OHD Learn · Hospital Payment Programs

Hospital Readmissions Reduction Program

Hospitals with too many patients returning within 30 days face a Medicare payment penalty of up to 3% — applied to every inpatient discharge, not just the ones with readmissions.

💰 Payment penalty program Up to 3% penalty 6 conditions measured
How the Program Works

Excess readmissions trigger a payment reduction on all Medicare inpatient discharges.

The Hospital Readmissions Reduction Program began in October 2012 and applies to hospitals paid under the Inpatient Prospective Payment System. For each of six specific conditions, CMS calculates whether a hospital's readmission rate is higher than expected given its patient population. If it is — if there are "excess readmissions" — the hospital faces a payment penalty.

The penalty is calculated as a multiplier applied to the hospital's base Medicare operating payments for all inpatient discharges during the fiscal year — not just discharges related to the penalized conditions. A hospital penalized for excess heart failure readmissions sees a payment reduction on every Medicare inpatient case it handles that year.

The maximum penalty is 3%. Most penalized hospitals face reductions in the 0.1% to 1% range, but the aggregate effect across thousands of annual discharges is financially significant.

⚠️
Payment Impact
The penalty applies to all Medicare inpatient base payments — not just readmission-related cases. A hospital with 5,000 annual Medicare discharges facing a 1% penalty sees that reduction applied to every case. The penalty is calculated and published annually by CMS for each participating hospital.
The Six Conditions

Six conditions chosen for prevalence, measurability, and improvability.

CMS selected conditions where readmission rates are both common enough to measure reliably and sensitive enough to care quality that holding hospitals accountable is meaningful. All six use 36 months of data for reliable estimates.

AMI
Heart Attack
30-day unplanned readmission after acute myocardial infarction hospitalization. One of the original three conditions when HRRP launched in 2012.
HF
Heart Failure
30-day unplanned readmission after heart failure hospitalization. Historically among the highest-volume conditions in Medicare — and among the highest-readmission.
PN
Pneumonia
30-day unplanned readmission after pneumonia hospitalization. One of the original three conditions and a common driver of HRRP penalties for community hospitals.
COPD
Chronic Obstructive Pulmonary Disease
30-day unplanned readmission after COPD hospitalization. Added in FY 2015. COPD readmissions are frequently driven by patient social factors as much as clinical care quality.
THA/TKA
Total Hip / Knee Replacement
30-day unplanned readmission after elective total hip or knee arthroplasty. Added in FY 2015. A high-volume procedure where post-discharge care coordination is directly measurable.
CABG
Coronary Artery Bypass Graft Surgery
30-day unplanned readmission after CABG surgery. Added in FY 2017. A lower-volume condition than the others — meaningful only for hospitals performing significant cardiac surgery volume.
The Excess Readmission Ratio

Predicted versus observed — adjusted for what you can't control.

The penalty is not based on raw readmission rates — it is based on the excess readmission ratio, which compares a hospital's predicted readmission rate (given its patient mix) to its actual rate. A hospital with sicker, more complex patients is expected to have higher readmission rates, and the model accounts for that.

Excess Readmission Ratio (ERR)
The ratio that determines whether a penalty applies. ERR above 1.0 = excess readmissions.
The formula
ERR = Predicted ÷ Expected
Predicted rate: what the model says this hospital's rate would be given its patient mix. Expected rate: what a perfectly average hospital would produce with the same patients. ERR above 1.0 means worse than expected. ERR below 1.0 means better.
Dual-eligibility adjustment (2019)
Beginning in FY 2019, CMS introduced a peer-group adjustment that compares hospitals to other hospitals with similar shares of dual-eligible patients (Medicare-Medicaid). Hospitals serving higher proportions of low-income patients are compared to peers with similar social complexity — not to the full national average.
ERR < 1.0
No penalty
Readmissions are at or below expected levels. No payment adjustment for this condition.
ERR = 1.0–1.x
Penalty applies
The excess readmission ratio exceeds 1.0. The penalty is calculated from the aggregate excess readmissions across all six conditions.
Max 3%
Maximum penalty
No hospital's HRRP payment multiplier can fall below 0.97, regardless of how high its excess readmission ratios are.
Sources
  1. CMS Hospital Downloadable Database Data Dictionary, January 2026 — CMS Provider Data Catalog
  2. Hospital Readmissions Reduction Program — CMS.gov
  3. HRRP Overview — QualityNet.cms.gov