Public Policy

Hospital Readmissions Rates, Medicare Penalty Analysis


A widely cited statistic in the national readmissions debate holds that one in five acute hospital discharges will lead to a readmission within 30 days.1 Associated costs are estimated at $17.5 billion, although that figure encapsulates significant variation across diagnoses, regions, and hospital models.1 Analyses by CMS and others suggest that average 30-day readmission rates have been falling, albeit slowly, to 17.8% during the fourth quarter of 2012 after averaging 19% over the previous five years, according to Congressional testimony by Medicare Director Jonathan Blum in February 2013.2

CMS calculates “excessive readmissions rates” for subsequent hospital admissions to the same or a different hospital for specific diagnoses within 30 days of discharge, risk-adjusted for planned and unrelated readmissions using methodology endorsed by the National Quality Forum. Based on the hospital’s rate of actual to expected readmissions, HRRP penalties are applied to all Medicare-based diagnosis-related group (DRG) payments to the hospital for the fiscal year in question, to a maximum of 3% of Medicare payments. The list of conditions now includes heart failure, acute myocardial infarction, pneumonia, acute exacerbation of COPD, other lung ailments such as chronic bronchitis, and admissions for elective total hip and total knee arthroplasty.

Aggregate average penalty in FY2015 for 2,610 hospitals paying penalties, or three-fourths of those subject to the program, will be 0.63% of total base hospital DRG reimbursement, or approximately $428 million in total readmissions penalties. Thirty-nine hospitals are paying the full 3% penalty, based on their posted readmissions between July 2010 and June 2013.3 If a hospital has fewer than 25 discharges for a given condition, then CMS does not calculate its excess readmissions penalty for that condition.

In its June 2013 report to Congress, the Medicare Payment Advisory Commission (MedPAC), which first proposed readmissions payment incentives in 2008, recommended steps to refine the computation of penalties, all with “the goal that any policy change should maintain a hospital’s incentive to reduce readmissions.”4 CMS has stated that it is continuing to revise its algorithms for excluding planned and unrelated readmissions from the penalty calculation.5

MedPAC found that the rate of “potentially preventable readmissions” (PPR) was 12.3% in 2011, according to the “3M Algorithm” developed by 3M Health Information Systems, which uses administrative data to identify hospital readmissions that may indicate problems with quality of care. The PPR logic determines whether the reason for readmission is clinically related to a prior admission and therefore potentially preventable.6

Others define preventable readmissions in terms of quality problems, medical errors through actions taken or omitted during the initial hospital stay that could lead to patient harm.

Larry Beresford is a freelance writer in Alameda, Calif.


  1. Jencks SF, Williams MV, Coleman EA. Rehospitalizations among patients in the Medicare fee-for-service program. N Engl J Med. 2009;360(14):1418-1428.
  2. Blum J. Statement of Jonathan Blum on delivery system reform: progress report from CMS before the U.S. Senate Finance Committee. February 28, 2013. Available at: Accessed March 12, 2015.
  3. Rau J. Medicare Fines 2,610 Hospitals in Third Round of Readmissions Penalties. Kaiser Health News. October 2, 2014. Available at: Accessed March 12, 2015.
  4. Medicare Payment Advisory Commission. Report to the Congress: Medicare and the health care delivery system. Chapter 4: refining the hospital readmissions reduction program. June 2013. Available at: Accessed March 12, 2015.
  5. Rodak S. CMS responds to 6 major critiques of readmissions measures. Becker’s Infection Control and Clinical Quality. August 7, 2013. Available at: Accessed March 12 2015.
  6. Goldfield NI, McCullough EC, Hughes JS, et al. Identifying potentially preventable readmissions. Healthcare Financing Review. Available at: Accessed March 12, 2015.

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