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Why the Obama Administration Is Shaking Up Medicare

Medicare announces new plans to pay more doctors based on value.

Now that millions more people have health insurance, the Obama administration's next big priority is making sure patients—and the federal government—get what they pay for.

The Health and Human Services Department laid down an ambitious plan Monday for changing the way Medicare pays health care providers, and officials hope the changes will spread throughout the health care system.

By 2018, HHS wants half of all Medicare payments to flow through specific reimbursement programs that pay doctors based on the health outcomes they achieve with their patients, rather than for the procedures they performed. And it wants 90 percent of all Medicare payments to be tied in some way to outcomes. It's the first time Medicare has set specific targets for how much of its spending should be tied to value, and it's a major step toward reforms that could save the country billions of dollars.

Just about everyone agrees, at least rhetorically, that the system needs to move in that direction. But getting there is much harder—especially for doctors, hospitals, and other providers whose bottom lines depend on Medicare reimbursement.

There are two big levers for cost control in health care. The first is via direct cuts in payments for certain services; it's easier and, for lawmakers, it's familiar. Obamacare has slowed the growth in Medicare spending mostly by making blunt cuts in the program's payments to doctors, hospitals, and insurance companies. Likewise, Congress frequently cuts a percentage point or two from one sector or another—often to pay for another sector's pay bump.

But Monday's move is a step toward a different cost-control mechanism: initiatives to better coordinate patients' care, reducing their need for multiple procedures and thereby cutting costs while improving quality.

Similar changes are also a priority for congressional Republicans interested in entitlement reform, and for liberal health care advocates who see quality improvement as a way to keep the focus on patients, not simply federal spending.

"Whether you are a patient, a provider, a business, a health plan, or a taxpayer, it is in our common interest to build a health care system that delivers better care, spends health care dollars more wisely, and results in healthier people," HHS Secretary Sylvia Mathews Burwell said in a statement.

Some of the models HHS wants to expand were part of the Affordable Care Act, including Accountable Care Organizations. Networks of hospitals and doctors pull together into a single ACO, with the goal of tightly coordinating care for each patient. ACOs are billed based on their outcomes, rather than allowing each member to bill Medicare separately. Medicare even penalizes some ACOs if they don't meet certain quality standards or savings targets.

ACOs have had mixed results: Although they've shown an improvement in quality, several providers have dropped out of the program, and Medicare hasn't saved as much money as many advocates had hoped.

Whether it's through ACOs or not, though, there is broad bipartisan support for major changes to the health care delivery system. There's a bipartisan plan in Congress to replace Medicare's existing payment formula and move the system toward more coordinated, efficient care (lawmakers just can't agree on how to pay for it).

Moving away from the existing fee-for-service system poses some financial risk to providers, whose business models are based on the reimbursements they get for each service they provide. Trade organizations representing doctors and hospitals said Monday they shared the administration's goals, but they needed to see more details about how Medicare plans to reach its new targets.

"We encourage the administration to fully evaluate and improve on the delivery system reforms currently in place to ensure that we are learning from the pilot and demonstration projects to best meet patient needs," the American Hospital Association said in a statement. "Moreover, we need to phase in changes in a thoughtful manner that is tailored to the specific needs of individual communities."