Medicare’s Hospital Readmissions Reduction Program1

Starting October 1, 2012, the Hospital Readmissions Reduction Program (HRRP) reduces a hospital’s base operating Medicare diagnosis-related group (DRG) payments with respect to readmissions for three conditions, including: (1) acute myocardial infarction (ACI); (2) heart failure (HF); and (3) pneumonia (PN).

Section 1886(q) of the Social Security Act (the Act) and section 3025 of the Affordable Care Act (ACA) provide the statutory authority for this non-budget neutral program. The Centers for Medicare & Medicaid Services (CMS) predict that the HRRP will decrease payments to hospitals by as much as 0.3 percent (approximately $280 million) in FY 2013.

Some of the key definitions and concepts used in calculating payment adjustments under the HRRP include:

Adjustment Factor:  A hospital’s “adjustment factor” or readmission payment adjustment is the greater of (1) the ratio of a hospital’s aggregate dollars for excess readmissions to their aggregate dollars for all discharges or (b) the statutory adjustment maximum for the Fiscal Year (FY). For FY 2013, the number cannot exceed 0.99 (i.e., a 1% reduction). The statutory floor adjustment factor is 0.98 for FY 2014 and 0.97 for FY 2015 and subsequent years.

Applicable Hospitals: The term “applicable hospitals” includes hospitals paid under 42 U.S.C. § 1395f(b).

Applicable Conditions: An “applicable condition” is defined as a “condition or procedure selected by [the Secretary of the Department of Health and Human Services] among conditions and procedures for which: (i) readmissions… represent conditions or procedures that are high volume or high expenditures…and (ii) measures of such readmissions . . . have been endorsed by the entity with a contract [with a consensus-based entity, such as the National Quality Forum, as set forth in 42 U.S.C. § 1395aaa]  . . . and such endorsed measures have exclusions for readmissions that are unrelated to the prior discharge (such as a planned readmission or transfer to another applicable hospital).”  The three applicable conditions for FY 2013 are set forth above (HCI, HF and PN) and were chosen due to the fact that their readmissions tend to be high or result in a high expenditure.

Hospital Payments for Discharges:  Under the HRRP, hospital payments for discharges are equal to the product of the “base operating DRG payment amount” and the adjustment factor for the hospital for the fiscal year. The “base operating DRG payments” are therefore reduced based upon the excess readmissions calculations.

Base Operating DRG Payment:  The base operating DRG payment includes the payment amount that would otherwise be made under [42 U.S.C. § 1395ww] (determined without regard to the Hospital VBP Program) for a discharge notwithstanding the HRRP, reduced by any portion of such payment amount that is attributable to payments which refer to outlier payments, indirect medical education (IME) payments, disproportionate share hospital (DSH) payments and payments for low-volume hospitals (42 U.S.C. § 1395ww(o)(7)(D)).

Aggregate Payments for all Discharges: These equal the sum of base operating DRG payments for all discharges.

Readmission Payment Adjustment:  In calculating the readmission payment adjustment, the ratio equals: 1 minus the ratio of – (i) the aggregate payments for excess readmissions; and (ii) the aggregate payments for all discharges.

Aggregate Payments for Excess Readmissions:  The aggregate payments for excess readmissions are defined as: “The sum, for applicable conditions . . . of the product, for each applicable condition, of (i) the base operating DRG payment amount for such hospital for such applicable period for such condition; (ii) the number of admissions for such condition for such hospital for such applicable period; and (iii) the Excess Readmission Ratio… for such hospital for such applicable period minus 1.”

Said differently, aggregate payments for excess readmissions are equal to the sum of base operating DRG payments for AMI x (excess readmission ratio for AMI-1)] + [sum of base operating DRG payments for HF x (excess readmission ratio for HF-1)] +[sum of base operating DRG payments for PN x (excess readmission ratio for PN-1)].

Ratio1-(Aggregate payments for excess readmissions/ Aggregate payments for all discharges)

Excess Readmission Ratio: The “excess readmission ratio” is a hospital-specific ratio based on each applicable condition, defined as the ratio of “risk-adjusted readmissions based on actual readmissions” for an applicable hospital for each applicable condition (of the three listed above), to the “risk-adjusted expected readmissions” for the applicable hospital for the applicable condition.

Excess Readmission Ratio for HF, AMI and PN: (for each condition – HF, AMI and PN – for each hospital based on admissions from July 1, 2008 to June 3, 2011 for FY 2013) = risk-adjusted actual readmissions/ risk-adjusted expected readmissions.



1 Comment

  1. Deb Connor

    Very impressive distillation from the CMS Rule document. Please consider contacting Health Technology Services, Inc. as you work with your clients and identify situations where claim data review can support their concerns. Our CEO Mark Ammons, our president Vic Koppang or myself would welcome the opportunity to discuss how we could be of assistance. Much success! Deb Connor

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