Congressional Budget Office: Medicare Demonstrations Ineffective at Reducing Costs, Improving Efficiency

Medicare demonstrations designed to improve health care quality and
efficiency have largely failed to result in savings, according to the results
of investigations summarized in a Congressional Budget Office brief.

In the brief, the Congressional Budget Office (CBO) noted an evaluation
of 10 major demonstrations by independent researchers showed that most programs
have failed to reduce Medicare spending.

“In nearly every program, spending was either unchanged or
increased relative to the spending that would have occurred in the absence of
the program, when the fees paid to the participating organizations were
considered,” Douglas W. Elmendorf, the director of CBO, wrote in his
CBO’s Director’s Blog.

“The outcomes of these demonstrations are not surprising, nor
should they be to anyone with a rudimentary understanding of how markets
work,” B. Sonny Bal, MD, JD, MBA, told O&P Business
sister publication, Orthopedics Today. “In essence,
the government, as a major participant in the health care market, micromanaged
disease management and attempted to fine-tune payment schemes based on selected
measured outcomes. The result, not surprisingly, is more cost and not much

Medicare spending was more likely to be reduced through programs that
featured substantial interaction with physicians and significant in-person
interaction with patients, the brief noted — but even these programs, when
averaged, failed to achieve savings substantial enough to offset their fees.

According to information posted on CBO’s Director’s Blog, one
of the four value-based payment demonstrations resulted in Medicare savings.
The others resulted in either little or no savings.

“During the 2 decades of so-called disease management schemes,
there must have been a necessary, added cost component related to the disease
micromanagement regimes themselves,” Bal, an said. “Health care
practitioners negotiated around the onerous regulations and expectations, and
ended up providing care closest to that which they were trained to anyway. At
the end of the day, the outcomes were largely unchanged — both in terms of
disease and treatment outcomes — and related costs were higher to reflect
the costs of regulation itself.”

According to the CBO brief, one of the hurdles to lower spending and
increase the quality of health care is Medicare’s fee-for-service payment
system. The system, according to the brief, “rewards providers for
delivering more care, but does not pay them for coordinating with other
providers.” Other problems highlighted by the brief lie in the
nation’s decentralized health care delivery system.

The brief concludes programs that involve disease management and care
coordination or value-based payment will have to undergo changes to their
payment and delivery systems so spending reductions can be properly achieved
and the quality of care can be improved.

Bal said the report blames the Medicare fee-for-service system for the
failure of government-driven market intervention — and suggests that a
lack of communication and centralization may be to blame for high costs and a
failure to reach goals.

“It may be true that the fee-for-service system is one defective
component in an overall system that promotes limitless demand for expensive
health care, distorts incentives at the provider end and creates predictable
price inflation, but centralization is hardly the answer,” Bal said.
“However attractive central control and price regulation may be to the
bureaucracy, these measures are no substitute for time-tested economic
principles … the individual physician must be wary that these
demonstration projects are a disguised attempt to knock down the
fee-for-service system, without any other attendant system reform.”

“The Medicare demonstrations reviewed here … offer several
lessons for designing and evaluating demonstrations in the future,”
Elmendorf wrote in his blog post.

Bal, meanwhile, suggested a system wherein trade barriers were removed
and the market opened to willing participants — “where the
government’s role would be to enforce the rule of law rather than create
the law in favor of the highest bidder.”

Such a system, he said, would equilibrate to determine proper demand and

“Conversely, if we continue down the current path, centralization
of health care in a single provider with complete distortion of incentive and
demand is predictable with the inevitable erosion of quality, innovation and
attendant spiraling of costs,” Bal said.

At a base level, however, he noted that proper reform could simply be a
matter of taking a more “realistic” viewpoint.

“Fundamental to any meaningful reform must be a realistic attempt
to inject market efficiency into the system,” Bal said. “The consumer
must pay, at least in part, for the cost of health care, and the costs can no
longer be distorted by high mandates, incentive schemes, payment formulas and
remote bureaucrats.” – by Robert Press

For more information: Accessed Feb. 15, 2012.

Nelson L. Lessons from Medicare’s demonstration projects on disease
management, care coordination, and value-based payment. Issue brief. January.

Disclosure: Bal has no relevant financial disclosures.

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