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Medicare Payments Cut for Low-Quality Hospitals

Posted Nov 28 2012 12:00am

In the past, Medicare basically paid hospitals the same amount for every type of admission regardless of quality.  Of course, Medicare did adjust payments to hospitals based on the their cost of labor (hospital wage index adjustment), share of low-income patients (disproportionate share hospital payment), and number of medical school residents (indirect medical education payment), and other factors; but quality of care had no effect on these payments.

No longer.

Medicare last month began levying financial penalties against 2,217 hospitals it says have had too many readmissions . Of those hospitals, 307 will receive the maximum punishment, a 1 percent reduction in Medicare’s regular payments for every patient over the next year, federal records show.

These penalties are not trivial. Barnes-Jewish Hospital in St. Louis will lose $2 million in Medicare payments this year.

Why is monitoring re-admissions so important? The answer is rooted in Medicare’s current payment system.

Medicare generally pays hospitals a set fee for a patient’s stay, so the shorter the visit, the more revenue a hospital can keep. Hospitals also get paid when patients return. Until the new penalties kicked in, hospitals had no incentive to make sure patients didn’t wind up coming back. The maximum penalty is set to double next October and then reach 3 percent of reimbursements in October 2015. Medicare also is expanding the list of conditions it will assess in setting punishments.

No payment incentive program is perfect and this one is not exception. From the world of unintended consequences:

With pressure to avert readmissions rising, some hospitals have been suspected of sending patients home within 24 hours, so they can bill for the services but not have the stay counted as an admission. But most hospitals are scrambling to reduce the number of repeat patients, with mixed success.

In an incentive to prevent hospitals from shortening stays, the re-admission penalties may just incentivize hospitals to move more and more care to the outpatient setting.

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