Wall Street Journal

Medicare Offers Overhaul
Of Hospital Reimbursing

By THEO FRANCIS
November 27, 2007

Medicare proposed sweeping changes to the way it reimburses hospitals, outlining a plan that would essentially redistribute cash by reducing payments across the board and then giving providers a chance to "earn back" money by meeting quality-of-care thresholds.

The proposal, outlined yesterday in a 104-page report to Congress, expands on existing Medicare efforts to align federal payments to hospitals and doctors more closely with the quality of care they offer. But such a change has the potential to squeeze hospitals already facing financial difficulties even as it offers monetary incentives to improve medical care.

"We think this is another step down the pay-for-performance road," said Tom Valuck, who led the project for the federal Center for Medicare and Medicaid Services, or CMS. "That's the heart of pay for performance -- if you're not performing, you're not paid as much."

As laid out in the report, Medicare would cut payments to all facilities by a flat 2% to 5%. That money would then form an incentive pool for distribution to hospitals that show the most improvement or that meet or surpass certain thresholds on a variety of quality measures. The plan, dubbed "value-based pricing," would require congressional action to implement.

The agency said the program is designed to be cost-neutral to the government, and could even save money if Congress decides not to require redistribution of all the withheld cash. Lawmakers ordered up the report in 2005 as part of a deficit-reduction act.

One hospital group that has previously championed Medicare pay-for-performance programs sounded a cautionary note. "We want to make sure what we're doing here is rewarding hospitals for quality gains and not developing a cost-cutting program," said Stacey Brown, a spokeswoman for Premier Inc., a hospital consortium that worked with CMS on an earlier pay-for-performance pilot project. She added that an incentive program "should not be used for any punitive measures."

Some health-policy experts warn that incentive programs can backfire if structured poorly. Medicare makes up nearly half of some hospitals' revenues, and many operate on razor-thin margins. Half of all hospitals netted less than 3.75% in 2005, according to a study by Cleverley + Associates, a consulting firm in Worthington, Ohio.

Reducing payments overall in order to fund the bonuses "is going to be a challenge for a hospital that's got a very tight margin, and many hospitals do," said Arnold Epstein, chairman of Harvard University's Department of Health Policy and Management.

Medicare officials said they would monitor the program closely and adjust it as necessary, and at the same time expand the quality criteria used to determine whether hospitals earn back the lost revenue. "We want to make sure we're not causing some unintended or perverse consequences," said Kerry Weems, acting administrator of CMS.

Write to Theo Francis at theo.francis@wsj.com