Reducing Readmissions: Preventing Setbacks Through Safer Transitions

Rising Penalties, Persistent Risks

The Centers for Medicare & Medicaid Services' Hospital Readmissions Reduction Program continues to dock payments to hospitals exceeding expected 30-day readmission rates for key conditions, a policy in place since 2012 to curb avoidable returns and control costs. In fiscal year 2026, which began October 1, 2025, the share of hospitals facing meaningful penalties has ticked upward after years of gradual improvement, signaling that gains in reducing readmissions may be stalling or reversing.

Preliminary data released in September 2025 show 240 hospitals—8.1% of those evaluated—will see reductions of 1% or more on Medicare inpatient payments, compared with 7% in FY 2025. The majority still face smaller cuts below 1%, but the increase marks the first rise in penalized hospitals in five years. Hospitals serving higher proportions of dually eligible Medicare-Medicaid patients, often safety-net facilities, experience slightly elevated average penalties.

These financial hits carry real weight: penalties cap at 3% but can total tens of thousands to millions per hospital, straining margins in an era of tight reimbursements and rising operational costs. Readmissions remain costly and disruptive, especially for older adults who account for a large share of Medicare hospitalizations; poor transitions from hospital to home or post-acute care frequently lead to setbacks, including medication errors, inadequate follow-up, or social barriers to recovery.

A key tension lies in the program's methodology. Rapid growth in Medicare Advantage enrollment—reaching over half of beneficiaries—has created distortions because HRRP historically used only traditional Medicare data, potentially over-penalizing hospitals in high-MA areas where remaining fee-for-service patients may have unobserved higher severity. Recent studies estimate this leads to annual penalty redistributions of $284-297 million across hospitals. CMS finalized rules to incorporate MA data into readmission calculations beginning FY 2027 and shorten the performance lookback period, but these adjustments will not affect current penalties.

The stakes extend beyond hospitals to patients and the system: preventable readmissions burden older individuals with health declines and family strain while driving unnecessary spending in a program already under scrutiny for equity and effectiveness.