Hospital Readmissions Reduction Program: An Economic and Operational Analysis

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