ABOUT THE COLUMNISTS Harvard professor Clayton Christensen and internal medicine physician Jason Hwang are co-founders of Innosight Institute, a nonprofit think tank focused on healthcare and innovation. They are co-authors of The Innovator's Prescription: A Disruptive Solution for Health Care (McGraw-Hill, January 2009). Vineeta Vijayara-
-ghavan is a Senior Research Fellow at Innosight Institute.

The decision last week by supporters of the "public option" not to tie payment schedules in the public health insurance plan to Medicare reimbursement rates was a crucial step forward. But we must not lose focus on fixing the broken Medicare system.

Though the Congressional Budget Office estimates that 6 million people may eventually be covered under the public option, its cost remains pocket change compared to the federal outlay that will continue to flow through Medicare and Medicaid. Combined, they cover 94 million people and account for nearly 40 percent of all health care spending in the U.S.

The problem is that the Medicare payment system has never been good for spurring innovation in care delivery, and innovation will be critical to changing the underlying cost base of the health care system over the next 10 years.

Medicare has also failed to keep its costs in check. The low rates it pays to providers are largely an illusion of byzantine cost accounting and archaic payment formulas. Proponents of Medicare argue that its rates are low because a government-run plan doesn't carry the overhead of profit-making that burdens private-sector plans. But that ignores the much bigger reason that Medicare has managed to keep its costs down: The government's size offers it great leverage to demand some of the lowest prices in the industry. And while this may sound like an argument in favor of government-run health care, it has in fact led to unsustainable cost-shifting within larger health systems, where private insurers are ultimately charged higher prices to subsidize the true cost of providing health care to Medicare patients.

Furthermore, Medicare's low rates have resulted in some doctors simply limiting treatment of Medicare patients or refusing to accept them altogether. If this trend persists, patients who found solace in coverage through a public insurance plan may still discover they are without suitable options for care.

Medicare remains primarily a fee-for-service system that rewards intensity, rather than quality, affordability or patient satisfaction. Its rates have long unfairly punished hospitals and providers in certain regions of the country who have managed to provide high-quality care at lower cost. States like Minnesota, Washington and Oregon pay out more in tax dollars to federal Medicare programs than its citizens get back; the average Medicare enrollee in southern Florida receives about $15,000 in services per year, while those in Minnesota receive only half that for comparable care. These low-cost/high-quality states have banded together to get the House and the Senate to include stipulations in the current bills that reward value, rather than punish it. Currently, House leadership has agreed to include language asking the Institute of Medicine to derive a new payment model based on a value index, while the Senate version gives the secretary of Health and Human Services the power to develop quality assessment criteria to be tied to future payments.

The items in these bills are steps in the right direction, but they only mark the beginning of linking Medicare rates to the true costs of health care delivery. Until legislators can devise a payment system that actually rewards innovation rather than stunts it, Medicare will only serve as a hindrance in the nation's efforts to provide affordable health care to all.

In the process of applying patches to Medicare's broken payment model, the discussion has reached a level of absurdity where proposed cuts and additions are little more than arbitrary tweaks to appeal to certain constituencies. House Speaker Nancy Pelosi had been touting "Medicare plus 5 percent" for the public option, but the rate was not clearly linked to any analysis of cost of services. Meanwhile, Congress recently failed to repeal (subscription) scheduled cuts of Medicare rates to physicians. Payments are scheduled to fall 21 percent next year, although Congress every year repeals the cuts, often at the last minute. This annual drama demonstrates the degree to which the payment system serves as a political pawn rather than an actual reflection of the value of services rendered.

So where can we turn for solutions? The few times in which Medicare has helped push forth an innovation or expand one on a wider scale, it has borrowed from the playbook of integrated health systems and co-ops in the private sector. HealthPartners, a Minnesota co-op serving over 1 million customers, was the first health system in the nation to hold hospitals accountable and stop paying for "Never Events" -- 27 egregious events and medical errors, such as wrong-side surgery, identified by the National Quality Forum. They introduced this change in 2004, to great opposition from the Minnesota Medical Association and the American Medical Association. It took Medicare another three years to make the same change, spurring thousands of hospitals and insurers to change their own practices.

Medicare is also currently testing bundled payments for events like heart surgeries at four sites in pilots that will continue through 2011. But meanwhile, Pennsylvania's Geisinger Health System has already run its own studies, revised protocols and calculated appropriate rates in order to establish its ProvenCare program, which charges a flat fee for a growing list of surgeries, including coronary bypass, cataracts and hip replacements, as well as all pre-op and post-op care.

In our zeal to expand coverage to as many Americans as possible, let's not overlook reforming the "public option" we've had for a long time. Medicare functions as a very blunt instrument for change. We'll need far more nuanced approaches to create and spread innovation if we are to truly improve health care delivery in the coming years