PRINCETON, NJ – Twelve New Jersey hospitals and their participating physicians have received approval from the federal government to test a new incentive method that aims to reduce healthcare costs while improving quality of care.

The three-year trial program could serve as a basis to overhaul government payment for Medicare services nationwide.

"Rising healthcare costs are a growing burden for all of us," said Betsy Ryan, president and CEO of the New Jersey Hospital Association. "This is a bold test to see if we can redesign the failed system of the past and replace it with strategies that keep healthcare affordable while making it better and safer for patients."

The NJHA spearheaded the effort to win a waiver from the federal Centers for Medicare and Medicaid Services to test the initiative in New Jersey. Called "gainsharing," the program offers physicians financial incentives to work with hospitals in lowering costs in a variety of ways. Ryan said the program includes stringent quality controls to protect patients.

The program is designed to encourage physicians and hospitals to work together to provide the most efficient care for patients. Currently, Medicare reimburses hospitals a fixed rate for treating a Medicare patient, based on the patient's diagnosis. But physicians are paid differently, receiving individual payments for each procedure or each day spent in the hospital. Ryan said those very different payment philosophies are inconsistent, and the gainsharing project aims to bring them together.

Under gainsharing, physicians may share a portion of the savings that are realized by working with the hospital to make a patient's stay more efficient. The overall savings could ultimately benefit the Medicare program.

"It's a simple, elegant idea to align incentives of doctors and hospitals – all with the ultimate goal of creating a better healthcare outcome for the patient and eliminating unnecessary costs from our healthcare system," said Michael Kalison, chairman of Applied Medical Software, which worked with the NJHA to design the pilot project.

Participating New Jersey hospitals are AtlantiCare Regional Medical Center, Overlook Hospital in Summit, Holy Name Hospital in Teaneck, Jersey Shore University Medical Center in Neptune, Hunterdon Medical Center in Flemington, Monmouth Medical Center in Long Branch, St. Francis Medical Center in Trenton, Our Lady of Lourdes Medical Center in Camden, The Valley Hospital in Ridgewood, Somerset Medical Center in Somerville, JFK Medical Center in Edison and CentraState Healthcare System in Freehold.

The project will be monitored and evaluated by CMS. At its conclusion, CMS will analyze an array of data – from quality indicators to cost savings – to determine whether its strategies could be replicated nationwide.

The program is designed around three core areas: efficiency strategies, quality standards and financial incentives.

"Our challenge as a nation is to design a system that provides health coverage to all, while reducing costs and maintaining quality," said Sean Hopkins, NJHA's senior vice president of health economics. "This demonstration project represents a commitment by the provider community to be part of the solution."