Medicare Experiments To Curb Costs Seldom Implemented on a Broad Scale

The Democratic health reform legislation comes studded with cautious plans to test proposals reining in Medicare costs. But history suggests that even if the experiments are successful, the odds aren’t high that their lessons will be applied to the entire program.

Consider the case of a 1990s pilot project that earned the support of a president, several key legislators and successive Medicare leaders-from both parties. A five-year test showed that lumping together payments for doctors and hospitals for some heart surgeries encouraged them to be more efficient and reduced Medicare’s cost by 10 percent. But the project ran into relentless opposition from doctors and hospitals. The result: Congress has never approved the change for widespread Medicare use and Medicare continues to study the issue.

Successful Medicare experiments are “certainly not enough to change policy,” said Paul Ginsburg, director of the Center for Studying Health System Change, a nonpartisan research group in Washington. Yet Democrats’ hopes to “bend the cost curve” hinge in large part on introducing successful Medicare experiments into the system. And because of Medicare’s clout as the insurer for 45 million older and disabled Americans, many private insurers follow its lead.

Medicare has conducted hundreds of tests, called pilots or demonstration projects, since the mid-1970s, but can’t apply them to the entire system without congressional approval. Lawmakers have made other important changes, but pilot projects have rarely been the catalyst.

Most of these experiments haven’t been expanded because they failed a threshold test; they didn’t save money or improve care. Others passed the test but were derailed by objections from hospitals, doctors and other providers — or were caught up in political fights as control of Congress shifted. Only a handful resulted in broad health system changes. Two became permanent programs. And the biggest success – a more efficient way to pay hospitals – occurred 27 years ago.

Congress is frustrated by the lack of innovation, aides said. But they note that political leaders are hesitant to make changes to the Medicare system without such rigorous study and without consensus because they fear alterations could result in unintended dire consequences on a massive scale.

Still, in the reform legislation working its way through Congress, lawmakers have added provisions that they hope can improve the odds for implementing successful demonstrations. One measure seeks to circumvent the difficulties of getting congressional approval for changes. It would give the secretary of Health and Human Services the authority to expand demonstrations that work; Congress’ permission wouldn’t be needed. Another would create an Innovation Center that would allow Medicare to pursue promising ideas more quickly. Yet another would set up an independent Medicare commission to recommend Medicare savings that would be implemented if Congress didn’t act.

Proponents think these strategies would at least partially shield Congress from the political pressures of industry groups trying to ward off changes. But some experts disagree. Joe Antos, an economist at the American Enterprise Institute, said that the Innovation Center “may make matters worse” by expanding the complicated bureaucracy that runs Medicare.

Many Paths to Nowhere

The 1991 heart surgery pilot project shows how difficult it is to prod Congress to change Medicare in the face of opposition from providers. The test was begun during President George H.W. Bush’s administration by Gail Wilensky, who was head of the agency running Medicare and Medicaid. Wilensky no longer ran Medicare by the time the demonstration results were in, but as an adviser to Congress, she said she believed the program was ripe for expansion. Her Democratic successor, Bruce C. Vladeck, agreed.

But his efforts to expand the demonstration fell flat because of broad opposition from such heavyweights as the Mayo Clinic in Rochester, Minn., and the American Hospital Association and — after Medicare officials suggested including joint replacement surgery in the program — the American Academy of Orthopedic Surgeons.

In the demonstration, Medicare combined a number of separate payments normally made to the hospital and doctors for specific procedures and follow-up care in an effort to discourage them from performing excessive services. As part of the plan to expand the effort, participating hospitals would be allowed to market themselves as “Centers of Excellence.” Critics had a litany of complaints: The term “Centers of Excellence” suggested other hospitals were less than excellent; patients in some areas would have limited access to care, and all the savings went to Medicare. None were to be shared with the providers.

Vladeck included the program in President Bill Clinton’s attempt at a sweeping Medicare overhaul in 1997 as part of the Balanced Budget Act. But the provisions were stripped from the legislation.

