Incentives Matter: Medicare’s Hospital Readmissions Penalties Are Having An Impact

cmsIn 2012, Medicare began to penalize hospitals which had too many readmissions. For a small number of targeted conditions, the program compares actual readmissions within 30 days to what an acceptable readmission rate should be. This is an important part of the drive to “pay for value, not volume.”

For example, if a patient who had a knee replacement is readmitted within 30 days because the implant was poorly implanted, the hospital used to profit from that readmission because the extra costs would just be submitted to Medicare for reimbursement.

Evidence so far suggests reducing readmission was low-hanging fruit. In the program’s fourth year, Medicare will penalize over half the nation’s hospitals a total of $528 million, an increase of $108 million over last year. It is a significant increase, but not a money-maker for taxpayers, amounting to just 0.18 percent of Medicare’s expected hospital spending of $287.1 billion in 2016.

Nor was it expected to be a money-maker. It was meant to change hospitals’ behavior, and it has. Although Medicare targeted only a small number of conditions it viewed as highly problematic, the policy had a knock-on effect, too. According to research published in the New England Journal of Medicine, readmission rates for targeted conditions declined from 21.5 percent in 2007 to 17.8 percent in 2015, while readmission rates for non-targeted conditions declined from 15.3 percent to 13.1 percent. Most of the changed happened after 2012.

Another analysis indicated readmissions for acute myocardial infarction (heart attack) experienced the best relative improvement, from 17.3 percent in 2010 to 14.3 percent in 2014. Those three percentage points amount to a 17 percent reduction in readmissions, an indicator of how flabby hospitals’ processes were.

However, it is a static, not a dynamic improvement. Doing fewer bad things is not the same as redesigning processes to dramatically improve productivity. Such improvements cannot happen as long as Medicare continues to pay hospitals according to a cost-plus fee schedule. Freeing up hospitals’ prices to respond directly to patients’ demands (like foreign hospitals which cater to cash-paying international patients do) would reduce both unnecessary readmissions and costs.

Comments (10)

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  1. Barry Carol says:

    Another big factor driving down readmission rates is increasing use of observation status even for periods as long as five or six days. Observation status is outpatient care. A patient is not considered an inpatient until a doctor formally admits the patient to the hospital. The financial downside for hospitals is Medicare pays a lower rate for observation status than it does for inpatient care.

    This is a big financial deal, especially for patients who then need to be discharged to a nursing home or rehabilitation center for further care. Medicare, under current rules, requires at least a three day INPATIENT stay before it will pay for the SNF or rehab care. Ah, the law of unintended consequences at work.

    • dennis byron says:

      I agree that the use of observation status as a device to reduce documented Part A readmissions is an issue but the allegation that tens of thousands of people on Medicare are being held under observation for four or five or six days and then not getting SNF coverage under Part A is way overblown (most recently in the New York Times describing the Notice Act). I have never seen a three-day rule story that includes the effect of the separate but related (and ever changing) two-midnight rule (which is changing again in 2017).

      The real issue is that the healthcare industry has for decades participated in a maybe socially admirable but illegal effort to help families bridge into non-Medicare-covered custodial care. Instead of putting a few nice docs and nurses in Federal prison for a year or two, which would solve the problem for good, the government comes up with all these crazy rules (not even getting into policies about making progress in rehab, etc.)

  2. John Fembup says:

    “Medicare, under current rules, requires at least a three day INPATIENT stay before it will pay for the SNF or rehab care.”

    There’s also the “two midnight” rule. That’s the rule that fixed the observational rule. Until it was discovered it needed a fix, too. Apparently the two midnight rule also produces some unexpected consequences.

    Whatever, I am confidant CMS is on it, and will figure out another fix, pronto. Aren’t you confidant? 😎

  3. Barry Carol says:

    John — Are you telling me that as long as a patient spends at least three days in the hospital whether he is classified as an inpatient or under observation status, Medicare will pay for the first 100 days of SNF or rehab care (80% for days 21-100) if it’s needed?

    • John Fembup says:

      i don’t claim to know for sure, but that seem to be one effect of the two midnight rule. Some hospitals say they know what it means and don’t like it; others just say they are confused. A Congessman claims he has the solution – and haven’t we all heard that before?

      As the mountaintop guru said to the struggling pilgrim “I can explain the meaning of life my son – but please don’t ask me any questions about Medicare”. 😎

    • dennis byron says:

      Medicare Part A pays for skilled nursing (which almost always includes occupational or physical therapy “rehab”) with no co-pay for 20 days and with a co-pay for another 80 days. (Not surprisingly most stays are for 19 days; I have no statistic for that but it’s directionally correct.)

      However this applies only if the person has been officially admitted by a physician to an acute care hospital at which he or she has admitting privileges first for 3 days. In addition every one of those up to 100 (typically 19) days has to be certified by a licensed physician on a continuing basis to be medically necessary. And documentation is needed that progress is being made against whatever the stated rehab goal is.

      Unfortunately over the years the sign offs have been manipulated to bridge the transition for many to custodial care that Medicare does not cover(more so years ago but less and less with all the publicity about this issue this century)

      • dennis byron says:

        also, I don’t think Medicare pays 80% for days 21 to 100 but instead pays some set amount

        • Barry Carol says:

          When my father was sent to rehab after hip replacement surgery in 2000 followed by long term custodial care, Medicare paid 100% of it’s daily payment rate for the first 20 days and 80% of its payment rate for the next 80 days. I don’t remember what the payment rate was but it was far more generous than the Medicaid rate.

          The daily rate that the family had to pay for the next 11 months until he died was $163 per day as compared to the Medicaid rate at the time of $119, a 37% difference. Multiple co-morbidities precluded him from living independently any longer.

          • Dennis Byron says:

            Today, it’s a fixed $161 a day for days 21-100. That may be 20% of the day 1-20 Medicare rate but I doubt if Medicare pays that much.

            And under current rules, laws and policies, you probably would not have received the 100 days of Medicare SNF coverage for a hip replacement. My guess is that where that length of coverage applies today it is related to wound recovery or possibly stroke recovery but not something like joint replacement recovery where the rehab could be done outpatient as soon the person can stand.

            • Barry Carol says:

              My father also had CHF, ESRD and diabetes. The broken hip turned out to be the straw that broke the camel’s back in terms of his ability to live independently. After a few months, he couldn’t walk at all and needed SNF care indefinitely after that since he had nobody to help take care of him at home. If it was just a hip replacement and no other significant health issues, it would have been a different story.