A Big Green Pill for Health Care?

Lawmakers are mulling higher Medicare payments for the most efficient providers. A pilot program suggests it could cure some of the system's ills

By Timothy J. Mullaney and Howard Gleckman

For the past 18 months, the federal Medicare bureaucracy has been testing a big new idea: Paying more for better health care. The rules-driven behemoth has long paid pretty much all doctors and hospitals the same, regardless of the quality of care provided.

Now some in Congress want Medicare to make pay-for-performance the new rule, not the exception.

BusinessWeek Online has learned that Senate Finance Committee Chairman Chuck Grassley (R-Iowa) and ranking Democrat Max Baucus (D-Mont.) are expected to introduce a bill June 30 authorizing the Centers for Medicare & Medicaid Services to put all of the nation's hospitals on the pay-for-performance plan.


  And that's not all: A Senate source says the bill also will call for doctors, home-health agencies, and nursing homes to be put on pay-for-performance plans. And a companion bill sponsored by Senators Edward M. Kennedy (D-Mass.) and Mike Enzi (R-Nev.) will give cash incentives to health-care providers increasing their use of information technology.

The bills' twins goals are to both improve the quality of health care and trim costs. So far, trials run by Medicare show pay-for-performance plans that modestly increase hospitals' compensation can lead them to be much more careful about basics, like making sure that heart-attack patients are given aspirin.


  The real question is whether e-health, which also includes technologies for automating delivery of prescription drugs to keeping medical records electronically, can deliver the savings of $100 billion a year or more that enthusiasts believe it will.

Medicare likes the idea of pay-for-performance legislation, which is also being studied by the House Ways & Means Committee. In a June 24 letter to Ways & Means Chairman Bill Thomas (R-Calif.) and Rep. Nancy Johnson (R-Conn.), CMS administrator, Dr. Mark McClellan, said Medicare's rules force the agency to pay for duplicative tests and services, and to cover readmissions that would not have been necessary if patients had received better care the first time.

"Linking a portion of Medicare payments to valid measures of quality...would give providers direct incentives and financial support to implement the innovative ideas and approaches that actually result in improvements in the value of care that our beneficiaries receive," McClellan wrote. But Medicare is not immediately expected to take a position on the specifics of the Grassley-Baucus proposal.


  In its largest test, pay-for-performance made an immediate impact in the quality of care delivered in more than 270 hospitals. Beginning in 2003, Medicare tracked hospitals' compliance with a series of recommended best practices dealing with the treatment of conditions such as pneumonia, heart attacks, coronary-bypass operations, and joint-replacement surgery. In the first nine months of the test, the median score for the quality of care for all conditions at all hospitals improved by roughly 6%.

On Medicare's 100-point scale, the median score for the treatment of all conditions rose to 83, from 77. Nineteen hospitals improved by 30% or more their quality scores for care of heart failure, according to Premier Inc., a consortium of nonprofit hospitals coordinating the study for Medicare.

The pay-for-performance test project has involved both carrots and sticks. Hospitals scoring in the top 10% in quality ratings for each condition get paid an extra 2% per case -- enough to double profits in some cases. Those in the next 10% collect an extra 1% per case. As for hospitals that fail to lift their scores out of the bottom 20% during the first year, they will see payments reduced by up to 2%.


  However, the Grassley-Baucus bill plans to rely only on incentive payments, not including provisions for penalizing weak performers, the Hill source says. That bill would allow Medicare, after consulting with providers, to decide details of the specific incentives offered to doctors and hospitals, the source added.

One hospital that did particularly well in the pay-for-performance trial is Hackensack University Medical Center in New Jersey, which was featured in a recent BusinessWeek cover story (see BW, 3/28/05, "The Digital Hospital"). Hackensack scored highly from the beginning in everything but orthopedics, says Peter Gross, chairman of internal medicine at the 683-bed hospital.

But the striking thing was the fast changes Hackensack made after initially scoring poorly in orthopedics. Doctors had often neglected to cut off antibiotics within 24 hours of surgery, leaving patients vulnerable to infections and a life-threatening form of diarrhea. "We got the major players to agree to changes, and we put a system in place," says Gross. By the end of the trial's first year, Hackensack had pulled its orthopedics score into the top 10%, despite initially failing to rank in the top 30%.


  The pay-for-performance push is part of a broader effort to increase the role of information technology in health care. In mid-June, Senators Hillary Rodham Clinton (D-N.Y.) and Senate Majority Leader Bill Frist (R-Tenn) teamed up on a proposal for federal aid to develop uniform standards for electronic health records, also a goal of President George W. Bush.

Technology also drives pay-for-performance plans because hospitals and doctors use it to track their results, and also to enable new business processes that lead to greater precision and quality in delivering care, Gross says.

Grassley and Baucus hope their bill can be voted upon before yearend. One possibility: Congress will consider a bill to increase Medicare reimbursements to doctors and hospitals, and pay-for-performance incentives may be added to that measure. The ultimate diagnosis of the initiative is still a ways off, but the initial prognosis for better, more cost-effective health care looks promising.

Mullaney is BusinessWeek's Internet editor in New York, and Gleckman is a correspondent in the Washington bureau

Edited by Ira Sager

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