Payment Incentives: Reducing Hospital Readmissions

Introduction | Evidence of Quality Improvements | Evidence of Savings | Key Considerations |Further Resources | State-by-State Ratings 

The Policy

Medicaid adjusts payments to hospitals with higher-than-expected potentially avoidable readmissions (PARs).


Potentially avoidable readmissions (PARs) are those hospital readmissions - occurring in a fixed period of time - that could have been prevented if the patient received effective discharge care planning and coordinated outpatient follow-up when leaving the hospital after their initial admission. Approximately 20 percent of all patients admitted to U.S. hospitals each year are readmitted to the hospital within 30 days of discharge. And a staggering 51.5 percent of all patients discharged after having surgery either died or were readmitted within a year of discharge. The Medicare Payment Advisory Commission has estimated that three-quarters of readmissions could likely be avoided with better care, such as better discharge planning.

Under the Affordable Care Act (ACA), the federal government will decrease Medicare payments to hospitals for the costs associated with higher than expected PARs beginning October 12, 2012. Hospital performance will be evaluated based on readmissions for heart attack, heart failure and pneumonia. Under the law, the Centers for Medicare and Medicaid Services (CMS) will establish a baseline for each hospital's readmission rates for these three conditions and compare that to the hospital's actual readmission rates. CMS will cut payment to hospitals with readmission rates higher than baseline according to a formula established in the law. According to industry sources, the largest reduction in payment rates for FY 2013 will be 1 percent, though that reduction can rise to 2 percent in FY 2014 and 3 percent in FY 2015 and beyond. Under the law, beginning in FY 2015, CMS can expand the list of conditions to an additional four conditions.

The ACA provisions will apply to Medicare payments only. States, however, may implement these kinds of payment rate reductions in Medicaid and may even go beyond the ACA provisions -- by using a broader definition of potentially preventable readmissions, for example -- in order to improve patient care and contain costs.

Evidence of Quality Improvements

The threat of a reduction in payment incentivizes hospitals to take the right steps to keep patients from bouncing back into the hospital. These steps include ensuring that patients know how to take care of themselves after discharge and are connected with the providers that will coordinate their follow-up care. Reducing the incidence of PARs also keeps patients safer in that it lowers the risk of contracting a hospital-acquired infection.

Evidence of Savings

In New York, an initial program that made risk-adjusted modifications to hospital inpatient rates based on PARs generated $47 million in total savings in the first year.

A California Discharge Planning Collaborative study released in February 2011 shows that reducing hospital stays from avoidable readmissions by just one day, in California alone, could save government health care programs $227 million a year ($179 million in Medicare savings plus $48 million in Medicaid savings).

Community Catalyst has estimated that states could save over $849 million annually through Medicaid payment reforms for PPRs - click here for state-by-state estimates.

Key Considerations

Managed Care: States can adjust payments to hospitals directly in their Fee for Service product. They can reap even larger savings by modifying their managed care contracts to require MCOs to adjust payments to hospitals based on PPRs, and reducing the capitation payments they pay to MCOs to reflect this payment adjustment.

Data Collection: In order to identify the unrelated conditions that may cause patients to be readmitted, states will need to collect data on which conditions are present at the time of the original admission to the hospital. While some states already collect this data, many do not.

Risk Adjustment: To put in place a successful payment reform strategy, states will need the ability to risk-adjust hospitals' rates of PARs to take into account the unique health status and social risk factors of the patients each hospital cares for. This is essential to prevent penalizing facilities that treat patients who are sicker and harder to care for, since patients with a greater burden of co-morbidities or social risk factors are more likely to be readmitted. Risk adjusting hospitals' rates of readmissions allows the state to see how their rates would compare if they all saw the same patient-mix.

Performance Benchmark: The potential for savings from payment reform varies from state to state and depends in part on how aggressive a state is willing or able to be. States have a number of choices that will determine the size and speed at which they realize savings. These include:

Further Resources

Community Catalyst's Payment Reform Toolkit, which includes model legislation, state savings estimates, and talking points to help respond to hospital concerns 

Smart Payment Reforms Can Reduce Costs and Improve Quality: A Short Primer, by Community Catalyst. 

State-by-State Ratings

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