience: Small hospitals consistently had higher patient experience scores—which consist of measures for communication and responsiveness—than hospitals overall, while safety net hospitals had the lowest scores of any of the hospital types (see fig. 3). Patient outcomes: Median scores for the patient outcomes domain— which comprises measures for mortality rates and other results and was added in fiscal year 2014—were generally lowest for small rural hospitals in each year of our analysis, except for fiscal year 2016, when compared to hospitals overall (see fig. 4). Safety net hospitals and small urban hospitals—with the exception of fiscal year 2016— also did not perform as well as all hospitals in the years of our analysis. Safety: Safety scores—which were added in fiscal year 2017 and include measures for infection rates and other complications—were lowest for safety net hospitals and higher for small rural and small urban hospitals than the median scores for hospitals overall. The median score for the safety net hospitals was about 11 percent lower than the median score for all hospitals. Small rural hospitals had the highest median score and small urban hospitals also had a higher median score than hospitals overall. However, 21 percent of all hospitals were missing scores for this new domain in fiscal year 2017. Trends for the efficiency domain, which contains the single cost measure—Medicare spending per beneficiary—were similar to the quality domains in that small hospitals tended to perform better than safety net hospitals and better than hospitals overall from fiscal year 2015, when the domain was added, through fiscal year 2017 (see fig. 5). Safety net hospitals have had the same median efficiency scores as for hospitals overall during the 3 years it has been included in the program. However, over 40 percent of all hospitals had an efficiency score of 0 during these years due to CMS’s methodology for calculating scores. This methodology resulted in a low median score of 10 for all hospitals, though many hospitals had considerably higher efficiency scores. Hospitals’ total performance scores were consistent with the trends in the quality and efficiency domain scores. Specifically, when compared to all hospitals, total performance scores were lowest for safety net hospitals and generally highest for small urban hospitals during fiscal years 2013 through 2017 (see fig. 6). Median payment adjustments generally have varied for all hospitals, and small rural and small urban hospitals, since the program began; however, in most years, the median payment adjustment for safety net hospitals has been a penalty—that is, a negative payment adjustment. In contrast, the small hospitals, as well as hospitals overall, generally had positive payment adjustments, indicating a bonus, with the exception of fiscal year 2014. Small urban hospitals consistently received higher payment adjustments than all hospitals—between 0.03 and 0.36 percentage points higher—every fiscal year. (See table 2.) The majority of all hospitals received a bonus or a penalty of less than 0.5 percent each year of the program (see fig. 7). However, over time, an increasing percentage of hospitals received bonuses of more than 0.5 percent, and by fiscal year 2016, more than one-quarter of all participating hospitals received a bonus of more than 0.5 percent. Compared to all hospitals, a higher percentage of small rural and small urban hospitals received bonuses of more than 0.5 percent, and this disparity has grown as the program continues. An increasing percentage of hospitals have also received penalties of greater than 0.5 percent over time, and safety net hospitals consistently had the highest percentage of penalties of 0.5 percent or more when compared to all hospitals, small rural hospitals, and small urban hospitals. In part, the size of the bonuses and penalties, in dollar terms, has been increasing due to the increase in the initial reduction from 1 percent in fiscal year 2013 to 2 percent in fiscal year 2017 (see table 3). In addition, as more hospitals receive bonuses in excess of 0.5 percent, the difference between the bonuses and penalties has been increasing. For example, in fiscal year 2013, the median bonus and penalty for all hospitals was nearly identical. Over the years, the median bonus has more than doubled, but the median penalty has nearly tripled. For most hospitals, the annual bonus or penalty is less than $100,000, and by the end of the fiscal year 2017, over $690 million will have been redistributed from hospitals that received penalties to hospitals that received bonuses. Safety net hospitals received a smaller percentage of the bonuses and paid a greater share of the penalties than small rural and small urban hospitals. For example, safety net hospitals have received about 5 percent of the bonus dollars and paid approximately 10 percent of the penalty dollars each year. In contrast, small rural and urban hospitals have received an average of about 9 and 12 percent of the bonus dollars, respectively, and both groups of these small hospitals paid about 5 percent or less of the penalties dollars during fiscal years 2013 through 2017. Since the efficiency score