Monday, October 1, marked a date hospitals knew was coming since March 2010: the beginning of federal fiscal year (FY) 2013, and the initiation of the CMS Readmission Reduction Program.

The Readmission Reduction Program, referred to more commonly as the “readmission penalty,” has been a looming threat to hospitals for the past 18 months. But that’s been a long and uncertain 18 months. When the penalty program was legislated in Section 3025 of the Affordable Care Act, the details were still to be determined, and it was not until August 1, 2012 that CMS issued the final rule containing details of how the penalty would be calculated.

In the interim, concerns raised by the American Hospital Association regarding the appropriateness of the CMS methodology for measuring readmissions — specifically the lack of adjustment for safety net hospitals who serve economically disadvantaged populations — gave some hospitals a sense that the penalties as described in Section 3025 and subsequently communicated via Hospital Specific Reports (HSRs) would be somehow modified. Read: watered down. Additionally, the 2012 Supreme Court challenge to the constitutionality of the Affordable Care Act also created uncertainty among hospital executives regarding whether all or part of the ACA would be law come October 1, 2012.

And so, last week, when the penalties rolled out as previously announced and consistent with the original concept, readmissions topped the agenda of hospital executive team meetings across the nation.

In total, 2,217 hospitals will be assessed a penalty ranging from 0.01 percent to 1 percent of their Medicare revenue in FY ’13. The magnitude of the penalty is determined by a calculation of an excess readmission ratio based on 30-day readmission rates for heart attack, heart failure and pneumonia. This “excess readmission ratio” is an adjustment factor that will be applied to each diagnosis-related group (DRG) reimbursement for FY ’13, and in that way reduce the total Medicare revenue for the organization. The average total annual penalty nationally is reported to be in the low six figures, while large hospitals subject to the maximum 1 percent will see close to a seven-figure revenue impact. The sum of the penalties assessed nationally approximates $280 million.

Although this year’s penalties cap at 1 percent of total Medicare revenue, there will be a rapid escalation of the magnitude of the penalties in the next two years to a maximum of 2 percent in FY ’14 and 3 percent in FY ’15.  Not only will the magnitude of the penalty increase, but so too will the number of conditions on which hospitals will be adjudicated. Section 3025 forecasts increasing the number of conditions in FY ’15 to include cardiac bypass surgery (CABG), cardiac stenting, and other vascular procedures. The Secretary of Health and Human Services is given discretion to add additional conditions “as deemed appropriate.”

Observers may think that the entirety of the hospital ecosystem is well aware of the magnitude of the penalty for their organization and the role they as individual providers have in reducing readmissions. Last week, I called upon my colleagues who are hospital executives, readmissions champions, and front-line providers working to implement strategies to improve care transitions and reduce readmissions to ask them how the readmissions penalty will impact their efforts.

I’ll start with the front line providers. These are the nurses, case managers, care coordinators, physicians, home health care and hospice providers, skilled nursing facility liaisons, and others. The work of delivering better care is partly on their shoulders, facilitated by the relationships they have with the post-acute and community-based providers in their region.  (The work of enabling improved care rests on the shoulders of organizational leaders, payers, and policy makers creating the infrastructure, systems and incentives to do so).

Through a series of group meetings over the past week, I asked these providers if they knew about the “readmission penalties.” Although a majority were aware that hospitals were going to be penalized for readmissions, none knew when the penalties started (next year was a common response) and none knew the magnitude of the penalty on their organization. None of these providers had heard from their leadership on this subject.

Readmission champions are typically managers or executives who hold responsibility for leading efforts to reduce readmissions. These are the people who are studying their care processes, reviewing readmissions, and enabling testing and implementing practice improvements. Many of them have been leading what I would characterize as “low burn” readmission reduction efforts over the past 1-2 years. In some cases, the low intensity was because the future was uncertain regarding the magnitude of the penalties, and they did not want to make the “first move.” They did not want to have to account for a “double loss” of investing real money into new programs and services that would reduce hospital volume. For those who espoused this perspective, early success in reducing readmission rates was a lose-lose proposition.

Other readmission champions have been fully committed to success in their efforts to lead teams to improve care transitions and reduce readmissions, but have not been empowered to make investments (in enabling technologies, or new services), change policies (such as organizational standards of care), or even use performance data freely (such as sharing data in a community-based quality improvement effort).  Thus, they have been working with earnest commitment to improve care, but have been hamstrung by not being able to fully execute on the concepts of improved transitional care.

Finally, there are the readmission champions who have access to mobilizing resources to implement new services and invest in the staff time required to analyze data and processes, implement changes, review results, and iterate as indicated. Although there are more and more success stories emerging at each Hospital Engagement Network (HEN) or Quality Improvement Organization (QIO) collaborative learning session, these are new stories, representing work that is yielding results in 2012; it will be FY ’17 before 2012 results will form the first year of aggregated data (2012-2013-2014).

Seizing Attention Despite Imperfections

Disadvantaged populations. There are several commonly invoked problems with the Readmission Reduction Program. The most commonly invoked “fairness” issue is that hospitals that serve economically disadvantaged populations – with presumably less access to care in the community and lower levels of self-efficacy in navigating a complex fragmented health care system – are going to be penalized the same as hospitals who serve populations who do not struggle with these complexities. On the one hand, these safety-net hospitals can little afford any reduction in resources, and this seems to many as penalizing providers who are least able to afford it. On the other hand, CMS has gone on record as stating that there are several hospitals that fit this characterization which do not evidence higher than expected readmissions rates, implying that it is not fait accompli that these hospitals are unable to make improvements in care delivery and services to reduce avoidable rehospitalizations.

