The Obama administration issued a final regulation to reward hospitals that provide high-quality care, the first in a series of steps that are designed to fundamentally transform the way that the federal government pays for healthcare.
Under the initiative, one of several authorized in the new healthcare law the president signed last year, Medicare will pay more to institutions that score well on a series of measures that gauge patient care and pay less to those that don't hit the quality benchmarks.
Though commonplaces in many industries, setting quality benchmarks and tying them to compensation will be new for many of the nation's hospitals. It is a strategy that Medicare has never used before on a systematic basis.
Many experts and consumer advocates said Friday that they saw these kinds of quality initiatives as crucial not only to improving medical care but also to controlling costs.
"Today's payment system is riddled with perverse incentives that reward volume and high-profit-margin services, regardless of value, outcomes or appropriateness," said Christine Bechtel, head of the Campaign for Better Care.
"This rule is a much-needed effort to begin attacking this problem at its root."
Hospitals that fall short of the new benchmarks could lose as much as 1% of what Medicare would pay them in 2013.
That's a relatively modest penalty for an industry that receives more than $150 billion a year from the government for treating Medicare patients, but the stakes could become significant as more quality initiatives are implemented.
Medicare, which provides insurance to nearly 50 million elderly and disabled Americans, paid for 12.4 million hospitalizations in 2009, according to the Centers for Medicare and Medicaid Services.
There is growing evidence, however, that tens of thousands of patients receive poor or even dangerous care, which can drive up costs by requiring rehospitalizations and additional treatments.
One recent study published in the journal Health Affairs estimated that 1 in 3 hospital patients experienced an "adverse event" such as being given the wrong medication, acquiring an infection or receiving the wrong surgical procedure.
The Obama administration sees improving quality as the best strategy for saving cash-strapped public healthcare programs like Medicare and Medicaid rather than requiring beneficiaries to pay more for their care, as House Republicans proposed in the budget they passed this month.
"Achieving lower costs through better quality is the right way," said Dr. Don Berwick, a leading patient safety advocate who oversees the Medicare and Medicaid programs.
Hospital officials have viewed the prospect of new quality initiatives warily, concerned that some measurements might unfairly penalize providers.
In the first year, a report card will grade hospitals on 12 so-called process measures, which track things such as how quickly heart attack victims are given anti-clotting medicines and how quickly surgical patients receive antibiotics after surgery to cut down on infections
In 2014, the Obama administration plans to expand the report card to include so-called outcome measures, including mortality rates for patients after they leave the hospital and the prevalence of hospital-acquired conditions such as infections and bedsores.
Institutions with high rates of hospital-acquired conditions, as well as those with high readmission rates, stand to be penalized a second time because of another quality initiative still under development.
Some hospital officials have criticized the imposition of two penalties for hospital-acquired conditions.
"It effectively places hospitals at double jeopardy," said Beth Feldpush, senior associate director of policy at the American Hospital Assn.
The association also raised concerns about relying too heavily on surveys of patient opinion, which they said could penalize hospitals that care for sicker patients.
But the Obama administration decided to keep the patient satisfaction measures on the report card they will be using, a move applauded by consumer advocates who see them as an important measure of hospital performance
The quality initiatives under development are expected to generate even more debate. But a growing number of hospital leaders are now backing the safety initiatives.
"We see this as a largely nonpartisan issue," said Dr. David Pryor, chief medical officer of Ascension Health in St. Louis, the nation's largest nonprofit health system. "Democrats, Republicans, independents, all stakeholders should agree that Medicare should pay for safe, high-quality healthcare."