Primer to the Medicare Readmission Penalty

Primer to the Medicare Readmission Penalty

What is Medicare’s Hospital Readmissions Reduction Program? To encourage efforts to reduce preventable readmissions, Congress created the HRRP as part of the Affordable Care Act in 2010. Of the three Medicare pay for performance programs created by the ACA, the HRRP contains the largest acute inpatient prospective payment penalty. Through the ACA, the Centers for Medicare & Medicaid Services are instructed to penalize hospitals with higher than expected readmissions for specific clinical conditions such as acute myocardial infarction, pneumonia and heart failure. In FFY 2015, chronic obstructive pulmonary disease and elective total hip and total knee arthroplasty were added to the list of clinical conditions. The HRRP payment penalties took effect in FFY 2013 with up to a 1 percent penalty and hospitals can now incur a penalty of up to 3 percent base operating DRG payments.

What cases are included in the indexing cohort? Currently, if a bill contains certain ICD-9 codes with diagnosis for acute myocardial infarction, pneumonia, heart failure, chronic obstructive pulmonary disease and elective total hip and total knee arthroplasty, the accounts are considered an index admission if the patient meets the inclusion criteria listed below (table 1). The codes need to be the primary diagnoses for the four conditions, however the procedure codes for hip and knee replacements can appear anywhere on the record. If the patient is readmitted within 30 days from the index admission, the case is generally considered to be a readmission and a penalty will be incurred if the patient is considered to be below average risk by the models used to risk-adjust the readmission measures.

Table 1

Cohort / ICD-9 Codes
Acute Myocardial Infarction (AMI) / Any 410.xx excluding 410.x2
Heart Failure / 40201, 40211, 40291, 40401, 40403, 40411, 40413, 40491, 40493 or 428.xx
Pneumonia / 4800, 4801, 4802, 4803, 4808, 4809, 481, 4820, 4821, 4822, 48230, 48231, 48232, 48239, 48240, 48241, 48249, 48281, 48282, 48283, 48284, 48289, 4829, 4830, 4831, 4838, 485, 486, 4870, 48242 or 48811
COPD / 49121, 49122, 4918, 4919, 4928, 49320, 49321, 49322, 496, 51881, 51982, 51884 or 7991
Total Hip / Total Knee / 8151 or 8154

Once the index admission has been identified, certain patients are then excluded from the program. Exclusions consist of patients less than 65 years of age, patient expires during hospitalization, the patient is a Medicare beneficiary for less than 12 months and others. The following table provides details of the exclusions.

Table 2

After the index admission has been identified, patient activity is then tracked and if a patient returns to the hospital as an inpatient within 30 days, that return is generally considered a readmission. Certain exclusions to the cases admitted to the hospital within 30 days of an index admission exist as illustrated in table 3.

Table 3

How is the readmission rate calculated? The readmission rate is a complex algorithm that divides the “predicted” readmission rate by the “expected” readmission rate. The “predicted” readmission rate, is the percent of patients predicted to return within 30 days after risk-adjusting for their age, gender and clinical comorbidities. The “expected” readmission rate is based on the average readmission rate from a national sampling of similarly risk adjusted cases. The quotient of this calculation will result in the excess readmission ratio for each index cohort. If the quotient is greater than 1.0, the cohort contains more readmissions than what was expected, thereby incurring a penalty. If the quotient is less than 1.0, the cohort contains fewer readmissions than what was expected and no penalty is incurred. Unlike the Medicare value-based purchasing program, the HRRP contains no ability to receive bonus payments.

Table 4

What are the risk adjustments? Risk adjustments provide normalization of clinical complexity for each index cohort. Certain clinical complications generally result in higher likelihood for readmission and the risk-adjustment process lessens the penalties incurred when patients with these comorbidities are readmitted. The Centers for Medicare & Medicaid Services works to ensure that all hospitals are measured fairly based on their patient mix and needs. While the risk adjustment varies between each index cohort, some examples include calorie malnutrition, ulcers, drug and alcohol disorders, psychiatric comorbidity, and other anemia. The following tables, prepared by HIDI, illustrate the risk adjustment (yellow bar) and the percent of times an indexing account contained a risk adjustment condition (green bar).

How is the readmission penalty calculated? The readmission penalty is based on the excess readmission rate for each cohort and multiplied by the amount of payments received throughout the measurement period for each cohort. The product is then added together to determine the total amount of “overpayments” made by Medicare. The total overpayment amount is then divided by the total amount of revenue for all discharges to determine the payment penalty. The penalty cannot exceed 3 percent. The table below is an example of the calculation.

FFY 2015 Program ESTIMATE (Based on ACTUAL and ESTIMATED data)
AMI / HF / PN / THA/TKA / COPD
Eligible Discharges / 38 / 26 / 33 / 135 / 60
Predicted Rate – [B] / 11.8% / ||||||||||||||||||||||||||||||||||| / 26.4% / ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| / 19.3% / ||||||||||||||||||||||||||||||||||||||||||||||||||||||||| / 8.1% / |||||||||||||||||||||||| / 23.9% / |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Expected Rate – [C] / 19.1% / ||||||||||||||||||||||||||||||||||||||||||||||||||||||||| / 24.0% / |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| / 20.6% / ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||| / 5.3% / ||||||||||||||| / 23.4% / ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Excess Ratio [ B / C] – [D] / 0.6178 / 1.1000 / 0.9369 / 1.5283 / 1.0214
Medicare Inpatient Operating Payments (condition-specific discharges) – [E] / $529,530 / $307,809 / $268,267 / $1,539,548 / $550,621
Est. Excess Dollars [if D is greater than 1.0 then ( D - 1 ) X E ] – [F] / $0 / $30,781 / $0 / $813,346 / $11,765
Est. Total Excess Dollars [ Sum of F ] – [G] / $855,892
Total Medicare Inpatient Operating Revenue (all discharges hospital wide) – [H] / $25,000,000
Est. Uncapped Adjustment Factor [ 1 - ( G / H )] / 0.9658
Est. Capped Adjustment Factor
[i cannot be less than 0.9700 for FFY 2015] / 0.9700

Setting readmission reduction goals. Hospitals should carefully assess their current performance against the expected readmission rate specific to that facility. Since the expected rate is based on a national sampling of similar clinical condition cases, each facility will have a different benchmark or goal. Due to the significant impact risk-adjustment can have on individual hospitals’ scoring, national or state observed rates should not be used in determining the goal. The Missouri Hospital Association releases readmission reports throughout the year, which contain the benchmark, based on the latest available Medicare data and HIDI produces quarterly interactive readmissions dashboards based on the CMS risk-adjusted methods applied to more recent hospital discharge data. This can provide a starting point in determining goals for your facility.

Summary: The Medicare HRRP has the potential to be the largest quality payment penalty of the three pay for performance programs. It is vital for hospitals to understand what the readmission calculations are and how it will influence payments in future years. It is also vital that hospitals calculate the predicted rate as specified by the Centers for Medicare & Medicaid Services while setting goals that are based on the current patient clinical needs, specific to each hospital.