The HVBP program affects Medicare payments to approximately 3,000 acute care hospitals for the inpatient services provided to Medicare beneficiaries. Hospitals are included in the HVBP program if they are paid through Medicare’s Inpatient Prospective Payment System. Thus, hospitals not paid through this system, such as critical access hospitals, are not subject to payment adjustments by the HVBP program. By law, the HVBP program is budget neutral, which means that the total amount of payment increases, or bonuses, that it awards 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 accomplish this, CMS calculates each hospital’s payment adjustment percentage by applying a fixed percentage decrease, and then adding back percentage increases based on the hospital’s assessed quality performance in prior years. As specified in PPACA, the initial percentage reduction grew from 1.0 to 1.5 percent from fiscal year 2013 to fiscal year 2015, and will reach a maximum of 2 percent in fiscal year 2017. The percentage increases added back are based on a hospital’s performance on each quality measure included in the HVBP payment formula. For each of these HVBP quality measures, CMS considers both the results of a hospital’s absolute performance and the changes in its performance over time, and then counts the better result toward the hospital’s quality score. The total quality score is derived from a hospital’s performance on all the HVBP quality measures. If a hospital obtains a percentage increase or supplement from its HVBP total quality score that exceeds the initial percentage reduction, it receives a net increase, or bonus, from HVBP for that year. If the increase from its total quality score is smaller than the initial reduction, the hospital receives a net decrease, or penalty, in payments compared to what it otherwise would have received without the HVBP program. The HVBP quality measures are distributed across several different performance categories—known as domains—that comprise a set of related quality measures. The number of domains included in the formula has grown from two (clinical process and patient experience measures) in fiscal year 2013 to four (adding patient outcomes and efficiency to the original two). Each domain consists of multiple quality measures, except for efficiency which consists solely of the Medicare Spending per Beneficiary measure. Across all of the domains, the number of measures included in the HVBP payment formula has grown from 20 in fiscal year 2013 to 26 in fiscal year 2015. Before quality measures can be added to the HVBP formula, they must first have been publicly reported under the IQR program for at least one year. CMS makes adjustments each year— usually providing several years notice—to the measures to be included in the HVBP payment formula in future years and to the relative weights applied to the quality domains in calculating each hospital’s total quality score. For example, in fiscal year 2013, 70 percent of the total quality score was based on clinical process measures. In fiscal year 2015, clinical process measures represented 20 percent of the total score. (See appendix II for a list of all the IQR measures included in the HVBP program.) Once CMS calculates a hospital’s performance across all of the domains and subsequently determines its corresponding bonus or penalty, the inpatient Medicare payment for each discharged patient is adjusted up or down throughout the fiscal year based on the size of the hospital’s bonus or penalty. (For two hypothetical examples, see fig. 1.) Only a portion of the total Medicare payment is affected, however. For example, the HVBP bonus or penalty does not alter certain add-on payments, such as those that compensate hospitals for serving a disproportionate share of low- income patients or for providing medical education. As a result, hospitals caring for large proportions of low-income Medicare or Medicaid patients and major teaching hospitals have a lower proportion of their total Medicare payments affected by their HVBP bonus or penalty, compared to other hospitals that do not receive these add-on payments. Most hospitals received a bonus or penalty from the HVBP program of less than 0.5 percent of applicable Medicare payments in each of the first three years of the program. Small hospitals and hospitals with better financial performance generally had higher payment adjustments, that is, larger bonuses or smaller penalties. Among the subgroups we analyzed, we found that safety net hospitals received lower payment adjustments compared to hospitals overall, but the gap narrowed over time. Small rural and small urban hospitals had similar or better results than hospitals overall. In each of the HVBP program’s first three years, a large majority of hospitals—between 74 percent and 93 percent—received a bonus or penalty of less than 0.5 percent. (See fig. 2.) Roughly the same number of hospitals received bonuses and penalties, with more bonuses awarded in fiscal year 2013 and fiscal year 2015, and more penalties awarded in fiscal year 2014. The amount of the annual median bonuses and median penalties increased slightly each year. The median bonus in 2015 was 0.32 percent of applicable Medicare payments and the median penalty was 0.26 percent. (See