Seminar – Unintended Consequences of Hospital Regulation: The Case of the Hospital Readmissions Reduction Program (HRRP)

Dr Nicos Savva, London Business School

The Patient Protection and Affordable Care Act (ACA) of 2010 represents one of the most significant regulatory overhauls of the United State healthcare system since the initial establishment of Medicare and Medicaid. While attention has largely been directed towards provisions that expanded medical coverage, the ACA also established several incentive schemes aimed at reforming the care delivery process by holding hospitals accountable for their performance in order to rein in costs and improve quality. One of the first such schemes introduced was the Hospital Readmissions Reduction Program (HRRP), which requires the Centres of Medicare and Medicaid Services (CMS) to reduce payments to hospitals that exhibit higher than average 30-day risk-adjusted readmission rates.

This paper examines the impact of the Hospital Readmissions Reduction Program (HRRP) on hospitals’ admission behaviour. We exploit variation in hospitals’ financial exposure to HRRP penalties due to i) readmission performance, and ii) financial constraints, to show that hospitals reduced readmissions post HRRP at least to some extent by increasing the number of patients that were classified as admitted for “observation.” Under this classification patients do not count as admissions for HRRP purposes. This increase is estimated to be 12.7 per cent more for hospitals that were exposed to HRRP penalties compared to non-penalised hospitals, and as much as 31.1 per cent if the hospital was also financially constrained.

The magnitude of this effect is operationally significant; rough calculations suggest that over 40 per cent of the readmission reduction that followed HRRP can be attributed to the change in observation bed usage. Our results also have implications for the implementation of HRRP which is based on average-performance benchmarks. When hospitals use observations beds to reduce their readmission figures, they also lower the average readmission rate against which other hospitals are penalised, hurting high-performing hospitals not managing readmissions though observation beds.

Research co-authored by Chris Chen.

Speaker bio

Nicos Savva is an Associate Professor of Management Science and Operations at the London Business School, where he teaches courses on data analytics, modelling, and healthcare management. Nicos’s research examines healthcare operations and innovation and has appeared in leading journals such as Management Science, Manufacturing & Service Operations Management, and Production and Operations Management. Nicos holds editorial positions in Management Science, Manufacturing & Service Operations Management, and Production and Operations Management. He holds a PhD in Management Science, an MPhil in Finance, and an MA in Natural Science (Physics), all from the University of Cambridge.