What HIM Professionals Need to Know: Readmission Penalty Ramp Up

In the FY 2026 Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) proposed rule, the Centers for Medicare & Medicaid Services (CMS) introduced significant updates to the Hospital Readmissions Reduction Program (HRRP).

CMS is proposing five major changes to the HRRP that will have significant impact on how hospitals and health systems manage and address readmissions. If these proposed changes are finalized, important adjustments will be needed towards readmission avoidance strategies. 

The proposed changes include the following:

1. Inclusion of Medicare Advantage Data: Historically, HRRP has assessed readmission rates using data from only Medicare Fee-for-Service (FFS) beneficiaries. In a notable shift, CMS proposes to refine all six readmission measures to include patients enrolled in Medicare Advantage (MA). The IPPS ruling stated that this will provide a more comprehensive view of hospital performance across the full spectrum of Medicare beneficiaries and aligns with CMS’s broader goal of data harmonization.
2. Removal of COVID-19 Exclusions: CMS previously excluded patients with a COVID-19 diagnosis from the denominator of the readmission measures to account for pandemic-related disruptions. CMS now proposes to remove this exclusion across all six measures.
3. Shortening the Applicable Period: CMS proposes to reduce the applicable data collection period for readmission measures from three years to two years.
4. Revised DRG Payment Adjustment Formula: In conjunction with the inclusion of MA data, CMS proposes to modify the diagnosis-related group (DRG) payment ratios used in the HRRP payment adjustment formula. These modifications are intended to ensure the payment penalty calculations accurately reflect the expanded patient population and the varying costs associated with MA versus FFS enrollees.
5. Clarification of the Extraordinary Circumstances Exception (ECE) Policy: CMS seeks to update and codify the ECE policy, clarifying that the agency retains discretion to grant exceptions based on hospital-submitted requests. This adjustment (listed throughout the proposed ruling in many of the changes) aims to streamline administrative processes and increase transparency for hospitals impacted by extraordinary circumstances such as natural disasters or other systemic disruptions.

HRRP & MA Readmission Denials

There is a clear emerging tension between how hospital performance is measured under the HRRP in the proposed ruling and how MA plans are rated under the Medicare Star Ratings system. It appears that for now, hospitals are going to be caught with a potential double penalty, while MA plans appear unscathed.

As discussed in previous articles, under the current HEDIS data submission requirements, MA plans are not obligated to report all hospital readmissions. Because HEDIS measures rely on self-reported paid claims, MA plans are only required to submit data for readmissions they have approved for payment. Consequently, denied or bundled claims are excluded from the MA Star Rating calculations, potentially underrepresenting true readmission rate.

This creates a regulatory disconnect, as hospitals will now be held financially accountable for readmissions of MA patients as part of the HRRP.  Hospitals will also see no relief from the existing denials related to readmissions from MA plans. Thus, hospitals could be denied payment on a readmission from an MA plan and also have to report this as a readmission under the HRRP.  Yet the MA plans face no parallel accountability for these same readmissions.

While the FY 2026 IPPS proposed rule reflects a commitment to equal accountability across Medicare populations, true parity will remain elusive until CMS imposes comparable transparency and quality reporting requirements on MA plans.

As it stands, the burden of readmission accountability remains disproportionately shouldered by hospitals.

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