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Medicare's $963 Million Experiment

Will hospitals improve if the government pays them more?
Medicare's $963 Million Experiment
Photograph by Barrett Emke for Bloomberg Businessweek

Conventional wisdom holds that financial incentives motivate workers to improve their performance. The U.S. is about to find out if that’s true for health care, too. In a massive cost-control experiment beginning on Oct. 1, Medicare will peg a portion of payments to the quality of care that hospitals deliver, instead of the type and number of procedures they perform. The idea is to see whether shifting financial incentives for hospitals can make people healthier and save the U.S. money before Medicare’s hospital trust fund becomes depleted, which could happen by 2024.

The program works this way: Medicare will withhold 1 percent—$963 million—of its 2012 payments to the country’s 3,000 acute-care hospitals. To get the money, hospitals have to meet benchmarks—giving aspirin to heart attack patients within 24 hours, for example—and score well on patient satisfaction surveys that rate doctors’ listening skills, cleanliness of bathrooms, and other service aspects. The high achievers will be eligible for bonuses.