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How Readmission Rates Affect a Hospital's Bottom Line

The healthcare industry spends billions of dollars annually due to hospital readmissions. In fact, the Agency for Healthcare Research and Quality (AHRQ) reports that just one readmission costs an average of $15,200, according to the latest data available. Readmissions will also affect a consumer’s perceptions of the quality of care at hospitals and health systems.

Several efforts have been made to reduce hospital readmissions. One of the most notable is the Hospital Readmissions Reduction Program (HRRP). This Centers for Medicare & Medicaid (CMS) program encourages hospitals to improve care coordination to reduce potentially preventable readmissions using a value-based purchasing program that decreases payments to hospitals with high readmission rates. HRRP has been associated with decreased rates, which correlate with better patient care and improved outcomes.

The Medicare Readmission Rule: How HRRP Penalties Are Calculated

Under the HRRP, hospitals receive penalties for higher than expected 30-day readmission rates for six conditions and procedures:

  • Acute myocardial infarction
  • Chronic obstructive pulmonary disease
  • Heart failure
  • Pneumonia
  • Coronary artery bypass graft surgery
  • Elective primary total hip arthroplasty and/or total knee arthroplasty

CMS calculates payment reductions and component results for eligible hospitals based on their performance during a rolling performance period. These reductions apply to all Medicare fee-for-service base operating diagnosis-related group payments during the fiscal year. The CMS readmission penalty is capped at 3% or a payment adjustment factor of 0.97. Hospitals have 30 days to review their HRRP data and request corrections.

CMS uses a formula that factors in the proportion of dually eligible discharges, an excess readmission ratio (ERR), performance relative to the peer group median, and other variables to determine a hospital’s payment reduction.

How COVID-19 Altered the CMS Readmission Penalty

Because of the COVID-19 pandemic, CMS has adjusted how it collected data for fiscal year (FY) 2023. CMS typically reviews three years of data to determine how to collect penalties. Under normal circumstances, data for FY2023 would have included July 2018 to July 2021. However, CMS excluded data from the first half of 2020. Now, FY2023 data has been calculated from July 1, 2018, to Dec. 1, 2019, and July 1, 2020, to June 30, 2021. Hospitals that were unable to meet Medicare standards were given lower reimbursement cuts than in previous years. CMS also suppressed the pneumonia readmission measure in FY2023 due to the impact of COVID-19.

How Readmissions Affect the Financial Performance of Hospitals and Health Systems

Hospital readmissions and financial performance are inextricably linked. One study found that hospitals in the best quintile of readmission rates experienced higher operating margins than those in the worst. Additionally, hospitals in the lowest quintile of 30-day readmission rates encountered lower odds of financial distress than those in the highest quintile. The study also found that hospitals with high-quality performance may sustain and positively affect financial performance in subsequent years.

Hospitals with poor financial health may be at risk of closure, limiting patients’ access to care, which is especially true in underserved or rural areas. One critique of HRRP penalties is they fail to account for socioeconomic differences between the populations that hospitals serve. Hospitals in areas with low socioeconomic status often incur more substantial penalties for treating more complex patients. These “safety net hospitals” generally serve low-income populations, often relying on public funding and operating on thin profit margins. They will not turn away patients who are unable to pay, and many times the patients will struggle to afford their prescriptions or lack transportation to get to follow-up appointments, increasing their risk of being readmitted.

Reducing readmission rates can also be associated with an increase in operating expenses. Attempts to reduce readmissions may require an investment in activities, such as implementing home healthcare programs or communicating with patients about their follow-up plans post-discharge. While hospitals may reduce readmissions and subsequently decrease their risk of being penalized under the Medicare readmission rule, they may need to spend more on the initial hospitalization, possibly increasing operating expenses per patient. Though these efforts require upfront costs, research indicates that hospitals which deliver high-quality outcomes may experience superior financial performance compared to hospitals with poor-quality outcomes.

In fact, a study published in the peer-reviewed journal Medical Care Research and Review showed that “for an average hospital, avoiding one excess readmission would result in reimbursement gains of $10,000 to $58,000 for Medicare discharges.” The authors concluded that “the economic case for investments in a readmission reduction effort was strong overall, with the possible exception of hospitals with low excess readmissions.”

The Financial Impact of Patient and Provider Perspectives on Hospital Readmissions  

Hospitals with excessive readmission rates are not only subject to penalties, but also run the risk of reputational damage leading to negative financial impacts. Public reporting of data collected under the HRRP is mandatory, and patients may be deterred from choosing certain hospitals if their readmission rates are high. Not only that, but patients are more likely to view their readmission as preventable and to attribute their readmission to the hospital system. One study found that 58% of patients surveyed believed “a modifiable system issue contributed to their readmission.” On the other hand, providers felt no modifiable cause for readmission could be identified 71% of the time.

Patients may use the CMS Care Compare tool to make informed decisions about their healthcare. The tool provides an overall star rating and a patient survey rating. The star rating is based on the hospital’s performance in different areas of quality, including readmission rates and safety of care.

Strategies for Reducing Hospital Readmission Rates

Reducing hospital readmissions requires a multi-pronged approach — and an understanding of why they occur. Are patients being readmitted because they do not understand their discharge plan? If so, it may be necessary to rethink discharge planning. Most patients are unable to remember discharge instructions or do not fully understand the instructions. One way to better ensure patients understand their discharge plan is to use the teach-back method. This method asks patients to explain their discharge instructions in their own words, which can clarify for providers whether patients understand their plan correctly.

Another way to reduce readmissions is to focus on preventing medication mishaps. Research has shown that one-fifth of readmissions are medication-related, so implementing strategies that focus on medication reconciliation and medication reconciliation post-discharge (MRP) can reduce the risk of rehospitalization. Access to clinical pharmacists with expertise in adverse drug events and drug interactions can help improve medication adherence. Hospital administrators who want to strengthen medication adherence should seek proactive solutions.

Cureatr supports patients with medication reconciliation services and medication adherence assistance — with a demonstrated 9.3% increase in patient adherence to maintenance medications. Our clinical pharmacists combine access to prescribing and clinical databases with human connection to reach more patients, reconcile more medications post-discharge, reduce readmissions, and improve the quality of patient care. Learn more about how the right medication management approach can help your organization reduce avoidable readmissions and better protect your bottom line.

Improving Patient Care and Quality Ratings With Medication Management


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