How CMS Leveled the Playing Field for Hospital Readmission Penalties

Hospitals will be stratified into five peer groups based on the proportion of dual-eligibles in their service populations.

Editor’s note: Since this story originally ran, CMS finalized the rule that affects the Hospital Readmissions Reduction Program rule. The content below has been updated with this information.

The Centers for Medicare and Medicaid Services (CMS) recently finalized a new rule to make payments under the Hospital Readmissions Reduction Program (HRRP) more equitable to hospitals that serve a high proportion of patients eligible for both Medicare and Medicaid—dual-eligibles. Under the new rule, HRR penalties for these hospitals could be lowered. The first comment period for the proposed rule concluded in June, and CMS announced the final rule on Aug. 2. The final rule states that CMS will assess penalties based on a hospital’s performance relative to other hospitals with a similar proportion of patients eligible for both Medicare and full-benefit Medicaid. It defines dual eligible as “the proportion of dual-eligible patients among all Medicare fee-for-service and Medicare Advantage stays during the three-year period that corresponds to the performance period.”

Patrick Pilch, managing director and national co-leader of The BDO Center for Healthcare Excellence & Innovation, recently shared insights regarding the proposed rule and the impact it could have on hospitals.

Why did CMS propose a change to HRRP penalties for hospitals serving many dual-eligible patients?

Pilch: CMS began in 2009 and 2010 to standardize costs around care. I met with CMS around that time to look at the post-acute care market and helped them create a bundled payment around hip and knee replacements. The cost of hip replacements across the country ranged from $10,000 to $80,000—a confounding level of variation. CMS payment was normalized around a patient who is 58 years old in moderate health and socioeconomic demographic. This is a bundled payment; if a patient is readmitted, there is no additional payment.

Think about the impact of this approach on payment for hospitals with many dual-eligible patients. The 58-year-old in moderate health has private insurance and no social or economic issues. He or she receives treatment, is discharged to a family member, and gets appropriate follow-up care. Consider the fact that 19 percent of dual-eligibles are considered to be in poor health, compared to 9 percent of patients who are not dual-eligibles (A Data Book: Health Care Spending and the Medicare Program, Chapter 4, “Dual-Eligible Beneficiaries,” June, 2016, Medicare Payment Advisory Commission [MedPAC]).

Their greater health needs generate higher costs. Poorer health status increases the likelihood of readmission for the same reason within the 30-day window. Also contributing are social risk factors such as a lack of housing, community health services, or family to assist with care after discharge. If there is no clinic for patients to access, the hospital becomes the sole provider of care; without family or safe setting for patient discharge, hospitals keep patients longer.

With its final new rule, CMS is acknowledging that charging hospitals with a higher percentage of dual-eligibles the same HRRP penalties for readmissions is unfair. The proposed adjustment to HRRP penalties would reflect the challenges facing each hospital’s population.

How does the new HRRP penalty system work?

Pilch: To avoid unfairly charging identical penalties to hospitals with very different patients, the final CMS rule  stratifies hospitals into five peer groups based on the proportion of dual-eligibles in their service populations. The analysis of a hospital’s patient population would be based on its own records. A simple count based on home addresses would be less effective because while a public safety net hospital typically serves a geographic area, a nearby academic medical center may draw patients from outside that area, especially for tertiary and quaternary care. In that case, the two hospitals would be placed in different peer groups. To the extent that hospitals can demonstrate that they have a high proportion of dual-eligible beneficiaries, they will receive an HRR abatement for readmission penalties.

The current maximum HRR penalty for readmission for designated diagnoses is 3 percent. It is projected that 1 percent of all hospitals will incur the maximum penalty, while 78 percent of all hospitals will incur no penalty or incur a penalty of 1 percent or less. (Boccuti C., Casillas G., “Aiming for Fewer Hospital U-turns: The Medicare Hospital Readmission Reduction Program,” May 10, 2017, Kaiser Family Foundation.)

At this point in the process, some hospitals may not think that this abatement is enough, but it is recognition of the problem and a starting point for more equitable charges.

In light of the final rule, what financial risk management plan changes would be prudent for hospitals that serve a higher proportion of dual-eligibles?

Pilch: Many hospitals that have a high proportion of dual-eligibles have a financial office that offers counseling and Medicaid enrollment services, where Medicare enrollment and Medicaid eligibility are checked on the front end. To prepare for this CMS measure, which it has said it will implement for the FY19 HRRP, these departments should make sure that they clearly document all patients’ eligibility, so when patients are readmitted within 30 days, the hospital knows immediately whether they are dual-eligible. Document not only the medical reason for readmission, but also why patients return—for example, no housing, no follow-up care, or no family support.

It is challenging to establish the kind of robust up-front documentation practices that ensure beneficiaries are enrolled properly and tracked accurately, positioning the hospital for both reliable payment and proper placement in CMS peer groups. Hospitals can begin by tapping existing resources in the social work department. In my experience, hospital social workers are highly knowledgeable about the challenges patients face when they are discharged into local communities. Social workers know peoples’ histories and daily lives, where they live, and to whom they are discharged.

Although social workers often identify problem areas during case management, their records are separate from the financial office. Different functions within the hospital such as social work and financial services need to be connected, with a new workflow developed around that connection. The final CMS rule is an opportunity to bridge that gap in a way that will aid payment while creating a complete picture of patient care upon which hospitals can base future planning to better serve their communities. Hospitals with many dual-eligibles will have the documentation in place to support the placement in the appropriate peer group to receive reduced HRR penalties.

Could hospitals use the final CMS rule as a starting point for developing value-based payment?

Pilch: Through the proposed rule, CMS is evaluating risk pools and stratifying them, just as successful ACOs [accountable care organizations] do. Part of this transition involves a shift in perspective on cost and care. When you identify the costliest patients in a risk pool and learn what elevates their costs, the intuitive financial approach is to cut costs. However, the integrated financial approach acknowledges that the hospital needs to provide appropriately aligned services and care to those patients because they have the greatest need. The integrated approach results in better outcomes, which in turn increases value-based payments.

In the proposed rule, CMS is showing it understands that hospital payments are not one-size-fits-all. Just as better outcomes warrant better payments, so do positive outcomes for more challenging patient populations. Consider that as we move to value-based care, there is going to be some degree of capitation for an episode of care. If your hospital can view episodes of care through the integrated financial mind, then the strategies you apply to dual-eligible patients can elevate outcomes and potential quality-based payments across the board.

Interviewed for this article:

Patrick Pilch, CPA, MBA, is managing director and national co-leader of The BDO Center for Healthcare Excellence & Innovation and is a member of HFMA’s New York Metropolitan Chapter. BDO USA is a member firm of the BDO International accounting network.