## For Fiscal Year (FY) 2016, the Centers for Medicare and Medicaid Services (CMS) has estimated that total readmissions penalties will be approximately $420M, down slightly from $428M in FY 2015.

The Affordable Care Act established the Hospital Readmissions Reduction Program (HRRP), which imposes penalties on hospitals deemed to have “excess readmissions.” To calculate the penalty, CMS reviews the claims for five readmission measures for excess readmissions. The claims are grouped by measure based on diagnosis and procedure codes. The FY 2016 measures are unchanged from FY 2015:

- Acute Myocardial Infarction (AMI)
- Heart Failure
- Pneumonia
- Chronic Obstructive Pulmonary Disease (COPD)
- Total Hip and/or Knee Arthroplasty

CMS publishes a readmissions adjustment factor for each affected hospital to indicate the level of its penalty, which ranges from 0.9700 (reflecting the maximum 3% penalty for FY 2016) to 1.0000 (indicating no penalty). The penalty is assessed against Medicare base operating DRG payments for all discharges at a penalized hospital. However, CMS does not publish an estimated penalty for individual hospitals.

BESLER Consulting calculated the penalty for each hospital, following the formulas laid out by CMS at:

The following is a sample readmission penalty calculation:

**Base Operating DRG Payment Amount:**

[[case mix index × ((labor share × wage index) + (nonlabor share x COLA))] + new technology payments, if applicable] × total Medicare cases

[[1.3656 × ((3,804.40 × 1.0537) + (1,661.69 x 1))] + 0] × 5,433 = 41,852,953

To estimate a hospital’s total readmission penalty, the Medicare case-mix index can be used in place of the DRG weights for each case

**Readmissions Payment Adjustment Amount:**

(base operating DRG amount for all admissions × readmissions adjustment factor) – base operating DRG amount for all admissions

(41,852,953 × .9765) – 41,852,953 = (983,544)

For FY 2016, 2,620 facilities are being penalized. The highest penalty for a single facility is over $3.6M. 49 hospitals are being penalized at least $1M in FY 2015. 38 hospitals are receiving the maximum 3% penalty, but only two hospitals are members of both groups.

In fact, eight of the hospitals experiencing over $1M in penalties have a readmissions adjustment factor of 99% or greater, indicating a penalty of less than or equal to 1%. This demonstrates that the penalty percentage plays only a small part in the total impact for a given hospital. More important drivers are the total volume of Medicare patients and the case-mix index of the provider.

The total penalty for the hospitals receiving the maximum 3% penalty is approximately $11.6M, or an average of about $305K per hospital. The minimum and maximum penalties for this group were $20K and $1.2M, respectively.

Due to what many commenters consider a flaw in the language describing the calculation of the excess readmission penalty in the ACA, measures with a low overall readmission rate will cause a penalty to increase by a factor that is the inverse of the Medicare-wide readmission rate.

For example, in FY 2015, CMS added a readmission measure for Total Hip and/or Knee Arthroscopy. This measure has an overall readmission rate of only about 5%. Therefore the calculation of the penalty imposes a reduction in Medicare reimbursement of approximately twenty times the payments hospitals receive for excess readmissions. We believe this was the greatest driver of the increase in the overall FY 2015 HRRP penalty by almost $200M. This higher overall penalty has continued in FY 2016.

It’s very interesting to examine the calculation behind the HRRP. While it follows the letter of the law (Section 3025 of the Affordable Care Act (ACA) as amended by section 10309 of the ACA), many feel that the impact is unfair.

The Medicare Payment Advisory Commission (MedPAC) provided a simplified example of how the calculation overly penalizes providers in their June 2013 Report to Congress.

Number of admissions in Measure | 100 |

National average readmission rate for the Measure | 20% |

Expected hospital readmissions | 20 |

Actual hospital readmissions | 24 |

Adjusted hospital readmissions | 22 |

Excess readmissions | 2 |

Excess readmissions ratio | 1.1000 |

Average base operating DRG payment for Measure | $10,000 |

*In this example, the base operating DRG payments for the two excess readmissions would be $20,000 ($10,000 x 2).*

However, the definition of “aggregate payments for excess readmissions” in the ACA, section 3025(4)(A), is “the product, for each applicable condition, of (i) the base operating DRG payment amount for such hospital for such applicable period for such condition; (ii) the number of admissions for such condition for such hospital for such applicable period; and (iii) the excess readmission ratio…minus 1.” Based on this definition the excess readmissions ratio is multiplied by the operating DRG payments for total admissions for the measure, not the operating DRG payments related to the expected readmissions. The result in the example above is $100,000 (100 x $10,000) x (1.1000 – 1)), five times the actual payments received for the excess readmissions.

The “aggregate payments for excess readmissions”, $100,000 in the above example, flows into the calculation of the readmission adjustment factor. Therefore the hospital is penalized at a much higher rate.

Unfortunately, even though MedPAC has recommended that the calculation be modified (including in the comments to the FY 2016 IPPS Proposed Rule), since it is following the methodology included in the ACA, CMS has stated that any the change requires legislative action. Hence the calculation is expected to continue in its current form even though it appears to be overly penalizing providers relative to the cost of the excess readmissions.

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