selectively with available providers, Medicare has traditionally allowed all licensed providers to participate in the program who (1) wish to serve Medicare beneficiaries, (2) are willing to accept Medicare’s administratively set rates as payment, and (3) meet minimal predetermined federal standards. Each provider setting has its own requirements for Medicare participation. Essentially all institutional providers must undergo accreditation or certification by CMS or its agents, and many report performance data. For example, hospitals are required to develop and maintain a quality assessment and performance improvement program, meet standards for content and retention of medical records, and fulfill requirements for organization and functioning of medical staff, among many other conditions. Participating physicians must agree to accept Medicare’s payment for covered services as the full charge and not bill the Medicare patient for additional fees above the applicable coinsurance or deductible. While most doctors “accept assignment” as participating physicians, others do not and can bill a limited amount above the Medicare payment. All physicians billing Medicare, nonetheless, agree to specific billing procedures. There are, however, no quality or performance requirements for physicians to participate in Medicare beyond state licensure.

Medicare payments have historically been made on the basis of standard formulas or fee schedules that do not reflect different levels of performance (see Appendix A). This payment system was based on the assumption that all licensed providers who met the conditions of participation would provide care of acceptable quality. This payment approach generally persists today, even though it is now recognized that significant variations exist in the quality of care offered by providers and that the average level of care is far from that associated with current best practices. (See Chapter 2 for more discussion of payment systems.)

Current Medicare care payment practices can have toxic effects because they do not reflect the relative value of certain services, such as preventive and primary care, and place little or no emphasis on achieving high levels of clinical quality within a given amount of resources. For example, the physician’s fee schedule does not pay providers adequately for cognitive services such as care coordination and patient education, which are essential for patients with chronic conditions. In addition, the data and methodologies that CMS uses to calculate certain payments under the physician’s fee schedule tend to favor relatively new high-technology services (MedPAC, 2006). Costs are frequently driven upward by a system that provides incentives for a high volume of services, but not for efforts to promote the basic principles of higher-quality care. The system also encourages utilization of expensive services that may not be more effective than less costly ones. In fact, the fee-for-service system itself, as well as the payment methodology for various providers, encourages an increase in quantity and intensity of

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