So Many Hospitals, So Little Information: How Hospital Value Based Purchasing is a Game of Chance

As part of the 2010 Patient Protection and Affordable Care Act, Medicare hospitals have part of their Medicare reimbursements withheld and then redistributed to hospitals based on quality performance. The Hospital Value Based Purchasing payment reimbursement plan relies partly on ordinal rankings of hospitals to determine how money is redistributed. We analyze the quality metric distributions used for payment and show that there is not enough information to reliably differentiate hospitals from one another near the payment cutoffs; and conclude that a large part of the payment formula is driven by sampling variability rather than true quality information. The implication is that efforts to distinguish hospital quality along certain performance metrics may be futile. We propose and alternative hospital quality ranking methodology based on ranking and selection statistical theory. Acknowledgements: The authors are grateful for comments from Chloe East, Richard Lindrooth, Edward Norton, and Andrew Ryan, as well as by seminar participants at ASHEcon, the Colorado School of Public Health, and the University of Colorado Boulder/Denver Applied Economics Workshop. We would like to thank George Jacobs and Madia Parker Smith for excellent research assistance. Each of the authors declares that (s)he has no relevant or material financial interests that relate to the research described in this paper.