Introduction
In today’s value-driven healthcare landscape, the CMS Hospital Star Ratings have become one of the most visible indicators of hospital quality. These ratings are not just for patients – they influence hospital strategy, public perception, and even reimbursement rates. This report explains how the star ratings are calculated and explores new research showing how quality scores can impact negotiated prices.
What are CMS Star Ratings?
The Centers for Medicare & Medicaid Services (CMS) uses star ratings to evaluate hospitals, allowing patients to compare provider quality. The star ratings range from one to five stars and provide a snapshot of a hospital’s overall quality by summarizing performance across multiple dimensions of care.
A higher star rating not only enhances a hospital’s reputation but also leads to significant financial benefits, including higher reimbursement rates from Medicare, Medicaid, and private insurers. High ratings can also improve patient trust and retention, attract skilled healthcare professionals, and provide competitive edge in a data-driven healthcare landscape.
CMS assigns star ratings to various healthcare organizations and providers, including hospitals, nursing homes, and home health agencies. Each rating system evaluates different aspects of care based on quality measures specific to the type of facility or services. The information provided in this article relates to acute inpatient and outpatient hospitals.
The star rating is based on five key performance categories, each carrying a different weight in the overall score: Mortality (22%), Safety of Care (22%), Readmission (22%), Patient Experience (22%), Timely and Effective Care (12%). This weighting scheme reflects the relative importance of each category in assessing overall hospital quality, with a stronger emphasis on outcome-based measures.
How are the Star Ratings Calculated?
The primary steps that CMS takes to calculate Star ratings are as follows:
- CMS selects a few dozen measures and standardizes them
- CMS assigns measures to the five measure groups: Mortality; Safety of Care; Readmission; Patient Experience; and Timely and Effective Care
- Measure groups are scored based on all individual calculations
- An overall quality score is determined from scores of the measure groups
- CMS decides if the hospital is eligible for an official overall Star Rating
- Eligible hospitals are assigned to peer groups based on the number of measures calculated
- Hospitals are clustered by similar performance scores and given official CMS Star Ratings
Step 1: Select and Standardize Measures
The first step in calculating the CMS star ratings involves selecting appropriate measures to ensure they accurately reflect hospital quality. The selection process is overseen by the Center for Outcomes Research and Evaluation (CORE) in collaboration with CMS and includes input from the Technical Expert Panel (TEP) and public feedback.
Only measures that are publicly reported for acute inpatient and outpatient care hospitals on Medicare’s Care Compare website are considered eligible. Measures specific to specialty hospitals, such as cancer or psychiatric facilities, are excluded to maintain consistency and comparability among general acute hospitals.
To ensure that only meaningful and reliable measures are included, CMS applies five exclusion criteria:
- Structural measures that cannot be combined with other process and outcome measures
- Non-directional measures where it is unclear if a higher or lower score is better
- Voluntary or non-mandated measures
- Overlapping measures that capture similar information
- Measures reported by fewer than 100 hospitals.
After applying these criteria, 46 measures were deemed eligible for inclusion in the April 2025 star rating. Once measures are selected, CMS standardizes them using Z-scores to convert different types of data to a common scale. This involves calculating a Z-score for each measure using the formula:
Step 2: Assign Measures to Measure Groups
The 46 eligible measures are categorized into five distinct measure groups: Mortality, Safety of Care, Readmission, Patient Experience, and Timely and Effective Care. Each group captures a different aspect of hospital quality, ranging from clinical outcomes to patient-reported experiences.
Calculation Methodology for Each Measure Group
The Mortality measure evaluates the rate at which patients die within 30 days of being admitted to the hospital for specific conditions, including heart attacks, coronary artery bypass graft (CABG) surgery, chronic obstructive pulmonary disease (COPD), heart failure, pneumonia, and strokes. CMS collects mortality data through Medicare claims and administrative records derived from hospital billing information. The seven mortality rates are standardized using Z-scores then averaged to determine the hospital’s Mortality score.
Safety of Care focuses on hospital-acquired infections and complications, including MRSA, C. diff, surgical site infections, and complications from hip and knee replacements. Data is pulled from the National Healthcare Safety Network (NHSN) managed by the CDC and hospital discharge data submitted to CMS. Each safety measure is standardized using Z-scores then averaged to create a single Safety of Care score.
