U.S. to Overhaul Medicare Payments to Doctors, Hospitals

Operations Inside The Care Harbor Public Health Clinic
A healthcare aide treats a patient during the Care Harbor Public Health Clinic event at the Los Angeles Sports Arena in Los Angeles, California, U.S., on Thursday, Sept. 11, 2014. Care Harbor, a nonprofit organization that aids the uninsured with large-scale free urban health clinics, will provide free medical, dental, and vision care to an estimated 1,000 patients each day during its 3 day event. Photographer: Patrick T. Fallon/Bloomberg

The Obama administration will make historic changes to how the U.S. pays its annual $3 trillion health-care bill, aiming to curtail a costly habit of paying doctors and hospitals without regard to quality or effectiveness.

Starting next year Medicare, which covers about 50 million elderly and disabled Americans, will base 30 percent of payments on how well health providers care for patients, some of which will put them at financial risk based on the quality they deliver. By 2018, the goal is to put half of payments under the new system.

For doctors and health facilities, the system will tie tens, and then hundreds, of billions of dollars in payments to how their patients fare, rather than how much work a doctor or hospital does, lowering the curtain on Medicare’s system of paying line-by-line for each scan, test and surgery.

“We believe these goals can drive transformative change,” Sylvia Mathews Burwell, secretary of the Health and Human Services Department, said in the statement.

The program would be a major shift for hospitals, health facilities and physicians, eventually more than doubling the reach of programs that the U.S. said has saved $417 million and that have been a model for how the government hopes to influence, and slow down, health spending.

Medicare paid about $362 billion to care providers in 2014, the health department said in a statement, making it the biggest buyer of health care services in the U.S. Paying separately for each procedure, called “fee-for-service,” has long been viewed as an inefficient driver of U.S. health spending, which at more than 17 percent of gross domestic product is the highest in the world.

Broad Reach

The Obama administration’s announcement today is the first time the government has ever set specific goals to steer the nation away from fee-for-service payments.

Medicare’s practices are often echoed by private insurers who cover 170 million Americans. If the U.S.’s plan is successful, non-elderly consumers could eventually see cost savings, though they may also find that doctors and hospitals offer fewer services as they seek to cut waste and maintain profits.

Doctors and hospitals are already facing changes under the Patient Protection and Affordable Care Act, or Obamacare. About 20 percent of Medicare spending is now paid through programs in which health-care providers either take some financial risk for their performance or at least collect and report measures of their quality, the health department said. Expanding that figure was a key goal of the the law.

At Risk

“The people who are delivering care are increasingly at financial risk for the services that are being rendered,” Dan Mendelson, CEO of Avalere Health, a Washington consulting firm, said in a phone interview. “It’s increasingly likely the physician or the hospital is going to make more money if they provide less care.”

The country’s main lobbying groups for doctors and hospitals said they were on board, at least with the broad idea behind the overhaul. “We support secretary Burwell’s goals and plans,” said Maureen Swick, a representative of the American Hospital Association.

Robert Wah, president of the American Medical Association, said that physicians were worried about additional bureaucracy. “This idea that we’re talking about delivery reform and setting up a system of delivery reform, we’re very supportive of that,” Wah said in an interview in Washington. “The details will be important to see.”

Industry Reaction

Burwell met with about two dozen health industry officials this morning to brief them on the administration’s plan. Participants included executives of Verizon Communications Inc., Boeing Co., UnitedHealth Group Inc., Anthem Inc. and representatives of large hospital chains and physician organizations.

The Affordable Care Act, often criticized by its opponents for not doing much to control health-care costs, created several programs the Obama administration now plans to rely upon to end fee-for-service payments. For example, the law penalizes hospitals with high rates of readmissions of Medicare patients within 30 days of discharging them, and encourages doctors and hospitals to band together and closely coordinate their care, with the aim of reducing redundancies and inefficiency.

Those programs have saved about 50,000 lives and reduced health-care spending by about $12 billion, based on preliminary estimates, the health department said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE