Unintended Consequences of Hospital Regulation: The Case of the Hospital Readmissions Reduction Program

45 Pages Posted: 3 Sep 2018

See all articles by Christopher Chen

Christopher Chen

Indiana University - Kelley School of Business

Nicos Savva

London Business School

Date Written: August 22, 2018

Abstract

This paper examines the impact of the Hospital Readmissions Reduction Program (HRRP) on hospitals' admission decisions. HRRP provides incentives for hospitals to reduce readmissions by imposing penalties to hospitals that exhibited higher than average 30-day risk-adjusted readmission rates. Indeed, after HRRP was introduced in 2012, readmission rates have fallen by 1.2% on average across monitored conditions. In this paper, we show that part of this reduction may be due to hospitals admitting more patients for observation as opposed to inpatient admission. Under this classification, patients receive hospital-level care but do not count towards admissions for HRRP purposes. To show that this is the case, we combine four hospital-level datasets. We exploit variation in hospitals' financial exposure to HRRP due to: i) readmission performance relative to national average; and ii) financial constraints. We find that hospitals exposed to HRRP penalties increased observation bed usage by 16.9% more compared to non-penalized hospitals, and by as much as 40.6% if they were also financially constrained. A back-of-the-envelope calculation suggests that if just 10% of the change in observation admissions was done to avoid readmissions, the observed reduction in readmissions following HRRP would be 21% smaller than reported. Furthermore, if hospitals are indeed using observation admissions to avoid readmissions then one would expect that post-HRRP readmissions of patients originally discharged from the same hospital would have decreased at a higher rate compared to readmissions to hospitals other than the discharging hospital. Using a detailed patient-level dataset, we confirm that this is indeed the case.

Keywords: Healthcare, Regulations, Hospital Readmissions Reduction Program

JEL Classification: I18, L88

Suggested Citation

Chen, Christopher and Savva, Nicos, Unintended Consequences of Hospital Regulation: The Case of the Hospital Readmissions Reduction Program (August 22, 2018). Available at SSRN: https://ssrn.com/abstract=3236983 or http://dx.doi.org/10.2139/ssrn.3236983

Christopher Chen (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Nicos Savva

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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