Understanding the Hospital Readmission Reduction Program

The Hospital Readmission Reduction Program (HRRP) was implemented with the Fiscal Year (FY) 2013 Inpatient Prospective Payment System (IPPS).

It is a mandatory Medicare value-based purchase program that is designed to encourage hospitals to improve communication and care coordination with patients and their caregivers to reduce avoidable readmissions. Only subsection (d) hospitals as defined in the Code of Federal Regulations (42 CFR 412.20), which basically translates to those hospitals that are governed by the IPPS, must participate in this measure.

Hospitals in Maryland are exempt since they have a different reimbursement methodology. The fiscal year (FY) 2026 IPPS proposes incorporating Medicare Advantage beneficiary data into the calculation of HRRP measures and aggregate Medicare Severity Diagnosis Related Groups (MS-DRGs). The performance period for FY 2026, which begins October 1, 2025, is 7/1/21 to 6/30/24.

The impact of poor performance on the HRRP is often misunderstood because payers, such as Medicare, may also have payment rules associated with readmissions. For example, Traditional Medicare requires if a patient is discharged or transferred from an IPPS hospital and readmission to the same hospital on the same day, “for symptoms related to, or for evaluation and management of, the prior stay’s medical condition, hospitals will adjust the original claim generated by the original stay by combining the original and subsequent stay onto a single claim MM3389.” 

Many other payers will require readmission be combined with a preceding stay that occurs up to 30 days prior. These payment requirements are not part of the HRRP.

Poor performance on the HRRP can lead to a maximum payment reduction of three percent for those paid under IPPS. When a hospital is penalized for poor performance the amount of the penalty is applied to the hospital’s base operating rate, which is the factor that is multiplied by the relative weight of the billed MS-DRG, for the applicable fiscal year.

It is actually a much bigger financial burden than many realize. If a hospital has a base rate of $6,500 and a 0.75 percent penalty you would multiply 6500 by 0.9925 = lowering the base operating rate to $6,451, a loss of $49 dollars. If the hospital’s case mix index (CMI) is 2.800 the penalty results in an average loss of about $137 per claim paid under IPPS. It doesn’t seem like much until the value is annualized. For more information about how the penalty is calculated visit QualityNet Home.

The full impact of HRRP will depend on the payer mix. The higher the volume of traditional Medicare patients, the higher the financial impact. If Medicare Advantage is added into the penalized population, then that would result in even lower Medicare total payments since the majority of Medicare beneficiaries are enrolled in Medicare Advantage. The Medicare Advantage population is expected to continue to grow and surpassed the traditional Medicare population in 2022. 

According to Definitive Healthcare List of Hospitals with the Highest Readmission Penalties summary data for FY 2023 found 17 hospitals received the full three percent penalty. The average penalty for hospitals is 0.34 percent. About 20 percent of hospitals do not receive a readmission penalty.

It is important to remember that hospitals can also be penalized up to another 3 percent from poor performance on Hospital Value Based Purchasing (HVBP) with a maximum of 2 percent and the Hospital Acquired Conditions Reduction Program (HACRP) with a flat penalty of 1 percent.

Currently, the HRRP includes the following criteria Hospital Readmissions Reduction Program (HRRP) Overview:

• Patients are age 65 and older;
• Have been hospitalized for one of the following conditions or procedures included in the Hospital Readmissions Reduction Program (HRRP) during the performance period. The patients have been diagnosed with the following:
  • Acute myocardial infarction (AMI)
  • Chronic obstructive pulmonary disease (COPD)
  • Heart failure (HF)
  • Pneumonia
  • Coronary artery bypass graft (CABG) surgery,
  • Total hip arthroplasty and/or total knee arthroplasty (THA/TKA) and,
• The patients are enrolled in Medicare fee-for-service (FFS) Part A and Part B for the full 12 months before the index stay (that is, the initial admission), as well as enrolled in Part A during the index stay.

There are several factors that impact performance on HRRP. Many hospitals focus on the services aspect by implementing better discharge planning processes and aggressive patient follow up protocols, including specialized clinics to reduce the need for additional hospital care within the 30-day time period. Hospitals may also impact performance through utilization review practices that leverage observation services for the measure population before considering inpatient care.

An increasing number of hospitals are understanding the role of documentation and coding on performance both in determining the measure population and in risk-adjusting the population. This is the connection between HRRP clinical documentation integrity (CDI) and coding professionals.

The payment reduction methodology is based on the excess readmission ratio (ERRs), which is currently calculated using traditional Medicare claims (excludes Medicare Advantage claims). The EER is calculated for each sample within the overall HRRP population.

Documentation and coding practices impact the predicted 30-day readmission rate based on the hospital’s patient case mix. This value is the denominator to the expected 30-day readmission rate, an average rate developed from hospitals with a similar patient case mix.

If other hospitals risk-adjust their patient population better than your hospital, it is likely to be penalized because it will have an EER > 1.0. High performing organizations will have EERs below 1.0 as much as possible.

As previously mentioned, the purpose of HRRP is to reduce unplanned readmissions. Hospitals have tried a variety of ways to exclude future readmissions, but this is not a hospital level factor. The Centers for Medicare & Medicaid Services (CMS) uses an algorithm to identify readmissions that are typically planned. Some types of care are always considered planned. These include the following:

• Transplant surgery
• Maintenance chemotherapy or immunotherapy
• Rehabilitation

Planned readmissions can also include some elective procedures, when the principal diagnosis is not acute. CMS states, “admissions for acute illness or complications of care are never considered planned QualityNet Home.”

If reviewing the health record for CMS Hierarchical Condition Category (HCC) risk-adjustment diagnoses is part of the CDI workflow, it can be beneficial to review the Hospital-Specific report to better identify opportunities to improve capture of risk-adjustment measures. In fact, measuring improvement in risk-adjustment for HRRP and the other CMS mandatory quality measure could be a good departmental measure.

Often hospitals don’t have an elegant way to measure the impact of CDI on quality measure performance, but if CDI efforts can reduce the penalty, the hospital can measure the financial impact by how much less the operating rate is reduced. A reduction of $10 in the HRRP could add back thousands of dollars annually to the bottom line.  

Programming note:

Listen live when Cheryl Ericson reports on the latest CDI news on Talk Ten Tuesday with Chuck Buck and Angela Comfort, 10 Eastern.