The Centers for Medicare & Medicaid Services (CMS) should reassess its all-cause readmission policy and move toward a policy that meets the intent of the Affordable Care Act (ACA).


Under CMS’s Hospital Readmissions Reduction Program—which was mandated by the ACA and became effective for hospital discharges on or after Oct. 1, 2012—Medicare payments to hospitals with higher-than-expected risk-adjusted readmission rates are reduced by up to 1 percent in 2013, increasing to 3 percent in 2015. The rationale for the program is that hospitals benefit financially when a preventable readmission occurs, because they are paid for both the original admission and the subsequent readmission—in effect financially rewarding poor-quality care. 

The CMS program has been criticized as not adequately accounting for patient severity of illness and socioeconomic status, resulting in disproportionate penalties to hospitals that treat the sickest and poorest patients.a Although adequately accounting for patient severity of illness and socioeconomic status is essential, there is an even more fundamental problem with the program: It holds hospitals responsible for readmissions over which they have little or no control. 

Taking a Closer Look

With few exceptions, the Hospital Readmissions Reduction Program includes readmissions due to any cause. Although the provision of high-quality care in the initial hospitalization, adequate discharge planning, adequate postdischarge follow-up, and better coordination between the inpatient and outpatient healthcare teams can prevent many readmissions, some readmissions are clearly beyond the control of the hospital. For example, following discharge for treatment of pneumonia, the program’s all-cause approach would hold a hospital responsible for a readmission due to an emergency appendectomy, a fractured hip, a stroke, or an acute myocardial infarction (AMI). This is both unreasonable and unfair. Although there are plans to eliminate planned surgeries from the program, such limited exclusions do not adequately address the inherent unfairness of the all-cause readmission approach.

States that have implemented payment adjustments for excess readmissions have not taken this all-cause approach. For example, New York regulations require that Medicaid payments to hospitals be adjusted for readmissions that are “clinically related to the prior admission” and “could reasonably have been prevented by the provision of appropriate care consistent with accepted standards in the prior discharge or during the postdischarge follow-up period.”b Texas law requires that Medicaid payments to hospitals and managed care plans be adjusted for readmissions that “resulted from deficiencies in the care or treatment provided to the person during a previous hospital stay or from deficiencies in post-hospital discharge follow-up” and do “not include a hospital readmission necessitated by the occurrence of unrelated events after the discharge.”c Furthermore, the June 2007 Report to Congress by the Medicare Payment Advisory Commission (MedPAC) that proposed the Medicare payment adjustments for readmissions was based on analyses that included only readmissions that were related to the prior discharge.

An all-cause policy is inconsistent not only with the direction state policymakers have taken, but also with the provisions of the ACA, which require that the readmissions reduction program “have exclusions for readmissions that are unrelated to the prior discharge.” In similar legislation relating to inpatient complications rather than readmissions, the Deficit Reduction Act of 2005 (DEFRA) established payment reductions for inpatient complications that were “reasonably preventable.” Reasonably preventable and related are terms used by Congress to express essentially the same intent. The ACA did not intend for hospitals to be held accountable for readmissions that are clearly beyond their control. Instead, it intended for hospitals to be held accountable only for readmissions that are related to the prior admission and therefore reasonably preventable. 

Despite the clear language in the ACA, CMS has stated, “We do not seek to differentiate between related and unrelated readmissions or to identify preventable readmissions.”d It is difficult to understand how the ACA requirement to have exclusions for “readmissions that are unrelated to the prior discharge” can be interpreted by CMS to mean there was no need to “differentiate between related and unrelated readmissions.” It is especially difficult to understand in light of how CMS interpreted the previous “reasonably preventable” requirements in DEFRA for inpatient complications. 

For inpatient complications (known as hospital-acquired conditions [HACs]), CMS limited the complications included in the payment adjustment to only those complications that were virtually always preventable (beyond a reasonable doubt), which is the opposite of an all-cause approach (guilty until proven innocent). For example, patients admitted for pneumonia who have an unrelated complication of appendicitis, stroke, or AMI would not have a payment penalty imposed, while patients admitted for pneumonia who have a subsequent readmission for an unrelated appendectomy, stroke, or AMI would have those readmissions included in the hospital’s readmission rate, potentially resulting in a payment penalty for the hospital. The criteria used by CMS for determining which complications are used for payment adjustment are inconsistent with the criteria CMS used for determining which readmissions are used for payment adjustment.

The distinction between all-cause and reasonably preventable is a substantive distinction that affects a significant proportion of readmissions. For the past several years, the Florida Agency for Health Care Administration has published comprehensive comparisons of hospital readmission rates using a methodology that excludes readmissions that are not preventable.e The Florida public reports exclude approximately 40 percent of all readmissions as not preventable.f Given this volume, the inclusion of unrelated readmissions in the Hospital Readmissions Reduction Program could have a significant impact on which hospitals have financial penalties imposed. 

