First of three parts

As far back as 1999, federal and state regulators began to receive complaints that the heart surgery unit at Palm Beach Gardens Medical Center in Florida was a breeding ground for germs.

Dust and dirt covered some surgical equipment. Trash cans and soiled linens were stored in hallways. IV pumps were spattered with dried blood. One patient's wife said she saw a medical assistant tear surgical tape with his teeth.

State inspectors in 2002 found "massive post operative infections" in the heart unit, requiring patients to undergo more surgery and lengthy hospital stays.

In a four-year period, 106 heart patients at Palm Beach Gardens developed infections after surgery, according to lawsuits and government records. More than two dozen were readmitted with fevers, pneumonia and serious blood infections. The lawsuits included 16 patients who died.

How did Medicare, the federal health insurance program for the elderly, respond?

It paid Palm Beach Gardens more.

Under Medicare's rules, each time a patient comes back for another treatment, a hospital qualifies for an additional payment. In effect, Palm Beach Gardens was paid a bonus for its mistakes.

Medicare's handling of Palm Beach Gardens is an extreme example of a pervasive problem that costs the federal insurance program billions of dollars annually while rewarding doctors, hospitals and health plans for bad medicine. In Medicare's upside-down reimbursement system, hospitals and doctors who order unnecessary tests, provide poor care or even injure patients often receive higher payments than those who provide efficient, high-quality medicine.

"It's the exact opposite of what you would expect," said Mary Brainerd, chief executive officer of HealthPartners, a nonprofit health plan based in Bloomington, Minn. Her Medicare HMO ranked among the top 10 in the nation last year for quality but was paid thousands of dollars less per patient by Medicare than lower-performing plans.

"The way Medicare is set up," Brainerd said, "it actually punishes you for being good."

As Medicare approaches its 40th anniversary on July 30, much of the debate about the nation's largest health insurance program revolves around whether it will remain solvent for aging baby boomers. Yet another critical question is often overlooked: whether taxpayers and patients get their money's worth from the $300 billion Medicare spends each year -- now about 15 percent of federal spending and projected to grow to nearly a quarter of the budget in a decade.

Along with its sister program, Medicaid -- which provides health coverage for the poor -- Medicare exerts a huge influence on the entire health care system. Hundreds of insurers, large and small, follow its lead. In that sense, the government health program provides a window into the quality shortcomings that plague most of American medicine.

For a year, The Washington Post crisscrossed the country to examine the economics of Medicare and how it monitors the quality of its services -- reviewing thousands of documents and interviewing hundreds of researchers, regulators and patients. The system is highly valued by 42 million elderly and disabled beneficiaries, but it wastes an enormous amount of money on inefficient medicine, the examination found.

Researchers at Dartmouth Medical School, who have been studying Medicare's performance for three decades, estimate that as much as $1 of every $3 is wasted on unnecessary or inappropriate care. Other analysts put the figure as high as 40 percent.

"It is astounding," said Arnold Millstein, an expert on medical quality and a member of an advisory board to Medicare. Increasingly, he added, the waste is driving up the overall cost of health care. "We are medically impoverishing increasing numbers of Americans in part because of our inattention to eliminating waste," he said.

Medicare has difficulty controlling waste because of deficiencies in the way it monitors and enforces quality standards. Its oversight system is fragmented, underfunded and marred by conflicts of interest, records and interviews show. For every $1,000 that it pays to hospitals and doctors, it invests just $1 or $2 to oversee and improve patient care.

"The amount we spend on quality is a pittance," said Kenneth W. Kizer, a physician and president of the National Quality Forum, a nonprofit that works with Medicare officials to develop standards of care.

Medicare has outsourced many enforcement activities to private groups that have overlooked or missed cases in which patients were injured or killed, according to hundreds of inspection reports and interviews with state regulators. In some cases, facilities have gone years without an inspection.

Medicare officials do collect reams of information on quality of care. Yet in many cases the data aren't analyzed or are locked inside incompatible 20-year-old computers.

One result: striking variations in what Medicare pays for care in different states, or even neighboring Zip codes. In 2001, the typical Medicare patient in Los Angeles cost the government $3,152 more than a comparable patient in the District. A patient in Miami cost $3,615 more than one in Baltimore.

Those disparities cannot be explained by differences in local prices or rates of illness, said John E. Wennberg, a Dartmouth physician and an expert on geographical variations in medical care. Rather, higher spending is related to the number of specialists, hospital beds and technology available. "If you have twice as many docs in a community," said Wennberg, "you end up with twice as many office visits."

Yet most high-spending states rank near the bottom in quality of care, Medicare data show. Louisiana ranked 50th in quality yet first in Medicare spending in 2001, the most recent year available. New Hampshire was first in quality but 47th in spending.

Medicare acknowledges that its system rewards bad care. Officials have only recently begun to address the problem.

This year, Medicare began requiring hospitals to report their performance on a handful of measures, such as how many heart attack patients received recommended beta blockers and aspirin. Officials say the reports will pressure hospitals to improve and save money. But officials don't use the data to punish poor performers or to steer patients to the best performers.