table 1.) In dollar terms, most of these annual bonuses or penalties were less than $50,000. For example, in fiscal year 2015, 52 percent of hospitals received bonuses or penalties that led to payment adjustments of less than $50,000, and 72 percent of hospitals had payment adjustments of less than $100,000. The size of bonuses or penalties, when measured in dollars, is a function of both the percentage bonus or penalty and the total amount of applicable Medicare payments a hospital is owed. In the aggregate, the HVBP program redistributed about $140 million dollars from hospitals that received penalties to hospitals that received bonuses in 2015. We found that smaller hospitals generally had higher payment adjustments—that is, larger bonuses or smaller penalties—than larger hospitals in the HVPB program’s first three years. Specifically, hospitals with 60 beds or fewer had the highest median payment adjustments in fiscal years 2013 and 2015, from among the five different hospital size categories (by number of beds) that we analyzed. In fiscal year 2015, the overall median payment adjustment for hospitals with 60 beds or fewer was a bonus of 0.38 percent. In contrast, hospitals in the categories with the largest number of beds—those encompassing 201 to 350 beds and more than 350 beds—had the lowest median payment adjustments in fiscal year 2015. (Hospitals with more than 350 beds also had the lowest median payment adjustments in fiscal year 2013, but the differences among several of the categories were small.) See appendix III for the results of our analysis of hospital bed size categories. In addition, we found that hospitals with better financial performance, as measured by net income, generally had higher payment adjustments under the HVBP program. In each of the HVBP program’s first three years, hospitals with the highest net income had higher payment adjustments than hospitals with negative net income. Hospitals with net income of more than 5.0 percent received the highest median bonuses from among the seven net income categories that we analyzed. (See appendix IV.) Hospitals with lowest net income from among the categories we analyzed—negative margins of greater than -5.0—had among the lowest median payment adjustments in the HVBP program in fiscal years 2013 and 2014. However, the pattern for this group of hospitals with the lowest net income did not continue for fiscal year 2015, as these hospitals had median payment adjustments that were higher than those of hospitals in some other net income categories. Safety net hospitals consistently had lower median payment adjustments—that is, smaller bonuses or larger penalties—than hospitals overall. These adjustments ranged between .07 and .12 percentage points lower in the program’s first three years, with the smallest gap coming in fiscal year 2015. (See table 2.) Safety net hospitals exceeded hospitals overall in scores for efficiency but had lower scores each year for the other three HVBP domains. (See appendix V.) Therefore, one reason why the gap narrowed in fiscal year 2015 was the addition of the efficiency domain to the HVBP formula in that year. In contrast, small urban hospitals had higher median payment adjustments—that is, larger bonuses or smaller penalties—than hospitals overall during the program’s first three years. The greatest difference was in fiscal year 2015, when small urban hospitals had a median payment adjustment 0.22 percentage points higher than hospitals overall. Small urban hospitals had generally higher scores across each of the HVBP program’s performance domains compared to hospitals overall in all three years, with the exception of the patient outcomes domain in fiscal year 2014. Compared to safety net and small urban hospitals, small rural hospitals’ median payment adjustments more closely mirrored those of hospitals overall. In two of the program’s first three years, the median payment adjustment for small rural hospitals was within 0.02 percentage points of the median for all hospitals, before increasing relative to hospitals overall in fiscal year 2015. Small rural hospitals generally had higher median scores on the patient experience and cost efficiency domains than hospitals overall and had lower median scores on the clinical processes and patient outcomes domains. As with hospitals overall, most safety net, small urban, and small rural hospitals received bonuses or penalties of less than 0.5 percent in each of the program’s first three years. (See appendix VI.) However, the proportion of these hospitals with bonuses or penalties of less than 0.5 percent was generally lower than for hospitals overall, with the largest differences in fiscal year 2015. For example, 59 percent of small urban hospitals received payment adjustments of less than 0.5 percent in fiscal year 2015—compared to 74 percent for hospitals overall. In the same year, about 36 percent of small urban hospitals received bonuses of 0.5 percent or greater, compared to 18 percent of hospitals overall. Our analysis found no apparent shift in HVBP quality measure trends during the initial years of the program, but such shifts could emerge over time as the program implements planned changes. The same pattern held for most quality measures not included in the HVBP program.