HRRP Further Clarified in CMS's Latest IPPS Rule


A few days ago CMS released its proposed rule for the FY 2013 Inpatient Prospective Payment System (IPPS). Contained within the rule are additional details on the Hospital Readmissions Reduction Program’s (HRRP) penalty structure. This posting begins by providing a couple interesting charts showing a couple of charts CMS included in the rule that demonstrate the wide-ranging effects of the program. This will be followed by a more in-depth explanation of where CMS stands today with the HRRP’s penalty structure and then provide the details of some key proposals contained within the rule. Be warned – most of this positing is a granular review for the previously initiated.

If you’d like a more general overview of the HRRP before digging in, take a look at 2 of our recent blogs written on the subject:

An Early Look at the Hospital Readmissions Reduction Program

Details of How CMS’s HRRP Penalties are Derived

A Few Charts on the HRRP’s Impacts to Ponder

CMS has released a chart for public comment that demonstrates the estimated effect of the HRRP on hospitals with a disproportionate number of low-income patients. In the chart below, those hospitals in the highest DPP (DSH patient percentage) grouping have the highest percentage of low-income patients. From looking at the chart, it appears that penalties will be larger for hospitals with greater percentages of low-income patients. When defending their current measure selection, CMS stated: “Our analysis indicates that better quality of care is achievable regardless of the demographics of the hospital’s patients.” But it will be interesting to see how CMS responds as they stated in last year’s proposed rule that they would analyze the program for disparate impacts on hospital’s with disadvantaged populations, even noting “one option might be to refine the measures themselves to include factors such as SES in the risk adjustment.”

The chart below estimates the distribution of the penalty percentage amount among hospitals subject to the HRRP. CMS estimates 65.5% of hospitals will be penalized under the program.

CMS Finalized Half of the Penalty Structure in FY 2012’s IPPS Rule and Has Now Proposed the Other Half

CMS chose to implement the regulations for the HRRP through the rulemaking process over a 2 year period, with the FY 2012 IPPS rulemaking resulting in finalization of many of the program’s specifics and this year’s IPPS rulemaking finalizing any provisions that remained undefined.

The HRRP regulations can conceptually be thought of as the means to define the penalty formula provided by Congress in the PPACA. Below is a snapshot of the main component of the penalty formula:

If you look closely, you’ll see that the formula has two main components – a reimbursement component, represented by the DRG payment, and a measures component, represented by the Excess Readmission Ratio. The components are multiplied to determine “excess readmissions.”

Last year’s rule focused on the measures ratio half of the formula, while this year’s rule focuses on defining the reimbursement component. Below is a table for that lists the terms that were finalized last year and lists the terms that are currently proposed by CMS:

Key Proposals in the FY 2013 IPPS Proposed Rule on the HRRP

1. Proposed definition for base operating DRG payment. CMS plans to use a wage-adjusted DRG operating payment, which it defines as “the applicable average standardized amount adjusted for resource utilization by the applicable MS-DRG relative weight and adjusted for differences in geographic costs by the applicable area wage index.” This wage-adjusted DRG operating payment will not include any IME adjustments, DSH adjustments, love volume adjustments, or outlier payments, but will include any “new technology add-on payments.” The penalty will be applied to each discharge. Sole Community Hospital’s base operating DRG payment for penalty calculation will be based on the federal rate and not the hospital specific rate.

2. Proposed definition for the adjustment factor. For FY 2013, CMS has defined the adjustment factor to be “the greater of the ratio or the floor of .99.” The floor increases to .98 in FY 2014 and to .97 for FY 2015 and beyond. The adjustment factor will be multiplied by each base DRG operating payment to reduce total Medicare payments for hospitals with excess readmissions.

3. Proposed definition for aggregate payments for excess readmissions. CMS chose to use the statutory definition, which is a hospital’s excess readmission ratio multiplied by base operating DRG payments for the applicable conditions (acute myocardial infarction, heart failure, and pneumonia).

4. Proposed definition for aggregate payments for all discharges. CMS also chose to use the statutory definition here, which is the total of a hospital’s base DRG operating payments for all conditions.

5. Proposal to use historical MEDPAR claims data for aggregate payments. For penalty calculation, CMS chose to use historical MEDPAR data so that aggregate payments reimbursement is consistent with the historical period and data used to calculate the readmission measure’s ratios. For FY 2013, the claims data will be pulled on claims with “discharge dates on or after July 1, 2008, and no later than June 30, 2011.”

6. Proposal to use ICD-9 codes to identify conditions subject to identification as excess. For determining the base operating DRG payment for select conditions, CMS will utilize the same ICD-9 codes as those used for the measures on the Hospital Compare website and those that will be used to calculate the excess readmission ratio. They may be found on the QualityNet website. The claim will be an applicable condition if it’s listed as the principal diagnosis on the claim.

7. Proposal for definition of applicable hospital. CMS is going to stick with the statute and apply HRRP penalties to subsection (d) hospitals, which is basically acute care hospitals paid by the IPPS located in U.S. States and the District of Columbia. So, for example, Critical Access and LTCH Hospitals will not be subject to penalties under the HRRP. This means a ratio calculated from publicly available readmissions data on Hospital Compare may be slightly different than the measures enforced through the HRRP.

8. Impact File released containing Excess Readmissions for Applicable Hospitals. CMS released estimated excess readmission ratios for the HRRP in FY 2013 that can be used to estimate your penalty for budgeting the HRRP’s impact.


If this wasn’t enough and you’d like more detail on CMS’s proposed definitions or to download the Impact File with your facilities estimated excess readmissions ratios, visit CMS’s FY 2013 IPPS Proposed Rule Home Page.


Matt Wimberley
Consultant, Strategic Advisory Services

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Categories: Readmissions

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