was added to the HVBP program in fiscal year 2015, about 20 percent of the hospitals that received bonuses each year had weighted composite quality scores below the median for all hospitals in fiscal years 2015 through 2017 (see table 4). For each fiscal year, a higher percentage of safety net and small rural hospitals received bonuses (between 26 and 36 percent) when compared to all hospitals, despite having quality scores below the median score for all hospitals. The median payment adjustments for the hospitals that received a bonus with lower quality scores were less than median bonuses overall. For example, in fiscal year 2015, the median bonus for all hospitals was 0.32 percent, and the median bonus for the hospitals that received a bonus with composite quality scores below the median was 0.17 percent. Hospitals that received a bonus despite having composite quality scores below the median for all hospitals had sufficiently high efficiency scores to achieve total performance scores that made them eligible for bonuses. Across all hospital types and years, the median efficiency scores for these hospitals ranged from 1.50 and 6.00 times higher than the median efficiency scores for hospitals overall. For example, in fiscal year 2017, the overall median efficiency score for small rural hospitals was 30.00. In contrast, the median efficiency score for small rural hospitals that received a bonus with a composite quality score below the all-hospital median was more than twice as high at 70.00. Table 5 compares two actual hospitals—both of which received a bonus—with similar total performance scores but different composite quality scores. Hospital A outperformed Hospital B in every quality domain except safety and received a composite quality score of 40.00, well above the median of 29.03. While both hospitals had an efficiency score above the median of 10.00, Hospital B’s high efficiency score results in a total performance score above that of the higher quality Hospital A. According to CMS documentation, the agency developed the weighting formula to ensure that the Medicare spending per beneficiary measure— the sole measure in the efficiency domain—would make up only a portion of the total performance score and that the remainder would be based on hospitals’ performance on the other measures. The same documentation stated that the distinct measure of cost, independent of quality, would enable the agency to identify—and subsequently reward through payment adjustments—hospitals involved in the provision of high- quality care at a lower cost to Medicare. However, CMS’s formula for weighting the domain scores to determine a total performance score has created a system that, in some cases, rewards lower quality hospitals that provide care at a lower cost. In a November 2016 report to Congress, CMS indicated that it was aware of reports that the added efficiency metric resulted in some lower quality hospitals receiving bonus HVBP payments in 2015. However, in the report CMS reiterated that its scoring methodology—the weighting of quality domains at 75 percent and the efficiency domain at 25—provided balanced consideration for quality and efficiency and would ensure that high-quality hospitals were being rewarded. Our work shows that CMS has not achieved this balanced consideration as it intended, thereby rewarding some lower quality hospitals due to their high efficiency scores. CMS did not require a complete set of domain scores to participate in the HVBP program after 2015, but instead proportionately redistributed the missing scores’ domain weights to the other domains, including efficiency. As a result, the efficiency score can carry even more than its assigned weight, and hospitals with missing domain scores had efficiency scores that were weighted higher than those of the other participating hospitals. This amplified the contribution of the efficiency domain to hospitals’ total performance scores. The assigned weight for the efficiency score was 20 percent in fiscal year 2015 and 25 percent in fiscal years 2016 and 2017. However, due to the proportional redistribution, a hospital’s efficiency score could be weighted between 25 and 50 percent—rather than the original 20 percent—in fiscal year 2015 and between 26 and 71 percent—rather than the original 25 percent—in fiscal years 2016 and 2017, depending on how many and which domains were missing. Table 6 illustrates the impact of redistributed domain weights on hospitals in fiscal year 2017. Hospital A, the same hospital noted in table 5, is considered a higher quality hospital, with a composite quality score well above the median of 29.03 for all hospitals in 2017. Three other actual hospitals—hospitals C through E—show how the proportional redistribution of weights can dramatically increase the effect that a hospital’s efficiency score can have on its total performance score. Hospital C is missing two domains, together worth 45 percent of the total performance score. The 45 percent is then proportionally redistributed to the other domains so that the clinical processes domain weight increases from 5.00 percent to 9.10 percent and the weights of the patient experience and efficiency domains each