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The Effect of Medicare Readmissions Penalties on Hospitals' Efforts to Reduce Readmissions: Perspectives from the Field


Under the Affordable Care Act, Medicare recently began financially penalizing hospitals that have higher-than-expected rates of 30-day readmissions for select conditions. By offering an inducement to lower preventable readmissions, the Hospital Readmissions Reduction Program aims to improve care coordination and reduce unnecessary spending. In contrast, hospitals may be financially rewarded for readmissions under the current fee-for-service system.

Hospitals that exceed the number of expected readmissions are subject to a range of penalties, with a maximum payment reduction of 1 percent in 2012. The maximum penalty will increase to 2 percent for discharges starting in 2013 and to 3 percent in 2014. Medicare may accumulate savings of up to $8.2 billion over seven years as the program is fully implemented.

More than 2,200 hospitals faced some level of penalty in the first year. The penalties amounted to approximately $125,000 per hospital on average and $280 million total. Nine percent (278) of the hospitals were assessed the maximum penalty.

To understand the impact of the penalties, we talked with state and local hospital leaders and improvement teams participating in the Institute for Healthcare Improvement’s (IHI) State Action on Avoidable Rehospitalizations (STAAR) initiative, a four-year project supported by The Commonwealth Fund. (The full report of our findings is available on the IHI website)

The interviewees were "early adopters" who sought to invest in care transitions ahead of the financial incentives to do so. These engaged leaders indicated that the effectiveness of these penalties in reducing preventable readmissions is limited by several factors. Their recommendations include:

    • Improve the way the excess readmissions ratio is calculated. Since the penalties are based on readmissions over a three-year period (initially 2008–2011), some hospitals could be penalized for years after their readmissions rates improved. Additionally, the benchmark represents a moving target since excess readmissions are determined by comparison to the national average, which will be recalculated each year.

      Suggested changes include switching to a hospitalwide, all-cause readmissions measure with an annual time-frame measurement and holding the national benchmark constant for a period of time. Switching to a hospitalwide, all-cause readmissions measure as the basis for the penalty would have broader implications for the way that hospitals intervene to reduce unplanned readmissions and, therefore, may warrant further discussion within the provider community. The federal government will begin reporting hospitalwide, all-cause unplanned readmissions data on the Hospital Compare website in July 2013.

    • Help hospitals address competing quality priorities and assess which tools designed to lower readmissions are best for their organization. Hospitals are often constrained by a lack of appropriate guidance or the capability to develop a portfolio of improvement projects using their existing resources. Some interventions to reduce readmissions have shown positive results in pilots and trials. However, these programs may require additional funding to hire new staff or a significant time commitment from existing staff.

      The Centers for Medicare and Medicaid Services’ (CMS) Partnership for Patients’ Hospital Engagement Networks, which are already working on reducing readmissions, can help hospitals identify best practices and develop a quality-improvement infrastructure that will address readmissions in the context of other priorities.  

    • Address disincentives more broadly. Hospitals and other providers need to engage in collaborative quality improvement to reduce readmissions. However, current reimbursement policies typically do not pay for care coordination. Individual physicians, for example, are not held financially responsible for unnecessarily sending patients to the emergency department or back to the hospital.

      Some interviewees proposed extending the penalty to community and postacute care providers to achieve greater impact. Others proposed implementing bundled payment or shared savings approaches. The Affordable Care Act creates opportunities for hospitals to engage with community providers and organizations to reduce readmissions through CMS’s Community-based Care Transitions Program and by forming accountable care organizations. Expanding the application of these and other reforms can begin to address the fragmentation of care that frequently contributes to high readmissions rates.

These insights from the field can help guide policymakers as they seek to refine the readmissions reduction program as part of a larger effort to create incentives for improved care coordination and integration. Such initiatives will help the health care delivery system achieve the triple aim of better care and improved outcomes at lower cost.

Publication Details



M. Laderman, S. Loehrer, and D. McCarthy, The Effect of Medicare Readmissions Penalties on Hospitals' Efforts to Reduce Readmissions: Perspectives from the Field, The Commonwealth Fund Blog, February 2013.