Providing Fair Value

03/18/2010 05:12 am ET | Updated May 25, 2011

In the U.S. Senate's health care reform package, hospitals would receive government rewards for providing value - good care at a fair cost. It's a great idea. It should be done the right way to boost efficiency while protecting hospitals that may have higher costs because of the sicker or more impoverished population they serve.

The idea behind value based purchasing is to reward hospitals for efficiency by giving them a larger reimbursement from Medicare, the federal insurance for senior citizens. The best outcomes at the least cost would be rewarded, providing an incentive for all hospitals to strive for quality and efficiency. Inefficient hospitals could lose 2 percent of Medicare payments.

But efficiency is not easily defined. A recent report by the Medicare Payment Advisory Commission (MEDPac), which advises Congress on Medicare, found Medicare pays more to some hospitals in order to meet federal priorities, not because of waste. If you adjust for these expenses, which include the higher costs to teach new doctors or serve high cost areas of the country, many of the apparent cost differences go away.

In other words, there are many care-based reasons why some hospitals cost more. But, so far, the Senate health care reform legislation has not taken all these reasons into account. This means some hospitals, many in urban areas serving poorer populations, could lose some Medicare funds, more because of their geography than their efficiency.

To give true incentives, all hospitals must be on equal standing and that means adjusting for their real costs, not assuming cost pressures are the same for all hospitals. Also, many of the cost pressures are easily explained.

The most obvious is the cost of living, which in some areas of the country is much higher than average. Wages, supplies, rent, energy and everything else cost more in Los Angeles, Chicago, Atlanta, New York City, Boston, Newark, Philadelphia and other places like them. This drives the cost of health care higher so Medicare pays more.

Another factor driving costs higher is the nature of the hospital. Teaching hospitals, for example, spend more on manpower to oversee physician student training and other costs of teaching. Medicare provides extra reimbursement for these efforts adding to the total Medicare cost charged by the hospital.

Poverty also often leads patients to ignore ongoing medical treatment until they are eligible for Medicare at age 65. So, a patient who has never had routine exams may now face extensive treatment for illnesses that could have been detected and treated more simply at a younger age. Medicare reimbursement also is higher for hospitals that treat a disproportionate share of Medicaid patients and the uninsured, for whom they lose money on most episodes of care. These patients often need services such as social work and care coordination in addition to clinical care.

Lastly, patient choice plays a significant role in the cost of end-of-life care. Many hospitals now offer palliative care to provide comfort and pain management for terminal patients. But this is by no means the option preferred by every patient.

Despite some studies criticizing the cost of end-of-life care at some hospitals, we must remember that the decision on what care to provide ultimately rests with the patient. Yes, it can be expensive to conduct some tests and provide necessary treatment to save life, but no one should disregard another person's choices as to his or her life.

Health care reform legislation should carefully review the reasons for hospital costs and fully fund the expenses that are legitimate. To treat all hospitals' payments as identical does not recognize that many hospitals must operate under very different conditions. Government policy recognizes many of these differences now.

Value based pricing should boost higher efficiency and encourage the highest quality by accepting these differences. As a result, patients will over time see improved care. In this way, hospitals can continue to teach, conduct research, serve the poor, and provide care in more expensive as well as less expensive regions - all the things they should do - while driving innovation and producing cost savings.