The Bush administration is moving toward overhauling the way it reimburses Medicare (search) providers by financially rewarding those who meet certain standards and punishing those who don't.

Currently, the Medicare system does not differentiate among providers when reimbursing them for a particular service. Hospitals, doctors and other providers are paid the same regardless of the level of service performed.

Mark McClellan, administrator of the Centers for Medicare and Medicaid Services (search), told hospital administrators Wednesday that he wants Medicare to adopt a concept called "pay-for-performance." Attorneys within CMS are exploring which changes in reimbursement rates could be made administratively and which ones would require congressional approval.

"We need to be awarding better performance," McClellan told members of the Federation of American Hospitals (search) at a meeting in Washington.

McClellan said revising the way the federal government reimburses Medicare providers is not a way to trim soaring Medicare costs. Rather, he said, it is a way to make the health care program for the elderly more efficient. He also stressed that he wants to make changes sooner rather than later.

"Now is the time," McClellan told reporters after his remarks.

Medicare provides health care coverage to about 41 million people, and its costs continue to grow at a rate far exceeding the growth of the overall economy. The $300 billion program is expected to grow at a rate of about 7.5 percent annually during the next decade, with an even greater increase occurring next year with the addition of a prescription drug benefit.

While McClellan stressed that pay for performance is not intended to reduce the growth of the program, such a change in reimbursement methods would have the potential to affect the bottom line for health care providers. Many of them have questions about what benchmarks the government would use to measure how well they are doing their job, said Susan Van Gelder, senior vice president for the Federation of American Hospitals.

"The standards should be based on scientific proof that if you do these certain things, you'll have a better patient outcome," said Van Gelder. "And it should be practical stuff that is not a burden to collect."

Van Gelder said the federation awaits more details and more results from demonstration projects using pay-for-performance before it signs off on revamping Medicare's reimbursement methods. Still, the federation supports the overall concept.

"It's hard to be against better quality," she said.

The American Medical Association (search) unveiled on Wednesday a new set of principles that it would seek in the implementation of pay-for-performance programs, including voluntary physician participation and the use of accurate data and fair reporting.

"The primary goal of any pay-for-performance program must be to promote quality patient care," said Dr. John Armstrong, the AMA's secretary. "Some so-called pay-for-performance programs are a lose-lose proposition for patients and their physicians, with the only benefit accruing to health insurers. We believe that pay-for-performance programs done properly have the potential to improve patient care, but if done improperly can harm patients."

McClellan told the federation, which represents privately owned and managed hospitals throughout the country, that various demonstration projects are using the pay-for-performance concept with encouraging results. In one case, the hospital quality initiative, about 98 percent of 4,000 hospitals eligible for the program have submitted data for 10 benchmarks; in return, they got a financial reward.

McClellan's comments came one day after the Medicare Payment Advisory Commission (search), a panel established by the Balanced Budget Agreement of 1997, recommended to Congress that it adopt pay-for-performance for physicians, hospitals and home health agencies.

"The program should start with a small share of payment and increase over time," the commission said.