Indeed, a recent study of Veterans Administration data found that if the program were limited to only those readmissions considered reasonably preventable, the financial penalties for 30 percent of hospitals would change.g The study concluded that “inclusion of preventability in the definition of readmissions has a significant impact on which hospitals will suffer payment penalties.” 

The assumption underlying the decision to include readmissions from all causes in the readmissions reduction program is that unrelated readmissions would average out and no hospital would be financially disadvantaged by their inclusion. The Veterans Administration study demonstrates that this assumption is false and that inclusion of unrelated readmissions does bias a hospital’s readmission rate.

The ultimate intent of the ACA readmission policy is to provide a financial incentive for hospitals to improve quality and lower readmission rates. The inclusion of readmissions over which a hospital has no control not only raises an inherent question of validity, but it also is detrimental to quality improvement efforts. An all-cause readmission approach that presumes hospital culpability for virtually all readmissions will divert hospitals from productive quality improvement efforts. Physicians and hospital administrators will— predictably and quite understandably—respond defensively to protect their reputations as well as the financial bottom line. In many cases, the defensive responses will take the form of efforts to discredit the readmission policy, detracting from the primary goal of correcting potential quality problems. An all-cause readmission approach that blames hospitals for virtually all readmissions will divert hospitals’ quality improvement efforts away from those readmissions where quality improvement is actually possible. 

CMS has identified clinically credible financial incentives as a key reason for the success of the Medicare inpatient prospective payment system (IPPS), as reflected in its comments in the Federal Register:h

“The success of any payment system that is predicated on providing incentives for cost control is almost totally dependent on the effectiveness with which the incentives are communicated. . . . Central to the success of the Medicare inpatient hospital prospective payment system is that DRGs have remained a clinical description of why the patient required hospitalization.” 

Clinically credible financial incentives are fundamental to achieving the behavior changes that are needed to improve quality and lower readmissions. The Hospital Readmissions Reduction Program as implemented does not adhere to this core lesson from the implementation of IPPS.

Significant improvements in quality can be achieved when the method used to adjust hospital payments is clinically credible. For example, Maryland’s Health Services and Cost Review Commission implemented a rate-based payment adjustment for reasonably preventable inpatient complications, with preventability determined by detailed clinical logic.i In the first two years of the initiative, inpatient complications in Maryland decreased 15 percent. The cost savings over the first two years of the Maryland payment adjustment for inpatient complications totaled $110.9 million.

Time to Address Readmissions Payment Flaws

In its 2007 Report to Congress on readmissions, MedPAC cited research demonstrating that efforts to “improve communication with beneficiaries and their other caregivers, coordinate care after discharge, and improve the quality of care during the initial admission can avert many readmissions.” Payment adjustments based on readmission rates could stimulate hospital quality improvement efforts that could in turn yield significant and sustainable reductions in readmission rates. But the payment adjustments that drive those efforts must be clinically credible if they are to be effective. 

Paying for both the original admission and a subsequent preventable readmission financially rewards poor-quality care. The ACA mandate for the Hospital Readmissions Reduction Program is intended to address this flaw in the payment system. But as implemented, the program lacks clinical credibility and is inconsistent with the legislative intent of the ACA. At best, it is distracting, and at worst, it is harmful to hospitals and their quality improvement efforts. 

Richard Averill, MS, is senior vice president, clinical and economic research for 3M Health Information Systems, Wallingford, Conn..

Norbert Goldfield, MD, is medical director, 3M Health Information Systems, Wallingford, Conn..

John S. Hughes, MD, is a consultant, 3M Health Information Systems, New Haven, Conn..


a. Abelson, R., “Hospitals Question Medicare Rules on Readmissions,” The New York Times, March 29, 2013 ; and Joynt, K.E., and Jha, A.K., “A Path Forward on Medicare Readmissions,” New England Journal of Medicine, March 28, 2013. 

b. “Rule Making Activities,” New York State Register, July 21, 2010. 

c. Senate Bill 7, State of Texas. 

d. “Rules and Regulations,” Federal Register, Aug. 31, 2012. 


f. Goldfield, N.I., et al., “Identifying Potentially Preventable Readmissions,” Health Care Financing Review, Fall 2008. 

g. Mull, H.J., Chen, Q., O'Brien, W.J., Shwartz, M., Borzecki, A.M., Hanchate, A., Rosen A.K., “Comparing Two Methods of Assessing 30-Day Readmissions: What Is the Impact on Hospital Profiling in the Veterans Health Administration?Medical Care, July 2013 

h. CMS, Final Rule, “Medicare Program; Payments for New Medical Services and New Technologies Under the Acute Care Hospital Inpatient Prospective Payment System,” Federal Register, Sept. 7, 2001. 

i. Hughes, J., et al., “Identifying Potentially Preventable Complications Using a Present-on-Admission Indicator,” Health Care Financing Review, Spring 2006. 

j. Calikoglu, S., Murray, R., Feeney, D., “Hospital Pay-for-Performance Programs in Maryland Produced Strong Results, Including Reduced Hospital-Acquired Conditions,” Health Affairs, December 2012. 

Publication Date: Tuesday, October 01, 2013

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