Medicare penalizes hospitals with higher-than-expected readmission rates through the Hospital Readmissions Reduction Program (HRRP), which the Centers for Medicare & Medicaid Services (CMS) uses to reduce a hospital’s Medicare inpatient payments by up to 3 percent for an entire fiscal year. CMS calculates readmission rates as a risk-adjusted ratio of actual to expected 30-day unplanned readmissions across six specific conditions, then compares each hospital against a peer group of similar hospitals. For FY 2026, roughly 2,400 hospitals face some level of penalty, and about 8 percent face reductions of 1 percent or more.
What Counts as a Readmission
A readmission is an unplanned return to any acute care hospital within 30 days of discharge from an initial inpatient stay.1Centers for Medicare & Medicaid Services. Hospital Readmissions Reduction Program The patient does not have to return to the same hospital or come back for the same diagnosis. A heart failure patient discharged from Hospital A who shows up at Hospital B’s emergency department 12 days later with pneumonia and gets admitted counts as a readmission against Hospital A.
Scheduled returns do not count. Planned chemotherapy, staged surgical procedures, and organ transplant surgery are classified as planned readmissions and excluded from the measure.1Centers for Medicare & Medicaid Services. Hospital Readmissions Reduction Program
Observation status sits outside the measure entirely. Patients held under observation are technically outpatients, even if they spend a night or two in a hospital bed. Because HRRP tracks inpatient admissions, a return classified as observation rather than a formal inpatient admission does not appear in the readmission data.
The Six Conditions Measured
HRRP tracks 30-day unplanned readmission rates for six conditions and procedures chosen because they are high-volume, high-cost, and sensitive to care coordination:2Centers for Medicare & Medicaid Services. Hospital Readmissions Reduction Program (HRRP)
- Acute myocardial infarction (heart attack)
- Heart failure
- Pneumonia
- Chronic obstructive pulmonary disease (COPD)
- Elective primary total hip and/or total knee arthroplasty
- Coronary artery bypass graft (CABG) surgery
Only fee-for-service Medicare claims currently feed these measures. Starting with FY 2027, CMS plans to incorporate Medicare Advantage claims data, which will expand the patient population captured and can shift calculations for many hospitals.3Centers for Medicare & Medicaid Services. FY 2026 Hospital Inpatient Prospective Payment System (IPPS) and Long-Term Care Hospital Prospective Payment System (LTCH PPS) Final Rule
How the Excess Readmission Ratio Works
CMS does not use a raw count of returning patients. The core metric is the Excess Readmission Ratio (ERR), calculated separately for each of the six conditions. The ERR is the ratio of a hospital’s risk-adjusted actual readmissions to its risk-adjusted expected readmissions.4eCFR. 42 CFR Part 412 Subpart I – Payment Adjustments Under the Hospital Readmissions Reduction Program Risk adjustment accounts for patient characteristics like age, sex, and clinical conditions documented during the initial stay, so a hospital treating sicker patients is not automatically penalized for the severity of its case mix. If a hospital readmits patients more often than expected, its ERR climbs above 1.0. At or below 1.0, it is performing at or better than expected.
A hospital needs at least 25 eligible discharges for a given condition during the performance period. Fewer than that, and the condition drops out of the calculation entirely.5CMS. Hospital Readmissions Reduction Program Measures
Peer Group Comparisons
After the 21st Century Cures Act, CMS stopped measuring every hospital against a flat 1.0 benchmark. Hospitals are now sorted into five peer groups based on the share of their patients dually eligible for Medicare and full-benefit Medicaid. Peer group 1 has the lowest share of dual-eligible patients; peer group 5 has the highest. Each hospital’s ERR is compared against the median ERR of its own peer group, and the hospital is flagged for excess readmissions on a condition only if its ERR exceeds that median.6Centers for Medicare & Medicaid Services. New Stratified Methodology Hospital-Level Impact File User Guide Safety-net hospitals whose patients have more complex social needs now compete against institutions with similar demographics rather than affluent suburban medical centers.
