Hospital Value Based Purchasing

What is Hospital VBP?

The Medicare Hospital Value-Based Purchasing Program (VBP) is an initiative to transition hospital reimbursement away from a fee-based system and a move towards a system that rewards hospitals for providing high quality, cost effective care. The program is budget-neutral, and builds on the existing Hospital Inpatient Quality Reporting (IQR) framework. Statutorily created in the Affordable Care Act and implemented in FY13, this program withholds a certain percentage of hospital Medicare payments upfront, and re-distributes the funds to the participating hospitals based on performance.

How is the program constructed?

Hospital VBP is a budget-neutral withhold and re-distribution program. Eligible hospitals subject to the program have payments withheld in the front-end of the fiscal year, and then funds are redistributed after performance scores are calculated. Below is the scheduled Medicare hospital payment withholding amounts:

• FY 2013 – Withhold 1.00%

• FY 2014 – Withhold 1.25%

• FY 2015 – Withhold 1.50%

• FY 2016 – Withhold 1.75%

• FY 2017 – Withhold 2.00% [maximum onward]

Performance is assessed through achievement and/or improvement amongst hospitals in the program. Achievement is measured against a set national benchmark, and improvement is measured against your own hospital. Eligible hospitals report their performance to CMS. Data is evaluated and scored based on achievement and improvement. If a hospital meets or exceeds the set standards they will be rewarded with higher payments, and if they fail to meet these set standards they will receive lower payments

CMS estimates that in FY15 at 1.5%, the total amount of money collected to redistribute as a value-based incentive will be approximately $1.4 billion, increasing to $2 billion once fully implemented.

What is measured?

In the Hospital VBP program, CMS assesses hospital performance through a selection of quality and efficiency measures. These categories are known as domains, and include:

• Patient Safety

• Clinical Quality

• Patient Experience

• Efficiency

Each of the four domains is assigned a specific value used in calculating total performance. In driving policy, each of the domains is assigned weights to reflect measure emphasis. For example, in FY 2016 CMS finalized clinical care outcome measures a 40% weight—this means that 40% of the entire program adjustment is dictated by performance on outcome measures. CMS continues to update domains, measures, and weights in the annual Inpatient Prospective Payment System (IPPS) proposed rule.

To access the most recent updates on measures in this program, visit:

Why does this program matter?

The ultimate goal of the Hospital VBP Program is to improve the quality of care patients receive. The idea is to incentivize hospitals to achieve certain goals and exceed certain standards by rewarding them with additional Medicare payments at the conclusion of each fiscal year. The initiative seeks to transition away from a fee-for-service system and a movement towards a system that rewards hospitals for providing the quality, cost-effective care.

The program also has the opportunity to drive down healthcare spending. Adjustments to value policy can both incentivize increased quality and also produce a net savings for the Medicare program.  For example, an Institute of Medicine report in September 2012 found that if all states provided care of the quality delivered by the highest performing state, 75,000 fewer deaths would have occurred1. The HQC encourages adoption of policies that drive quality improvement and increase efficiency. Just a 1% improvement in efficiency through value-based payment policies would achieve savings of $15 billion over 10 years in Medicare Part A alone.2

What needs to change to improve the program?

One of the changes the HQC would like to see made to the program is the amount of funding subject to performance distribution. Although this is statutorily capped, we are concerned that 2% is not sufficient enough to drive significant value-based change. This remains one of the primary barriers to the value-based purchasing program.

Additionally, we support the movement towards outcome-based measures and away from processes. Early in the program’s implementation, emphasis was made on process measures. However, as the program matures, we believe outcomes should be the primary focal point of quality measurement.

Finally, to achieve a value-based system, measures of quality and cost/efficiency need to be weighed equally. We support the inclusion of additional measures of cost/efficiency to bolster the program as a reflection of value-based care.


1) Institute of Medicine, Best Care at Lower Cost: The Path to Continuously Learning Health Care In America (Sept. 2012).
2) Figure derived from data: Henry J. Kaiser Family Foundation. Medicare Spending and Financing. Fact Sheet. Publication (#7305-07). November 2012. Figure represents 1% savings in Medicare Part A spending for 2012. 

Copyright 2018 The Healthcare Quality Coalition. All Rights Reserved.  Site map