Medicare's Hospital Readmission Reduction Program FAQ

What is this CMS program and what is the purpose of it?

The Affordable Care Act of 2010 requires HHS (Department of Health and Human Services) to establish a readmission reduction program. This program, effective October 1, 2012, was designed to provide incentives for hospitals to implement strategies to reduce the number of costly and unnecessary hospital readmissions. CMS (Centers for Medicare and Medicaid Services) defines a readmission in this context as “an admission to a subsection(d) hospital within 30 days of a discharge from the same or another subsection(d) hospital.” Subsection(d) hospitals, per the Social Security Act, include short-term inpatient acute care hospitals excluding critical access, psychiatric, rehabilitation, long-term care, children's, and cancer hospitals. Additionally, the 21st Century Cures Act requires CMS to assess a hospital’s performance relative to other hospitals with a similar proportion of patients who are dually eligible for Medicare and full-benefit Medicaid beginning in FY 2019. The legislation requires estimated payments under the non-stratified methodology (i.e., FY 2013 to FY 2018) equal payments under the stratified methodology (i.e., FY 2019 and subsequent years) to maintain budget neutrality.

When the program was implemented, about 20% of Medicare patients were readmitted to a hospital within one month of discharge; CMS considered this number excessive and believed that readmissions are an indicator of quality of care, or lack thereof. This new program provides an incentive for hospitals to decrease readmissions by coordinating transitions of care and increasing the quality of care provided to Medicare beneficiaries. The program is part of CMS’ goal to transition to value-based purchasing--paying for care based on quality and not just quantity.

These incentives are escalating penalties that decrease a hospital’s payments from all of its Medicare cases (see FAQ 2).

The purpose of this program is to improve quality and lower costs for Medicare patients. It is meant to help ensure that hospitals discharge patients when they are fully prepared and safe for continued care at home or at a lower acuity setting.

CMS includes the following six condition/procedure-specific 30-day risk-standardized unplanned readmission measures in the program:

  • Acute Myocardial Infarction (AMI)
  • Chronic Obstructive Pulmonary Disease (COPD)
  • Heart Failure (HF)
  • Pneumonia
  • Coronary Artery Bypass Graft (CABG) Surgery
  • Elective Primary Total Hip Arthroplasty and/or Total Knee Arthroplasty (THA/TKA)


What payments are affected and what are the payment penalties?

For FY 2020, CMS calculates the payment adjustment factor and component results for each hospital based on their performance during the three-year performance period of July 1, 2015 through June 30, 2018. Payment reductions are applied to all Medicare fee-for-service (FFS) base operating diagnosis-related group (DRG) payments between October 1, 2019 through September 30, 2020. The payment reduction is capped at 3% (i.e., payment adjustment factor of 0.97).

All Medicare payments to an “affected” hospital will be reduced. A hospital’s readmission rate and the percent penalty, if applicable, were determined based on the frequency of Medicare readmissions within 30 days for AMI, CHF and pneumonia for patients that were discharged in July 2008 through June 2011. The analysis was based on the principal diagnosis at discharge with certain exclusions: transfers to another acute care hospital, certain readmissions that are unrelated to the prior discharge and certain planned readmissions for procedures related to the AMI measure. Readmissions data also exclude those patients that died during the index admission and those that left the hospital against medical advice. CMS will continue to look at other potential exclusions from the readmission penalty calculation.

If the rates of readmissions to a discharging, or another Inpatient Prospective Payment System (IPPS) hospital were deemed excessive, the hospital’s IPPS payments were decreased for all Medicare payments. CMS determined the “excess readmission ratios” for the three diagnoses or “measures” based on a National Quality Forum (NQF) endorsed methodology; the analysis process and methodology are complex and looked at three years of discharge data and at least 25 records for each condition. The excess readmission ratio includes adjustments for clinical factors such as patient demographic attributes, comorbidities, and patient “frailty.” Hospitals are compared with a national average readmission ratio that generally applies to a hospital’s patient population and the applicable condition. For hospitals that exceeded the average readmission ratio, a penalty was determined and is now being applied to Medicare payments.

The hospital payment penalty was implemented in October 2012, deducting 1 percent of every Medicare payment for a hospital that was determined to have “excessive readmissions” for the three measures (AMI, CHF and pneumonia). In October 2013, the penalty increased to 2 percent and in October 2014 to 3 percent. In 2015 additional conditions/measures for the initial inpatient admission will be added to the current three measures and will include readmissions following an acute exacerbation of chronic obstructive pulmonary disease (COPD), and following an elective total hip arthroplasty (THA) or total knee arthroplasty (TKA).

