Incentivizing Cost-Effective Reductions in Hospital Readmission Rates

The recent regulatory changes enacted by the Centers for Medicare and Medicaid Services (CMS) have identified hospital readmission rates as a critical healthcare quality metric within the United States. These regulations have targeted a sizeable reduction in hospital readmission rates as a control variable to reduce Medicare and Medicaid expenditures. These reductions may come at a considerable cost to hospitals. Any additional preventive care must be covered by the current capitation payment scheme, the payments associated with the Diagnosis Related Group (DRG) received by the hospital for each treated patient. This research focuses on the utilization of pay-for-performance mechanisms to cost effectively reduce hospital readmission rates and meet the regulatory standards set by CMS. The payment incentive mechanisms are designed to better align financial interests of the physicians and the hospital by rewarding best performance. The performance metric we use is the hospital length of stay and readmission rates, as the reduction of either one without increasing the other improves quality of care at lower costs. To enhance care and financial performance, in addition to the financial incentives we  provide physicians with a decision support software tool that we have designed to assist with the discharge decision.

 Using a data set on patients undergoing complex gastrointestinal surgery at a large Southeastern medical university, we develop an econometrically-based decision support software that can be used to make more effective, evidence-based hospital discharge decisions. Combining the presence and absence of our decision support software tool with two alternative pay-for-performance mechanisms, instantaneous reward payments and deferred rewards (paid as bonus), we investigate the efficacy of the utilization of alternative physician compensation mechanisms and the decision support software tool. A total of 162 medical students participated in an experiment. Our data suggest that either pay-for-performance physician compensation schemes reduces hospital length of stay for patients, with additional reductions observed when we combine the instantaneous  reward payment mechanism with the decision support software. The combination of the deferred payment scheme with the decision support software effectively lowers the readmission rates within the experiment. Combined these results indicate that utilizing our decision support model in conjunction with changes in the physician compensation mechanism incentivizes cost effective reductions in hospital readmission rates.