updated 9/21/2006 2:36:39 PM ET 2006-09-21T18:36:39

Quality not quantity should be the federal government’s guide in setting payments to doctors, hospitals and other health care providers, a report requested by Congress said Thursday.

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Medicare, the nation’s health care program for the elderly and disabled, pays doctors and hospitals when they perform a particular service. But such a system “tends to reward excessive use of services, high-cost complex procedures, and lower quality care,” the Institute of Medicine said.

The institute called for a system that rewards quality, such as spending more counseling time with patients on how to avoid trips to the hospital. It once again recommended “pay-for-performance.” But this time, it also spelled out how the government should pay for it.

Many health care providers won’t be happy with the recommendation.

The institute said Congress should cut the base payments that Medicare makes to hospitals, nursing homes, insurers and doctors. Then, it should use the savings to create pools that reward providers when they do work that has been proven effective in improving a patient’s health, it said.

“If hospitals are already losing money treating Medicare patients, there’s no incentive if you’re going to further cut payments,” said Carmela Coyle, senior vice president for policy at the American Hospital Association. “What’s needed is a stable source of funding for these kinds of incentives. It shouldn’t be done by cutting what are already inadequate reimbursement amounts.”

Coyle said new funding should be carved out for the bonus pools called for by the IOM.

But Dr. Robert Berenson, a senior fellow at the Urban Institute, said provider opposition does not mean that the IOM’s recommendation is wrong.

“At a time when data from Dartmouth says we’re spending plenty in Medicare, it’s not reasonable to say we need to throw new money to improve quality,” he said.

The Dartmouth Atlas Project reports that the government spends far more in some states than others, but there is no indication that patients in the states with the highest spending are better off. In fact, the reverse seems to be true.

Berenson said any transition to pay-for-performance would have to be gradual, and that is something the IOM recommended, too. He also said that changes made in payments to hospitals back in the 1980s was done only after the federal government put new money on the table.

The IOM mission is to serve as adviser to the nation to improve health. It warned that policymakers who view “pay-for-performance” as a way to save money in Medicare could be disappointed.

“Pay for performance will not necessarily reduce the cost of care, but it will help ensure that what is paid for will be more beneficial to patients,” the report said.

Spending for Medicare exceeds $320 billion a year. The program serves nearly 43 million people.

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