MSBA 7004 Operations Analytics
Group Assignment – Hospital Readmission Reduction Program
Patient readmissions—return visit to a hospital—is widely viewed as a negative sign for quality
of health care. In the United Sates, since 2012, hospitals with excessive 30 day readmissions
have been penalized under the Hospital Readmissions Reduction Program (HRRP) as
mandated by the Affordable Care Act (ACA). The HRRP aims to incentivize hospitals to
embrace efforts to reduce readmissions through improving patient care quality and transitions.
In general, the HRRP penalizes hospitals for excessive readmissions by adjusting
Medicare (a type of government funded insurance) payments based on a ratio of excess
readmissions. In fiscal year 2015, more than 2,610 hospitals were penalized a total of
approximately $482 million for excess readmissions.
Despite these penalties, hospitals with excess readmissions may face the prospect of
losing revenue from overall reduced inpatient volume from efforts to reduce readmissions.
With the high proportions of patients being readmitted, these readmissions constitute a
significant amount of Medicare revenue to these hospitals. This dilemma of avoiding the
readmissions penalty versus the potential cost of reducing hospital volume and associated
revenue may attenuate enthusiasm for readmission reduction efforts.
You are asked to examine through financial modeling the financial incentives of
hospitals to engage in readmissions reduction efforts, considering both the HRRP penalty and
the potential of loss of revenue from lower hospital patient volume. Specifically, you are asked
to model hospitals as net income maximizers and link operational parameters to hospital
financials.
According to the HRRP guideline, a hospital’s excess readmissions penalty calculation
is based on a risk-adjusted performance metric as the Excess Readmission Ratio, which is equal
to Risk-adjusted Predicted Readmissions (RPR) divided by Risk-adjusted Expected
Readmissions (RER). RPR can be viewed as a hospital’s actual readmissions performance
measure, while RER represents the benchmark (target) performance measure to which a
hospital’s RPR rate is compared. RER is an estimation of expected readmission performance
of a national average hospital subject to the HRRP with the same patient risk factors as the
evaluated hospital.
MSBA 7004 2022 Module 2
If the hospital’s Excess Readmission Ratio exceeds 1, it incurs a financial penalty
proportional to the level of excessiveness (Excess Readmission Ratio - 1) multiplied by the
Centers for Medicare & Medicaid Services (CMS) payment for Medicare patients. However,
the total readmissions penalty is limited to a maximum equal to a predetermined percentage of
total Medicare payments the hospital receives for treatment. Within the HRRP policy the
penalty cap is operationalized as being equal to 1 – Floor Adjustment Factor (FAF). Under the
current structure, this penalty cap is set at 3% (FAF 0.97). Thus, a hospital receiving the full
3% penalty would receive payment equal to 97% of full possible Medicare payments.
Make the following assumptions to analyze whether a hospital would be incentivized to reduce
readmissions:
1. Hospitals are revenue maximizers.
2. Do not consider the cost of reducing readmissions. (In reality, hospitals will have to
make improvements/changes to their process to reduce readmissions which will cost
them. We will not model these cost components in our analysis, but it should certainly
be considered by the hospital manager when she is making a reduction decision.)
3. Hospital revenue is proportional to the patient volume.
4. Hospitals have two type of patients by whom they receive payment from: Medicare
patients and private patients which hospitals are paid by CMS and private insurers
respectively.
5. HRRP only affects Medicare payments and not private payments.
6. The payment amount (revenue) per patient is identical for Medicare and private
patients. (Hint: Revenue can be normalized as a function of only patient volume and
penalty structure. Exact payment per patient is not necessary for analysis.)
7. Readmission performance, RPR, is identical for both patient types.
8. If a hospital decides to reduce readmissions, it will not cherry pick and only reduce
CMS patients. In other words, the hospital will reduce readmissions for both patient
types in equal proportions.
9. A hospital will not intentionally increase readmissions.
MSBA 7004 2022 Module 2
Questions
1. Mathematically state the objective of the hospital as a function of the relevant factors.
2. Graph hospital 50158 and 50245’s normalized revenue as a function of readmission
rate. And analyze whether the hospitals would be incentivized by the HRRP to reduce
readmissions.
3. Assess the effectiveness of HRRP: analyze all 183 hospitals and report the
effectiveness of HRRP in incentivizing hospitals to reduce readmissions. Visually
present your findings in the most efficient way with managerial insights.
Report format:
For question 2, describe when a hospital is incentivized to reduce readmissions by the HRRP
penalty. Report the two graphs and provide a concise description of your finding and compare
the two hospitals. For question 3, submit the data file by appending a new column indicating
whether a hospital is incentivized or not. Hint for visualizing your findings: what are the key
parameters that affect hospital decisions. In the report, provide a summary of your findings
including the percentage of hospitals incentivized to reduce readmissions. Strict 4-page limit
excluding title page and appendix. Attach Python code in appendix. No other coding language
is allowed. Do not write the questions. Peer evaluation scores will be collected, and free riders
will be penalized accordingly.
Data Dictionary:
1. County: County the hospital is located in.
2. HospitalID: Hospital identifier.
3. MedicareFr: Fraction of Medicare patients
4. RPR: Risk-adjusted Predicted Readmissions (in percentage)
5. RER: Risk-adjusted Expected Readmissions (in percentage)