Does What Caused the Penalty Matter? A Test of the Differences in the Cost of Reducing Readmissions Across Diagnoses

The Hospital Readmission Reduction Program (HRRP) is a prominent P4P program of the Centers for Medicare and Medicaid (CMS) intended to reduce hospital readmissions. Under the HRRP, excess readmissions for Heart Attacks, Heart Failures and Pneumonia lead to a penalty of up to 3% for all Medicare admissions. Hospitals are incentivized to reduce readmissions for these three targeted conditions, however the cost of reducing readmissions across diagnoses may not be equal. I provide a conceptual model of hospital behavior that sheds light on the difference in the cost of reducing readmissions across diagnoses. I show using this model that as the number of patients in the targeted condition rises, the hospital’s marginal cost of reducing the penalty increases by relatively more than the marginal benefit. I test this empirically using a difference in differences design and the entire Medicare inpatient discharge data. I find evidence that hospitals focused the reductions in readmissions towards the HRRP condition most likely to lead to a penalty. I also find evidence that the lower the number of patients in the condition causing the penalty, the larger the decrease in readmission rates. These intuitive results are novel and fundamental to the discussion on the relative incentive to reduce readmissions across medical diagnoses and how P4P programs can be optimized to reflect this differential cost.