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Will The Readmission Rate Penalties Drive Hospital Behavior Changes?


February 14th, 2013

Since the development of the metric in 1984 by Anderson and Steinberg, inpatient hospital readmission rates have been used as a marker for hospital quality. A good deal of attention is now being paid to the new readmission rate penalties in the Affordable Care Act (ACA).

While the penalties have garnered significant attention, it is unknown whether they will materially change hospital behavior. In this post, after reviewing the mechanics of the penalties, we take a close look at how they are likely to affect hospital incentives. We also suggest some refinements to the penalties that could help achieve the aim of reducing preventable readmissions.

How The Penalties Work

The readmission penalty in the ACA is based on readmissions for three conditions: Acute Myocardial Infarction (AMI), Heart Failure, and Community Acquired Pneumonia. For each hospital, the Centers for Medicare and Medicaid Services (CMS) calculates the risk-adjusted actual and expected readmission rates for each of these conditions. Risk-adjustment variables include demographic, disease-specific, and comorbidity factors. The excess readmission ratio is the actual rate divided by the expected rate.

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Creating Outcome-Driven Health Care Markets


October 23rd, 2012

America’s health care market does not work well. It is inefficient, asymmetric, and in most cases not particularly competitive. The Affordable Care Act (ACA) legislated a myriad of changes to reform and improve insurance markets with exchanges as a centerpiece. While exchanges and reforms like subsidies, guaranteed issues, age bands, community rating, reinsurance, and risk adjustment are all helpful, a huge opportunity remains to segment the health care market around different categories of patient demand.

Basic economic theory states that a well-functioning market is aligned between supply and demand. Ideally, suppliers and customers align around the preferences of the customers – the unit of alignment is driven by the demand side. When we examine health care, we see demand falling into three segments: healthy people who have episodic needs, chronic disease patients with predictable needs, and highly complex patients with less predictable needs. Given the high variance between the three submarkets, we believe that each of these segments should be thought of as a discrete market and served by different types of insurance products, payment models, and health care providers.

We believe that this is necessary since each of these segments values providers differently. For a healthy patient with periodic needs, convenience and experience are likely to matter more than continuity with a provider and care team. Conversely, chronic disease patients are likely to value clinical outcome attainment, complication avoidance, and care coordination very highly. And complex patients will need and value the customization, access to research, and specialization that the latest medical breakthroughs can deliver. Not only are the sources of value different, but so are the delivery systems and payment models needed to align incentives for value.

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