Readmission is broken into three quality measures: unplanned hospital visits overall, unplanned hospital visits by condition, and unplanned hospital visits by procedure. Unplanned hospital visits overall measures the rate of readmission for patients after discharge from the hospital. Unplanned hospital visits by condition measures the hospital return days for patients with heart attack, heart failure, and pneumonia. It also includes the rate of readmission (within 30 days) for patients with COPD, heart attack, heart failure, and pneumonia.
Unplanned hospital visits by procedure includes the rate of readmission for patients with CABG and hip/knee replacement and the rate of unplanned hospital visits after an outpatient colonoscopy, chemotherapy, and surgery. The rates are calculated using Medicare claims and eligibility data, risk adjusted for factors such as age and comorbidities. The individual measures are standardized using Z-scores and averaged to determine the Readmission score.
The Patient Experience measure evaluates patients’ perspectives on their hospital care. CMS implements eight weighted measures from the Hospital Consumer Assessment of Healthcare Providers and Systems (HCAHPS), including nurse communication (22%), doctor communication (22%), staff responsiveness (18%), communication about medicines (18%), discharge information (14%), care transition (14%), cleanliness and quietness (18%), and an overall hospital rating (10%). These measures are converted into a percentage of “Always” or “Yes” answers, normalized using Z-scores, weighted based on importance in hospital quality, and summed to get the Patient Experience score.
Timely and Effective Care evaluates how promptly and effectively hospitals deliver care to patients, covering vaccination rates, ER wait times, and appropriate follow-up care. Data is sourced from medical records and Medicare claims. Each measure is standardized using Z-scores and averaged to get the final score.
Step 3: Calculate Measure Group Scores
In this step, CMS combines the individual measure scores within each group to calculate a single Measure Group Score for every hospital.
For each group (e.g., Mortality, Safety of Care), CMS starts by taking the standardized scores (Z-scores) of all the measures a hospital has reported within that group. These scores are averaged to produce the group’s overall score. While each measure is weighted equally within the group, the actual weight depends on how many measures the hospital reports. For example, if a hospital reports four measures in a group, each measure contributes 25%; if it reports two, each contributes 50%.
Once weighted, the individual scores are summed to calculate the Measure Group Score. These group scores are then standardized again (just like the individual measures) to ensure that they can be fairly combined with other group scores in the next step.
If a hospital does not report any measures in a given group, that group is considered “missing” and is excluded from the calculation. Missing groups are addressed in Step 4 when CMS applies re-weighting.
Step 4: Combine Group Scores into a Summary Score
The summary score is a single numerical value that represents a hospital’s overall performance across all measure groups. This score is used to determine the hospital’s final star rating. The weights assigned to each measure group were developed with significant stakeholder input, including the Technical Expert Panel (TEP) and public comments.
Outcome-based measures (Mortality, Safety of Care, and Readmission) are given higher weights because they directly reflect the quality of care and patient outcomes. Timely and Effective Care is weighted less since it focuses more on process measures rather than outcomes.
Final Weights for Each Measure Group:
- Mortality (22%)
- Safety of Care (22%)
- Readmission (22%)
- Patient Experience (22%)
- Timely and Effective Care (12%)
If a hospital does not report any measures for given group, CMS re-proportions the weight of the missing group(s) across the remaining groups. This ensures that the summary score reflects only the measure groups for which the hospital has reported data. The weight of the missing group is distributed proportionally among the reported groups, using the Hospital Value-Based Purchasing (HVBP) approach for re-weighting.
For example, if a hospital does not report any measures for Patient Experience, the 22% weight is redistributed among the remaining groups. The new weights would be:
- Mortality (28.2%)
- Safety of Care (28.2%)
- Readmission (28.2%)
- Timely and Effective Care (15.4%)
Step 5: Set Minimum Thresholds for Star Eligibility
Setting minimum thresholds ensures that hospitals receive an Overall Star Rating only if there is sufficient data to make a meaningful assessment of their performance. Thresholds balance inclusivity (allowing as many hospitals as possible to be rated) with validity and reliability (ensuring that rates are meaningful and based on adequate information).
To qualify for an Overall Star Rating, a hospital must:
- Report at least three measures in each of at least three measure groups
- At least one of the measure groups must be
Mortality or
Safety of Care - All available measures and measure groups are included in the summary score if the minimum threshold is met – even if some groups only have 1 or 2 measures.
Step 6: Assign Hospitals to Peer Groups
The goal of peer grouping is to ensure fair comparisons by evaluating hospitals against others with similar levels of available data. Peer groups are determined after applying the minimum thresholds (Step 5). Hospitals are assigned to one of three peer groups based on the number of measure groups for which they report at least three measures: a 3-measure, a 4-measure, and a 5-measure group peer group.
