Background: The current Medicare policy of non-payment to hospitals for Hospital-Acquired Conditions (HAC) seeks to avoid payment for preventable complications identified within a single admission. The financial impact ($1 million–$50 million/yr) underestimates the true financial impact of HACs when readmissions are taken into account. Objective: Define and quantify acute inpatient readmissions arising directly from, or completing the definition of, the current HACs. Research Design: Observational study. Subjects: All non-federal inpatient admissions to California hospitals, July 2006 to June 2007 with a recorded Social Security number. Measures: Readmission to acute care within 1 day for acute complications of poor glycemic control; 7 days for iatrogenic air emboli, incompatible blood transfusions, catheter-associated urinary tract infections and vascular catheter-associated infections; 30 days for deep vein thromboses or pulmonary emboli following hip or knee replacement surgery; and 183 days for foreign objects retained after surgery, mediastinitis following coronary artery bypass grafts, injuries sustained during inpatient care, infections following specific joint or bariatric surgery procedures, and pressure ulcers stages III & IV. Results: An additional estimated $103 million in payments would be withheld if Medicare expands the policy to include non-payment for HAC related readmissions. The majority (90%) of this impact involves mediastinitis, post-orthopedic surgery infection, or fall related injury. Conclusions: Limiting the current HAC policy focus to complications identified during the index admission omits consideration of many complications only identified in a subsequent admission. Non-payment for HAC-related readmissions would enhance incentives for prevention by increasing the frequency with which hospitals are held accountable for HACs.