Bad Practices Net Hospitals More Money

In 2003, the most recent year for which data were available, HealthPartners outperformed every Medicare HMO in the Miami area, Medicare quality data show. Still, over the average lifetime of a Medicare patient, the federal program will pay Miami's HMOs about $50,000 more per patient.

What happens to the extra money? It does not all go to the bottom line of the health plans. Rather, it benefits patients in Miami. Under Medicare rules, the HMOs are required to use much of the extra funds to eliminate premiums or provide benefits such as prescription drugs and eyeglasses.

In Minnesota, though, members of HealthPartners pay for their own eyeglasses. They get no prescription drug plan and are charged a monthly $120 premium -- or nearly $1,500 per year -- above and beyond what Medicare pays the health plan.

Medicare "comes out of an old model of care that makes no sense," said HealthPartners' Brainerd. "It isn't fair to those of us who do a better job, and it isn't fair to our patients who end up paying higher out-of-pocket costs."

Donna Burtanger, a spokeswoman for WellCare, said the Miami HMO provides "high quality care and a good value" to Medicare patients. She added that it is "extremely difficult to compare cost and quality of services across various regions of the country."

But Peter T. Wyckoff, executive director of the Minnesota Senior Federation, said that his and other low-cost states end up subsidizing less efficient states.

"It's the worst sort of medical welfare," Wyckoff said. "Can you imagine if Social Security were to pay you $50,000 more because you lived in another part of the country? There would be hell to pay. There would be a revolution."

A Culture of 'More'

Medicare's built-in incentive to provide more services is one cause of the striking variations in spending, analysts say.

"Geography is destiny," said Wennberg, head of the Dartmouth project that has studied Medicare records for 30 years.

Wennberg said differences in spending from region to region aren't caused by varying rates of illness. Rather, they are usually linked to the kinds of extra health services provided in the high-spending areas, such as visits to specialists, tests, costly MRI and imaging scans, and a plethora of minor procedures. The greater the supply, the higher the number of services delivered.

Miami, which has twice as many specialists as the national average, more hospital beds and more technology, is far more expensive than Minneapolis -- a city in a low-cost, high-quality state -- even after adjusting for differences in patients' age, sex, race and medical condition.

In 2001, a traditional Medicare patient in Miami used $10,113 in services, on average. A Medicare patient in Minneapolis: $4,888.

Doing more doesn't necessarily mean doing better, according to Wennberg's colleague, Elliott S. Fisher, who has found that patients in high-spending regions fare no better than those in lower-cost regions. "There is just no evidence that doing more helps," he said. "At best, you do the same, and in some cases you actually do worse."

Recently Medicare officials have begun an effort to transform the way the program pays for care, with a renewed focus on quality. Congress also has joined in, mandating that Medicare try ways to increase competition and link payments to quality.

Medicare has a pilot program to reconfigure how it pays for patients with chronic conditions such as diabetes, heart disease and kidney failure. While relatively small as a percentage of all patients, these beneficiaries account for about half of all money spent. Medicare is testing the idea of paying doctors a single, all-inclusive fee for managing each patient's care, linking the payment to whether the patient gets better.

Another initiative is studying the effect of paying doctors and hospitals small bonuses when they provide preventive treatments such as an annual eye exam for diabetics. Recently, Medicare also began tapping its databanks to give patients access to basic information about the quality of care provided by hospitals, nursing homes, home health and dialysis centers. Much of the information is now reported by the health care providers and posted on Medicare Web sites.

By linking payments to performance, Medicare hopes to shift the culture of medicine away from automatically doing more. In theory, that could lead to savings and improve care.

Mark B. McClellan, head of the Centers for Medicare and Medicaid Services, declined to be interviewed for this article. Straube, his acting chief medical officer, said the savings from reform would be substantial. "Some say billions, some say tens of billions," he said.

To achieve that goal, however, Medicare will have to up the ante, not only rewarding high-quality providers but also withholding payments from those that don't measure up.

"We want to assure that every patient gets the right care every time," Straube said. "That's the vision."

Barriers to Reform

For now, Medicare's reforms are research demonstrations or pilot programs, not actual requirements. Nor is Medicare using its clout to penalize underachieving providers. Hospitals are rewarded for simply reporting how they do on specific measures of quality, but not for their actual performance. Those posting superior results are still paid the same as underachievers.

To obtain more ambitious savings, some analysts say, Medicare will have to take a more aggressive stance. But that requires confronting the powerful lobby of hospitals, doctors and nursing homes.

"The more successful [Medicare officials] are, the more likely provider interest will rise up to prevent the program from ever implementing these changes on other than a demonstration basis," said Robert A. Berenson, a physician and former top Medicare official now based at the Urban Institute.

There is ample history to support Berenson's view.

In the mid-1990s, Medicare paid a select group of high-performing Midwest medical centers an all-inclusive fee for open-heart surgery. Medicare received a 10 percent discount from the package price.

An analysis of the program by federal officials declared it a success. But when Medicare proposed expanding it to include knee- and hip-replacement surgeries, some hospitals balked and the idea was dropped, according to former Medicare officials. "They objected to the identification of particular institutions as being more worthy than other institutions," said Bruce C. Vladeck, Medicare's director from 1993 to 1997.

Vladeck said Minnesota's Mayo Clinic was one of the most vocal opponents. Mayo executives were interested in both projects but backed away, saying in a March 1997 letter that the primary criterion used by Medicare was "large discounts," not excellence.

Vladeck, however, said it was his recollection that Mayo executives took the position they shouldn't have to give Medicare a steep price break but at the same time didn't want their rivals to get special recognition.

"They said, 'We're Mayo and we don't give anyone discounts,' " Vladeck said.

In 1997, Congress ordered Medicare to conduct a demonstration of competitive bidding involving Medicare HMOs to see if lower prices resulted. Two locations were Kansas City, Mo., and Phoenix.

HMOs in Phoenix worked behind the scenes to kill the demonstrations, including lobbying Congress, said Bryan Dowd, a health policy professor at the University of Minnesota who studied the project.

"It was well-orchestrated opposition," Dowd said. "The local plans organized picketing by beneficiaries. I think they may have even bused them in. And they got to the Arizona [congressional] delegation."

In July 1999, the Senate amended a health care bill to ban the projects in Kansas City and Phoenix. A few months later, similar language found its way into the main 2000 federal spending legislation. The same Congress that ordered the demonstration project was responsible for killing it.

Dowd made that point when he testified before the House subcommittee on health in September 1999.

"Only the most cynical among you will not be surprised," he told lawmakers, "when I tell you that the greatest current threat to this congressionally mandated demonstration is Congress itself."

Researcher Alice Crites contributed to this report.