The Business of Health Care

Can CMS Be a Venture Capitalist?

Lisa Suennen, a venture capitalist, writes this post about the provision in the national health care reform act that created the Center for Medicare and Medicaid Innovation (CMI). This agency has $10 billion to “research, develop, test and expand innovative payment and service delivery models that will improve the quality and reduce the costs of care” for patients covered by CMS-related programs. Lisa notes, “What is great about CMI is that they have the authority to run their programs much more like a business would without many historical governmental constraints. ”

I don’t want to be a stick in the mud, particularly as my able friend Don Berwick takes charge of CMS, but I want to point out that previous efforts by the government to be innovative in other fields have failed because:

(1) Venture funding embodies risk-taking. Government usually does not do this because there is a political imperative never to be blamed for misspending taxpayer money. The bureaucracy, therefore, systematically eliminates ideas that are untested.

(2) Alternatively, the leaders of such agencies get seduced by good-sounding ideas that have not been able to meet a market test and whose efficacy is subject to the normal variations in markets. Then, they will persist with unsound investments because the concept of sunk costs is politically difficult to acknowledge. Private firms consider past investments as fiscally “gone” for purposes of evaluating future investments. But the government often behaves as if investments have a carry-forward risk of embarrassment, so it is more likely to throw good money after bad.

(3) Worse yet, agencies are encouraged to invest in those ideas that have political connections.

My favorite example of all of this was the Synthetic Fuels Corporation, created by Congress to move research and development of synthetic fuels out of the Department of Energy and into a public-private partnership that would hurry along new energy sources. And here is another more recent Massachusetts case. Let’s hope these examples are inapposite to the vision for CMI, but history does provide warnings.

Paul Levy is the President and CEO of Beth Israel Deconess Medical Center in Boston. Paul recently became the focus of much media attention when he decided to publish infection rates at his hospital, despite the fact that under Massachusetts law he is not yet required to do so. For the past three years he has blogged about his experiences in an online journal, Running a Hospital, one of the few blogs we know of maintained by a senior hospital executive.

2 replies »

  1. “What is great about CMI is that they have the authority to run their programs much more like a business would without many historical governmental constraints.”
    The cultivated naivete is really quite charming. To imagine that what is written down on the paper is what actually happens — well, I wish I could also go back to my childhood. Sigh.
    I wonder: where do “historical government constraints” come from? Why do they get created? What are the several ways they get created? Are there any risk-averse behaviors — not written in any statute or rule — that develop in a bureaucracy with unionized workers that might not develop in a venture capital firm? How about when that bureaucracy is subject to Freedom of Information requests by large numbers of smart people who only want to replace the head of the bureaucracy with someone they owe a political favor? Can you actually legislate this perennial dynamic away, seeing that the legislators themselves are the people who owe the favors? Can God create a rock that even He cannot lift?
    It’s all just too hard to think through.

  2. Government could best support innovation by being a buyer instead of an investor. For example they recently funded research in solar cells by a couple companies to the tune of a few billion. The chances of these two companies coming out ahead are very small, like the examples you cited. Like most investments we will most likely have nothing to show for it.
    If the federal government had instead announced they will purchase 500 million a year of solar cells, they would create a market for competition in which more skilled investors would invest. They would spurn research and investment in dozens of firms instead of two and in the end have something tangible to show for it.
    They buy healthcare for 50? million people or more and do so through a couple dozen similar systems. If they would just open up Medicare and allow other entities to manage blocks of 10-20K they would learn 1000 time more then 1-2 pilot projects they bless and fund. Hundreds of firms would put their capital at risk for the opportunity to prove new ideas. Thus hundreds of new ideas would be tested at any one time. Those that work could be adapted and built upon.