The “Centers of Excellence” program wasn’t the only promising demonstration to be quashed-some were halted even before their launch for political reasons.

In 1997, for example, Congress instructed Medicare to test a plan under which suppliers of durable medical equipment–oxygen tanks, diabetes supplies and wheelchairs-would submit bids. Medicare would use the bids to generate a range of prices that it would pay and would require suppliers who wished to sell to Medicare patients to meet those prices. After the demonstration showed a 20 percent savings, legislators in 2003 ordered Medicare officials to expand the program.

But by 2008, medical supply companies, worried they would lose money, pressured lawmakers to reconsider details of the program. Congress came to share the suppliers’ view that the bidding process was unfair to smaller companies and delayed the project until 2011.

In late 1999, a similar experiment to extract better prices from managed-care plans was jettisoned as well. Lawmakers had mandated the program two years earlier, but when Medicare officials chose Phoenix, Ariz., as one of the test sites for the project, local insurers appealed to Congress. Sen. Jon Kyl, R-Ariz., pushed one bill that called competitive pricing in Medicare “an important” goal but delayed its implementation. In the end, Kyl and Rep. John Shadegg, R-Ariz., brokered legislation that blocked spending on the program anywhere in Arizona. In essence that killed the whole program. 

“Everyone wants competitive bidding, but nobody wants it in their backyard,” said Linda Magno, who directs Medicare’s demonstrations program. “And unfortunately, every backyard has a congressman or two.”

A 2004 demonstration in New Jersey to encourage physicians to practice more efficiently by giving them a share of hospital savings faltered when four hospitals excluded from the program convinced a judge that it was illegal. The hospitals said the project put them at a competitive disadvantage, but the judge blocked it because Congress had not specifically authorized the demonstration.

The lawyer who designed the program, Michael Kalison, said the demonstration was back on track after Congress approved it recently. “So far, so good,” he said.

A Critical Success

A rare victory came in the 1980s. Federal deficits soared following President Ronald Reagan’s 1981 tax cuts. At the same time, Medicare’s hospital costs were rising quickly. In 1981, they were up more than 17 percent. That put pressure on Congress to find a way to bend the cost curve – and it did.

Medicare had been studying ways to deal with the issue. One demonstration found that paying a flat rate for hospital services limited spending growth compared with the traditional method of reimbursing hospitals based on how much they spent, plus a small bonus.

Congress approved the change in the way hospitals were paid in 1983. By 1985, hospital spending was growing by only 5.7 percent, according to federal officials. Many private insurance companies followed Medicare’s lead to get in on the savings.

Democrats also point to other successes, such as a managed-care program for social services, and the Program for All-Inclusive Care for the Elderly, which pays groups of providers a monthly lump sum for providing all care to frail, low-income Medicare patients. The overhaul bills include a program to reduce hospital admissions, an issue addressed in recent demonstrations. But since the hospital payment change was adopted, nothing has achieved a similar kind of cost restraint.

“There’s really not very much cost containment in the [reform] proposals, but there are the seeds,” said Stuart Altman, a professor of health policy at Brandeis University and a Nixon-administration health official. “They are these demonstrations.”

The demonstrations in the legislation include ones that would test accountable-care organizations, medical homes and combining physician and hospital payments for post-acute care. These projects could change the way health care is delivered, increase its coordination and efficiency and, over time, lower costs for consumers.

“Out of those pilot projects could come significant changes in Medicare,” said Clifton Gaus, who directed Medicare’s demonstration programs in the 1970s. “It just could take a long time. The bending the cost curve problem is now, not in five years.”

Congress’ own budget advisers agree. “Large reductions in health spending will not actually be achieved without fundamental changes in the financing and delivery of health care,” Douglas W. Elmendorf, director of the Congressional Budget Office, wrote in a June letter to senators. Reaping the long-term reward of experiments such as the accountable care organizations and payment-bundling programs, he cautioned, “would require tough choices to be made.”