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Hospital Readmissions Reduction Program: An Economic and Operational Analysis

Management Science Vol. 62, No. 11, November 2016, pp. 3351–3371

43 Pages Posted: 13 Dec 2013 Last revised: 27 Mar 2017

Dennis Zhang

Washington University in St. Louis - John M. Olin Business School

Itai Gurvich

Northwestern University

Jan A. Van Mieghem

Northwestern University - Kellogg School of Management

Eric Park

The University of Hong Kong - Faculty of Business and Economics

Robert Young

Feinberg School of Medicine

Mark Williams

Feinberg School of Medicine

Date Written: May 30, 2015

Abstract

The Hospital Readmissions Reduction Program (HRRP), a part of the US Patient Protection and Affordable Care Act, requires the Centers for Medicare and Medicaid Services (CMS) to penalize hospitals with excess readmissions. We take an economic and operational (patient flow) perspective to analyze the effectiveness of this policy in encouraging hospitals to reduce readmissions. We develop a game-theoretic model that captures the competition among hospitals inherent in HRRP's benchmarking mechanism. We show that this competition can be counter-productive: it increases the number of non-incentivized hospitals, which prefer paying penalties over reducing readmissions in any equilibrium. We calibrate our model with a dataset of more than 3,000 hospitals in the United States and show that under the current policy, and for a large set of parameters, 4% to 13% of the hospitals remain non-incentivized to reduce readmissions. We also validate our model against the actual performance of hospitals in the three years since the introduction of the policy. We draw several policy recommendations to improve this policy's outcome. For example, localizing the benchmarking process -- comparing hospitals against similar peers -- improves the performance of the policy.

Keywords: Health care, Game theory, Public Policy

Suggested Citation

Zhang, Dennis and Gurvich, Itai and Van Mieghem, Jan A. and Park, Eric and Young, Robert and Williams, Mark, Hospital Readmissions Reduction Program: An Economic and Operational Analysis (May 30, 2015). Management Science Vol. 62, No. 11, November 2016, pp. 3351–3371. Available at SSRN: https://ssrn.com/abstract=2366493 or http://dx.doi.org/10.2139/ssrn.2366493

Dennis Zhang (Contact Author)

Washington University in St. Louis - John M. Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States

Itai Gurvich

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Jan Albert Van Mieghem

Northwestern University - Kellogg School of Management ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

Eric Park

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Robert Young

Feinberg School of Medicine ( email )

Chicago, IL 60611
United States

Mark Williams

Feinberg School of Medicine ( email )

Chicago, IL 60611
United States

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