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.

I Still Haven’t Found What I’m Looking For

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.


Comments (26)

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  1. Gary Fradin says:

    One demand-side approach that no one considers seriously: real consumer education about outcomes, not just lip service.

    My company’s approach (yes, this is a self-serving comment) is to teach patients how to choose medical care based on quality, not price. Who wants the cheapest, crappy care?

    Auto buyers have a set of metrics to use, including resale value, miles per gallon, crash test rating etc.

    Medical consumers don’t. Would that they knew about NNTs, absolute vs. relative risk reductions and risk-adjusted specialist or hospital mortality rates.

    Two points:

    1. Just having this info available isn’t enough. Consumers need to know how to use it too;
    2. Generating this data is probably not a public sector function, as political forces will force the conversation into a methodological quagmire.

    But the private sector, responding to demand from a well-educated consumer base, probably will provide useful data that will force innovation and improvement.

    The first step, in my opinion: teach people how to shop and what to demand. The rest will follow.

  2. Jeff says:

    Good analysis.

  3. Michael says:

    How can the efficiencies of free markets EVER work without the re-integration of the roles of payer and consumer in one entity? So long as care is consumed by one entity and paid by another, we will never see good cost control.

    If we sit down in a restaurant and have foreknowledge that someone else is going to pay the bill, we’ll never look at the right side of the menu.

  4. Buster says:

    It’s rather naive to assume providers will successfully implement cost-saving methods when it’s not in their best interest to do so.

  5. Devon Herrick says:

    I like the idea of experimentation to discover what works and what doesn’t work. However, a rigid pilot project is a poor substitute for competition that rewards innovative firms, while putting those that fail to innovate out of business. Pilot projects hold some promise. However, the weaknesses of pilot projects should be considered whenever designing them.

  6. Andy P says:

    There are parallels to education in America.

    Bureaucrats – Heavily involved “top down” approaches because it is just too important to let things go wrong.
    Laymen – Believe they have the right answers to the problems.
    Public educators – Not trusted because the consumer believes they only care about their jobs.
    Private educators – Not trusted by the consumer because they are in it for profit.

    As consumers get more educated and more comfortable with private education, the government clamps tighter.

  7. Michael says:

    The areas of health care where consumers pay their own bills – cosmetic surgery, lasik vision correction for instance – have seen much better cost control.

  8. Ann Alice says:

    Gary – I like the auto dealers’ comparison. It would be different world of health care if patients had the information for those kind of shopping options.

  9. Michael says:

    When third parties are picking up the tab, there’s not much of a market for that information, though. Relevant information on various automobiles is available because consumers use it to make choices. The role of government in that area is to make sure that the protocols used to derive that desired information are the same from manufacturer to manufacturer.

  10. David says:

    Is it true that there is no data from the many Medicare HMO’s operating in markets throughout the country? Couldn’t CMS mine the information amassed by these risk bearing entities to see if there are programs that work? I recall that admissions, length of stay, re-admissions and Rx compliance were all improved with nurse case managers in the company I worked for. Chronic diseases were managed better too. We used data per 1000 to compare various programs for effectiveness.

  11. Earl Grinols says:

    It is not necessary to re-invent the wheel. Why do we not all agree that the only known, reliable way to provide private goods such as health care at lowest possible cost is through competitive private markets.

    so here is an idea: Why not find out what supports and establishes competitive markets and try that for health care?

    Personally, I do not think this is rocket science, nor nearly as hard as some are making it out to be.

  12. brant mittler says:

    John, please give us your example or examples of “high quality, low cost care.” I hope you don’t say “Mayo Clinic,” because it is high quality, high cost care.

  13. John Goodman says:

    Brant, Intermountain health systems in Salt Lake City is often cited as the highest quality, lowest cost system.

  14. Greg B says:

    John – Your discussion regarding Demand side vs Supply side is spot on. Having spent time on both the demand and supply side I have been able to identify a “common” element related to program failure. Demand-side does not control delivery of care processes from a clinical perspective (nor should it). They tend to believe that financial incentive is all that is needed. And, supply-siders are not very good at delivery of care process design as they tend to believe that specialty and hospital silos are immune from process improvement.
    Consumers exacerbate this issue by picking supply-side or demand-side advocates without understanding what is required either financially or clinically. Consumers of healthcare are not like consumers for commodity products. This is not like picking which SUV or Hybrid is the best in class. It is more like asking the consumer to choose a regional transportation solution. It’s too big and too complex, and they default to picking the “best, latest and most expensive”.
    It is an integrated process problem and very few organizations are willing to invest in the end-to-end view. Someone needs to own the end-to-end process. The market is fairly selfish – it’s not about to invest dollars in an end-to-end venture because it’s the long view and it doesn’t generate short-term returns.
    Sorry, no answers, but I was hoping you had one.

