Reforms that Don’t Work

Right before Christmas the Congressional Budget Office (CBO) lowered the boom on a set of health reform ideas by confirming what everyone should already have known anyway: You can't change the practice of medicine with demand-side reforms.

This is devastating. At least it's devastating if you're a member of the Obama health team. During the election, Obama's health advisors said they could save the average American household $2,500 a year through such reforms as coordinated care, preventive care, evidenced-based care, pay-for-performance care, electronic medical records and a slew of similar ideas. The CBO response? These reforms will save about 1% of what the Obama team projects, and maybe nothing at all [here and here]. They may even increase costs!

Before you lament the fact that the CBO waited until after the election to tell us this bad news, know that John McCain endorsed the same reforms – as did almost every presidential candidate (without the ridiculous claims about monetary savings). They also have been endorsed by what I call the "new consensus" folks: left and right, business and academic, government and nongovernment, public and private sectors – including employer groups and third-party payers of all sorts. (I'll withhold the names out of respect for the families.)


"Everybody Knows"

It's cynical, depressing and sometimes factually
incorrect. Still, it seems to fit. Next
week, I'll pair something
cheerier with "Health Care Markets that Work."

The CBO report will come as no surprise to wonks who know that CMS has already been trying out all these ideas through pilot projects. As reported here and here these experiments have been hugely disappointing. No money is being saved. Contractors are pulling out. And CMS is considering cancelling some projects in mid-course.

So why did anybody ever think these ideas would work? Because they already are working – here and there, in isolated spots, within the third-party payer system and with systematic regularity outside the system. But where they work, they are invariably supply-side, not demand-side, innovations.

So why do people cling to an approach to reform that doesn't work? Because it's impossible for them to do otherwise. Basically, there are two ways to think about health care: the technical (engineering) approach and the economic approach. People in the first group invariably want to tell doctors how to practice medicine. To them, doctors are the problem. The solution is to induce, incentivize, cajole, bully, intimidate, coerce, command, etc. doctors into practicing medicine in predetermined ways.

People in the second group understand that no one person, agency, etc. knows the best way to produce medical care. Instead, the best ideas come from the interaction of 800,000 doctors and 300 million patients. To allow those ideas to emerge, we need to liberate doctors, not impose more controls on them.

More about that next week.

Comments (21)

Trackback URL | Comments RSS Feed

  1. Joe S. says:

    These CBO reports confirm everything I have been reading at this site for a long time. Also they confirm everything that Dr. Goodman has been saying about how to reform the health care system.

    By contrast, they refute just about everything that is being said about reform by virtually every leading politician, including all the people advising Barack Obama.

  2. Greg says:

    Joe, the CBO is doing more than refuting the views of politicians. It is refuting the entire world view of the Commonwealth Fund, the Robert Wood Johnson Foundation and the entire health policy establishment.

  3. Nancy says:

    John,I think the song you chose is intriguing. Do you really think everybody (at least the policy wonks) know this stuff?

    I don’t know which is more depressing — the idea that everybody is denying what they already know or the idea that everybody is just ignorant.

  4. Larry C. says:

    Didn’t someone once say the definition of insanity is to do the same thing over and over and expect a different result.

  5. Stephen Clark says:

    John, you forgot to mention that the CBO report was produced under the direction of Peter Orszag. He will now become Obama’s director of the Office of Management and Budget (OMB0.

    That means that the CBO report de facto is the position of the Obama Administration. Or, at least it means they will not be able to ignore it or run away from it.

  6. Tommy H. says:

    I think Stephen is right. And this gets back to the very cynical and depressing song. Did the Obama team know from day one that what they were saying was wrong? That is, were they mistaken? Or were they just lying?

  7. Bret says:

    Hey, folks. Let’s not forget all the conservative Republicans who have endorsed these same ideas. Newt Gingrich, John McCain, the Bush administration — just to name a few.

  8. Uwe Reinhardt says:


    What we have had in American health care IS the product of the interaction between physicians and their patients. The result has been the Wennberg Variations and total health spending growing on average 2.5 percentage points faster than the rest of the GDP.

    Who other than physicians and their patients has been driving this show? Has Medicare ever told doctors and patients how to respond to a particular illness (other than, perhaps, HMOs contracting with Medicarte)?

    So what are you really saying, John? What are those marvelous supply-side innovations you hint at? And how did patients trigger them?

    I think lurking behind your obtuse statements on health care is the idea that when patients have sufficient fiscal skin in the game, they may force physicians to be more innovative in finding cost-effective care. Perhaps so.

    Of course, it would be nice if you ever came out and called this by its proper name: rationing health care by porice and ability to pay. Why not have a little courage, John, and say so openly.

    I say so because a $5,000 or $10,000 deductible is never going to change the health-care behavior of high income people like you or me one whit. But it will change the health-care behavrio of someone making only $50,000.

