What is an unintended consequence of hospital spending below the Medicare Target Price, where hospitals below the target are paid a reward and those exceeding the target are penalized?

Unintended Consequences of Medicare Target-Based Payment Systems

The primary unintended consequence of penalizing hospitals that exceed Medicare target prices is that hospitals may engage in gaming behaviors—including premature discharges, reclassifying admissions as observation stays, and avoiding sicker patients—which can paradoxically worsen patient outcomes and increase mortality rather than improve care quality. 1

Gaming Behaviors and Coding Manipulation

When hospitals face financial penalties for exceeding spending targets, they respond with several strategic adaptations that may not reflect genuine quality improvement:

• Administrative coding changes have been responsible for a substantial portion of apparent improvements in readmission rates, with coded inpatient complexity increasing over the past decade to artificially lower risk-standardized readmission rates 1
• Observation status manipulation allows hospitals to treat patients who need admission as outpatients, thereby excluding them from readmission calculations while still billing Medicare 1
• Emergency department discharge increases enable hospitals to avoid formal admissions that would count toward their penalty calculations 1
• Declining or delaying appropriate admissions reduces the denominator of patients at risk for readmission, artificially improving hospital performance metrics 1

Adverse Patient Outcomes

The most concerning unintended consequence is the potential harm to patients through premature discharge and reduced access to necessary care:

• Increased mortality rates have been observed following implementation of payment reduction programs, with hospitals facing large Medicare payment cuts showing smaller improvements in mortality rates compared to hospitals with small cuts 2
• Premature hospital discharges driven by length-of-stay targets can lead to higher readmission rates and worse patient outcomes from a broader perspective 1
• Deteriorating patient outcomes in the long run occur when hospitals reduce staffing levels and operating costs in response to payment cuts 2

The evidence shows that for heart failure patients specifically, while 30-day readmissions decreased from approximately 23.8% to 20.6% between 2008 and 2016, raw 30-day mortality increased from 7.9-8.4% to 8.8-9.2%, and 1-year mortality increased from 27.8% to 31.1% 1

Perverse Incentives Against Quality Care

Efficiency measures that focus solely on cost reduction create incentives that are fundamentally misaligned with patient welfare and high-quality care delivery: 1

• Cost reductions without quality safeguards may be associated with worse quality of care delivery and adverse patient outcomes 1
• Measures capturing only length of stay can lead to practices of premature discharge associated with higher readmission rates, worsening care and increasing costs from a comprehensive perspective 1
• Elimination of high-cost interventions may occur even when they provide reasonable health benefits, as hospitals prioritize avoiding penalties over optimal patient care 1

Inequitable Impact on Safety-Net Hospitals

The penalty structure disproportionately affects hospitals serving vulnerable populations:

• 79% of Medicare-participating hospitals have been penalized under the Hospital Readmissions Reduction Program, with safety-net hospitals facing particularly severe financial consequences 1
• Inadequate risk adjustment fails to account for socioeconomic factors, functional status, frailty, and cognitive status that drive readmissions but are beyond hospital control 1
• Perpetuating penalty cycles occur because hospitals with larger initial penalties tend to receive ongoing greater penalties despite substantial improvements, as they must compete against the improving mean performance of all hospitals 1

Rewarding Low-Quality, Low-Spending Hospitals

A particularly problematic unintended consequence emerged when spending metrics were added to value-based purchasing:

• Low-quality hospitals began receiving bonuses when spending was incorporated into performance metrics, with 0% of low-quality hospitals receiving bonuses in fiscal year 2014 compared to 17% in 2015 3
• All low-spending hospitals received bonuses in fiscal year 2015 (100%) compared to only 38% in fiscal year 2014, regardless of their quality performance 3
• Price-based competition may lead hospitals to allocate more resources to easily evaluated hotel services rather than clinical care, with lower clinical resource use associated with worse risk-adjusted mortality outcomes 4

Clinical Implications and Safeguards

To avoid these unintended consequences, payment systems require fundamental redesign:

• Complementary quality measures must accompany cost metrics in a balanced scorecard approach, making tradeoffs between cost and quality explicit rather than hidden 1
• Mortality should be incorporated as an indicator of superior process measures and long-term patient-centered benefit, addressing the disproportionate severity of readmission penalties compared to mortality penalties 1
• Post-discharge care metrics should include observation stays and emergency department visits to accurately reflect patients seeking emergent care after discharge and prevent gaming through reclassification 1
• Minimum quality thresholds should be established to prevent rewarding low-quality, low-spending hospitals 3

The fundamental problem is that measures focused solely on reducing costs without explicit attention to quality outcomes push expenditures away from areas where they produce economically attractive health results, creating perverse incentives that adversely affect patients and society. 1