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Reducing Hospital Readmissions Payment Incentives September 2011

Reducing Hospital Readmissions Payment Incentives September 2011

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Published by Patricia Dillon

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Published by: Patricia Dillon on Feb 22, 2013
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P4P is a particular instance of a broader set of payment reforms called value-based purchasing
(Rosenthal et al. 2006, Rosenthal 2009, Miller 2009). P4P initiatives typically use evidence-
based measures of quality, effectiveness, and effciency to classify or select providers, and to
determine how much they are paid. Commercial P4P systems often use hybrid approaches,
combining fee-for-service payment with payment bonuses or withholds that refect provider
performance on specifc measures of quality or patient satisfaction (Bernstein et al. 2010).

Evidence of the effects of P4P systems is mixed, in no small part because of the diffculty of
discerning their impact on care delivery, costs, or outcomes. However, many may simply offer too
little fnancial incentive for providers to invest in quality improvement (Rosenthal et al. 2005).

A P4P system intended to reduce readmissions, when hybridized with fee-for-service, would
pay hospitals with low case-mix-adjusted readmission rates more than it would pay hospitals
with high case-mix-adjusted readmission rates. To invest in reducing readmissions, a revenue-
maximizing hospital would need to see a fnancial beneft that outweighs its direct and indirect
costs. That is, the hospital would need to succeed in increasing its P4P payment rate enough
to offset both its higher cost per discharge and its revenue loss due to lower patient volume.
Whether any one hospital would see such a net beneft is not immediately obvious. Indeed, the
hospital’s response would depend both on its own circumstances and on the particular P4P
strategy used. All else equal, a hospital that expects a larger reduction in its readmission rate
would be less inclined to invest in reducing readmissions, even when paid less per admission.


hospitals also receive revenue by readmitting patients discharged from other hospitals. For the purpose of this analysis, we assume
that a hospital’s decision as to whether to implement an intervention to reduce readmissions is made independently—that is, each
hospital considers only the fnancial consequences it might produce when acting alone.


Reducing Hospital Readmissions in New York State: A Simulation Analysis of Alternative Payment Incentives

Payment Incentives to Reduce Readmissions (continued)

For payers, a potential advantage of P4P is the opportunity to retrieve savings immediately,
even if hospital behavior does not change. Payers are most likely to retrieve P4P savings
“off the top” by paying low-performing hospitals less, while making little or no adjustments
to payment rates for high-performing hospitals. This practice limits high-performing hospitals’
incentives to further reduce readmissions, although it might be effcient if currently low-
performing hospitals offer the greatest potential for reducing aggregate readmissions.

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