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Date:  Sept. 21, 2006

Contacts:  Christine Stencel, Media Relations Officer

Christian Dobbins, Media Relations Assistant

Office of News and Public Information

202-334-2138; e-mail <>




Medicare Payment System Discourages Improvements in Quality of Patient Care;

Program Should Phase In Pay-for-Performance Approach


WASHINGTON -- Because Medicare's current fee-for-service payment system does little to promote improvements in the quality of health care for the program's nearly 42 million beneficiaries, the U.S. Department of Health and Human Services should gradually replace it with a new pay-for-performance system for reimbursing participating health care providers, says a new report from the Institute of Medicine.  Given that pay for performance does not yet have an established track record, the new system should be phased in, so that involved parties can build on successes along the way and avoid unintended negative consequences, said the committee that wrote the report. 


For an initial period of three to five years, Congress should reduce base Medicare payments across the board and use the money to fund rewards for strong performance, the committee said.  At the same time, efforts should be made to evaluate other ways to fund bonus payments that could be used longer term.  Many large, institutional health care providers and organizations that already have the capacity to begin participating in the pay-for-performance system should be required to do so as soon as it is launched, the report adds.  But participation by small physician practices should be voluntary for the first three years, at which time the HHS secretary should decide whether to implement broader mandatory participation.


"Medicare beneficiaries are not getting the highest possible quality of care because the program's payment system encourages volume rather than efficiency and quality," said committee chair Steven A. Schroeder, Distinguished Professor of Health and Health Care, University of California, San Francisco.  "The urgency of the situation demands that steps be taken now to encourage health care institutions and clinicians to improve their quality.  Pay for performance has demonstrated sufficient promise based on early experience that it should be pursued, albeit cautiously and in a manner that allows for learning and adjustment as needed.  And we should remember that pay for performance is just one part of the solution; other interventions will be needed to achieve the level of quality that Medicare patients deserve."


Medicare currently provides more than $300 billion in health care benefits annually to around 42 million older and disabled Americans through a system that reimburses participating providers for the services they deliver.  Reimbursement rates do not vary with the quality of the care that patients receive, the report notes.  The current system pays for treating injury and illness -- and encourages use of new, high-tech interventions -- but it does not generally reimburse for preventive services such as patient education.  Nor does it pay for coordinating the care of patients whose conditions involve multiple providers, and it offers no incentives to improve patients' overall health status, the committee found. 


Little hard data on the effects of pay-for-performance systems are available, the committee acknowledged.  Although more than 100 incentive programs have been launched in the private sector in the past few years, fewer than 20 studies have assessed the impact of these programs on quality of care and health outcomes.  However, noting that both private- and public-sector groups are eager to move forward with pay for performance, the committee concluded that a gradual implementation would enable officials to assess the program along the way, adapt to knowledge gained, and monitor for unintended negative effects -- such as providers avoiding certain kinds of patients or withdrawing from Medicare.


The committee deferred to Congress to determine by how much to decrease Medicare base payments to create a pool of funds for bonus payments.  However, it recommended that the percentage be sufficient to create rewards large enough to motivate health care providers' participation and real improvements.  Physician fees are already scheduled to decline over the next few years under a mechanism that adjusts reimbursements to control Medicare's costs.  Congress therefore may need to appropriate some new funds to ensure that the reward pool is sufficient, the committee said. 


Using a reduction in base payments to fund bonuses should be used initially while other, more sustainable long-term strategies are explored.  Sustaining the rewards pool through savings generated by improved efficiency and cost-reducing reforms has great potential, the committee said, and it urged the Centers for Medicare and Medicaid Services to test ways to make this funding source work. 


To increase the likelihood of participation by as many health care providers as possible, the program should reward those who improve their performance significantly as well as those who meet or exceed designated thresholds of excellence.  As providers increasingly make improvements, the fraction of rewards for excellence will grow; therefore the standards for achieving improvements should be raised appropriately.  


The committee considered whether requiring mandatory participation in Medicare's pay-for-performance program would help achieve the goal of universal participation, but it recognized that some providers -- especially those who practice independently or in small organizations -- may need technical assistance and additional infrastructure before they can measure their performance and report the data.  At the same time, a number of institutional providers already have the means to collect and report information.  The committee therefore recommended that Medicare require participation by providers with this capacity and allow others to participate voluntarily at the beginning. 