    I also say so because, while the approach you and the many commentators on your blog prefer is cloaked in the mellifluous name of “Consumer Directed Health Care.” To the best of my knowledge, neither you nor like minded thinks tanks have ever seriously worked on how hospitals, doctors and so on would make their prices and the quality of their services known to patients. I have written on it, John, and so has Karen Davis. Have you?


  9. Mark Head says:

    There is a very important sense in which Demand Side solutions are the BEST way to approach this; however I tend to agree that most of what’s been called demand side is supply side in disguise. Demand for medical services is theoretically unlimited. Supply of services is decidedly not. I can’t live my life any way I want, go to any doctor I want when something “breaks,” and say “You fix it” and go to my employer (health plan) and say “You pay for it.” Our company provides employer-sponsored health management /wellness services. We identify health risk factors at the member level and coach members to take personal responsibility to live a healthier lifestyle, including see the doctor when they should, getting the tests and lab work that they should have, and adhering to medication regimens as appropriate. Ideally, “optimizing” utilization of health care services will yield reduced costs. Pay for performance tries to get at this from the supply side, but an employer-worksite-based approach is, in my considered opinion far superior. We also analyze claims costs to the member level, and participants in our programs are spending less than non-participants – even where chronic conditions are present. Optimized utilization may increase office visit and medication costs, but tends to decrease the costs of (far more expensive) ER utilization and inpatient admissions. We are empowering individuals to have healthier, more on-point dialogs with their physicians, and giving them their agendas to help keep those converstaions focused. This is a truer form of consumerism than just what emerges from High-Deductible Health plans. But, in all cases, reducing unnecessary demand by improving fundamental human health is indeed a demand side factor that can, is, and will continue to impact the way doctors practice medicine.

  10. Vic Wood says:

    I am a physician and I take issue with Uwe’s comments. If he thinks doctors are the reason that healthcare has increased in cost he does not understand the process and I venture to say has never treated a patient. Hey Uwe, you want to see what my prices are? Go to If the government and insurance industry would get out of the way the cost of healthcare WILL come down.

  11. miles z. says:

    Two points. Before anything is done or suggested, why not have an official proclamation that, health care is a right of all Americans. Second, why not consider a basic floor of health care coverage funded publicly; anything in excess of a basic level would be paid for privately, either individually or through the employer.

  12. miles zaremski says:

    I just read Uwe’s post after submitting my previous comment. Suffice it to say that changing the behavior of those who provide health care services is dependent upon what the consuming public demands. Those that can afford “cadillac” services will always be able to say, “doc, I want this and this and this. But those consumers are in the considerable minority in this country. It is what the overwhelming majority of the public want and need. And, they want to be provided health care services at a reasonable price that is affordable. The price tag for affordability is an amorphous concept since millions cannpt afford any amount. So, what is a worthy solution – – – something in the middle, as suggested by my just posted comment: provide a basic level of care for all. Anything above that we would be on our own to find and pay for. Ciao.

  13. Steve Bassett says:

    Hi John and Professor Reinhardt,

    Where are the price signals? We allocate resources to super efficient efficient facilities the same as we allocate resources to facilities one ought to avoid like the plague. Payers try to send price signals with P4P, but this is terribly inefficient. Why do the payers not offer an open market product that REWARDS PATIENTS for using best value facilities. PPOs have got to go. 90-95% of a given payers PPO facilites are “in-network” Why don’t payers go the whole way and invite 100% to participate. Hospitals should decide what they want to charge so as to compete for patients on price/quality? Patients would pay less, nothing or even get paid in some cases to use a best class facility. What we have now is a bunch of Monday morning quarterbacks trying to control everything – absolutely absurd. It’s nothing short of embarrassing from my perspective, and it’s stressful for everyone involved. As always pride is at the heart of the matter… everyone thinks he knows best his brothers health care needs: what, where, how much, the cost, how much he should pay, who should treat him, and how many bedpan changes he should get. Absurd.

  14. Steve Reeder, M.D. says:

    Medical care is no different than any other good or service in our country. Free market is the best solution.

    Doctors feel beleaguered by insurance companies and lawyers, and then are told what their services are worth. Most doctors are individualists and don’t tolerate this kind of intrusion into their lives. This leads to deception and skulduggery, as it always will with government interference and price fixing.

    Why not offer incentives to doctors and patients, in effect, a tax cut, to live a healthy lifestyle? Is this not what HSA’s do? Make them more available and explain to the people how this will benfit them.
    Encourage patients and doctors to promote this, then offer better rates to those that do. And for God’s sake, get rid of this awful link of insurance to the employer.
    The fatal conceit of the bureaucrats is to think that they can tell us little people how we should behave.
    It’s never worked.
    And Uwe, why ask me for my prices when the insurance company tells me the charge??

