1. Understand the Penalty Conditions
CMS is authorized by the Hospital Readmission Reduction Program to start penalizing for excess readmissions for congestive heart failure (CHF), pneumonia, and acute myocardial infarction (AMI) in 2013. These conditions were chosen in part due to their high volumes and readmission rates, as well as their significant cost to Medicare. In 2015, the number of conditions will expand and will likely include chronic obstructive pulmonary disease, coronary artery bypass graft, percutaneous coronary interventions and vascular procedures. Again, penalties will not be limited to payment for the noted diagnoses, but will be levied against a hospital’s entire Medicare payment for the year. CMS defines readmissions as “all cause” with a few exceptions, such as hospital transfers and readmissions for hospice and radiation.
2. Calculate Your Revenue at Risk
There are 2 different methods for penalty calculation provided in the Patient Protection and Affordable Care Act (PPACA). The worse-case scenario is a 1% Medicare payment reduction across all DRGs in fiscal year 2013, increasing to 2% in 2014 and 3% in 2015. For example, if a hospital’s total inpatient payments from Medicare totaled $50 million in FY 2012, the hospital would lose $500,000 (1% of $50 million) of its inpatient operating payments in FY 2013. On the other hand, if the alternative calculation (described below) results in total excessive payments of less than the cap, Medicare payments will be reduced by that percentage.
To determine the potential penalty, the amount of excessive payments made for each of the 3 conditions must be calculated. The PPACA defines excessive payments as the product of the number of patients with the applicable condition, the base DRG payment made for those patients and the percentage of readmissions above the expected rate for that specific hospital.
Sample Hospital: (Number of patients with condition) x (Average reimbursement for condition) x (% Higher than expected) = Excessive payment for condition
| Condition | # of Patients | Avg Reimbursement | % Higher Than Expected | Excessive Payment |
| CHF | 500 | $5,000 | 20% | $500,000 |
| AMI | 400 | $4,000 | 10% | $160,000 |
| Pneumonia | 300 | $3,000 | 5% | $45,000 |
| Total Excess Payment | $705,000 | |||
Continuing with the example from the worst-case scenario, if the above sample hospital’s total inpatient operating payments from Medicare were $50 million in FY 2012, then their excessive payments were 1.4% of total operating payments ($705,000 divided by $50 million). However, the maximum penalty in FY 2013 is 1% of the total operating payments, which is less than this hospital’s total excessive payments. Based on this example, this hospital would lose $500,000 (1% of $50 million) of its inpatient operating payments in FY 2013. On the other hand, if excessive payments were determined to be 0.8% (instead of 1.4%), then the hospital would be penalized $400,000 (0.8% of $50 million).
3. Prepare for Penalties Now
Although many questions remain about how Medicare’s readmission penalties will play out, including expected readmission rates per hospital and how penalties will be levied in a bundled payment program, there are still clear actions all health care organizations can and should take immediately, including the following:
- Know your readmission metrics including original discharge disposition and origin of readmission
- Calculate readmission rates by condition, physician performance and post acute care facility
- Regularly share readmission data with key stakeholders, including physicians, senior executives and case management
- Identify opportunities based on patient demographics and common readmissions
- Screen and target patients based on risk assessments
- Compare disease-specific outcome measures to national and local competitor rates.
Neal Gold, MD, is Director of Sg2.