increase from 25 percent to 45.45 percent. We also found that hospitals with missing domain scores were more likely to receive a bonus than hospitals with all domain scores. Specifically, in fiscal year 2017, 68 percent of hospitals with missing domain scores received a bonus, compared to 50 percent of hospitals with all domain scores. Of the approximately 20 percent of hospitals that received a bonus with a quality score below the median described earlier, many were also missing domain scores. For example, in fiscal year 2017, 182 of the 345 lower quality hospitals that received a bonus (53 percent) were missing at least one quality domain score. Hospitals with missing domain scores had bonuses that grew to exceed the median bonus payment adjustment for all hospitals. In fiscal 2015, the median bonus adjustment for all hospitals was 0.32 percent. For lower quality hospitals with missing domain scores, the median bonus adjustment that year was slightly lower at 0.31 percent. However, by fiscal year 2017, lower quality hospitals with missing domain scores that received bonuses had a bonus adjustment of 0.74 percent, considerably higher than the median bonus adjustment of 0.54 percent for hospitals overall. CMS decided to proportionally redistribute missing domain scores in order to maintain the relative weights of each remaining domain and reliably score hospitals on their performance. However, the issues we identified with the weighting formula—in that it results in some lower quality hospitals receiving bonuses—are exacerbated for hospitals with missing domain scores. As a result, hospitals with missing domain scores are more likely to get a bonus, and, in some cases, those bonuses are greater than median bonuses overall. Additionally, while CMS intended to keep the efficiency metric independent of quality, the effective weight of the efficiency measure depends on the extent to which hospitals report quality measures. As a result, the balance the agency tried to achieve in the total performance score—allocating 75 percent of the score to the quality domains and 25 percent of the score to the efficiency domain—is no longer achieved. The aim of the HVBP program is to improve hospital quality and efficiency by providing incentives for hospitals to improve their quality of care and to become more cost efficient. Throughout the 5 years of the program, CMS has made modifications to meet these goals by changing quality performance domains and domain weighting from year to year. With the addition of the efficiency domain in fiscal year 2015, CMS signaled the importance of hospitals’ providing care at a lower cost to Medicare, and, in its weighting formula, the agency tried to find balanced consideration for quality and cost. Rather than achieving this balance—which would have allowed the agency to identify and reward higher quality and lower cost hospitals—CMS’s weighting formula has resulted in bonuses for some lower quality hospitals, solely due to their cost efficiency. Because the program is budget neutral, bonuses for lower quality hospitals may result in smaller bonuses for hospitals that are performing well across all domains. The issue is especially stark for between 10 and 25 percent of the hospitals that were missing domain scores in fiscal years 2015 through 2017, which has also contributed to the awarding of bonuses to lower quality hospitals. If CMS continues to use the current formula, it will continue to reward hospitals that do not score well on quality and efficiency metrics. To ensure that the HVBP program accomplishes its goal to balance quality and efficiency and to ensure that it minimizes the payment of bonuses to hospitals with lower quality scores, we recommend that the Administrator of CMS take the following two actions: Revise the formula for the calculation of hospitals’ total performance score or take other actions so that the efficiency score does not have a disproportionate effect on the total performance score. Revise the practice of proportional redistribution used to correct for missing domain scores so that it no longer facilitates the awarding of bonuses to hospitals with lower quality scores. We provided a draft of this report to HHS for comment, and its written comments are reprinted in appendix III. The department indicated that it would examine the formula used for calculating hospitals’ total performance scores and would explore alternatives to the practice of proportional redistribution. While HHS stated it would consider revisions to these practices, it indicated that any changes to the weights of the domains, or the distribution of weights for missing domains, would be evaluated for potential negative impacts and would be subject to notice and comment rulemaking. HHS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the Secretary of Health and Human Services, the CMS Administrator, and other interested parties. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or cosgrovej@gao.gov. