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Medicare helps tens of millions of older Americans manage their healthcare costs, but providing benefits costs the government hundreds of billions of dollars each year. To try to manage those costs, Medicare has put in place a system of incentives and penalties designed to encourage hospitals and healthcare providers to deliver quality care. Yet it now appears that Medicare's penalties have turned out to target a surprising set of hospitals, and the impact on them and their patients could be a big negative without adjusting Medicare's incentive system. Below, you'll learn who's at risk and what can be done to solve the problem.

Encouraging higher-quality healthcare
In October 2012, the Centers for Medicare and Medicaid Services implemented a new policy. In an effort to control costs, CMS started reducing Medicare reimbursement payments to hospitals participating in its Inpatient Prospective Payment System if they had a greater number of people readmitted after initial release than expected. In particular , CMS looked the number of patients readmitted after suffering heart attacks, heart failure, pneumonia, hip or knee replacements, and chronic obstructive pulmonary disease. It then compared the number to its own expected number based on averages among similar hospitals. If the number of actual readmissions is higher, then Medicare cuts payments.

The idea behind the guidelines is to encourage hospitals to solve a medical problem the first time it sees a patient. Readmissions can be extremely costly to Medicare, especially when they expose a failure to determine the root cause of a medical issue and therefore use valuable resources on services that turn out not to help patients.

However, new evidence points to other causes in disparities among readmission rates at different hospitals. Researchers from Harvard Medical School's Department of Health Care Policy found that a substantial portion of the differences among hospitals stemmed from socioeconomic and clinical characteristics rather than quality of care. In the words of study senior author and Harvard professor J. Michael McWilliams, "Our findings suggest that hospitals are penalized to large extent based on the patients that they serve."

Specifically, the study pointed to several key factors. Lower income levels often led to higher readmission rates, as did lower levels of patient education. Also, the ability to care for oneself with basic living activities like bathing, dressing, and eating independently was a determining factor in whether a patient was readmitted.

The net result is that hospitals in areas with high concentrations of at-risk patients often end up getting penalized, even though those institutions are often the ones that already struggle the most to survive financially. Lead author and research fellow Michael Barnett said that "the hospitals treating the sickest, most vulnerable patients are being deprived of resources that they could use to take better care of their communities" as a result of the penalties.

Currently, factors like these aren't generally included in Medicare's assessment of readmission results. Medicare does make some risk-based adjustments that center on age, gender, past medical history, and other diseases and conditions of the patients that a particular hospital serves and how they compare to the typical medical facility. Yet as the study authors note, looking closely at readmission rates shows just how important healthcare literacy is and how much trouble can come when groups of patients don't have the resources they need in order to recover fully from a serious illness.

What's next for Medicare?
In response to the study, the CMS appears ready to look at alternatives to its current penalty calculations. Medicare Chief Medical Officer and Deputy Administrator Patrick Conway said that it would keep "addressing any unintended consequences, particularly for those hospitals serving dual-eligible and low-income beneficiaries."

Yet the challenge will be to ensure that any new penalty calculation involves factors that are easily determinable as well as having a demonstrated link to readmission rates. Although hospitals typically already have or can easily collect data on age and medical history, asking them to gather information about patients' level of education, socioeconomic status, and other factors would dramatically widen the scope of data collection efforts. That in itself could put a dent in the potential savings from fairer penalties.

At its most basic level, the goal of rules like this is to make healthcare more effective and efficient, both in terms of health-related outcomes and cost. Regardless of the incentives and penalties that Medicare creates, the best thing that all Americans can do to further their healthcare efforts is to take greater responsibility for the care that they receive and to realize that with many conditions, it's critical to act in your own best interest rather than relying blindly on medical professionals to take care of every aspect of your recovery. As financial pressures on Medicare get stronger, the need to encourage participants to be smarter about their own healthcare will only grow.