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Hospital Readmissions Reduction Program: A Financial and Operational Analysis, Management Science


The Hospital Readmission Reduction Program (HRRP), a part of the US Patient Protection and Affordable Care Act, requires the Centers for Medicare and Medicaid Services to penalize payments to hospitals with excess readmissions. We take an economic and operational (patient flow) perspective to ask a simple question: assuming that hospitals are self-interested operating-margin maximizers and are strategically forward-looking, does the structure of the HRRP policy provide economic incentives to all hospitals to reduce readmissions? If not, which hospitals are left behind, and what are the challenges? Since hospitals are benchmarked against their peers under the policy, we use a game-theoretical model to describe hospitals' behavior. While the game is complex, we develop bounds on equilibria that provide insights into the effectiveness of the HRRP policy. We calibrate our model with a dataset of hospitals in California. Our model suggests that in the long term, a significant proportion of hospitals will prefer to pay penalties rather than reduce readmissions. For a broad range of parameters, we find that the policy may be ineffective in inducing some hospitals to reduce readmissions: these are hospitals that either (i) are located in sparsely served areas, (ii) have a low fraction of revenue coming from Medicare, (iii) have currently high readmission rates, or (iv) have a high contribution margin per patient. We also examine the effect of certain changes to the HRRP policy.




J Zhang, Eric Park, Itai Gurvich, Jan A. Van Mieghem, Robert S. Young, Mark V. Williams

Date Published



Zhang, J, Eric Park, Itai Gurvich, Jan A. Van Mieghem, Robert S. Young, and Mark V. Williams. 2016. Hospital Readmissions Reduction Program: A Financial and Operational Analysis. Management Science.(11): 3351-3371.


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