What you need to know about the forces reshaping our industry.

Blog Post

The financial value of readmissions reduction

July 31, 2017

    Reducing avoidable readmissions is an obvious clinical win, but some providers have expressed concern over how it impacts their bottom lines. Many assert that CMS' Hospital Readmissions Reduction Program (HRRP) penalties are not severe enough to replace the profit (or "contribution margin") lost by avoiding a follow-up procedure.

    Is this an incentive program without teeth, or simply one of health care's wonky urban legends? Let's find out.  

    The value of avoiding a readmission

    Research from Advisory Board's Financial Leadership Council shows that for most hospitals and conditions, employing aggressive readmissions reduction efforts is the most financially responsible course of action. Our CFO team found that, strictly financially speaking, a hospital's optimal readmissions level is the point at which it has reduced readmissions by enough to avoid HRRP penalties but still has some readmission procedures to provide a contribution margin. But that target is unrealistic for most hospitals due to the inherent unpredictability of readmissions.

    Ultimately, though, surpassing the "optimal" readmission level yields cost savings for hospitals in addition to improvements in patient care. FLC found that even a hospital that reduces readmissions by twice as much as the financially optimal level still improves its profitability, so it makes sense for hospitals to go full-tilt at readmissions reduction for both clinical and financial reasons.

    National statistics for cases with HRRP conditions, FY 2016


    Source: Advisory Board analysis of CMS Readmissions Tables, MedPAR Inpatient Discharge Datasets.

    The numbers show that for all conditions—although especially for hip and knee replacement (THA/TKA) — hospitals and vendors incur a penalty far larger than the profit they would make from the extra case's contribution margin. This should largely dismiss assertions that reducing readmissions will hurt provider financials.

    Now that we know that reducing readmissions has both clinical and financial benefits, how can suppliers and service providers help to lessen the burden of readmissions?

    The supplier role

    In general, providers tackle readmissions reduction by streamlining inpatient processes and ensuring effective post-discharge transitions to improve long-term outcomes. Many suppliers are rightly focused on strategies to reduce variation in the procedural space, but there is also some room for suppliers and service providers to support the discharge process.

    Our Medical Readmission Reduction Toolkit identifies four key coordination steps for providers to use during the discharge and post-discharge processes to improve patient outcomes, and there's a role for suppliers to play along every step of the way.

    Stage 1: Transition planning during the inpatient stay 

    Suppliers can provide product-related information on how to better understand patient risk factors before discharge.

    Stage 2: Discharge education

    Non-branded discharge material can help providers and patients manage their recovery and aid hospitals with the HCAHPS score component for quality of discharge information.

    Stage 3: Post-acute care coordination

    IT suppliers and staffing providers, in particular, can aid hospitals and post-acute sites with greater service integration.

    Stage 4: Transitional care support

    Vendors can provide strong support by offering real-time data visibility that will impact post-discharge care.

    Readmissions are a complex subject, with hospitals, physicians, post-acute providers, suppliers, and patients all impacting results. What is clear is that suppliers and service providers can provide value to their hospital customers in their efforts to reduce readmissions.

    Have a Question?


    Ask our experts a question on any topic in health care by visiting our member portal, AskAdvisory.