The effects of the Quality-Bonus Program on quality of care in Medicare Advantage

Pay-for-performance (P4P), a policy reform in which payment to providers or health plans is connected to observable quality indicators, is quickly proliferating throughout the health care system. In 2012, Medicare implemented the Quality Bonus Program (QBP) in Medicare Advantage (MA), the market for private Medicare plans. The MA QBP is the first P4P program to incentivize health insurance plans, rather than health care providers. All MA plans are eligible to receive bonus payments based on an overall plan quality rating, which is calculated from a series of performance measures for clinical quality and patient satisfaction. Ratings are based on a “star” rating system, with ratings ranging between 1 (lowest quality) and 5 (highest quality) stars. Incentives in the program are very large: payouts to plans were approximately $3 billion in 2012 – around 20 times larger than the incentives in the first year of Medicare’s hospital P4P program.

In this paper we evaluate the effects of the MA QBP on plan quality by exploiting variation in the size of quality bonuses available to MA plans across counties. This variation is due in part to Medicare’s designation of “double bonus” counties. Subject to meeting two other criteria, counties with MA penetration of 25% in 2009 are eligible for double bonus status, while counties with MA penetration below the 25% cutoff are not.

Using county-level data from 2,929 counties between 2008 and 2013, we test whether greater bonuses are associated with a higher proportion of plans in each county that have quality ratings of 4 stars or higher. Our base specification, controlling for county and year fixed-effects, shows that bonus payments had a positive and statistically significant elasticity of 0.349 (p < .01). Evidence from the timing of program implementation suggests that improvements in quality were driven primarily by an increase in beneficiary enrollment in higher quality plans, rather than within-county improvements in quality.

Some evidence suggests these results may be biased by time-varying unobserved factors. To address this, we used the fuzzy regression discontinuity estimator. Limiting our sample to counties with MA penetration within 15 percentage points of the threshold for double bonuses, we instrument bonus size with whether a county is above the 25% penetration threshold.  First stage results showed a discontinuous relationship between the MA penetration rate and bonus size: meeting the county threshold for double bonuses was associated with a 24.2% increase in bonus size (p < .01). Estimates from the second stage showed that bonus payments had an elasticity of between 0.30 and 0.70, depending on the specification, although this effect was not statistically significant. Based on our results, we cannot reject the null, that larger bonuses in the QBP had no effect on quality. However, the relatively large variance estimates from our second stage leave open the possibility of Type II error.