Recommendation 1: The Secretary of the Department of Health and Human Services (DHHS) should implement pay for performance in Medicare using a phased approach as a stimulus to foster comprehensive and systemwide improvements in the quality of health care.

Achieving the promise of pay for performance to recognize and reward quality in Medicare requires answer to questions about several key design features, including:

  • The sources of revenue for rewards.

  • The types of performance measures that should receive preferential treatment in the early stages of implementation.

  • The appropriate design of the reward system.

The performance measurement framework will have to be sophisticated and nuanced to account fairly for complex clinical situations, such as the treatment of patients with multiple chronic diseases, in which the accepted care for one condition may be in conflict with that for another. Complex measures to address concerns about efficiency and patient-centeredness will require attention. Providers in different institutional settings (e.g., hospitals or skilled nursing facilities), diverse organizational environments (e.g., managed care or solo practices), and different specialty fields will need new capabilities (e.g., databases, information tools, and technical assistance) to comply with new reporting and payment procedures. If payment incentives are not carefully aligned with desired outcomes or if adequate resources or risk adjustments are not readily available, some providers may avoid accepting patients whose conditions could jeopardize their performance rating.

Recognizing the complexities of current circumstances, as well as the demand for action, the committee emphasizes the importance of introducing pay for performance not only through a gradual and phased approach that varies by setting, amount of reward, and measure, but also within a learning system that can evaluate experience with early efforts. Caution must be exercised to ensure that the proposed phased approach does not widen current gaps in performance among providers and domains of care. A learning system depends on monitoring and evaluation and collaboration between the private and public sectors that enables all stakeholders to learn from experience. Ultimately, major restructuring of basic Medicare payment systems beyond the incentives discussed in this report will be necessary. Such restructuring, which could require a transformation away from fee-for-service payments, could include elevating the value of integrated care management, relying more heavily on electronic health records, and facilitating payment that rewards high performance and coordination of services across care settings. Because measures and information systems needed to

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