Impacts of performance pay for hospitals: The Readmissions Reduction Program

Policy makers are increasingly tying payments for health care providers to their performance on quality measures, though there is little empirical evidence to guide the design of such incentives. I deploy administrative Medicare claims data to study a large federal program which penalizes hospitals with high rates of repeat hospitalizations (“readmissions”). I exploit the introduction of the penalty and policy-driven variation in penalty across hospitals to identify the effect of the program on hospital admission and treatment decisions, and on patient health. The program is associated with a 5% decrease in readmission accompanied by a 3% reduction in thirty day mortality. I quantify the role of two mechanisms – improvement in treatment quality and changes in admitting behavior – and find that quality improvement can explain 55-60% of the aggregate decrease. The change in admitting behavior seems driven by the penalty since there is a substantial decrease in admission rate for returning patients that could potentially incur a penalty but no such effect for those that will not. It plays a quantitatively important role and I find suggestive evidence of harm to affected patients.