Note that while the peer group assignment is based only on the number of measure groups with at least three measures, the summary score calculation includes all measure groups for which the hospital has at least one measure.
Step 7: Apply Clustering to Determine Star Ratings
To convert summary scores into a star rating between one and five stars, CMS applies k-means clustering which groups hospitals with similar performance based on their summary scores.
K-means is a widely used technique to divide data into a pre-specified number of groups (or clusters) based on similarities in their scores. Clustering is performed separately within each peer group (3-measure, 4-measure, and 5-measure groups), ensuring that hospitals are only compared to others with a similar scope of reported measures.
How K-Means Clustering Works for Star Ratings
- Initialization:
CMS specifies five clusters to correspond to the five star rating categories.
Initial cluster centers (means) are selected based on hospital summary scores. - Assignment
Each hospital’s summary score is assigned to the cluster with the closest mean. This assignment minimizes the distance between a hospital’s score and the mean score of its cluster. - Updating Cluster Centers:
After all hospitals are assigned to clusters, the mean score of each cluster is recalculated.
Hospitals are then reassigned to the cluster with the newly calculated closest mean. - Iteration:
The process of reassigning hospitals and updating cluster means repeats until the assignments no longer change between iteration – “convergence.” - Assign Star Ratings:
Once convergence is achieved, the clusters are ranked:
Lowest cluster – 1 star
Highest cluster – 5 stars
Intermediate clusters receive 2, 3, or 4 stars based on their relative performance
The k-means process generates exactly five categories, creating a standardized star rating scale. By minimizing within-cluster variability, this method ensures that hospitals within the same cluster have similar summary scores. Multiple iterations result in reliable and stable cluster assignments. Consequently, hospitals are assigned a star rating based on their performance compared to that of their peers.
Why CMS Star Ratings Matter:
Implications for Reputation, Quality, and Prices
The CMS Overall Star Ratings are designed to make hospital quality more transparent and comparable across facilities. While these ratings provide valuable insight for patients, they also carry real financial implications for hospitals. Higher ratings not only reflect better performance on clinical outcomes and patient satisfaction – they are also associated with improved market positioning and the ability to negotiate higher prices for healthcare services.
A custom analysis of approximately 500,000 provider-level records from Mark Farrah Associates explored the relationship between hospital CMS star ratings and negotiated service prices. The first step involved conducting an ANOVA test to determine whether mean negotiated prices differed significantly across hospitals with 1- to 5-star ratings. The test produced an F-statistic of 43.430 with a p-value of less than 0.001, indicating statistically significant differences between star groups. Figure 1 shows a clear upward trend: as CMS star ratings increase, so do average negotiated prices, with modest variation within each group.
Figure 1: Mean Negotiated Rate by CMS Star Rating
To further quantify this relationship, a regression analysis was performed using the following equation:
Where:
- Priceipt is the negotiated rate for payer i, provider p, and treatment t
- QualityRatingp is the CMS star rating for provider p
- δj and γk are dummy variables controlling for geographic and procedural variation
- εipt is the error term
The coefficient for QualityRating was 27.75, meaning that for each one-unit increase in a hospital’s CMS rating, the negotiated price increases by 27.75 units, on average, after adjusting for state/locality and procedure type.
These findings confirm that CMS Star Ratings go beyond symbolic value. Higher ratings translate into measurable pricing advantages – supporting the idea that hospitals with better reputations are able to negotiate better rates with insurers. For hospitals, this reinforces the strategic importance of quality improvement efforts – not only for clinical outcomes, but for financial viability in an increasingly value-driven healthcare market.
Conclusion
CMS Star Ratings provide a nationally standardized summary of hospital quality, allowing patients, payers, and policymakers to compare providers across key dimensions of care. These ratings reflect performance in clinical outcomes, patient experience, and care delivery efficiency – and they carry real consequences for hospitals’ reputations and financial outcomes.
This report is designed to help providers understand the seven-step methodology CMS uses to assign star ratings, from measure selection and standardization to final clustering. The analysis also includes original research demonstrating that higher CMS Star Ratings are consistently associated with more favorable negotiated service prices.
As value-based care continues to reshape the healthcare landscape, understanding the mechanics and implications of these ratings is essential for any provider seeking to improve quality, remain competitive, and strengthen their financial position.
