Readmissions Penalty at Year 3: How Are We Doing?

A few months ago, the Centers for Medicare and Medicaid Services (CMS) put out its latest year of data on the Hospital Readmissions Reduction Program (HRRP). As a quick refresher – HRRP is the program within the Affordable Care Act (ACA) that penalizes hospitals for higher than expected readmission rates. We are now three years into the program and I thought a quick summary of where we are might be in order.

I was initially quite unenthusiastic about the HRRP (primarily feeling like we had bigger fish to fry), but over time, have come to appreciate that as a utilization measure, it has value. Anecdotally, HRRP has gotten some hospitals to think more creatively, focusing greater attention on the discharge process and ensuring that as patients transition out of the hospital, key elements of their care are managed effectively. These institutions are thinking more carefully about what happens to their patients after they leave the hospital. That is undoubtedly a good thing. Of course, there are countervailing anecdotes as well – about pressure to avoid admitting a patient who comes to the ER within 30 days of being discharged, or admitting them to “observation” status, which does not count as a readmission. All in all, a few years into the program, the evidence seems to be that the program is working – readmissions in the Medicare fee-for-service program are down about 1.1 percentage points nationally. To the extent that the drop comes from better care, we should be pleased.

HRRP penalties began 3 years ago by focusing on three medical conditions: acute myocardial infarction, congestive heart failure, and pneumonia. Hospitals that had high rates of patients coming back to the hospital after discharge for these three conditions were eligible for penalties. And the penalties in the first year (fiscal year 2013) went disproportionately to safety-net hospitals and academic institutions (note that throughout this blog, when I refer to years of penalties, I mean the fiscal years of payments to which penalties are applied. Fiscal year 2013, the first year of HRRP penalties, refers to the period beginning October 1, 2012 and ending September 30, 2013). Why? Because we know that when it comes to readmissions after medical discharges such as these, major contributors are the severity of the underlying illness and the socioeconomic status of the patient. The readmissions measure tries to adjust for severity, but the risk-adjustment for this measure is not very good. And let’s not even talk about SES. The evidence that SES matters for readmissions is overwhelming – and CMS has somehow become convinced that if a wayward hospital discriminates by providing lousy care to poor people, SES adjustment would somehow give them a pass. It wouldn’t. As I’ve written before, SES adjustment, if done right, won’t give hospitals credit for providing particularly bad care to poor folks. Instead, it’ll just ensure that we don’t penalize a hospital simply because they care for more poor patients.

Surgical readmissions appear to be different. A few papers now have shown, quite convincingly, that the primary driver of surgical readmissions is complications. Hospitals that do a better job with the surgery and the post-operative care have fewer complications and therefore, fewer readmissions. Clinically, this makes sense. Therefore, surgical readmissions are a pretty reasonable proxy for surgical quality.

All of this gets us to year 3 of the HRRP. In year 3, CMS expanded the conditions for which hospitals were being penalized to include COPD as well as surgical readmissions, specifically knee and hip replacements. This is an important shift, because the addition of surgical readmissions should be helpful to good hospitals that provide high quality surgical care. Therefore, I would suspect that teaching hospitals, for instance, would do better now that the program also includes surgical readmissions than when the program did not. But, we don’t know.

So, with the release of year 3 data on readmissions penalties by individual hospital, we were interested in answering three questions: first, how many hospitals have managed to sustain penalties across all three years? Second, who are the hospitals who have gotten consistently penalized (all three years) versus not? And finally, do the penalties appear to be targeting a different group of hospitals in year 3 (when CMS included surgical readmissions) than they did in year 1 (when CMS just focused on medical conditions)?

Our Approach

We began with the CMS data released in October 2014, which lists, for each individual eligible hospital, the penalties it received for each of the three years of the penalty program. We linked these data to several databases that have detailed information about hospital characteristics, including size, teaching status, Disproportionate Share Hospital (DSH) Index – our proxy for safety net status — ownership, region of the country, etc. We ran both bivariate models as well as multivariable models. We show bivariate models because from a policy point of view, that’s the most salient (i.e. who got the penalties versus who didn’t).

Our Findings

Here’s what we found:

About 80% of eligible U.S. hospitals received a penalty for fiscal year 2015 and 57% of U.S. hospitals eligible for the penalties were penalized each of the three years. The penalties were not evenly distributed. While 41% of small hospitals received penalties in each of the three years, more than 70% of large hospitals did. There were large variations in likelihood of getting penalized every year based on region: 72% of hospitals in the Northeast versus 27% in the West. Teaching hospitals and safety-net hospitals were far more likely to be penalized consistently, as were the hospitals with the lowest financial margins (Table 1).

Table 1: Characteristics of hospitals receiving readmissions penalties all 3 years.


Consistent with our hypothesis, while penalties went up across the board for all hospitals, we found a shift in the relative level of penalties between 2013 (when the HRRP only included medical readmissions) versus 2015 (when the program included both medical and surgical readmissions). This really comes out in the data on major teaching hospitals: In 2013, the average penalty for teaching hospitals was 0.38% (compared to 0.25% for minor teaching or 0.29% for non-teaching). By 2015, that gap is gone: the average penalty for teaching hospitals was 0.44% versus 0.54% for non-teaching hospitals. Teaching hospitals got lower readmission penalties in 2015, presumably because of the addition of the surgical readmission measures, which tend to favor high quality hospitals. In the same way, we see the gap in terms of the penalty level between safety-net hospitals and other institutions narrowed between 2013 and 2015 (Figure).

1_size 2_teaching status 3_safetynet

Figure: Average Medicare payment penalty for excessive readmissions in 2013 and 2015

Note that “Safety-net” refers to hospitals in the highest quartile of disproportionate share index, and “Low DSH” refers to hospitals in the lowest quartile of disproportionate share index.


Your interpretation of these results may differ from mine, but here’s my take. Most hospitals got penalties in 2015 and a majority have been penalized all three years. Who is getting penalized seems to be shifting – away from a program that primarily targets teaching and safety-net hospitals towards one where the penalties are more broadly distributed, although the gap between safety-net and other hospitals remains sizeable.  It is possible that this reflects teaching hospitals and safety-net hospitals improving more rapidly than others, but I suspect that the surgical readmissions, which benefit high quality (i.e. low mortality) hospitals are balancing out the medical readmissions, which, at least for some conditions such as heart failure, tends to favor lower quality (higher mortality) hospitals. Safety-net hospitals are still getting bigger penalties, presumably because they care for more poor patients (who are more likely to come back to the hospital) but the gap has narrowed. This is good news. If we can move forward on actually adjusting the readmissions penalty for SES (I like the way MedPAC has suggested) and continue to make headway on improving risk-adjustment for medical readmissions, we can then evaluate and penalize hospitals on how well they care for their patients. And that would be a very good thing indeed.