ST. LOUIS - To improve the quality of health care and cut medical costs, the federal government is focusing increasingly on a simple, though powerful tool: changing hospitals' financial incentives.

Already, the federal Centers for Medicare and Medicaid Services is penalizing hospitals that provide ineffective medical treatment. Those hospitals with a high percentage of patients who are readmitted for the same condition within 30 days of a hospital stay will receive lower federal reimbursements.

Now, the agency is preparing to test a billing method called "bundled payments" to see if it can spur hospitals to lower treatment costs while delivering high-quality care.

If the pilot program is successful, it could be rolled out nationally to all Medicare patients.

Here's how the program will work:

. Medicare will reimburse hospitals at a fixed rate for all care related to an individual's primary diagnosis, such as a patient's need for knee replacement surgery.

. A hospital that delivers high quality care at a lower cost will make money on a treated patient. But a hospital whose treatment of the patient results in complications, hospital readmission and other problems will bear the cost of that additional care.

This pilot program is a creative way for hospitals and physicians to work together and take better care of patients at lower cost, said Walter Kopp, a hospital consultant based in San Anselmo, Calif.

"The health care industry is entrenched in fee-for-service medicine, and it has to break out," Kopp said. "This is an attempt to get at that."

SSM St. Mary's Health Center in Richmond Heights, Mo., and SSM DePaul Health Center in Bridgeton, Mo., are in the final stage of an application process to join the pilot program sponsored by the CMS Innovation Center, which is responsible for designing and testing models of health care.

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Medicare experiments with 'bundled' payments