Preventable. Second, providers take issue with the lack of distinction between “preventable” and “not preventable” readmissions. While this concept has resonance clinically, as certainly there are situations in which a readmission is a planned event in the course of therapeutic care, “preventable” is still very much in the subjective domain of the eye of the beholder. I have witnessed hospital and cross-continuum teams substantively evolve their own concept of “preventable” readmission as their expertise in system issues in care transitions deepens. Many fine cross-continuum teams review each and every readmission event as potentially preventable. We should not prematurely define what type of hospital utilization is potentially preventable when we operate in a practice environment that preferentially relies on acute-level care. From the patient’s standpoint, an unplanned return to the hospital is the salient event of concern.

Magnitude of penalty. Third, the magnitude of the penalty — averaging in the low six figures — may not stimulate desired investments in change. According to CMS, the average penalty is approximately $125,000. To put that number into perspective from a hospital revenue standpoint, it is the equivalent of approximately 12 Medicare fee-for-service hospitalizations per year (at an average of $10,000 each). That is 1 hospitalization per month; fairly undetectable from an operational standpoint. If an example hospital has 1,500 Medicare fee-for-service discharges annually, and aims to reduce readmissions by the Partnership for Patients goal of 20 percent, that would equate to a reduction of 300 hospitalizations annually totaling $3,000,000. There is still a significant gap between the magnitude of the penalty and the clinical objective (20 percent fewer readmissions, which is safer and more satisfying care) and the financial objective (20 percent reduction in Medicare expenditures).

One Chief Medical Officer I spoke with this week characterized the readmission penalties as just another uncertainty in the rapidly shifting reimbursement landscape. The implication is that his organization will be moving quickly through this period of uncertainty toward population-based accountability. Another Chief Quality Officer I spoke with is from an Accountable Care Organization and noted that the seven-figure penalties projected over the upcoming several years were most certainly causing distress among the leadership. Even if seven figures is a small percentage of total revenue, it is clearly a large enough absolute number to command attention.

Measurement time frame. Finally — and to me, most significantly — the readmission penalties are assessed on the prior three years of performance: July 2008 through June 2011. The world of hospital quality priorities has evolved tremendously since July 2008. In July 2008, President George W. Bush was in office, and Wall Street had not yet crashed. I conducted a national scan for hospital associations leading efforts to improve care transitions and reduce readmissions and found none. The Institute for Healthcare Improvement had not yet launched the STAAR Initiative, the Society for Hospital Medicine had not launched BOOST, and the results of the notable single randomized controlled trial model, Project RED (Re-Engineered Discharge), would not be published for another full year (June 2009).

As a demonstration of how quickly the combination of incentives, penalties, payment and policy changes have mobilized attention to a specific issue, the hundreds of millions of dollars in technical assistance, payment incentives, and penalties has resulted in a rapid expansion of efforts to improve care transitions and reduce readmissions. The following chart (click to enlarge) is my informal analysis of change over a relatively short amount of time. Observers will note that the end of the current measurement period was the beginning of readmission reduction efforts in hospitals across the US.

Here is what the three-year rolling average misses. A community hospital outside a major metropolitan area launched their transitions in care program two years ago, in September 2010. The first phase was implementing a telephonic follow up care service. In December 2010, they initiated a transitional care coach service, followed by a palliative care service in February 2011. They review their operational data monthly, and have consistent reductions in 30-day all cause readmissions for the patients receiving these new services.

Even with all this activity, investment, and improvement, for which they were recognized with a state-wide patient safety award in 2011, and even with the experience which formed the basis of their successful bid for the CMS Community-based Care Transitions Program (CCTP), this hospital – which in my view has been doing most everything “right” since late 2010 – will be subjected to the maximum 1 percent penalty.  To their credit, the executive team at this organization have always understood the three-year window and continue to support these investments, despite the losses incurred this year.

For hospitals in this position — incurring penalties despite their knowledge of demonstrably effective improvements outside the 2008-2011 measurement window — hospital executives may be able to see past this year, and perhaps (as I believe will be the case for the hospital in this example) next year as well. One Chief Quality Officer in a similar position confirmed that the new goal in the context of readmissions penalties is to get off the penalty list in two years, recognizing that their efforts launched in 2010.

There are hospitals that have not engaged in readmission reduction efforts. For these hospitals, I would project potential readmission penalty risk over the next five years for two reasons: first, any efforts launched in 2013 will form the basis for the FY ’18 measurement period (see chart below, click to enlarge); and second, because CMS readmission rate adjudication as “above expected” is based on the expected readmission rate, which may change as other organizations reduce readmissions faster or more effectively.

Bottom Line

Although there are several issues with the manner in which the penalties are calculated – issues which have real consequences at the level of individual hospitals – the readmission penalty program will compel hospitals to prioritize efforts to improve transitions and reduce readmissions. Hospital teams would be wise to consider not only the magnitude of this year’s penalty, but also projections of total penalty over the next several years.

It will be imperative to understand how hospitals — safety net and otherwise — move from a baseline of high readmissions to expected or lower-than-expected readmissions; the field is still nascent in hospital-wide results. It will also be important to study how hospitals that primarily serve underserved populations adapt and extend their partnership base with community health centers, community agencies, Medicaid payers, and other stakeholders to more effectively address the complexities of the social, economic, and behavioral drivers of hospital utilization. In all, the CMS Readmission Reduction Program will spur the much needed improvement efforts and research in these domains because real dollars are now on the line.