In October 2014, the Centers for Medicare & Medicaid Services began reducing Medicare payments by 1% for the bottom performing quartile of hospitals under the Hospital-Acquired Condition Reduction Program (HACRP). A tight clustering of HACRP scores around the penalty threshold was observed resulting in 13.2% of hospitals being susceptible to a shift in penalty status related to single decile changes in the ranking of any one of the complication or infection measures used to compute the HACRP score. The HACRP score also was found to be significantly correlated with several hospital characteristics including hospital case mix index. This correlation was not confirmed when an alternative method of measuring hospital complication performance was used. The sensitivity of the HACRP penalties to small changes in performance and correlation of the HACRP score with hospital characteristics call into question the validity of the HACRP measure and method of risk adjustment.