Quality Matters: IOM Report Finds that Medicare Payment System Discourages Quality Improvements
[Posted 10/05/06]

Medicare’s current fee-for-service payment system rewards excessive use of health care services by paying health care providers for treating illnesses and injuries, but not for patient education or other measures that might reduce costs over time, according to a new report from the Institute of Medicine. The report recommends a gradual shift to a system that rewards quality, not quantity. Unfortunately, the report also recommends that such a program be funded, at least initially, by cutting base payments to physicians and other health care providers.

The Institute of Medicine’s report, "Rewarding Provider Performance: Aligning Incentives in Medicare," is the third in a series of quality improvement studies requested by Congress.

This is not the first time the institute has recommended Medicare move toward pay-for-performance, but this time, it also spelled out how the government should pay for it.

The institute recommended that Medicare initially cut base payments to physicians, hospitals, and nursing homes, and use the savings to create bonus pools from which to reward not only quality improvement, but also continued excellence. The report does, however, recognize that physician fees are already scheduled to be cut over the next 10 years because of the flawed sustainable growth rate formula and acknowledges that Congress may need to appropriate some new funds to ensure that the reward pool is sufficient to encourage participation by all physicians.

The report also recommends that large, institutional health care providers and organizations be required to participate, but that participation by small physician practices should be voluntary for at least the first three years.

Contact: Sandra Bressler, 415/882-5171 or sbressler@cmanet.org.