More hospitals are receiving penalties than bonuses in the second year of Medicare’s quality incentive program, and the average penalty is steeper than it was last year, government records show.

Medicare has raised payment rates to 1,231 hospitals based on two-dozen quality measurements, including surveys of patient satisfaction and—for the first time—death rates. Another 1,451 hospitals are being paid less for each Medicare patient they treat.

For half the hospitals, the financial changes that started last month are negligible: they are gaining or losing less than a fifth of one percent what Medicare otherwise would have paid. Others are experiencing greater swings. Gallup Indian Medical Center in New Mexico, a federal government hospital on the border of the Navajo Reservation, will be paid 1.14 percent less for each patient. Arkansas Heart Hospital in Little Rock, a physician-owned hospital that only handles cardiovascular cases, will get the largest bonus, 0.88 percent.

The bonuses and penalties are one piece of the health care law’s efforts to create financial incentives for doctors and hospitals to provide better care. They come at a tumultuous time as the technical problems of the healthcare.gov insurance portal and premium prices are stoking questions about the law’s viability. The incentives are among the law’s few cost-control provisions that have kicked in, but it is too early to tell how effective they will be in making hospitals operate more efficiently.

“This program is driving what we want in health care,” said Dr. Patrick Conway, Medicare’s chief medical officer. He said most hospitals have improved since the program began a year ago. However, even some hospitals that have gotten better are still losing money because they are not scoring as well as others or have not improved as much.

Across the country, hospital executives say they have put renewed focus on excellence in the areas that are judged. Some have clamped down on nighttime noise, one of the questions patients are asked about, by replacing squeaky wheels on food carts and discouraging nurses and workers from chatting on cell phones outside of rooms. Others have scrambled to ensure heart attack patients always get an angioplasty within 90 minutes of arrival because that is part of the scoring. Some private insurers have adopted similar incentives.

“The thing about the government, if they start paying attention to it, we have to scramble around to pay attention to it,” said Dr. Leigh Hamby, chief medical officer at Piedmont Healthcare, a hospital system in Georgia. “It gets us moving.”

Hospitals in Maine, Massachusetts, Nebraska, New Hampshire, North Carolina, Utah and Wisconsin are faring the best, with 60 percent or more of hospitals getting higher payments, according to a Kaiser Health News analysis. Medicare is reducing reimbursement rates for at least two-thirds of hospitals in 17 states, including California, Connecticut, Nevada, New Mexico, New York, North Dakota, Washington and Wyoming, as well as the District of Columbia.

How A Hospital Is Rated

Under the program, known as Hospital Value-Based Purchasing, Medicare reduced payment rates to all hospitals by 1.25 percent. It set the money aside in a $1.1 billion pot for incentives. While every hospital is getting something back, more than half are not recouping the 1.25 payment they initially forfeited, making them net losers. The payment adjustments are applied to each Medicare patient stay over the federal fiscal year that started Oct. 1 and runs through September 2014. The potential bonuses and penalties were higher than they were last year, when the maximum at stake was 1 percent.

To assess quality, Medicare looked not only at how hospitals scored in comparison with each other, but also how much each improved from two years ago compared to other hospitals. A hospital is judged on whichever score is higher, so some hospitals with subpar quality rankings are still getting more money because they showed vast improvement. It won’t be clear how much any hospital’s bonuses and penalties amount to in dollar figures until next October because it depends on how much a hospital ultimately bills Medicare.

This year, 45 percent of a hospital’s score is based on how frequently it followed basic clinical standards of care, such as removing urinary catheters from surgery patients within two days to decrease the chance of infections. Thirty percent of the score is based on how patients rate the way they felt they were treated in the hospital, such as whether the doctors and nurses communicated well.

Medicare added its first measure of a medical outcome, looking at death rates of patients admitted for heart attacks, heart failure or pneumonia.Those mortality rates, calculated from the number of Medicare patients who died in the hospital or within a month of discharge, count for 25 percent of a hospital’s score.

The incentive program has received a mixed reception among hospital executives. Some complain that patients’ views sometimes are swayed by the swankiness of the hospital, and that hospitals that treat the very sickest patients often get the worst evaluations. Physician-owned hospitals that focus on just a few specialties have tended to do particularly well in the program, as evidenced by the Arkansas Heart Hospital’s record bonus this year. Some leaders also object that even if they show improvements, their hospital can lose money if the improvements are not as great as others.

Will Penalties Bring Change?

Researchers are unsure whether the penalties are significant enough to trigger major improvements, especially in areas such as mortality, where there’s no definitive explanation for why some hospitals do such a better job than others in keeping patients alive.

“Shame and penalties, I don’t know if that’s the best way to get organizations to change,” said Leslie Curry, a researcher at the Yale School of Public Health. Her work has found that hospitals with low mortality rates are the ones where it is a priority of executives and where there is a culture where front-line workers such as nurses and lab technicians feel comfortable raising concerns to doctors and devising better methods. “The fiscal penalties are nominal, frankly, in the scheme of things,” she said.

Others say even small differences in payments provide strong encouragement for hospitals to improve. “Sometimes institutions may think they’re performing excellently until they see outside data that compares to your peers,” said Dr. Richard Bankowitz, the chief medical officer of Premier, a group that works with hospitals to improve quality. “People are motivated to excel. Nobody wants to be in the bottom quartile anymore.”

