Hospital Competition and Quality of Care: Evidence from Medicare's Hospital Readmissions Reduction Program

A well-documented trend in the market for hospital services has been the recent rise in consolidation through system affiliation. While the implications of hospital consolidation for price have been extensively documented, the relationship between consolidation and quality is less clear. For example, if patients value high quality care, then hospitals in a competitive environment may strive to attract patients by raising quality. Alternatively, consolidation could lead to improved patient quality through enhanced care coordination and reduced service duplication. Much of the empirical evidence suggests that hospital consolidation has negative implications for patient health, however several studies have found either positive effects of consolidation on quality or no effect at all.

In an effort to improve care quality and reduce costly hospital readmissions for Medicaid beneficiaries, the Affordable Care Act (ACA) of 2010 included a provision known as the Hospital Readmission Reduction Program (HRRP). Initially, the HRRP included financial penalties for hospitals that exhibited relatively high rates of 30-day Medicare readmissions for three specific conditions: acute myocardial infarction (AMI), heart failure, or pneumonia. Beginning in fiscal year 2013, hospitals that failed to meet the readmission goals established by the Centers for Medicare and Medicaid Services (CMS) received up to a 1% reduction in total payments made under the Medicare Inpatient Prospective Payment System (IPPS). This penalty escalated to 2% of Medicare payments in the second year of the program and to 3% in the third year and beyond. Empirical evidence of the effect of the HRRP on hospital readmissions is limited and the findings have been mixed with some studies reporting that readmission rates for targeted conditions have decreased and others finding no effect.

Using reductions in readmission rates as a proxy for quality, I test whether a hospital’s response to the HRRP depends on the level of concentration in the local hospital market. Patient-level hospital discharge data for the states of Florida and New York from 2005 through 2014 are used to estimate changes in readmission rates for conditions targeted by the HRRP. Results suggest that, compared to high-performing facilities, hospitals facing a readmission penalty reduced their 30-day readmission rates for all three target conditions after the HRRP took effect. However, I provide evidence that at-risk hospitals in less concentrated (more competitive) markets were more likely to reduce readmission rates than those in more concentrated (less competitive) markets. Estimates of changes in readmission rates in more concentrated hospital markets following the announcement of the HRRP are typically indistinguishable from zero.

These findings provide additional evidence to support the notion that consolidation in hospital markets reduces patient quality and presents a novel insight into the relationship between market concentration and responsiveness to federal quality improvement initiatives.