"We have to develop systems that address the problem and certainly not pay people for bad care," said Barry M. Straube, acting chief medical officer for the Centers for Medicare and Medicaid Services, the agency that oversees the federal insurance program.

At the same time, he said, Medicare must move cautiously. "You don't want to be too drastic until we know what we're doing," Straube said.

'Immediate Jeopardy'

There may be no starker illustration of Medicare's upside-down economics than Palm Beach Gardens Medical Center, a 204-bed hospital on Florida's east coast. The hospital, part of the Tenet Healthcare Corp. chain, boasted one of the busiest cardiac programs in South Florida in the 1990s, performing more than 1,000 open-heart operations annually.

The heart unit was plagued by infections, which came to public view in 2002 as a result of patient lawsuits.

State regulators first received complaints in 1999 but had dismissed them, state records show. In May 2002, under mounting pressure, regulators returned to the hospital for a three-day inspection.

They found that 13 of 24 heart patients whose records they reviewed had "developed serious infections after their surgical procedures, requiring more major, re-constructive surgery." The state cited and later fined the hospital for violating state law.

Florida regulators forwarded their findings to the regional Medicare office in Atlanta. A few months later, in an Oct. 15, 2002, memorandum, an official there warned colleagues that Palm Beach Gardens "continued to be out of compliance" with Medicare requirements and that those conditions posed an "immediate jeopardy to patients' health and safety."

Some patients had to have additional operations or return multiple times to the hospital as a result of infections, according to state and federal records obtained under the Freedom of Information Act.

One patient, George M. Brown, 77, a West Palm Beach real estate broker and former Marine, died after he developed an infection following open-heart surgery, according to his daughter Susan. In all, her father had five operations, she said. The family sued and eventually reached a settlement with Tenet.

"Let's just say this," Susan Brown said before signing a confidentiality agreement that was part of the settlement, "he had a lot more time left."

When reimbursing hospitals, Medicare does not distinguish between new cases and problems that result from medical errors or poor care, officials of the insurance program said. So Palm Beach Gardens was eligible for additional payments each time a heart patient had to be readmitted. Medicare officials said they could not calculate how much more the hospital was paid.

Even though Medicare had no way to reduce its payments to Palm Beach Gardens, it could have removed the hospital from the program entirely. In October 2002, after the "immediate jeopardy" memo, Medicare officials in Atlanta informed Palm Beach Gardens that they proposed to do just that. Such a move could be fatal for any hospital, cutting off one of its largest sources of funds. For that reason, Medicare rarely expels hospitals, even for dangerous care.

The warning to Palm Beach Gardens proved to be no different. Medicare never cut off the hospital's payments. After the hospital filed a "plan of correction," it was back in Medicare's good graces.

State regulators did fine Palm Beach Gardens -- $323,800 in March 2003. But they quickly reduced it to $95,000. Elizabeth Dudek, Florida's top health regulator, said they did so "to avoid what could be a costly and lengthy appeal."

Hospital officials agreed to the fine without acknowledging any wrongdoing. Tenet, the hospital's owner, said in a statement last week that it "would be inaccurate to conclude" that all of the patients who were readmitted came back because of infections acquired during surgery. The company did not give further details about the cases.

Hospital officials have said their infection rate was about equal to the national average and that some results of the inspections were misleading. "There is no aggregate clinical evidence to show that these infections occurred as a result of care provided at the facility," Tenet said in its statement.

In 2004, Tenet settled more than 100 civil lawsuits for $31 million, again without admitting wrongdoing. After suffering a drop-off in business, Palm Beach Gardens is once again busy. The hospital's Web site touts its heart program as among the nation's best.

No Free Glasses

One of the losers in Medicare's payment system can be found near Minneapolis. Amid supersize bookstores and upscale coffee shops, doctors and nurses at the suburban Woodbury clinic tend to nearly 23,000 patients belonging to HealthPartners, the highly ranked Medicare HMO.

As a Medicare HMO, HealthPartners receives a flat fee from the federal health program to provide care to each member, unlike traditional Medicare, in which doctors and hospitals are paid each time they provide a service. Medicare bases that HMO fee in part on what it pays for its traditional fee-for-service members in that region.

The result is that HMOs that happen to be in areas where patients use more services and overall Medicare spending is high are paid thousands more annually per member than HMOs in low-cost areas such as Minnesota -- regardless of how the patients fare.

For example, WellCare, a Miami HMO, receives $11,834 to treat each of its Medicare members. HealthPartners: $7,851 -- a difference of $3,983 per patient per year.

Yet HealthPartners outperforms WellCare on 13 out of 14 Medicare quality measures.

More of its patients get flu shots and colorectal exams. Turnover among HealthPartners' doctors is lower. And patients of the Minnesota HMO -- whose average age is 78 -- report being happier with their care.

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 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. " 'You're going to call these others Centers of Excellence, and we won't be one.' "

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."

John Wennberg ties

higher spending

to several factors.Mark B. McClellan

is the administrator

of Medicare."The way Medicare is set up, it actually punishes you for being good," Mary Brainerd said.