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The Obama administration wants to dramatically change how doctors are paid

The Obama administration is setting aggressive goals for reforming how Medicare reimburses health-care providers. (AP Photo/Jeff Barnard)

The Obama administration on Monday announced an ambitious goal to overhaul the way doctors are paid, tying their fees more closely to the quality of care rather than the quantity.

Rather than pay more money to Medicare doctors simply for every procedure they perform, the government will also evaluate whether patients are healthier, among other measures. The goal is for half of all Medicare payments to be handled this way by 2018.

Monday’s announcement marks the administration’s biggest effort yet to shape how doctors are compensated across the health-care system. As the country's largest payer of health-care services, Medicare influences medical care generally, meaning the changes being initiated by the administration will likely be felt in doctor's offices and hospitals across the country.

“As a very large payer in the system, we believe we have a responsibility to lead," said Health and Human Services Secretary Sylvia Mathews Burwell in a press conference. "For the first time, we’re going to set clear goals and establish a clear timeline for moving from volume to value in the Medicare system.”

There's widespread agreement among policymakers that the U.S. health-care system needs to move away from rewarding doctors and hospitals for volume and focus more on the value of the care being offered. Doctors typically get paid set fees for every procedure they perform, regardless of whether patients get better.

In addition to improving patient care, the government also hopes to cut wasteful spending. Medicare’s current payment system, known as fee-for-service, cost taxpayers $362 billion last year, between the program's hospital insurance and medical insurance programs, according to the federal Centers for Medicare and Medicaid Services. Critics say the traditional payment scheme fails to discourage overuse of health-care services, without holding providers accountable for whether patients’ get healthier.

Medicare has been experimenting with payment models for more than a decade, and the 2010 Affordable Care Act tried to tackle the issue by expanding payment models that reward providers for the value of care they provide. The programs include lump sum payments for treating a patient throughout an episode of care, like a knee replacement surgery.

The most high-profile effort has been with accountable care organizations (ACOs), which are groups of providers who share in the savings – or losses – for managing patients on a budget. An estimated 7.8 million seniors enrolled in Medicare are currently being served by ACOs, according to the administration.

Farzad Mostashari, a former Obama administration official whose company has helped launch and run three Medicare ACOs, said some hospitals have been reluctant to adopt these alternative payment models because believe they can make more money by charging for each service. But he said the administration's announcement sends a clear signal that the health-care system is quickly moving away from a system that allows for so much waste.

CMS said alternative payment structures now represent about 20 percent of Medicare payments, and that will rise to 30 percent by 2016 under the administration's new goals. This marks the first time that Medicare has set specific targets for expanding the scope of alternative payment systems in the program, CMS said.

Debra Ness, president of the National Partnership for Women and Families, a consumer advocacy organization, said these payment models will force health-care providers to better coordinate care.

"We're not just talking about payment that lowers costs," she said. "The payment changes are designed to change the way that we deliver care in ways that will make that care work better for patients and families."

This shift to value-based payments had already been taking place in the private sector before the ACA. About 20 percent of provider payments by Blue Cross insurers are through contracts that try to prioritize quality over quantity, their trade association reported last summer. Aetna says 28 percent of its reimbursements are now in valued-based contracts, and it expects that rate to jump to 75 percent by 2020.

Many have viewed this broader shift as long overdue, as health care spending has grown to about one-sixth of the U.S. economy. But it's still uncertain how well these payment approaches work.

"We still know very little about how best to design and implement [value-based payment] programs to achieve stated goals and what constitutes a successful program," concluded a 2014 Rand Corporation study funded by HHS. The report, which reviewed pay-for-performance models implemented over the past decade, said improvements were "typically modest" and often hard to evaluate.

Some early efforts to implement newer value-based payment programs have shown mixed results.

Two high-profile ACA programs encouraging health-care providers to work as accountable care organizations have resulted in modest savings to the Medicare program so far, about $877 million. But at least 13 of the 32 organizations that participated in the most ambitious of these efforts — the Pioneer ACO program — have dropped out of the program in the past two years. Most of these groups left to join programs with less financial risk.

Farzad Mostashari, a former Obama administration official who now advises three Medicare ACOs, said some hospitals have been reluctant to adopt these alternative payment models because believe they could make more money by charging for each service. But he said the administration's announcement sends a clear signal that the health-care system is quickly moving away from this wasteful payment scheme.

"It's not so much about the specific goal, because that can and will change," Mostashari said. "It's about the sense of commitment that [hospitals] are perceiving."

A representative for the American Hospital Association said the trade group supports the administration's goals. Robert Wah, president of the American Medical Association, said members of the country's largest doctor's group were "encouraged" by Medicare's efforts to reform how care is delivered, as they’ve become increasingly concerned by bureaucratic requirements.

“There is a great deal of regulatory and administrative burden on [doctors] currently,” Wah said. “We’re in a period of great change, and great change causes anxiety.”