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Rachel Grande
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August 11, 2015

Updated March 2020

In 2012, the Centers for Medicare and Medicaid Services (CMS) began penalizing hospitals as part of a new Hospital Readmissions Reduction Program (HRRP). The program, established by the 2010 Affordable Care Act, was intended to reduce patient readmissions and excess healthcare spending by decreasing reimbursements to those hospitals with higher 30-day readmission rates.

The Hospital Readmissions Reduction Program was one of the first in a wave of CMS value-based purchasing initiatives. These programs, on the whole, aim to reward providers based on the quality of care that they deliver, rather than the quantity. By linking payments to measurable clinical and quality metrics, CMS can incentivize initiatives like improved patient communication and preventative care measures.

When the HRRP began instituting payment penalties in the 2013 fiscal year, CMS was only measuring excess readmissions for patients with one of the following three reported diagnoses:

    • Acute Myocardial Infarction (AMI)
    • Heart Failure, or
    • Pneumonia

In 2015, CMS expanded the program to include 30-day readmissions for patients with chronic obstructive pulmonary disease (COPD), and those who had received either elective total hip arthroplasty (THA) or total knee arthroplasty (TKA). Program measures were again expanded in the 2017 fiscal year to include patients readmitted within 30 days of a coronary artery bypass graft (CABG) surgery.

How are hospitals reimbursed for readmissions?

Hospital performance is assessed using a calculation called the excess readmission ratio—a measure of a given hospital’s 30-day readmission rate versus an expected national average for each of the conditions or procedures listed above.

Hospitals performing better than the national average receive an excess readmission ratio score less than 1.0000 and are rewarded for their success by receiving no payment penalty as part of the HRRP. Those hospitals with 30-day readmission rates that are greater than the national average are awarded a score of 1.0000 or higher and consequently receive lower Medicare and Medicaid reimbursements.

In the program’s first year, the maximum penalty was set to 1 percent of a hospital’s total expected Medicare payment. This maximum penalty was increased to 2 percent of the total Medicare payment for the 2014 fiscal year and increased again to 3 percent in 2015—where it has remained since. But what do these actually mean for hospital penalty costs?

How much do readmissions cost hospitals?

According to a 2017 article from the Kaiser Family Foundation, approximately 2,200 Medicare-certified hospitals were penalized in year one of the HRRP—resulting in about $290 million in total hospital Medicare payment loss.

Within four years, that number increased by about 82 percent. In the 2017 fiscal year, CMS collected $528 million in total Medicare penalties for excess hospital readmissions. It is worth noting, however, that the year-over-year increase in total CMS readmission penalties is due in large part to the addition of several new medical conditions and procedures in HRRP measurement.

A 2016 report from the American Hospital Association estimates that hospitals across the United States have faced nearly $1.9 billion in total HRRP penalties since the program’s initiation—including the $528 million total penalties in the 2017 fiscal year.

What are some criticisms of the hospital readmissions reduction program?

According to results from the first five years of the HRRP, the program has succeeded in its mission to decrease 30-day readmission rates for patients with any of the six established diagnosis or procedure measures.

A 2019 report from the Medicare Payment Advisory Commission (MedPAC) indicates that 30-day readmissions for all conditions fell from 16.7 percent in 2010 to 15.6 percent in 2016—with continued year-over-year decreases through the 2018 fiscal year.

Patient negligence causes some hospitals to face readmission penalty

Despite its success and worthy intentions, the program has been criticized by some within the healthcare industry for unfairly penalizing hospitals for matters outside of their control.  It would be unfair, for instance, to penalize hospitals in situations where patient negligence—like refusing to take prescribed medication—is the primary reason for a patient’s post-discharge decline and subsequent readmission.

Pneumonia readmission rates, for instance, are virtually the same at both high and low case volume hospitals—with a difference of only 0.32 percent in average 30-day readmission rates, according to Definitive Healthcare data. Despite this, hospitals that served larger volumes of pneumonia patients faced an average of $425,961 in readmission penalties for the 2019 fiscal year. This is compared to an average penalty of $91,827 at hospitals who served lower numbers of pneumonia patients last year.

Safety net hospitals face greater risk of CMS penalty

Another criticism of the Hospital Readmissions Reduction Program is that it disproportionately targets hospitals that serve greater numbers of low-income patients. Across all five reported years of the HRRP, major teaching hospitals and rural hospitals have reported higher rates of CMS penalizations and higher average readmission penalties than other facility types.

Both teaching hospitals and rural hospitals are among those most likely to serve as safety-net hospitals within their given communities—offering healthcare services to patients regardless of their insurance status or ability to pay.

These patients may be facing social or economic challenges at the time of hospital discharge that might make it more difficult for them to access appropriate follow-up services, or to recover in a way that would prevent a return to the hospital.

By failing to acknowledge the nuances in these hospital demographics, the HRRP inadvertently penalizes hospitals providing care to some of the most vulnerable patient populations.

CMS maintains that the Hospital Readmissions Reduction Program is a fair and equitable way to encourage hospitals to improve their quality of care and, ultimately, to lower readmission rates and reduce expenditure on unnecessary hospitalizations.  With changes having been made to the program each year since its introduction, it is likely that CMS will continue to make amendments as it seeks to achieve those goals.

Learn more

Interested in learning more about CMS value-based purchasing programs, and how these are impacting hospitals and other healthcare facilities? Definitive Healthcare tracks over 8,100 active hospitals and IDNs across the United States—almost 50 percent of which are Medicare-certified facilities.

Check out our blog “2019 Value-Based Purchasing Scoring Trends” to get an overview of how these 4,000 Medicare-certified hospitals are performing in CMS quality initiative programs.


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