When it comes to providing health care to seniors, the federal government is not a smart shopper.

That's according to a report by the Institute of Medicine, which recommends dramatic changes in how doctors are paid for their care, a recommendation which could be a boon to the health IT industry.

"The current payment system creates many incentives for a high volume of services, yet few for better health," concludes the report, "Rewarding Provider Performance: Aligning Incentives in Medicare," which recommends that physicians be rewarded for making their patients healthier.

"Medicare's current payment system places no emphasis on whether the care delivered is of high or low clinical quality or is appropriate," the report reads.

Instead, Medicare should tie reimbursement to patient outcomes and "should recognize, promote and reward improved coordination of care among a patient's multiple providers and during entire episodes of illness."

Resource Library:

Interoperable systems capable of sharing patient information between caregivers at hospitals, nursing homes, and community-based systems could prevent lapses and overlaps in care caused when caregivers at one institution do not realize what care has, or has not, been provided at another.

Report: State and local health IT spending to swell. Click here to read more.

Such recommendations are broader than many so-called P4P (pay-for-performance) programs. These tend to reward discrete actions, like recommending vaccinations, ordering particular blood tests for diabetic patients, or making sure that heart attack patients receive aspirin within an hour of being admitted.

Whether P4P rewards are triggered directly by doctors' practices or by healthier patients, IT is generally seen both as a way to improve care and to document that improvement.

A spokesman for CMS admitted that current payment systems were "not doing the job," but said that the report showed that CMS was "on the right track," as the Center is already implementing and studying P4P plans.

Last year, CMS awarded nearly $9 million as part of a voluntary program that would award hospitals bonuses for scoring in the top fifth for a set of quality measures. A similar program for large physicians group is underway.

In addition, CMS is sponsoring a variety of voluntary "demonstration projects" across the country.

These efforts seem narrow against the IOM's recommendation, especially seen against a project involving several health plans in California.

"California's experience with Pay for Performance demonstrates that rewarding physicians for quality, not quantity, results in better care," said Tom Williams, executive director of the Integrated Healthcare Association, the non-profit group organizing the effort.

Seven participating health plans (Aetna, Blue Cross, Blue Shield, CIGNA, Health Net, PacifiCare and Western Health Advantage) covering about 12 million patients paid physicians $90 million in P4P-related bonuses.

Cutting pay to underperforming physicians could fund rewards to improving and high-quality providers, according to the IOM. However, physicians groups warn that punishing policies would encourage doctors to shun CMS patients.

Still, the IOM says the Department of Health and Human Services needs three years to determine whether voluntary approaches are working. Otherwise, HHS should consider mandatory measures.

Margo Edmunds, a policy analyst with the Lewin Group, a health care research and consulting firm, expects CMS to move slowly and carefully. "I don't think we're going to see anything national. We'll see what we're seeing now start increasing."

Government studies how to push digital health records. Click here to read more.

That, she said, is the most responsible way forward. "They really want to get enough evidence about what works before they bring it up to scale."

But adopted programs will certainly include provisions to promote the use of electronic medical records, interoperable information technology, e-prescribing and the like, she said. "CMS is definitely committed to wiring the health care system."

The Institute's reports of flawed health care systems have already pushed health practitioners' toward revising workflow and incorporating health IT.

In July 2006, IOM recommended that all prescriptions be written electronically by 2010. Most famously, it alerted the public that medical errors are one of the top causes of death, with more people dying from medical errors than motor accidents, breast cancer or AIDS.

Check out eWEEK.com's for the latest news, views and analysis of technology's impact on health care.