Nearly 20% of Medicare beneficiaries aged 65 and over who were hospitalized in 2005 were readmitted within 30 days following their initial hospital discharge. The Medicare Payment Advisory Commission (MedPAC) estimated that these readmissions cost $15 billion per year in hospital payments and that as much as two-thirds of these readmissions may be preventable. Changes that address hospital readmissions among Medicare's FFS beneficiaries, such as placing a greater emphasis on effective discharge planning, adoption of different care management programs, and payment reforms, may improve patient care and generate cost savings for the program. (Other factors associated with rehospitalizations and the effectiveness of hospital discharge planning are discussed in Appendix A .) QIOs are also providing technical assistance to candidates seeking to participate in the Community Care Transitions Program established by the Patient Protection and Affordable Care Act (ACA as amended, P.L. 111-148 ). This report is intended to help Congress understand the complex issue of hospital readmissions and Medicare's ongoing and future activities to address those rehospitalizations. The report will then discuss Medicare's efforts to provide technical and financial assistance to hospitals' efforts to improve discharge procedures and manage patients' care transitions. Current Medicare Care Transition Initiatives

Prior to the enactment of ACA, from August 2008, through July 2011, during its 9 th SOW, QIOs in 14 states collaborated with providers in selected communities to identify the underlying causes of hospital readmissions in their communities and then develop different strategies to prevent those rehospitalizations. As part of the 10 th SOW which began August 1, 2011, QIOs will work to reduce readmissions 20% by 2013 which would prevent the rehospitalization of an estimated 1.6 million hospital patients, among other goals. CCTP may be continued or expanded if the Office of the Actuary (OACT) certifies that the expansion would reduce Medicare spending without reducing quality. Forthcoming Medicare Payment Initiatives to Address Readmissions

As well as establishing CCTP to assist certain high readmission hospitals with care transitions, ACA included several payment initiatives to encourage FFS providers, particularly hospitals, to work to minimize rehospitalizations, if not coordinate patient care across settings. This section will discuss the Hospital Readmission Reduction Program (HRRP), the national pilot program included in ACA, and the national bundled payment pilot program established by the Center for Medicaid and Medicare Innovation (CMMI). CMS is implementing this program over two years. National Pilot Program of Payment Bundling

Under a bundled payment method, a single payment is made for a defined group of services rather than individual payments for each service. How should quality of care be measured? The three-year project starting in 2012 will encompass four different bundled payment models. Reducing these readmissions could reduce Medicare expenditures. As endorsed by NQF, Medicare's time frame for a readmission is 30 days. Each component of the formula is described in statute as follows: 
Determine the excess readmissions ratio for the hospital defined as the risk-adjusted predicted readmissions divided by the risk-adjusted expected readmissions;
Determine the aggregate payments for excess readmissions for the hospital defined as the product of three components:
o The base operating DRG payments for the applicable conditions,
o The number of admissions for those conditions, and
o The hospital's excess readmissions ratio; 
Determine the aggregate payment for all discharges for the hospital defined as the sum of base operating DRG payments for all discharges for all conditions in the hospital;
Determine the excess readmissions payment ratio defined as 1 minus the ratio of the aggregate payments for excess readmissions for the hospital to the aggregate payments for all discharges—which can be displayed as: 
Determine the adjustment factor by using greater of the excess readmissions payment ratio or the floor adjustment factor (of 0.99 of the discharge payments in FY2013, 0.98 of the discharge in FY2014, 0.97 in FY2015 and in subsequent fiscal years (effectively limiting the adjustment to no more than a 1% reduction in FY2013, 2% in FY2014 and 3% thereafter); 
Determine the adjustment to the hospital payments for excess readmissions by multiplying the base operating DRG payment amount for discharges from the hospital by the applicable adjustment factor.
Nearly 20% of Medicare beneficiaries aged 65 and over who were admitted to a hospital in 2005 were readmitted within 30 days following their initial discharge. The Medicare Payment Advisory Commission (MedPAC) estimated that these readmissions cost the Medicare program as much as $15 billion per year and that perhaps as much as two-thirds of these readmissions may be preventable. Many policymakers believe that different care transition programs coupled with payment reforms can constrain hospital readmissions among Medicare's fee-for-service (FFS) beneficiaries, could improve patient care, and may generate cost savings for the program. Hospital readmissions are associated with a number of factors and are not necessarily attributable to problems with the quality of patient care, but strong evidence indicates specific interventions to better manage care transitions at the time of hospital discharge could reduce readmissions for certain conditions.
Medicare is building on past work by Quality Improvement Organizations (QIOs) to help providers identify the underlying causes of hospital readmissions in their communities and then develop different strategies to prevent those rehospitalizations. In their newest round of Medicare contracts, which began August 1, 2011, QIOs will work to reduce readmissions 20% by 2013 and provide technical assistance to participants in the Community Care Transitions Program (CCTP), a $500 million, five-year demonstration program established by the Patient Protection and Affordable Care Act (ACA as amended, P.L. 111-148) to help participating hospitals improve discharge procedures and manage patients' care transitions more effectively. CCTP may be continued or expanded if the Office of the Actuary (OACT) certifies that the expansion would reduce Medicare spending without reducing quality. By mid-March 2012, 30 sites had been selected.
As well as establishing CCTP, ACA included several payment initiatives to encourage FFS providers, particularly hospitals, to work to minimize rehospitalizations and coordinate patient care across settings. Two initiatives in particular are discussed in this report, the Hospital Readmission Reduction Program (HRRP) and bundled payments. The HRRP will penalize an acute care hospital with higher than expected readmission rates by as much as 1% of its base payments starting in FY2013. Initially, the HRRP must use the three existing readmission measures that are endorsed by the National Quality Forum (NQF) and are included on Medicare's Hospital COMPARE website (where publically reported data can be used to assess hospital performance). Hospitals and industry advocates have expressed concerns about the existing measures and the effect of the readmission penalties on certain safety-net hospitals; issues that are likely to attract significant Congressional attention as the program's implementation date approaches. CMS is also exploring bundled payment methods where a single payment is made for a defined group of services rather than individual payments for each service. The national bundled payment pilot program established by the Center for Medicaid and Medicare Innovation (CMMI) is a three-year project starting in 2012 that will encompass four different bundled payment models. Changing these FFS financial incentives may be Medicare's most effective strategy for addressing hospital readmissions.
This report examines the complex issue of hospital readmissions along with Medicare's ongoing efforts and future activities to reduce unnecessary readmissions.