The Obama administration finalized plans Friday to reward hospitals that provide high quality care, the first in a series of steps that are designed to fundamentally transform the way 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 scoring 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 Medicare has never used before on a systematic basis.
But many experts and consumer advocates see these kinds of quality initiatives as critical to not only improving medical care but also 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. While a relatively modest penalty for an industry that receives more than $150 billion a year from the government for treating Medicare patients, the stakes could become significant as the full series of quality initiatives is 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, 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 the new quality initiatives warily, concerned that some measurements may unfairly penalize providers.
In the first year, the report card will include 12 so-called process measures, which track things like 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 like infections and bed sores.
Hospitals with high rates of these conditions stand to be penalized further in the future under another quality initiative still under development, as do hospitals with high rates of readmissions.
Some hospital officials have criticized the 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 American Hospital Assn.also raised concerns about relying too heavily on surveys of patient opinion, which they say can 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 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 St. Louis-based Ascension Health, the nation's largest nonprofit health system. "Democrats, Republicans, Independents, all stakeholders should agree that Medicare should pay for safe, high quality healthcare.