The addition of mortality rates into the scores provides hospitals with their biggest challenge yet. Amanda Berra, a consultant at The Advisory Board, a Washington health care consulting firm, interviewed 40 chief medical officers at hospitals about mortality rates. “They were very split. About half of them said you could not have a more powerful measure. On the other side we heard people who were really unenthusiastic,” she said. “We heard that the data is not super meaningful. They felt they had drastically improved in recent years and have kind of gotten where they could go.”

The average penalty grew to 0.26 percent, up from 0.21 percent in the first year of the program. North Georgia Medical Center in Ellijay is the only hospital besides Gallup to lose more than 1 percent of its reimbursements: it will lose 1.04 percent. Denver Health Medical Center, a highly respected safety-net hospital, is losing 0.71 percent of its reimbursements. The hospital that was penalized the most last year, Auburn Community Hospital in upstate New York, reduced its 0.90 penalty, but will still lose 0.55 percent.

The average bonus was 0.24 percent, almost the same as last year’s 0.23 percent. Large bonuses are going to some major teaching hospitals, such as Thomas Jefferson University Hospital in Philadelphia and Duke University Hospital in Durham, N.C. Most are being distributed among smaller institutions, such as Pikeville Medical Center in Kentucky.

“The dollars are less important in terms of impact than the fact that the nation is sending a signal through the payment mechanism that there’s something to be worked on in the care we deliver,” said Nancy Foster, an executive at the American Hospital Association. “It’s a national symbol to health care providers that here is an area where you can do better.”

Many Past Winners Continue To Get Bonuses

Most winners from last year stayed winners and losers stayed losers. But there were some switches. Oaklawn Hospital in Marshall, Mich., improved its score the most from last year. In place of a 0.26 penalty, Oaklawn will receive a 0.65 percent bonus. A number of prominent academic medical centers also turned around their scores. Vanderbilt University Medical Center in Nashville, Massachusetts General Hospital in Boston, New York-Presbyterian Hospital in Manhattan, Cedars-Sinai Medical Center and Ronald Reagan UCLA Medical Center, both in Los Angeles, and Yale-New Haven Hospital were among the 300 places that went from a penalty to a bonus.

A total of 416 hospitals that won bonuses last year will be penalized this year. Centura Health-St. Thomas More Hospital in Canon City, Colo., dropped from a 0.08 percent bonus to a 0.72 percent penalty, the largest decrease.

This program is one of several Medicare has launched to make hospitals and doctors pay more attention to how their treatments compare with other hospitals, and to be more careful with public money. Medicare gives bonuses to the private Medicare Advantage insurance plans that score well on quality metrics. In 2015, the health law calls for the government to begin a quality payment program for physician groups of 100 professionals or more, and that is to be expanded to all doctors by 2017. The goal of all these programs is to replace the current financial incentive in Medicare, in which the only way for a hospital to get paid more is to perform more procedures and take on more patients.

For hospitals, the quality payments come on top of Medicare’s penalties on 2,205 hospitals with higher than expected readmission rates. The agency is doling out a maximum punishment this year of 2 percent. As a result two out of three hospitals are losing money starting last month from the combined effects of the quality and readmissions programs. Pineville Community Hospital in Kentucky is losing 2.57 percent of its reimbursements, the largest penalty in the country. Twenty-one other hospitals are losing 2 percent or more. These cuts come on top of reductions in special payments that go to hospitals that treat large numbers of low-income people.

Only 729 hospitals will end up with an increase in payments from the combined readmissions and value-based programs. Maine Coast Memorial Hospital in Ellsworth fared the best, gaining 0.80 percent.

Hospitals that are designated as critical access facilities, certain cancer hospitals and places with too few cases to be accurately measured were excluded from both programs.

Maryland hospitals are exempt because that state has a unique payment arrangement with Medicare.

Medicare relies on information found on hospital bills to determine the quality of care. In judging death rates, Medicare looked at patients admitted from July 2011 through June 2012, and compared those rates with how the hospitals performed between July 2009 and June 2010. For the clinical and patient satisfaction measures, Medicare assessed hospital performances from April 2012 through December 2012, and compared them with scores during the same months in 2010.

The amount of money at stake increases to 1.5 percent of payments in October 2014, and continues to grow by a quarter percent until it reaches 2 percent.

Medicare is planning to add new measures next year, including comparisons of how much patients cost Medicare at different hospitals and rates of medical mishaps and infections from catheters.

In addition, the maximum readmission penalties grow to 3 percent next year, and Medicare is launching a third incentive program that takes an additional 1 percent of payments away from hospitals with the most patients who suffered injury or infection during their stay.

Combined, these three quality programs have the potential to strip away as much as 5.5 percent of Medicare payments from the worst performing hospitals starting next October.

“We’re moving more toward outcomes measures,” Conway said. “We’re moving away from volume and toward quality.”

Read More:

– Data For Individual Hospitals (interactive chart)

– Downloadable CSV spreadsheet

– State Averages

– Methodology

jrau@kff.org

This article was produced by Kaiser Health News with support from The SCAN Foundation.