Impact of Race/Ethnicity and Socioeconomic Status on Risk-Adjusted Readmission Rates

Under the Hospital Readmissions Reduction Program (HRRP) of the Centers for Medicare & Medicaid Services (CMS), hospitals with excess readmissions for select conditions and procedures are penalized. However, readmission rates are not risk adjusted for socioeconomic status (SES) or race/ethnicity. We examined how adding SES and race/ethnicity to the CMS risk-adjustment algorithm would affect hospitals’ excess readmission ratios and potential penalties under the HRRP. For each HRRP measure, we compared excess readmission ratios with and without SES and race/ethnicity included in the CMS standard risk-adjustment algorithm and estimated the resulting effects on overall penalties across a number of hospital characteristics. For the 5 HRRP measures (heart failure, acute myocardial infarction, chronic obstructive pulmonary disease, pneumonia, and total hip or knee arthroplasty), we used data from the Healthcare Cost and Utilization Project’s State Inpatient Databases for 2011-2012 to calculate the excess readmission ratio with and without SES and race/ethnicity included in the model. With these ratios, we estimated the impact on HRRP penalties and found that risk adjusting for SES and race/ethnicity would affect Medicare payments for 83.8% of hospitals. The effect on the size of HRRP penalties ranged from −14.4% to 25.6%, but the impact on overall Medicare base payments was small—ranging from −0.09% to 0.06%. Including SES and race/ethnicity in the calculation had a disproportionately favorable effect on safety-net and rural hospitals. Any financial effects on hospitals and on the Medicare program of adding SES and race/ethnicity to the HRRP risk-adjustment calculation likely would be small.