The loopholes around penalizing hospitals for readmissions

With notably few exceptions, the American health care system has been financed on the basis of volume rather than value. That means that we’ve been paying providers for everything that they do, rather than paying them for the outcomes they produce. This is not common in other fields.

For example, if you are in an accident and have to take your car to a body shop, you (or your insurance company) typically pay them for the work once. If they haven’t repaired the vehicle properly, you can typically return the car to them and they will “make it right” for no additional charge. If you go out to eat, and the meal is not to your liking, the restaurant’s manager will typically offer to make you something else at no additional charge, or will discount the price of your unsatisfactory meal.

In health care, you pay the doctor to treat you, and if the treatment fails, you pay them to treat you again, and again, and again. Now, I’m not suggesting that this alone prompts physicians to do their job poorly or to provide more care than is necessary. Rather, I’m suggesting that the financial incentives are such that they do not reinforce physicians’ efforts to provide high quality care. Efforts to work around this include managed care and capitated payments, with the thinking that this shifts risk onto the providers and encourages them to doggedly pursue better outcomes. In some cases, this has worked. In other cases, it has backfired, as physicians simply reduce the amount of care they provide, much of it arguably needed care.

The latest development in this area is the implementation of financial penalties for hospitals with excessively high readmission rates among Medicare patients. As of October 2012, if a hospital’s readmission rate exceeds their expected readmission rate, they are fined by the Centers for Medicare & Medicaid Services (CMS). Right now, the maximum penalty is a 1% reduction in total Medicare payments over the coming year. By 2015, the penalty will increase to a maximum of 3%. This is a lot more money than it might seem from the percentage figures. In fact, it’s estimated to save Medicare roughly $300 million this year. That means, if hospitals don’t improve, CMS might keep nearly $1 billion a year starting in 2015.

Of course, the goal is to save even more money by using the penalty to encourage hospitals to prevent as many readmissions as possible. Medicare currently spends about $17 billion a year on readmissions, so there is considerable room for improvement and savings. However, I’m doubtful that the new penalties will achieve their desired effect. The reason is that hospitals have ways of artificially reducing their readmission rates. One prominent example is through the use of observation care, where patients are held in the hospital–sometimes for days–as outpatients. This is more costly for patients, who are responsible for a greater portion of their outpatient bills, it raises questions about the quality of care provided while a patient is under observation, and it seems like an ideal way for hospitals not to lose up to 3% of their Medicare reimbursement going forward.

So, will penalizing hospitals for readmissions work? I doubt it. Not unless we find a way to prevent hospitals from working around the penalty.

Brad Wright is an Assistant Professor of health management and policy who blogs at Wright on Health.

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    Ah yes, another person who has never treated a patient in his life who knows all the answers. Clearly readmissions are due to faulty care by the physicians. They certainly are not due to patient noncompliance, lack of needed support structure and home care as outpatients, or the natural course of certain diseases, to list a few. Thank goodness for people like this gentleman to set us all straight!

    • Brad Wright

      Of course the reasons you give–especially horrible post-acute care coordination–are important causes of readmissions. However, anyone with even a cursory understanding of microeconomics cannot argue that a fee-for-service system does nothing to discourage readmissions. As I said, this doesn’t mean that physicians are giving “faulty care” but that physicians make more money when the patients come back, so they don’t have an incentive–at least not a financial one–to keep folks out of the hospital. But I guess, since we all know that doctors are only in it to help people, that shouldn’t matter. The point is that the hospital ADMINISTRATORS may encourage observation care to dodge a penalty designed to incentivize better outcomes.

      • Brian Stephens MD

        How do penalties “incentivize” better outcomes?

        if the system wants better outcomes, then truly incentivize better outcomes. you cant “beat” better outcomes out of people. Even basic pyschology 101 teaches that.

        how is this for radical. TRULY incentize primary care physicians to do REAL primary care. Then you will have better outcomes, less hospitalizations, and you will have the proper support structures to prevent readmission.

        More people actually wanting to be primary care doctors. low and behold, plenty of good primary care for everyone.

        Real incentives work (not the piddly crap tokens they have tried.)

        Sticks will never work but to drive further people out of Primary care.
        Primary care keeps people out of the hospital. I have never known the hospital to keep people out of the hospital.

        • Brad Wright

          Well, if you can’t beat better outcomes out of people, why do we have jails, ground teenagers, and give out parking citations? But to your real point, YES, better incentives to reward good primary care–and to encourage entry into that field–would do more than reduce readmissions. It would also reduce admissions, particularly for ambulatory care sensitive conditions. And also more to your point that you have never known hospitals to keep people out of the hospital, I would say of course not, they’ve never had a reason to. Now they do. But, as many are concerned, they will just figure out a way to make money and avoid the penalty.

  • Margalit Gur-Arie

    Financial penalties and fines don’t work in health care and they don’t work in the corporate world. This is why banks keep breaking the law, and polluting industries keep polluting. They just incorporate the penalties into the cost of doing business and guess who ends up paying the penalty in the end?

    It’s not how you pay for health services – fee for services or some other convoluted way to not pay doctors – it’s what you pay for. Pay more for what you want more.

  • Doctor K Says

    While this continues the same old lines of thought there are a few basic misconceptions here. First- the idea that a penalty will actually work.

  • Ronald Hirsch

    It should be noted that the OIG has included the review of the overuse of Observation status on its 2013 work plan so hospitals will not be using that as a method to avoid readmission penalties. As others have pointed out, there is no magic solution, and many readmissions are not the fault of the hospital but that’s the way CMS plans to try to save the trust fund.

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