Why the Pilot Programs Failed

Just about everybody in the health policy blogosphere has noted with disappointment the failure of Medicare’s demonstration projects to reduce the costs of care. Recall that these are critical to President Obama’s challenge “To find out what works and then go do it.”

If nothing works, the fallback weapon in Obama Care is to reduce fees paid to doctors and hospitals. Yet the Medicare actuaries tell us that squeezing the providers in this way will put one in seven hospitals out of business in the next eight years, as Medicare fees fall below Medicaid’s. Under this scenario, senior citizens may be forced to line up behind welfare mothers, seeking care at community health centers and in the emergency rooms of safety net hospitals.

I believe this is the only blog that has confidently predicted that health care costs will never be controlled by running pilot programs and trying to “copy what works.” (Note, however: the Congressional Budget Office has shared our viewpoint from the beginning; see their previous conclusions here and here.) I’ll explain why I predicted failure all along below. First let’s review the latest results.

Over the past two decades, Medicare’s administrators have conducted two types of demonstration projects.

Disease management and care coordination demonstrations consisted of 34 programs that used nurses as care managers to educate patients about their chronic illnesses, encouraged them to follow self-care regimens, monitored their health, and tracked whether they received recommended tests and treatments. The primary goal was to save money by reducing hospitalization. With respect to these efforts, the Congressional Budget Office (CBO) finds:

  • On average, the 34 programs had little or no effect on hospital admissions.
  • In nearly every program, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program.

Value-based payment demonstrations consisted of four programs under which Medicare made bundled payments to hospitals and physicians to cover all services connected with heart bypass surgeries. With respect to these, the CBO finds that “only one of the four … yielded significant savings for the Medicare program” and in that one Medicare spending only “declined by about 10 percent.”

As Robert Laszweski put it at The Health Care Blog the other day, “thirty years into managed care, the stark reality is that we aren’t yet smart enough to get things under control.” That’s an understatement.

So why is none of this working? Because it all involves people on the demand side of the market trying to take the place of entrepreneurs who would ordinarily be on the supply side in any other market.

Successful innovations are produced by entrepreneurs, challenging conventional thinking — not by bureaucrats trying to implement conventional thinking. There are lots of examples of successful entrepreneurship in health care. There are very few examples of successful bureaucracy. Can you think of any other market where the buyers of a product are trying to tell the sellers how to efficiently produce it?

On the supply side, we have the islands of excellence (Mayo, Intermountain Healthcare, Cleveland Clinic, etc.). On the demand side, we have a whole slew of experiments with pay-for-performance and other pilot programs designed to see whether demand-side reforms can provoke supply-side behavioral improvements. And never the twain shall meet.

We cannot find a single institution providing high-quality, low-cost care that was created by any demand-side buyer of care. Not the Centers for Medicare and Medicaid Services (CMS), which runs Medicare and Medicaid. Not Medicare. Not BlueCross. Not any employer. Not any payer, anytime, anywhere.

Also, wherever we do find excellence we almost always discover that it cannot be copied. Megan McArdle argues that pilot programs — even when they work — are not scalable in every field.

In health care, scholars associated with the Brookings Institution identified 10 of the best hospital regions in the country and then tried to identify common characteristics that could be replicated. There were almost none. Some regions had doctors on staff. Others paid fee-for-service. Some had electronic medical records. Others did not. A separate study of physicians’ practices found much the same thing. There were simply not enough objective characteristics that the practices had in common to allow an independent party to set up a successful practice by copycat alone.

Bottom line: bureaucracies can’t do what only markets can do.

John C. Goodman, PhD, is president and CEO of the National Center for Policy Analysis. He is also the Kellye Wright Fellow in health care. His Health Policy Blog is considered among the top conservative health care blogs where health care problems are discussed by top health policy experts from all sides of the political spectrum.

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12 replies »

  1. Are you sure #2 is illegal? I see this all the time in the dentist profession out here. Granted, the dentists aren’t billing Medicare for the discounted service. I wonder if it extends to other federal programs Federal BCBS.

  2. Dr. Mike, seeing that Mr. Goodman’s argument is that pilot programs failed to reduce the cost of Medicare how would your examples 1,2,3, bring down the cost of Medicare?

    1. How is the ability of a patient to pay extra for better service, assuming in the process they are preventing another patient with less means from getting service, going to cut Medicare costs?

    2. Just who is getting the 50% discount at this mythical urgent care? The uninsured who pay cash, the privately insured who will get 50% off their co-pay, or the insurance company who will get 50% off their already discounted rate to the doc?

    Given that docs constantly complain they don’t get enough reimbursement from Medicare/Medicaid where will all this “discounting” occur?

  3. Sorry, Dr. Mike.
    From the tenor of your condescending remark to my rant, I made the mistake of presuming your aversion to doing anything that might be construed as “illegal.” I’m not trying to pick a fight with anyone. But I’m damn tired of what appears to be a very negative and increasingly aggressive effort on the part of a lot of professionals to destroy rather than repair an admittedly flawed and weak ACA. It falls way short of what many of us had hoped for but it’s the only national effort in our lifetime to craft a meaningful health care safety net.

    And when an aspiring presidential candidate says he’s not worried about the poor, afterwards responding with rhetoric instead of compassion, my reaction will always be prickly.

    I’m reminded of the old lawyer’s saw that if your client is innocent, argue the facts, but if he’s guilty then argue the law.
    In the case of the delivery of care as opposed to (as Ms. G-A said) its management, I agree with the Dickens character that said. “If the law says that, then the law is A ASS.”