  15. Robert Blandford says:

    Uwe Reinhardt writes:

    “I think lurking behind your obtuse statements on health care is the idea that when patients have sufficient fiscal skin in the game, they may force physicians to be more innovative in finding cost-effective care. Perhaps so.

    Of course, it would be nice if you ever came out and called this by its proper name: rationing health care by price and ability to pay. Why not have a little courage, John, and say so openly.”

    I’m sure Dr. Reinhardt understands that there must be rationing by some means.

    The rationing by price could be substantially alleviated by government transfers of money from taxes, for health care only, to individual citizens, and letting the health purchases take place in a free market.

    My approach along these lines is at

  16. John Goodman says:

    This is Peter Orzag at his confirmation hearing:

    Orszag said it could take more than five or ten years for measures such as health information technology and comparative effectiveness research to begin lowering costs…

    See full CQ article here.

  17. […] — Uwe Reinhardt, Commenting on "Reforms that Don't Work" […]

  18. Ayse Tezcan, MPH says:

    I do not believe Dr. Reinhardt was suggesting that MDs are responsible for the high cost of health care, but I do agree with him that the cost-constrains and market forces will not change the health behaviors of those of us who can afford it. I am in health care field and my husband is an oncologist in a private practice setting. I am quite familiar with both academic and private practice aspects of medical field.

    There are numerous issues that drive the current demise of our health care system. One is our national attitude towards and fascination with anything new and high tech, which create a needless demand without proven cost-effectiveness. Another one is the physician financial interest in services provided. When the physicians began owning the diagnostic tools and profiting from the treatments prescribed, the skepticism about the necessity of these tools was seeded. Of course, whenever the doctors become business people, they have to go with the market rules: consumer is always right!

    Historically, the money for the services rendered was settled between the doctor and physicians. When the services provided and the providers became diverse and interactions complicated, the medical community decided to regulate and set the parameters. AMA was the institution that created the insurance companies. It is in a way responsible surrendering their power for compensation – and precedence for litigation issues. Progressively, we ended up in the mess we created for ourselves. In Turkey, we have a saying “1 lunatic throws a stone in the well, 40 wise men couldn’t find a way to get it out.”

    Health care is a quite different than many other businesses in many ways but one is very important: no one can know how to manage an illness but a trained doctor. So they are the sole authority on telling what a patient needs. In general, the patients are not in a position to know the difference between a competent and not so doctor to make an informed choice so it improves the quality of the care. There is also the scarcity of the provider. When we decide to let the free market totally to run the health care business, we cannot limit the number of people who can be doctors. When you artificially control the supply side, you cannot expect the demand side to determine the price and quality. Also most patients develop an emotional bonding with their doctors (which is not true with our Best Buy or Microsoft sales person); hence, in most instances market forces would not work to determine the prices. Besides the services provided may have life-and-death consequences while many other goods may not be that essential to a person.

    I do think that the current health care financing should be changed. The doctors, rightfully, demand to recoup their years of intellectual and financial investments. However, there should be a way for every hardworking citizen of this country (and yes, the Americans are the hardest working people in the world regardless of what some partisan people claim) to access a basic health care. Maybe a two-tiered system might not be such a bad idea. There are pros and cons to every model; we just need to choose the one that will benefit two interest groups: doctors and patients. Finding that model is a big challenge but a good venue to innovate…

  19. Ayse Tezcan, MPH says:

    I mean “…was settled between doctors and patients…”

  20. […] we have pointed out many times, ObamaCare is not going to solve our most serious problems. It will make costs higher, not lower. It will lower, rather than raise, the quality of care. It will “solve” the problems of […]

  21. Aditi says:

    Obama?s hhaetlcare plan is a socially crafted one of equality that he has undertaken to execute on the basis ?expand benefits and talk about controlling costs?. This appears amply reasonable at the level of law makers and democrats to accept. If Republicans are out there to oppose they as wise persons must accept that a change cannot come about without changes whose negative aspect as is seen by them becomes exploitation in plain and simple terms at the cost of public and those privately affected by it and that I would not call nationalism and that is the reason Obama has come to defend himself and all others who have carefully crafted the plan by saying ?those who want to retain their insurance plan of the private world are welcome to do so? and in this, I basically see nothing of contradiction except the opposition to it as pressure being seen of political advantage to the Republicans by the Republicans? That is a fact if one has to look at the dirty sense of politics that has no limits but in a democracy like America Republicans have had a reputation where clean politics comes into the picture under the subtle sense of governance that allows governance to remain governance without a sense of right or wrong on it. Since, it is primarily a domestic issue as Michelle has indicated in his brief, the very fact he has brought out that makes outsiders like me comfortable with my frank comments. Thanks Michelle.