The Effect of a Hospital Pay for Performance Policy on Hospital and Post-Acute Care Integration

The 2010 Affordable Care Act promotes quality improvement by tying payment with quality. One such initiative, the Hospital Readmissions Reduction Program (HRRP) financially penalizes hospitals with high rates of unplanned readmissions, which cost $17.4-$25 billion annually or 16-22% of the total Medicare inpatient hospital spending. While past work has demonstrated that the HRRP has successfully reduced readmission rates, less work has examined mechanisms by which readmissions have been reduced.

To fill this gap, we investigate an important operational and structural mechanism that hospitals may rely on in response to financial incentives to reduce readmissions—greater integration with post-acute care (PAC) providers. Integration has the potential to reduce readmissions by improving the discharge process and minimizing disruption in care during transfer from hospital to PAC provider. Existing evidence supports this hypothesis by showing that formal and informal integration between hospitals and skilled nursing facilities (SNFs) leads to higher quality, measured by reduced readmissions or mortality. Although no statistically significant difference is found in the case of home health agencies (HHAs), the difference in effects plausibly stems from a difference in payment incentives which have also been changed by the HRRP.

Our study aims to investigate whether integration with PAC providers was a mechanism by which hospitals at greater risk of incurring the HRRP penalty reduced hospital readmissions. We examine hospitals’ reliance on and vertical integration with PAC providers in response to the HRRP. Furthermore, we explore characteristics of hospitals and PAC providers that are more likely to be integrated. Our empirical strategy uses a difference-in-differences framework that compares outcomes of hospitals at greater risk of incurring the HRRP penalty to those at lower risk before and after implementation of the HRRP. To address potential reverse causality driven by the negative impact of vertical integration on penalty risk, we instrument for the risk of penalty using the patient demographics—such as race, income, education level, and Medicare and Medicaid dual eligibility—which are excluded from the HRRP penalty calculation but have been noted as important social determinants of health outcomes.

Our main measure of vertical integration between hospitals and PAC entities is based on hospital’s referral concentration among PAC providers. We focus on referral-flow based integration as opposed to financial integration to account for informal integration. We use 100% Medicare claims data during 2010-2016 on elderly patients with hospitalization that were discharged to skilled nursing facilities or enrolled in home health care, the two largest types of post-acute care.

This study will provide insights into the extent to which pay for performance incentives drive integration between hospitals and PAC entities and the role of increased integration in enhancing quality of health care.