Because obtaining the technology and skills needed to collect and submit performance data could impose a burden on providers that discourages their participation, HHS should offer incentives to encourage providers to submit data, the committee recommended.  The data should be made publicly available to better inform patients and other stakeholders about the quality of various health care providers.


The study was sponsored by the Centers for Medicare and Medicaid Services of the U.S. Department of Health and Human Services at the request of Congress.  Established in 1970 under the charter of the National Academy of Sciences, the Institute of Medicine provides independent, objective, evidence-based advice to policymakers, health professionals, the private sector, and the public.  The National Academy of Sciences, National Academy of Engineering, Institute of Medicine, and National Research Council make up the National Academies.  A committee roster follows.

Pre-publication copies of Rewarding Provider Performance: Aligning Incentives in Medicare are available from the National Academies Press; tel. 202-334-3313 or 1-800-624-6242 or on the Internet at  Reporters may obtain a copy from the Office of News and Public Information (contacts listed above).


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[ This news release and report are available at ]




Board on Health Care Services


Committee on Redesigning Health Insurance Performance Measures,

Payment, and Performance Improvement Programs


Steven A. Schroeder, M.D. (chair)

Distinguished Professor of Health and Health Care

University of California

San Francisco


Bobbie Berkowitz, Ph.D., R.N., F.A.A.N.

Chair and Professor, Department of Psychosocial and Community Health

School of Nursing

University of Washington



Donald M. Berwick, M.D., M.P.P.

President and Chief Executive Officer

Institute for Healthcare Improvement

Cambridge, Mass.


Bruce E. Bradley, M.B.A.

Director, Health Plan Strategy and Public Policy

General Motors Health Care Initiatives

Pontiac, Mich.


Janet M. Corrigan, Ph.D.

President and Chief Executive Officer

National Committee for Quality Health Care

Washington, D.C.


Karen Davis, Ph.D.


Commonwealth Fund

New York City


Nancy-Ann Min DeParle, J.D.

Senior Adviser

J.P. Morgan Partners LLC

Washington, D.C.


Elliott S. Fisher, M.D., M.P.H.

Professor of Medicine and Community and Family Medicine

Dartmouth Medical School

Hanover, N.H.


Richard G. Frank, Ph.D.

Margaret T. Morris Professor of Health Economics

Harvard Medical School


Robert S. Galvin, M.D.

Director of Global Health Care

General Electric Co.

Fairfield, Conn.


David H. Gustafson, Ph.D.

Research Professor of Industrial Engineering

University of Wisconsin



Mary Anne Koda-Kimble, Pharm.D.

Professor and Dean

School of Pharmacy

University of California

San Francisco


Alan R. Nelson, M.D.

Special Adviser to the Executive Vice President

American College of Physicians

Fairfax, Va.


Norman C. Payson, M.D.


NCP Inc.

Concord, N.H.


William A. Peck, M.D.


Center for Health Policy

Washington University School of Medicine

St. Louis


Neil R. Powe, M.D., M.P.H., M.B.A.

Professor of Medicine, Epidemiology, and Health Policy and Management

Johns Hopkins University School of Medicine and Bloomberg School of Public Health



Christopher Queram, M.H.A.

Chief Executive Officer

Employer Health Care Alliance Cooperative

Madison, Wis.


Robert D. Reischauer, Ph.D.


Urban Institute

Washington, D.C.


William C. Richardson, Ph.D.

President Emeritus

Johns Hopkins University, and

President and Chief Executive Officer

W.K. Kellogg Foundation

Battle Creek, Mich.


Cheryl M. Scott, M.H.A.

Chief Operating Officer

McClintock-Scott & Partners



Stephen M. Shortell, Ph.D.

Blue Cross of California Distinguished Professor of Health Policy and Management, and


School of Public Health

University of California



Samuel O. Thier, M.D.

Professor of Medicine and Professor of Health Care Policy

Harvard Medical School and Massachusetts General Hospital



Gail R. Wilensky, Ph.D.

Senior Fellow

Project HOPE

Bethesda, Md.




Clyde J. Behney, M.B.A.

Deputy Executive Officer, and

Acting Director

Board on Health Care Services


Samantha M. Chao, M.P.H.

Senior Health Policy Associate


Tracy A. Harris, D.P.M., M.P.H.

Program Officer