In 2016, Medicare’s Hospital-Acquired Condition Reduction Program (HAC-RP) will reduce hospital payments by $364 million. Although observers have questioned the validity of certain HAC-RP measures, less attention has been paid to the determination of low-performing hospitals (bottom quartile) and the assignment of penalties. This study investigated possible bias in the HAC-RP by simulating hospitals’ likelihood of being in the worst-performing quartile for 8 patient safety measures, assuming identical expected complication rates across hospitals. Simulated likelihood of being a poor performer varied with hospital size. This relationship depended on the measure’s complication rate. For 3 of 8 measures examined, the equal-quality simulation identified poor performers similarly to empirical data (c-statistic approximately 0.7 or higher) and explained most of the variation in empirical performance by size (Efron’s R2 > 0.85). The Centers for Medicare & Medicaid Services could address potential bias in the HAC-RP by stratifying by hospital size or using a broader “all-harm” measure.