Medicare Reimbursement System Hinders Quality Improvements, Some Providers Contend

The New York Times on Friday examined how Medicare's reimbursement system can hamper some hospitals' attempts to improve quality of care because it pays providers a fixed amount based on specific diagnoses or procedures, "regardless of the quality of care." Some providers and hospital executives say that the system does not create incentives for providers to provide the best quality of care, the Times reports. According to the Times, the current Medicare payment system can "penaliz[e]" some hospitals because its payments for illnesses such as pneumonia are based on an estimate of the cost of an average case, regardless of type or cost of treatment used. For example, Intermountain Health Care, a network of 21 hospitals in Utah and Idaho, generally prescribes antibiotics for patients with pneumonia and avoids hospitalizing most people with pneumonia. As a result, Intermountain's "reimbursements fall short of its costs," and it foregoes about $1 million per year in Medicare payments as a result of avoiding hospitalizations and complications from treatment, the Times reports. Intermountain follows a similar protocol for patients with congestive heart failure, prescribing medication and avoiding hospitalization, but loses about $4 million in potential revenue from Medicare, according to the Times. Further, "every adverse drug reaction Intermountain avoids deprives it of the revenue from treating the case," the Times reports. Intermountain Chief Operating Officer Dr. Charles Sorenson said, "We are really rewarded for episodic care and maximizing the care delivered in each episode." According to the Times, Intermountain, a not-for-profit network, believes that providing the highest quality of care, regardless of payment, is part of its "central mission," but the network still tries to "keep hospital beds filled and make money where it can to subsidize unprofitable services and pay for charity care."

Glenn Hackbarth, chair of the Medicare Payment Advisory Commission, said, "Right now, Medicare's payment system is at best neutral and, in some cases, negative, in terms of quality -- we think that is an untenable situation." In a recent letter published in the journal Health Affairs, some health experts wrote that "the inertia of the health system could easily overwhelm nascent efforts to raise average performance levels out of mediocrity" and that "[d]ecisive change will occur only when Medicare, with the full support of the administration and Congress, creates financial incentives that promote pursuit of improved quality." Dr. Arnold Milstein, a consultant for Mercer Human Resource Consulting and medical director for the Pacific Business Group on Health, said as much as 20% of Medicare reimbursements should be based on quality and efficiency of care. CMS Administrator Tom Scully said that Medicare's payment system is "one of the fundamental problems" the program faces. According to the Times, that the Medicare bill (HR 1) recently passed by Congress and expected to be signed into law by President Bush on Monday "calls for studies and a few pilot programs on quality improvement," but some experts say that it would do "little to reverse financial disincentives to improving care," the Times reports. In an experiment, Medicare has been paying certain hospitals an additional 2% for delivering the highest-quality care. Other health policy experts, however, say that providers "should not be paid extra for doing what they should be doing in the first place," according to the Times. Helen Darling, executive director of the Washington Business Group on Health, said Medicare's payment system should "[drive] quality" by demanding higher standards (Abelson, New York Times, 12/5).