(Updates with bonuses beginning in sixth paragraph.)

Dec. 19 (Bloomberg) -- A university health system in Michigan and a Boston center affiliated with Harvard Medical School are among the first hospitals to join the health-care law’s most ambitious attempt at reducing medical spending, the government said today.

The Department of Health and Human Services designated 32 health systems part of a partnership with Medicare to encourage the formation of networks known as “accountable care organizations.” Participating hospitals earn bonus payments if they save Medicare as much as $1.1 billion over five years by streamlining care without reducing quality, for example by reducing admissions of chronically ill people.

“Today, if you’re a hospital executive, you’re rewarded for keeping your beds full,” said John Rother, president and chief executive officer of the National Coalition on Health Care. “That’s going to change” under the program. Members of the Washington-based nonprofit include labor unions, hospitals and employers.

The health-care law envisioned networks of hospitals, doctors and insurers pooling services and getting paid according to quality targets and how much money they save. The U.S. Federal Trade Commission and Justice Department will conduct antitrust reviews of the alliances.

The University of Michigan’s health system and Partners Healthcare, affiliated with Harvard Medical School in Boston, were among the hospitals designated today.

Bonus Payments

Total bonus payments are uncertain, said Richard Gilfillan, director of a new center at the U.S. Centers for Medicare and Medicaid Services that will supervise the program. Payouts will be less than the $1.1 billion the government hopes to save, he said.

One participant, Montefiore Care Management at The University Hospital for Albert Einstein College of Medicine in New York, projects it may earn about $52 million in bonuses through 2013 if it can reduce spending for about 24,000 Medicare beneficiaries by 10 percent, said Stephen Rosenthal, the president and CEO.

Montefiore won’t be paid without also achieving 33 measures of care quality, Rosenthal said in an interview, such as avoiding readmissions, screening Medicare patients for depression and offering them annual flu vaccinations. The quality measures are intended to prevent hospitals from stinting on care to reduce costs.

“You can create the savings and do a lousy job and get nothing,” he said.

Limited Payments

Bonuses may be limited in the first several years, Rother said, as hospitals invest in employees and training to provide more integrated care. Atrius Health, for example, a system of six physician groups in Massachusetts, plans to hire more nurses to focus on managing care for people with chronic disease such as diabetes, the chief medical officer, Rick Lopez, said by phone.

Allina Hospitals & Clinics, based in Minneapolis, plans to invest in an electronic medical records system to better track patients across its 11 hospitals and 90 clinics in Minnesota and Wisconsin, said Penny Wheeler, the system’s chief clinical officer, by phone. She said she met a breast cancer patient last week with 14 different care providers when the person should have one doctor monitoring all of her care.

“It would be wrong to imply that this is a magic bullet that’s somehow going to fix things in the next year or two,” Rother said. “We’re talking about really ambitious changes in the relationship between doctors and hospitals and other suppliers.”

Hospitals in the first group of participants must serve at least 15,000 Medicare beneficiaries in urban areas, or 5,000 in rural areas, and are at risk for reduced Medicare payments if they fail to record savings from what the government has spent caring for their patients in the past.

A second group expected to join the program next year won’t be at risk of reduced payment if they can’t produce savings.

The alliances begin Jan. 1 and have the potential to cover about 860,000 Medicare recipients in 18 states, the U.S. said.

--With assistance from Sarah Frier in New York. Editors: Chris Staiti, Adriel Bettelheim

To contact the reporter on this story: Alex Wayne in Washington at awayne3@bloomberg.net

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net