services. Medicare’s hospital outpatient payment system and that for physicians and other health care professionals tend to pay for each additional service, even if the service results from a complication or inadequate initial service. Thus, a provider who makes a mistake and has to repeat a procedure may be paid twice as much as one who performs it correctly the first time. Payment systems that bundle services broadly and comprehensively into a single payment run the risk of having providers avoid patients with extensive needs that are not adequately accounted for in the payment. For example, patients requiring extensive care in a skilled nursing facility can have relatively long waits for placement in such a facility because the base payment does not reflect all their likely needs (MedPAC, 2005a). Medicare’s various prospective payment systems and their incentives are discussed in Appendix A.

Just as payment methodologies can have an impact on the quality of health care, there are other aspects of the current health care delivery system that may affect care. For example, consumer-directed health plans are based on the expectation that greater transparency about service costs and quality and a greater responsibility for paying for care, including tiered benefit levels, will motivate consumers to select their health care providers carefully, which in turn will motivate providers to improve their efficiency and clinical performance in order to attract patients. Such health plans are relatively new and their full impact has yet to be measured, but they may have a positive influence on health costs and quality in the future.

Another way to overcome the unintended consequences of the current payment system is to create incentives to promote better quality through pay-for-performance strategies. Such strategies reward outcomes and processes associated with improved and/or high-quality care according to selected measures of provider performance. The committee recognizes that such a reward strategy will not necessarily result in lower spending for health care services, but improving quality should make it more likely that patients will receive more effective and efficient care. Although the promise of pay for performance may alter provider behaviors, it alone will not be the silver bullet for achieving high-quality care or curbing health care costs; it will, however, help ensure that what is paid for will be more helpful to patients.

The long-term growth in Medicare expenditures is projected to be substantial (see Table 1-2), creating a significant impetus for the development of payment strategies that can provide incentives for efficiency while encouraging high levels of clinical quality and patient-centered care. Because Medicare is such a large payer and because many private payers follow its policy lead, the program exerts a significant influence on the organization and delivery of health care services throughout the United States. Through its coverage and payment decisions, therefore, it could encourage the diffusion of high-quality practices.

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