Fee-For-Service (FFS) reimbursement has been disastrous for the American health care system because, instead of encouraging the delivery of the RIGHT products and services, it simply encourages MORE, and independent of quality and safety.  The system lacks transparency, so we haven't been able to distinguish appropriateness from inappropriateness. As a result we pay for everything, rewarding excess. The industry has seized on this and cultivated excess as a core value. It's a big part of why we're in the fix we're in today.

 

But FFS' other insidious impact is that it has enabled  - and I mean this in the clinical sense - doctors and hospitals to engage in behaviors fundamentally counter to their patients' interests as well as their own. FFS has allowed physicians to remain in small practices where they lacked the scale to invest in information technology tools, group purchasing or offshore medical malpractice arrangements. As a result, care in the little practices that currently dominate the medical landscape is often more expensive and of lower quality than is typical in larger practices.

 

In the same way, hospitals have been paid for their services without regard to their quality or safety performance, which has fostered a much laxer attitude toward improving care than if they were rewarded for high performance and penalized for poor outcomes.

 

For example, current Medicare rules sometimes require higher payment if a complication develops as a result of poor care. A surgical infection or pneumonia that develops while a patient is on a ventilator can lead to increased payments, because a DRG with complications is paid more than one without complications. Of course, this approach is counter to rewarding hospitals for investing in quality and reducing the frequency of adverse events.

 

In a major step last week, CMS threw down a gauntlet by announcing that, beginning next year October, it will no longer reimburse hospitals for preventable medical errors. In an article in the Newark Star Ledger, Tom Valuck, a CMS physician and administrator, explained "We are transforming Medicare from a passive payer simply processing claims to an active purchaser with a stake in quality and efficiency." Big news indeed.

 

A little more than a year from now, Medicare will no longer pay for the care and costs required to recover from mistakes that clearly are the hospital's fault: e.g., hospital-acquired infections (particularly those associated with catheters and intravenous lines), bedsores, objects inadvertently left in the body during surgery, transfusing patients with the wrong blood types, or falls in the hospital. Suddenly, hospitals have a financial incentive to make sure that these problems don't happen.

 

It's important to note that this change in attitude didn't just happen; it has been in the works for several years. (A great background document on this problem is MedPac's Report to the Congress: Promoting Greater Efficiency in Medicare, released in June.) Congress included a provision in the Deficit Reduction Act of 2005 that requires CMS, by October 2007, to identify at least two preventable hospital-acquired complications that are either high cost or high volume. The rule changes announced last week include a requirement that hospitals provide an indication of whether a complication is acquired in the hospital or present on admission. MedPac made this recommendation in it March 2005 report to Congress.

 

A related issue, "never events," include serious reportable events that have been identified by the National Quality Forum. The Leapfrog Group has recommended to Congress that Medicare require hospitals to report these events and that hospitals be precluded from billing for them.

 

Suddenly refusing to pay hospitals for preventable errors probably won't save enormous sums in the scheme of things. But the impacts of the action will reach much farther than the action itself. With Medicare taking the lead, commercial health plans undoubtedly will follow very quickly, and that will produce a large multiplier effect.

 

But most importantly, this decision acknowledges that many hospitals have already taken quality management steps that have significantly driven down their preventable error rates. It IS doable. By creating serious financial incentives - rewards for high performers and penalties for poor performers - for quality improvements in Medicare's payment redesign, CMS has taken a big and important step that will likely encourage not just leading hospitals, but those in the rank-and-file, to begin focusing on quality and safety in ways that most have not until now.

 

And that can only be good news for patients.