Are hospitals driving up costs for people with Medicare to improve quality ratings?

In a new Health Affairs post, David Himmelstein and Steffie Woolhandler argue that Medicare’s pay-for-performance system might be doing more harm than good, when it comes to hospital readmissions. Hospital readmission rates are not dropping as much as the data might suggest. Rather, they say that while some hospitals have redesigned their systems to improve patient care pre-discharge so that patients do not need to be readmitted soon after, other hospitals have been gaming the system to make it appear so.

Medicare’s new payment incentive system financially penalizes hospitals with high readmission rates. To meet quality standards imposed by the Centers for Medicare and Medicaid services, some hospitals have been reclassifying patient visits within 30 days after discharge so they do not count as readmissions. They either classify patients as outpatients, on “observational” status, or they admit these patients to the emergency room.

As a result, hospital quality improvement is likely not as significant as the Medicare readmission data would suggest. What’s worse, hospitals that fail to “readmit” patients who have been discharged within 30 days may be penalizing those patients financially. Even if they remain on observational status for several days, they will be ineligible for Medicare skilled nursing or rehab services. (To qualify for Medicare skilled nursing or rehab coverage, patients must be admitted to hospital as inpatients for at least three days in the 30 days prior to getting that care.) And, their out-of-pocket costs could be significantly higher while in hospital.

To support their claims, Himmelstein and Woolhandler reveal that hospital outpatient stays increased 96 percent in the seven years between 2006 and 2013. The rise in outpatient stays represents more than half of the decline in reported hospital readmission rates. There has also been a notable increase in hospital emergency department visits.

Hospital charges are already sky high in most areas of the country. And, competition is not reining them in. Some purchasers are using reference pricing to bring them down.  Health economist Uwe Reinhardt makes the case for an all-payer payment system.