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Advising the Congress on Medicare issues
MedPAC > News > Hospitals > The hospital readmission penalty: How well is it working?

The hospital readmission penalty: How well is it working?

The hospital readmission reduction program (HRRP), established under the Patient Protection and Affordable Care Act of 2010, has helped to reduce hospital readmissions. Since the introduction of the HRRP, readmission rates have fallen for Medicare beneficiaries across all types of hospitals, including those seeing higher shares of poor patients. In 2013 Medicare beneficiaries experienced roughly 100,000 fewer readmissions than in 2012. In 2015, the HRRP covers five conditions (heart failure, acute myocardial infarction, (AMI), pneumonia, chronic obstructive pulmonary disease (COPD), and planned hip and knee replacement surgery), with an average penalty of $163,000 per hospital for the 79 percent of hospitals expected to receive a penalty.

Addressing socio-economic status

One of the concerns the Commission and others have had with the HRRP has been that the average readmission penalties have been higher for hospitals serving the highest shares of poor Medicare patients.

In response, some have suggested modifying the risk adjustment models to account for the socio-economic status (SES) of patients. There are two problems with this approach. First, developing an empirically-based adjustment for SES would take several years, and second, adjusting for SES within the risk models will hide disparities and thus reduce pressure to improve care for the poor.  

The Commission has proposed a way to address the SES issue simply and quickly by refining the current HRRP.  Under the proposal, all hospitals would report their all-condition risk adjusted readmission rate, without an SES adjustment. The calculation of the readmission payment penalties, however, would be changed to account for differences in each hospital’s mix of poor patients. This would be achieved by dividing hospitals into peer groups based on their overall share of low-income Medicare patients (those on Supplemental Security Income (SSI)), and then setting a benchmark readmissions target for each peer group. Hospitals with higher shares of low–income Medicare patients would have a less stringent readmission target, and thus on average would receive lower penalties, or, if better than others in their peer group, no penalty. The advantages to this approach are that it can be implemented quickly with some small modifications to the HRRP statutory language, and hospitals with the highest shares of low-income patients will still have an incentive to continue improving their readmission rates.  

Improving the payment penalty formula

While the SES concerns have appropriately received significant attention, problems with the penalty formula have not received enough attention.  A key problem is that penalties for conditions with low readmission rates are much higher than penalties for conditions with higher readmission rates. A further problem is that the penalties are based on the cost of the initial admission, which further distorts penalties for higher cost conditions.  

Table 1. Readmission penalties under HRRP inversely proportional to readmission rate         

ConditionReadmission rateAnnual number of readmissionsCost of readmissions*(in millions)FY 2015Estimated net penalties (in millions)
Hip & Knee5.316,000110135

Note: COPD (Chronic obstructive pulmonary disease).
* Based on FY 2015 standardized base operating payments.
Source: MedPAC analysis of Medicare claims data from July 2010 through June 2013, applied to 2015 penalty rules. 

We illustrate the problem by comparing penalties under the HRRP for hip and knee replacements and COPD, which were both added to the program in FY 2015.  The total number of Medicare admissions for hip and knee replacements and COPD are similar, but the readmission rates differ substantially. The average readmission rate for hip and knee replacements is 5.3 percent. For COPD it is 20.7 percent, about 4 times higher (Table 1). The cost of COPD readmissions is also about 4 times as high, roughly proportionate to the number of readmissions. Given the facts, one would expect greater readmission penalties for COPD than for hip and knee replacements. However, the aggregate payment penalties for hip and knee readmissions ($135 million) under the HRRP are more than twice the penalties for COPD ($66 million). 

The Commission’s proposed refinements to the payment penalty formula would remove this distortion from the current policy by making penalties proportionate to the cost of the excess readmission. The refinements would also replace the current condition-specific readmission measures with an all-condition readmission measure (either the all-condition unplanned readmission measure currently reported on Hospital Compare or the 3M potentially preventable readmission measure used in many state Medicaid programs). Using either of these measures, readmission targets would be set in advance so providers would know by how much they would need to reduce readmissions to avoid readmission payment penalties in the future. This is in contrast to current policy, which requires hospitals to have below average readmissions rates for every condition in order to avoid payment penalties, and the average is not known until the end of the year. The readmission target would be set to maintain current budget savings from the HRRP.   


The Commission’s refinements would provide clearer targets, eliminate the problem of high penalties for low readmission rate conditions, maintain budget neutrality, and provide a more equitable treatment of hospitals with large share of poor Medicare beneficiaries. Legislative changes needed to implement these changes are straightforward. Moreover, these refinements could be implemented quickly using currently available risk-adjusted readmission measures.