Moneyball in Medicare

One of the most important changes to the US health-care system over the last two decades is the emergence of pay-for-performance to encourage hospitals and other providers to improve quality of care. Unlike fee-for-service reimbursement, these value-based purchasing programs measure aspects of quality and financially reward hospitals that are outstanding or at least improving in their care. Prior research has shown that hospitals often improve more when the marginal financial incentives are larger. However, the exact relationship between marginal financial incentives and year-over-year improvement in measures remains unclear. We use national 2015–18 data on approximately 2,700 hospitals to estimate how hospitals respond to pay-for-performance incentives in the Hospital Value-Based Purchasing (HVBP) Program. We show that this relationship is nonlinear, has strong serial correlation, is generally similar for different types of hospitals (with the exception of hospitals in the most competitive markets responding more strongly), and usually has similar patterns of sign, magnitude, and significance for both measures of marginal incentives. The results are critical for improving public policy for pay-for-performance programs.