An Examination of How an Avoided Readmission Affects Hospitals Financially

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Medicare's Hospital Readmissions Reduction Program (HRRP), introduced under the Affordable Care Act and implemented in Fiscal Year (FY) 2013, penalizes hospitals with excess 30-day unplanned readmissions, or excess readmission ratios (ERR) greater than one. A total of $428 million in HRRP penalties was collected in FY 2015 alone, with the average hospital penalty of over $150,000. Safety-net hospitals (SNHs) and teaching hospitals (THs) penalized more than other hospitals. While HRRP has been credited for a recent nationwide decrease in readmissions, experts have expressed concerns whether the positive financial impact from avoiding readmissions is strong enough to elicit further readmission reduction efforts. While it seems intuitive that avoiding readmissions would avoid penalty dollars equally for all hospitals, the underlying relationship is complex. This is because the ERR involves risk-adjustment for the hospital's patient severity of illness (a hospital with sicker patients on average will have fewer excess readmissions relative to actual readmissions) and adjustment for the size of the hospital (when a smaller hospital avoids a readmission it has a smaller effect on ERR than for a larger hospital). Also, the penalty has a ceiling for hospitals with many excess readmissions and a floor for hospitals with fewer-than-expected readmissions. Due to patient mix, size, and the ceiling/floor, an avoided readmission does not always translate to an avoided excess readmission. Readmission avoidance also has its costs. Hospitals forego Medicare reimbursement revenue from each avoided rehospitalization. SNHs and THs may lose more patient revenue than other hospitals because of supplemental Medicare payments they receive. Moreover, readmission reduction efforts may require investments in labor, administration, and management, costing from $130-$325 per patient discharge. To date, however, the full financial impact and the cost-benefit of an avoided hospital readmission are unknown. Our aim is to explore the full financial impact and cost benefit of an incremental improvement in readmission performance. First, we estimate the financial impact of an avoided readmission (Aim 1). Second, we use the impact estimates in a cost-benefit analysis of readmission prevention (Aim 2). Third, we (a) see whether this impact varies by hospital type and (b) identify factors associated with the impact (Aims 3a, b). Innovation: Our study is innovative in its use of the empirical formula to derive the estimated financial impact. Knowing the underlying data-generating process, we carry out exact calculations of the incremental change in penalty per an avoided readmission for each hospital, without biases associated with the regression approach. Impact: This project has far-reaching implications for patients and Medicare. To date, there is no research that has examined financial implications of an avoided readmission and therefore whether prevention efforts “pay for themselves.” Our study will offer the economic case for prevention for hospitals and policymakers, critical information for hospitals and policymakers in a changing HRRP policy environment.