Medicare P4P

Effect of P4P on Hospital Profits

How do value-based purchasing programs affect hospitals’ bottom lines? This is a particularly important question as the Affordable Care Act (ACA) mandates that CMS reward high-quality, low-cost hospitals with bonuses and give financial penalties to low-quality, high-cost hospitals. In 2003, CMS began a pay-for-performance (P4P) demonstration. Using this demonstration as a natural experiment, Kruse et al. (2012) aims to determine how P4P affect hospitals financials.


The study examines patients admitted to hospitals for an acute myocardial infarction (AMI), primary diagnosis code 410.x1. Beneficiaries who were transferred to other hospitals, that were enrolled in Medicare Advantage, that were discharged to hospice, or that were eligible for Medicare due to ESRD or disability status. Critical Access Hospitals (CAHs) were excluded from the sample.

This approach compares the changes in hospital revenues, hospital costs, and Medicare payments for hospitals subject to the policy change of P4P implementation with the changes in revenues, costs, and payments of a comparison group of hospitals not subject to P4P, from fiscal year 2002 through fiscal year 2005, spanning the initiation of P4P.

Specifically, the authors:

…compared these 260 P4P hospitals to a group of comparison hospitals drawn from the pool of all acute care hospitals in the United States that did not participate in the P4P demonstration project (n = 3,335). Logistic regression was used to estimate the propensity score, defined for each hospital as the probability of being enrolled in the P4P demonstration project, where the dependent variable was an indicator of enrollment in P4P, and the independent variables were hospital characteristics in the 4 years prior to the start of the P4P project (fiscal years 2000–2003). To predict the propensity of enrollment in P4P, we used hospital characteristics known to be related to hospital quality and quality improvement: number of beds, ownership status, teaching status, accreditation by the Joint Commission, registered nurse- and licensed practical nurse-to-bed ratios, percentage of Medicare admissions, urban or rural location, the percentage of a hospital’s patient days that are attributable to low-income patients, and level of market competition using the Herfindahl–Hirschman Index (defining markets as Hospital Service Area from the Dartmouth Atlas). To ensure that these two groups of hospitals were on similar cost and quality trajectories in the years prior to the initiation of P4P, we also included both the level of costs (i.e., total hospital costs for patients with AMI) and quality (i.e., average 30 days risk-standardized mortality rate for AMI) as well as the change in these two factors over the 4 years prior to the initiation of P4P.


The primary data source for this study was Medicare claims from fiscal years 2000 to 2005.

We supplemented Medicare claims data with hospital-level data from the annual Medicare Cost Reports (to obtain cost-center-specific cost-to-charge ratios), a variety of sources for hospital characteristics (including the Medicare Cost Reports, Impact file, and Provider of Services file) and publicly available data on hospital performance from the CMS Website Hospital Compare for calculation of P4P bonus payments.


How big were the bonuses hospitals received? “Average bonuses over the 2-year post-P4P period were $41.32
per AMI admission at P4P hospitals (averaged across all P4P hospitals whether or not they received a P4P bonus). Among hospitals that did receive a bonus payment these bonuses were on average $118.75 per AMI admission.”

The difference-in-difference results for changes in Medicare payments associated with P4P were also small and not statistically significant. Medicare payment for the index hospitalization was $28.83 (0.2 percent) higher per
admission to P4P hospitals compared with non-P4P hospitals in the year after P4P was implemented and the difference was not statistically significant. Medicare payments for posthospitalization care decreased by $98.27 per admission (0.5 percent) over the 2 years after P4P was implemented, a nonstatistically significant difference. We also found no statistically significant difference in total 1-year Medicare payments for patients seen at the two hospital groups.

Although the authors cannot directly observe investments in quality improvement, their results confirm other studies (Lindenauer et al. 2007; Werner et al. 2011) that indicate that P4P does not have a direct relationship to hospital costs.

Despite the fact that Medicare made over $17 million in bonus payments to hospitals, overall Medicare payments to these hospitals did not rise. This finding suggests that P4P may have generated offsets for Medicare such as decreased rates of complications/readmissions at P4P hospitals.


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