The penalty program, which began in October 2012, is among the toughest of Medicare's efforts to pay hospitals for the quality of their performances rather than merely the number of patients they treat. Unlike other new programs created by the federal health law, the readmissions program offers hospitals no rewards for improvements or the opportunity to opt out.

[See also: EMRs shown to reduce heart readmissions.]

While the overall number of penalized hospitals stayed about the same -- with Medicare penalizing two-thirds of eligible hospitals -- there have been considerable shifts among facilities. A Kaiser Health News analysis found that 1,371 hospitals are receiving a lower fine. Alegent Creighton Health Midlands Hospital in Papillion, Neb., will see the biggest penalty decrease, going from the maximum 1 percent fine in the current year to no fine for the second year. Nationwide, the average hospital fine will be slightly smaller, and the national total will be $53 million less than this year’s fines.

Medicare is increasing penalties for 1,074 hospitals. A total of 283 hospitals not fined in the current year, including Stanford Hospital in California and Johns Hopkins’ Sibley Memorial Hospital in Washington, D.C., will be penalized in the new round.

The October penalties will be applied on at least four out of five hospitals in Alabama, Arkansas, Florida, Kentucky, Illinois, Massachusetts, New York, New Jersey, Tennessee, West Virginia and the District of Columbia, the KHN analysis found. Maryland, which Medicare exempted from the program because it has a unique reimbursement system designed under a federal waiver, is the only state without a hospital getting a fine.

[See also: El Camino slashes hospital readmissions.]

"The recognition of just how complex and difficult of a problem this is is growing as people are starting to grapple with it on the ground," said Dr. Karen Joynt, a Boston cardiologist and Harvard researcher. "It's going to take creativity and innovation and most importantly reaching outside the hospital walls."

Fighting Incentives To Do More

Medicare has credited the penalty program for combatting a perverse financial incentive: hospitals earn more money if their patients' health deteriorates after they are discharged, because they can be paid for two stays instead of one. The Medicare Payment Advisory Commission (MedPAC), which reports to Congress, has estimated that 12 percent of Medicare patients may be readmitted for potentially avoidable reasons. Averting one out of every 10 of those returns could save Medicare $1 billion, MedPAC says.

The penalties are based on readmissions of Medicare patients who originally went into the hospital with at least one of three conditions—heart attack, heart failure and pneumonia—and were discharged between July 2009 and June 2012. Those that ended up in any hospital within 30 days were counted unless that readmission had been planned when the patients left the hospital after their original stay. Hospitals that had more readmissions than Medicare predicted after taking the severity of their patients' illness into account received fines.

Readmissions Penalty Data

• Medicare To Punish 2,225 Hospitals For Excess Readmissions
• Penalties By Hospital (Printable PDF)
• Penalties By Hospital (Downloadable CSV)
• State Averages
• Methodology

Nationally, the average fine decreased from 0.42 percent in the first year of the program to 0.38 percent.

In addition, 141 hospitals that in the first year were given the maximum penalty will get a lower punishment starting in October. Medicare determined that 1,154 hospitals kept their readmissions numbers low enough to escape fines.

Some of the changes in the new penalties may be due to refinements Medicare made in the way it calculated readmissions. This time, it excluded from its analyses cases where doctors had planned for a second admission. A lung cancer patient, for instance, might be admitted for pneumonia and then return for previously planned chemotherapy. Or doctors might unblock one of a heart attack patient's arteries and have him come back for a heart pump or previously planned transplant. Medicare estimates that readmissions are planned in 12 percent of heart attack cases, 6 percent of heart failure cases and 4 percent of pneumonia cases.

Nationally, the rate of all readmissions dropped somewhat last winter, according to Medicare, but those changes are too recent to be reflected in this year’s penalties.

As they did last year, the Medicare penalties appeared to land harder on hospitals that treat large numbers of poor people, according to calculations Medicare made and included in a regulation published Friday.

Among the safety net hospitals with the most poor patients, 77 percent were penalized, while only 36 percent of the hospitals with the fewest poor patients were penalized. Denver Health Medical Center, which has historically had low readmission rates and thus has been cited as proof that safety net hospitals can avoid readmissions for their patients, will get a 0.04 percent penalty after avoiding any punishment last year.

However, Medicare stated that it did not see a need to take the socio-economic populations of hospitals into account in the penalties, since it already factored in the differing health of those populations. "We routinely monitor the impact of socioeconomic status on hospitals’ results and have consistently found that hospitals that care for large proportions of patients of low socioeconomic status are capable of performing well on our measures," the agency wrote in its rule.

Dr. Eric Coleman, a director of care transitions program at University of Colorado, said more hospitals are taking readmissions seriously, in part because of the penalties. "People are starting to recognize that renaming discharge planning does not actually improve your readmissions rate," said Coleman, who designed a widely adopted method to reduce readmissions by coaching patients on what they need to do to stay healthy after leaving the hospital. "Hospitals have moved past 'is this for real' or 'should we do something.'"

Because Medicare applies the penalties to every payment for a patient stay, hospitals can only estimate what the dollar amount of the fines will turn out to be. Some large hospitals may end up losing more than $1 million from the penalties if last year is any guide.

But hospitals that succeed in reducing readmissions may end up with even less revenue by forgoing those second patient admissions, said Erik Johnson, a senior vice president at Avalere Health, a Washington consultant group that advises hospitals and other providers. "The economics of it still do not make a tremendous amount of sense, honestly," he said. "I think hospitals are being good actors in trying to bring these numbers down."

Hospitals Raise Concerns

The uneven impact of the penalties has been a major concern for hospitals. Low-income patients often have a harder time adhering to their post-hospital instructions, researchers say. Buying medicines can be prohibitively expensive for them, discharge instructions harder to follow, and a low-salt diet required to avoid continued congestive heart failure can be expensive. Some hospitals have noted that they have low mortality rates and said that may in part be due to their aggressiveness in recalling patients who seem to not be healing.