Changes in Readmission Adjustment Factors

Original story posted on: September 26, 2018

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In FY 2019, hospital performance in the HRRP will be assessed relative to hospitals within the same peer groups.

Since 2013, Medicare has penalized hospitals that have an “excessive” number of readmissions under a program called the Hospital Readmissions Reduction Program, or HRRP. The Centers for Medicare & Medicaid Services (CMS) measures hospital performance in the HRRP by calculating excess readmission ratios (ERRs) for each of the six program measures. An ERR is the ratio of predicted to expected readmissions for a given measure.

The payment adjustment factor formula is used to calculate the size of the payment reduction. Payment reductions were capped at 1 percent (i.e. a minimum payment adjustment factor of 0.99 percent) for FY 2013, then 2 percent for FY 2014 (i.e. a minimum payment adjustment factor of 0.98 percent), and 3 percent (i.e. a minimum payment adjustment factor of 0.97 percent) for FY 2015 and onward. Payment reductions are applied to all Medicare fee-for-service (FFS) base operating DRG payments for the fiscal year. The payment adjustment factor for FY 2013-FY 2018 is:

Powell 2

In this formula, dx is any one of the six measure cohorts. The excess readmission ratio (ERR) is a hospital’s performance on that measure.

For FY 2018, the HRRP cohorts includes six measures:

  • Acute myocardial infarction (AMI)
  • Chronic obstructive pulmonary disease (COPD)
  • Heart failure (HF)
  • Pneumonia
  • Coronary artery bypass graft (CABG)
  • Elective primary total hip and/or knee arthroplasty (THA/TKA)

There was a problem yielding a common complaint among certain types of hospitals with the penalty computations. According to an article published in the Journal of American Medical Association (JAMA) in 2013, certain types of hospitals bore the brunt of the penalties:

“Similarly, we found that major teaching hospitals are more likely to be highly penalized than nonteaching hospitals (44 percent [n = 118] versus 33 percent [n = 979], respectively) and less likely to not be penalized (19 percent [n = 50] versus 35 percent [n = 1043]). Safety-net hospitals are more likely to be highly penalized than non-SNHs (44 percent [n = 337] versus 30 percent [n = 760], respectively), and only 20 percent (n = 157) will not be penalized. In multivariate analyses, we found that the adjusted odds of being highly penalized are greatest for SNHs (odds ratio, 2.38 [95 percent CI, 1.91-2.96]; P < .001).”
JAMA. 2013;309(4):342-343. doi:10.1001/jama.2012.94856

 In December 2016, the 21st Century Cures Act (Cures Act) was signed into law. The legislation requires that CMS assess penalties based on a hospital’s performance relative to that of other hospitals with a similar proportion of patients that are dually eligible for Medicare and full-benefit Medicaid. The legislation further requires that estimated payments under the new methodology equal payments under the old design, also known as budget neutrality.

There is a rub with this neutrality provision, as with all such provisions. Medicare runs on a “prospective payment” methodology. The neutrality never actually works, out as it is based only on a guess. CMS came up with a new formula:

Powell 2

Beginning in FY 2019, hospital performance in the HRRP will be assessed relative to the performance of hospitals within the same peer groups. Hospitals will be stratified into five peer groups, or quintiles, based on their proportion of dual-eligible stays. A hospital’s dual proportion is the proportion of Medicare fee-for-service (FFS) and Medicare Advantage stays wherein the patient was dually eligible for Medicare and full-benefit Medicaid. 


Is the new method fair? Is it really true that hospitals with larger Medicaid populations face a more difficult readmission situation? Is it fair to increase reimbursement to hospitals with high Medicaid case mixes when they already get an add-on for Disproportionate Share Hospital (DSH) payments? These are policy issues that will continue to be debated. We have no opinion and take no sides.

While we need to wait and see what the peer group data will show, there is no doubt that hospitals with smaller Medicaid populations will bear much more of the readmission penalty burden. These new regulations will tend to pit hospitals within peer groups against each other in the fight against the penalties. It will also impact Medicare Advantage reimbursement for contracted and non-contracted services.


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Timothy Powell, CPA CHCP

Timothy Powell is a nationally recognized expert on regulatory matters, including the False Claims Act, Zone Program Integrity Contractor (ZPIC) audits, and U.S. Department of Health and Human Services (HHS) Office of Inspector General (OIG) compliance. He is a member of the RACmonitor editorial board and a national correspondent for Monitor Mondays.

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