change. Such an approach could apply the level of resources necessary to achieve significant changes in practices and collaborative arrangements, which may vary with the severity and complexity of clinical conditions and the performance measures employed. Yet restructuring the payment system in the absence of reliable evidence of positive outcomes associated with new payment incentives poses substantial risks. Certain unknown system requirements may be necessary to ensure that pay-for-performance strategies have their intended effects and do not have unintended adverse consequences. Key features and adjustments must be considered, such as how performance measures will address patients with multiple chronic diseases when accepted measures of high-quality care for one condition may contradict measures of high-quality care for another. If payment strategies are not carefully aligned with desired outcomes, providers may avoid accepting patients whose conditions would jeopardize their performance or withdraw from the Medicare system entirely. Both providers in organizational settings (such as hospitals and skilled nursing facilities) and solo practitioners will need data tools and quality improvement assistance to comply with reporting requirements that will allow them to participate in a pay-for-performance program.

In this report, the committee seeks to weigh these two approaches through an evidence-based analysis, keeping in mind that the current payment systems continue to have negative unintended consequences (discussed in Appendix A). The committee proposes a multiphase approach within a learning environment aimed at achieving transformation through a series of structured changes in current payment arrangements. The committee also examines the core features necessary to implement a pay-for-performance strategy while respecting the need for variation and tailored approaches in different health care environments.


Changes in the structure of Medicare payments could have a major impact on the quality of care delivered by the entire health care delivery system. As Medicare provides health care benefits to nearly 42 million U.S. citizens at an annual cost of well over $300 billion (2004 expenditures), CMS is in a unique position to lead the American health care industry in providing higher-quality care and greater value for the money spent on that care (IOM, 2002). Medicare’s current payment system is often inconsistent with the goal of promoting higher value. Some in the private sector have moved forward with attempts to reform the current payment system, but these efforts will not realize their maximum benefit without public-sector involvement. Medicare is also working on strategies to add value to the care it provides and is now collaborating with the private sector to accelerate change.

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