Medicare Penalty for Excess Hospital Readmissions

November 2012

In an effort to reduce preventable and costly hospital readmissions, the Affordable Care Act (ACA) created the CMS Hospital Readmissions Reduction Program.  Starting October 1, 2012, Medicare will penalize hospitals with excess readmissions for heart attacks, heart failure and pneumonia within 30 days of discharge, withholding up to 1 percent of Medicare payments to hospitals for such readmissions. This penalty will increase to 2 percent next year and 3 percent in the following year. In his article in The Denver Post, Ricardo Alonso-Zaldivar discusses the implications of this policy and reactions from stakeholders. While recognizing the common goal of better, more coordinated patient care, some hospitals and physicians are concerned about the feasibility and fairness of the policy because patients may be readmitted to the hospital due to factors outside of the direct control of providers.  For example, factors such as poverty and treatment compliance can influence the likelihood of a readmission. Accordingly, hospitals question how many readmissions are truly preventable, and thus “excess” according to the reduction program. Proponents of the policy, many of whom are consumer advocates, feel the penalty is appropriate and sends the right message: that care coordination and smoother transitions are necessary for better care quality and lower costs.

HCFO-funded researcher Vincent Mor, Ph.D., of Brown University offered insight into the challenge of hospital readmissions and potential policy strategies to reduce them in a recent commentary in the Journal of the American Medical Association. Mor's comments emphasized that prior to the Hospital Readmissions Reduction Program, there was little incentive for a hospital to consult with either the patient or their primary care physician to coordinate patient care after discharge. This resulted in a lack of smooth transitions in patient care and, ultimately, to greater hospital readmissions. Mor cites the ACA’s provision to penalize hospitals for excess readmissions as one attempt to hold hospitals accountable for ensuring a smooth transition from the hospital to post-acute care. He cites several other strategies that aim to achieve this same goal, including Accountable Care Organizations, bundled or episodic payments for acute through post-acute care, and care managers or coaches who can help during the care transition. Mor suggests that without either penalizing hospitals for excess readmissions or without bundling payment for an entire episode of care, there is little financial incentive for hospitals to reduce readmissions or delay a patient’s discharge.

Dr. Mor is the author of a full HCFO study focused on the incentives created by state nursing home bed hold payment policies and the resulting impact on hospitalizations. Additional information about the study can be found on the HCFO website. In recently-funded, related work, Tracy Yee, Ph.D., Center for Studying Health System Change, is examining how changes in payment rates for Medicare inpatient hospital services affects the volume of hospital admissions.

In addition to HCFO’s funded work related to this topic, AcademyHealth hosted a one-day invitational meeting in 2008, sponsored by the Commonwealth Fund, to discuss hospital readmission trends and to identify best practices and policy levers that could reduce hospital readmissions for Medicare patients. The full meeting report is available on the AcademyHealth website.