How are unnecessary hospital admissions identified?

The initial hospital inpatient admission for the applicable conditions (see FAQ2) (the discharge from which starts the 30-day potential penalty clock) is termed the “index” admission.

The hospital inpatient readmission (which can be used to determine application of a penalty if the readmission occurs within 30 days of the index inpatient admission stay) can be for any cause, i.e., it does not have to be for the same cause as the index admission. There are two exceptions from a readmission penalty: 1) readmission for certain staged AMI procedures likely planned during the index hospital inpatient admission, and 2) same-day hospital inpatient readmissions for the same condition to the same hospital.

Any readmission penalty is applied against the hospital where the index hospital inpatient admission occurred, i.e., the “index” inpatient admitting hospital is the one liable for the payment penalty.

What are hospitals doing to reduce excessive readmissions?

Beginning with FY 2020, the six HRRP readmission measures will be removed from the Hospital Inpatient Quality Reporting (IQR) Program.  In the FY 2018 IPPS final rule, CMS finalized changes in the methodology to calculate the payment adjustment factor in accordance with the 21st Century Cures Act to assess a hospital’s performance relative to other hospitals with a similar proportion of patients who are dually eligible for Medicare and full-benefit Medicaid beginning with the FY 2019 program.  CMS also updated the Extraordinary Circumstances Exemption (ECE) policy to allow hospitals to submit a form signed by the hospital’s Chief Executive Officer or designated personnel and to allow CMS to grant ECEs due to CMS data system issues which affect data submission.  In the FY 2017 IPPS final rule, CMS revision of the date for publicly reporting hospitals’ excess readmission ratio on the Hospital Compare website to allow CMS to post data as soon as possible following the review period. In the FY 2016 IPPS final rule, CMS finalized adoption of an ECE policy allowing hospitals that experience a significant disaster or other extraordinary circumstance beyond the hospital’s control (e.g. hurricane, flood) to request an exemption.  CMS also refined the pneumonia readmission measure by expanding the measure cohort to include additional pneumonia diagnoses: (i) patients with aspiration pneumonia; and (ii) sepsis patients coded with pneumonia present on admission, excluding severe sepsis, beginning with the FY 2017 program.


Hospitals continue to implement various strategies to decrease the rate of readmissions. Most focus on steps to increase coordination of care and communications between providers and patients. Improved discharge planning, education and follow-up for discharged patients are also key factors to reduce readmissions. The use of electronic medical records will support this effort by allowing information to be more easily shared and to provide continuity of care.

Other efforts include:

  1. Increased coordination with other providers and care settings to ensure that discharged patients receive the level of care they need for a safe transition out of the hospital.
  2. Prior to discharge, hospitals are using RNs, case managers and discharge planners to assess high-risk patients, identify patient needs and make sure there is a plan for meeting each need, and provide education and meet other discharge planning needs.
  3. Post discharge, hospitals are coordinating with community resources such as physicians, home health agencies, etc. Some hospitals are calling patients within hours after discharge to ensure that they understand their plan for continued care, have access to needed resources, medications, etc. and answer any questions the patient might have.
  4. Implementation of policies and procedures to notify physicians of their respective patient’s discharge, follow-up on test results, and checks on patient progress.

What are the implications for ED physicians?

This program will affect ED physicians because the ED is the entry point for many of these readmissions. Hospitals might well expect ED staff and physicians to identify patients presenting to the ED for any cause with a reasonable probability for inpatient admission, if such patients have been discharged from that hospital or perhaps a same-system hospital within the prior 30 days if the prior admission was for the applicable conditions (see FAQ 2).

Commensurate with good patient care, the ED will likely have to work with hospital case managers and discharge planners to determine if there are safe alternative care settings other than a hospital inpatient status. ED physicians should be proactive with the hospitals and medical staffs to develop programs and processes to address these readmissions. Vigorous and timely support from case management and/or social services will be important.

Nevertheless, it should be recognized by all involved that once the patient returns to the ED the options will be limited. Therefore, intervention by home health or similar entities following the initial hospital inpatient discharge will be important to promote healthy life- styles and compliance with medications, diet and other instructions.

Where can I get more information?

Updated March 2021


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