To keep the total Medicare savings under stratification equal to what the old non-stratified method would have produced, CMS applies a neutrality modifier, a multiplicative factor built into each hospital’s payment calculation.6Centers for Medicare & Medicaid Services. New Stratified Methodology Hospital-Level Impact File User Guide
Performance Period vs. Penalty Year
Two different time windows drive the program, and they don’t overlap. The performance period is the three years of discharge data CMS uses to calculate the ERR. The penalty year is the fiscal year in which the resulting payment reduction actually applies.
For FY 2026, the performance window runs from July 1, 2021, through June 30, 2024.7QualityNet. FY 2026 Hospital Readmissions Reduction Program – Hospital-Specific Reports and Review and Correction Period Information The three-year window smooths out random variation, so a single bad quarter will not sink a hospital’s score, but persistent problems will surface clearly. The resulting penalty then applies to every qualifying Medicare inpatient payment from October 1, 2025, through September 30, 2026.2Centers for Medicare & Medicaid Services. Hospital Readmissions Reduction Program (HRRP)
How the Payment Penalty Is Applied
HRRP is authorized under Section 1886(q) of the Social Security Act.8Social Security Administration. Social Security Act 1886 – Section: (q) Hospital Readmissions Reduction Program When a hospital has excess readmissions, CMS applies a payment adjustment factor that reduces the hospital’s base operating DRG payment on every Medicare fee-for-service inpatient discharge for the full fiscal year.2Centers for Medicare & Medicaid Services. Hospital Readmissions Reduction Program (HRRP) The reduction hits all Medicare inpatient claims, not just discharges for the six measured conditions. The maximum reduction is 3 percent, meaning no adjustment factor can drop below 0.97.
The reduction applies to the wage-adjusted DRG operating payment plus any new technology add-on payments.9eCFR. 42 CFR Part 412 Subpart I – Adjustments to the Base Operating DRG Payment Amounts Under the Prospective Payment Systems for Inpatient Operating Costs It does not touch several supplemental payments hospitals also receive:
- Indirect medical education payments
- Disproportionate share hospital payments for serving low-income patients
- Outlier payments for exceptionally costly cases
- Low-volume hospital adjustments
Which Hospitals Are Subject to the Penalty
HRRP applies to subsection (d) hospitals, meaning acute care hospitals paid under Medicare’s Inpatient Prospective Payment System.10Centers for Medicare & Medicaid Services. Hospital Inpatient Quality Reporting Program Several categories of hospital fall outside that definition and are exempt from the program entirely:
- Critical access hospitals (small rural facilities with 25 or fewer beds)
- Children’s hospitals
- Inpatient psychiatric hospitals
- Long-term care hospitals
- Rehabilitation hospitals
- PPS-exempt cancer hospitals (the 11 designated cancer centers exempt from prospective payment)
Hospitals in the Maryland Total Cost of Care Model are also exempt because Maryland operates under a separate all-payer rate-setting system. Veterans Affairs hospitals, which are not paid through Medicare’s prospective payment system, sit outside the program’s scope as well.
Reviewing Results and Looking Up a Hospital
Before penalties become final, CMS sends each hospital a Hospital-Specific Report showing its readmission data, ERR calculations, and proposed payment adjustment factor. Hospitals then have 30 days to review the results, ask questions about the calculations, and request corrections.2Centers for Medicare & Medicaid Services. Hospital Readmissions Reduction Program (HRRP) The window is narrow and strictly limited to calculation errors. A hospital cannot use it to argue that its patient population is uniquely challenging or that external factors drove readmissions up. Miss the 30-day deadline and the opportunity to dispute the numbers is gone.
For the public, CMS posts hospital-level readmission data on Care Compare. Anyone can look up a specific hospital and see its performance for each measured condition, including the number of eligible discharges and how the hospital’s rate compares to the national benchmark, displayed as “better than,” “no different from,” or “worse than” the national rate. Hospitals and researchers wanting the raw ERRs, peer group assignments, and payment adjustment factors can download the underlying files through QualityNet.5CMS. Hospital Readmissions Reduction Program Measures An ERR at or below the peer group median for all six conditions means no penalty; the higher the ERR climbs above that median across multiple conditions, the larger the payment reduction, up to the 3 percent cap.