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. Table 7 lists the Inpatient Quality Reporting program measures that the Centers for Medicare & Medicaid Services (CMS) used to analyze hospitals’ performance in the Hospital Value-based Purchasing program during fiscal years 2013 through 2017. This table identifies the domain associated with each measure, which measures were used to calculate domain scores each year, the measure code, and a description of each measure. In addition to the contact named above, Martin T. Gahart (Assistant Director), Erin C. Henderson (Analyst-in-Charge), Zhi Boon, Kye Briesath, and Elizabeth Morrison made key contributions to this report. Also contributing were Muriel Brown and Jacquelyn Hamilton. Medicare Value-based Payment Models: Participation Challenges and Available Assistance for Small and Rural Practices. GAO-17-55. Washington, D.C.: December 9, 2016. Health Care Quality: HHS Should Set Priorities and Comprehensively Plan Its Efforts to Better Align Health Quality Measures. GAO-17-5. Washington, D.C.: October 13, 2016. Patient Safety: Hospitals Face Challenges Implementing Evidence-based Practices. GAO-16-308. Washington, D.C.: February 25, 2016. Hospital Value-based Purchasing: Initial Results Show Modest Effects on Medicare Payments and No Apparent Change in Quality-of-Care Trends. GAO-16-9. Washington, D.C.: October 1, 2015. Health Care Transparency: Actions Needed to Improve Cost and Quality Information for Consumers. GAO-15-11. Washington, D.C.: October 20, 2014. Electronic Health Record Programs: Participation Has Increased, but Action Needed to Achieve Goals, Including Improved Quality of Care. GAO-14-207. Washington, D.C.: March 6, 2014. Health Care Quality Measurement: HHS Should Address Contractor Performance and Plan for Needed Measures. GAO-12-136. Washington, D.C.: January 13, 2012. Hospital Quality Data: Issues and Challenges Related to How Hospitals Submit Data and How CMS Ensures Data Reliability. GAO-08-555T. Washington, D.C.: March 6, 2008.

Summary: The HVBP program, enacted as part of the Patient Protection and Affordable Care Act (PPACA), evaluates hospital performance on quality and efficiency (Medicare spending per beneficiary) measures. Based on those results, CMS adjusts Medicare payments, leading to bonuses or penalties for hospitals. The first HVBP payment adjustments started in fiscal year 2013. PPACA included a provision for GAO to assess the HVBP program's impact on Medicare quality and efficiency, including the effects on safety net, small rural, and small urban hospitals. This report addresses (1) hospitals' performance in quality and efficiency categories; (2) how hospitals' payment adjustments have changed over time; and (3) the effect, if any, of efficiency scores on payment adjustments. GAO analyzed CMS documentation and data on performance scores and payment adjustments in each year for all hospitals participating in fiscal years 2013 through 2017. GAO also analyzed results for safety net, small rural, and small urban hospitals and interviewed CMS officials. The Hospital Value-based Purchasing (HVBP) program aims to improve quality of care and efficiency by creating financial incentives for about 3,000 participating hospitals. From fiscal years 2013 through 2017, performance on quality and efficiency measures varied by hospital type. Safety net hospitals—those that serve a high proportion of low-income patients—generally scored lower in quality compared to all participating hospitals. In contrast, small rural and small urban hospitals—those with 100 or fewer acute care beds—scored higher on efficiency compared to all hospitals. Payment adjustments—bonuses or penalties, announced prior to each fiscal year—have varied over time for all hospitals. In four out of the five years of GAO's analysis, small rural and small urban hospitals were more likely to receive a bonus compared to all participating hospitals, while safety net hospitals were more likely to receive a penalty. While a majority of all hospitals received a bonus or a penalty of less than 0.5 percent each year, the percentage of hospitals receiving a bonus greater than 0.5 percent increased from 4 percent to 29 percent from fiscal year 2013 to 2017. In dollar terms, most hospitals had a bonus or penalty of less than $100,000 in fiscal year 2017. Some hospitals with high efficiency scores received bonuses, despite having relatively low quality scores, which contradicts the Centers for Medicare & Medicaid Service's (CMS) stated intention to reward hospitals providing high-quality care at a lower cost. Further, among hospitals that were missing one or more quality scores, the efficiency score had a greater effect on the total performance score because of the methodology used by CMS. This methodology compensated for the missing scores by increasing the weights of all of the non-missing scores. Consequently, hospitals with missing scores were more likely to receive bonuses than hospitals with complete scores. Bonus or Penalty Status of Hospitals Participating in the Hospital Value-based Purchasing Program, Fiscal Years 2015 through 2017 So that lower quality hospitals do not receive bonuses, GAO recommends that CMS revise (1) the methodology used to calculate total performance scores and (2) its method of accounting for missing quality scores. In its written comments, HHS indicated that it would consider revising these two methodologies.