    Dr. Goodman’s relentless attacks on PPACA make me tired. And the drumbeat of repeal/ unconstitutional/ socialistic/ government-run/ job-killing/ and all the rest gets on my old Liberal nerves. A few years ago George Bush tossed out that “compassionate Conservatism” line in an effort to soften the sharp, hard edges of the New Conservatism which comes tempered with a Darwinian (i.e. Randian) Libertarian alloy. But the current political climate is getting all prissy about references to the eight years of government preceding the current administration. And as the election season gets under way I expect mentions of compassion to get lost in the main theme of worshiping at the altar of market economics.

  4. The issue I have with relying on free markets is that there are numerous market imperfections which the government if so inclined is in a fine position to help resolve.
    (1) The ability to earn superior returns by providing greater value to consumers. This is possible for prescription drugs and medical devices thanks to favorable intellectual property rights, but non-existent for other treatment modalities.
    (2) Incomplete and inconsistent data about provider cost and quality. The best data is drawn from medical records and objective health status tools across all payers.
    (3) Use of evidence-based best practices as a medical malpractice “safe harbor”. State law governs tort liability.
    The government can help improve how health care markets perform.

  5. Wow! You have an amazing talent for reading minds! How did you figure out from my clever little sarcastic quiz (about the lack of a true free market in healthcare) that I also don’t like the poor? Amazing.

    (psst – please don’t tell the 5 uninsured patients I saw in clinic today – they might not be as greatful for the big discount I gave them if they knew how much disdain I had for them)

  6. Apparently so. I just heard on the radio that Mr. Romney said he wasn’t worried about the “very rich or the very poor.” He’s focused on the ones in the middle, don’t you know. He reportedly said there are safety nets for those at the bottom… if they need fixing, he’ll fix them.

    It’s hard to tell where thousands of homeless people fit into that picture, about half of whom are children, many living in cars.

    And Dr. Mike below isn’t worried either, assuming “a medicare patient and a medicare accepting physician” for the examples in his clever little quiz.

    I may be obtuse, but in my view that safety net must include a baseline of medical care, affordable housing and education for children to all who need them — as accessible as potable drinking water.

  7. OK John, a little quiz for you. Which of the follow scenarios represents market driven healthcare. Assume in each case a medicare patient and a medicare accepting physician:

    1) Patient has a unusual mole that they are worried about, but doctor doesn’t have an opening for a biopsy until next week. Patient tells doc she is willing to pay a little more if he can find a way to squeeze her in this week.
    2) New urgent care in town hoping to drum up business advertises discounted walk-in visits. Patients are happy to be getting a 50% discount on their first visit as new patients at the new urgent care.
    3) Doc tells patient he is not taking new medicare unless they have a supplement.

    1) Illegal activity. Doc can go to jail if he accepts patient’s offer
    2) Illegal activity. Doc at clinic can go to jail if billing department actually follows through with discount for medicare patient.
    3) Stupid doctor. He gets the exact same payment whether or not the patient has a supplement.

  8. Dr. Goodman, don’t you ever give up?

    As far as I can see healthcare in America is and has been “market driven” since before we were born. And the result has been the world’s most expensive medical train wreck. I just went to the mailbox and sorted through a pile of coupons and advertisements, but there was nothing there offering any price-driven offers for doctors.

    This especially galls me:
    “…as Medicare fees fall below Medicaid’s. Under this scenario, senior citizens may be forced to line up behind welfare mothers, seeking care at community health centers and in the emergency rooms of safety net hospitals.”
    Why not just spell it out? That’s the old welfare queen/ illegal aliens/ lazy moochers trope trotted out in different language.

    Medicare beneficiaries who have enough assets to keep out of the Medicaid safety net supposedly are able to pay for supplemental insurance plans or Medicare Advantage plans, both of which are private, market-driven businesses. Otherwise, those Medicare beneficiaries will be IN the line, not BEHIND the line, of “welfare mothers.”

    As I see it, Medicaid reimbursements SHOULD be higher than those of Medicare. After all, Medicaid is all the care the poor will receive. Those receiving Medicare presumably are more able to avail themselves of that wonderful “market-driven” cafeteria of services about which you brag, replete with specialists, unlimited referrals, designer drugs supplemented by an array of for-profit insurance companies competing for customers.

    Anything other than that strikes me as counter-intuitive. What am I missing?

  9. “thirty years into managed care, the stark reality is that we aren’t yet smart enough to get things under control.”

    This is troubling. If it really isn’t working, it’s time to try something drastically different. Our healthcare system should be the best in the world, and it’s hard to argue that it currently is.

  10. “Why the Pilot Programs Failed”

    That headline framing could not be more fundamentally and transparently dishonest. Partisan much? (Asked and Answered)

    The CBO report concluded that the myriad demo initiatives turned out to be ~ a net wash financially, with a considerable +/- distribution around the mean.


    But, hmmm…. let’s see, of course, private sector “innovation” initiatives will ALL bear fruit, right?

    Y’know, they are all endowed with that Lake Wobegon aura.

  11. “I believe this is the only blog that has confidently predicted that health care costs will never be controlled by running pilot programs and trying to “copy what works.””

    Some of us actually read your blog. You advocate for copying what has been done in Indiana and laud other programs.


  12. Don’t worry John, nothing can stop this steam roller any more, because somewhere somehow someone decided that the management of care is more important than the actual delivery of care.