Medicare Advantage

Medicare Penalties Increase for Hospitals

For more information on Medicare, please call the number below to speak with a healthcare specialist


More than half of the nation’s hospitals will face a reduction in Medicare reimbursement rates for 2016 under the terms of the federal Readmissions Reduction Program. This figure is about the same as it was last year, but penalties have increased. Nearly 2,600 hospitals will face penalties this year totaling $528 million. Penalties take effect in October and run through September of next year.

The Hospital Readmission Reduction Program was instituted in 2012 under the Affordable Care Act in an effort to reduce the number of readmissions within a short time frame. Under the program, hospitals are judged by a set of national standards regarding appropriate readmission rates. If a hospital exceeds this anticipated amount, Medicare will withhold a portion of its reimbursements. The maximum fine for any hospital is 3 percent. In 2016, 49 hospitals throughout the country will face the maximum penalty. On average, the penalty this year was 0.73 percent, which is the highest it’s been since the program was instituted.

Some hospitals – particularly those that got hit with the maximum fine of 3 percent – will face significant financial backlash as a result of the program. In South Carolina, Beaufort Memorial Hospital will lose about $950,000 in Medicare reimbursements. That comes out to nearly $203 for every Medicare patient who gets discharged. Medicare discharges account for about half of all of Beaufort Memorial’s adult discharges.

As part of their research, the Centers for Medicare & Medicaid Services looked at 30-day readmission rates for Medicare patients dealing with specific conditions: chronic lung disease, coronary artery bypass graft surgery, heart attack, heart failure, hip and knee replacements, and pneumonia. However, penalties are applied to all Medicare readmissions regardless of conditions. In the case of Beaufort Memorial, a higher-than-average number of readmissions for hip and knee replacements resulted in the maximum penalty fee imposed by the program.

Opponents of the penalty program claim that data may be skewed by factors like a hospital’s primary demographic and double-dipping. If a person gets readmitted to the hospital for an unrelated accident, for instance, then the hospital’s readmission rate may jump higher than it would otherwise. Hospitals that serve sicker or older populations could also be at a disadvantage since these patients need more care.

However, the penalty fees are adjusted to account for these factors. In fact, certain hospitals are exempt from the fines altogether. Hospitals that cater to psychiatric patients, children and veterans, for instance, do not have to worry about penalties from readmission rates. In areas with critical access hospitals, those hospitals are also exempt because they are the only hospitals available. And because the state of Maryland has a special deal worked out with Congress over Medicare distributions, hospitals in that state are exempt. In total, more than 1,400 hospitals are exempt from the fines, including those that serve lower-income populations and those that train residents.

One unintended side effect is the growing number of patients who are being put into “observation” status. By placing patients in observation status – in which they’re treated at a hospital without actually being admitted – doctors can continue to provide care without fear of starting the readmission clock, so to speak. In an effort to prevent Medicare from withholding reimbursements, hospitals have found a workaround that can be financially challenging to patients.

Despite the high penalties this year, the reduction program appears to be having some positive effects on readmission rates as a whole. Hospital readmissions are a sore spot for Medicare expenditures. A study in 2008 by the New England Journal of Medicine found that avoidable rehospitalizations may add up to $12 billion each year. The readmission reduction program could help to reduce these potentially unnecessary expenditures.