  15. Stan Ingman says:


    I think we need to move beyond mini demonstration projects perhaps. We have been doing demos for 50 years or more. Comprehensive Health Care and Regional Medical Care in 1960s, etc , etc. DRGs and PACE reforms in 80s and 90s.

    State wide reform like Mass. and Vermont is the future at this stage. Affordable Health Care Reform may yet be the model to get us somewhere sane.

    Group of young physicians out side St Louis have set up large system , and moved away with simple insurance system of item reimbursement. They do not want to work so hard , have risk so high , and so they want the French or UK model in part. Why is the French model considered to be the best model in world now by some experts, interms of quality and coverage of a total population?


  16. John R. Graham says:

    Mr. Fradin,

    I have to channel Dr. Goodman who has often stated that if suppliers are not competing on price, they are not competing on anything else. If consumers cannot observe prices – and price differences – they do not know how to determine whether the higher quality of the more expensive provider is worth the extra cost.

    Nevertheless, I do think that there is another layer of public-choice theory here. I think the pilot programs are less driven by the CMS bureaucrats than by the suppliers proposing the pilot programs. It is entrepreneurship, but not in the way we classically understand it. They compete for government incentives because they are not confident that they can win in the market place.

    Similarly, Solyndra was not thought up by V-P Biden or Energy Secretary Chu. It was thought up by “entrepreneurs” (I’ve also seen the term “venture socialist” although I cannot recall who coined it) who invested a lot in lobbying the appropriate politicians and bureaucrats to give them a handout.

    Although Solyndra has failed, the same “venture socialists” will show up with another scheme. Their true competitive advantage is lobbying, not technology. The same dynamic must hold in health care.

  17. Michael says:

    Exactly right, Mr. Graham. Any business, any bureaucracy, any corporation or organization will compete for available resources, just as biological organisms do in nature. When those resources are in the hands of government, it’s the government’s satisfaction that will be sought. If those resources are in the hands of consumers, it’s the patients’ satisfaction that will be sought. THAT is the fundamental choice. The rest is decoration and embellishment.

  18. Greg Scandlen says:

    Everything the bureaucrats have tried has failed without exception. Yet we keep coming back to the exact same people for more of the same. In a real business these people would all have been fired years ago and be working at something they are actually able to do — like flipping hamburgers.

  19. Gary Fradin says:

    John –

    I pretty much agree with your 1st paragraph. My specific point: we generally don’t know which providers are higher quality…largely because we have no common agreement on medical quality metrics.

    If we had this info and agreement, then price competition makes sense.

    Otherwise, I don’t think so.

  20. charlie bond says:

    Hi John,

    As Oscar Wilde wrote: The truth is plain but rarely simple.

    You make two essential points:

    –American health care must be based on free market principles; top-down efforts to control patients and providers won’t work.

    –All health care is individual and intensely local; solutions must include patients and providers organized locally and linked nationally.

    It is for these reasons that The Patient-Physician Alliance has adopted this model and seeks to reform health care from the bottom up, not the top down.

    Keep up the good work.

    Charlie Bond

  21. Linda Gorman says:

    Pilot programs that have worked:

    Health savings accounts and qualified high deductible plans.

    Giving people on Medicaid a budget to spend on their own health care.

    Outpatient surgery.

    Exit question: what is the most important difference between these pilots differ from CMS/HHS/State pilots?

  22. Steve Barchet says:

    Hi John,

    What a pleasure to read your AM blog about Medicare pilot programs.

  23. Robert Kramer says:

    Amen to that

  24. Paul J. Nelson says:


    Primary Health Care would have the best potential for improving the efficiency of the healthcare industry. It is not currently obvious that this is true. A future scenario of shaving benefits and reimbursement is likely at some level. I can only say that the knowledge base exists for developing Primary Health Care that is available and accessible by, efficient and effective for each citizen. Think Professor Elinor Ostrom, Dr. Lawrence Weed, Peter Drucker to name a few. Look at the most efficient industry in the country: agriculture. Why is it so efficient? And above all, why is our nation’s maternal mortality rate the 41st worst of the 43 developed countries of the world?

    To start, any healthcare reform strategy must adhere to a common set of VALUES. I offer the following: transparency, collaboration and trust. If you needed health care for a cough, you would want these values as the governing values for that health care. That will occur reliably only when the values are the basis for leadership at every level of the healthcare industry.

    Federal demonstration projects would never be a means to develop leadership neighborhood by neighborhood and community by community!

  25. Gary Fradin says:

    John (Goodman) –

    I reviewed your posting again this morning. One methodological question that I wrestle with: the unit of measure for good quality.

    Specifically you refer to ‘islands of excellence’ including Mayo, Intermountain and Cleveland Clinic. How do you define ‘excellence’? What comparative metrics?

    I understand how to compare prices (more or less). But I struggle with how to compare quality.

    Appreciate your suggestions. Tks

  26. John Goodman says:

    Gary, I don’t have any independent metrics. I’m just accepting the conventional wisdom here.