Why the Obama Administration's New Medicare Payment Reform Plan Won't Live Up to the Hype

The administration wants to save billions by overhauling Medicare's payment incentives. The evidence shows how hard this is to do.



The Obama administration just announced the start of an ambitious new plan to reform Medicare payments, and it's already being billed as a major step toward health care cost control. Don't expect it to live up to the hype.

The initiative aims to move Medicare's payment system away from paying for discrete services and toward paying for outcomes. It will likely be a big deal, simply because it affects such a large chunk of federal spending; Medicare paid health care providers more than $360 billion last year.

But previous efforts to overhaul Medicare payments, even on a small scale under favorable conditions, have proven far more difficult than expected. Overall, experiments with these sorts of reforms have produced mixed results at best.

Instead, the new plan is better understood as a kind of Obamacare B-side—an idea championed by many experts during the crafting of the 2010 health law that got left out of the final mix, but is now being introduced as a kind of addendum.

The central aim of the initiative, announced by Health and Human Services Secretary Sylvia Matthews Burwell today in the New England Journal of Medicine, is to "have 85% of all Medicare fee-for-service payments tied to quality or value by 2016, and 90% by 2018" and to shift 50 percent of Medicare payments to quality or value tied "alternative payment models" by the end of 2018, with an interim goal of 30 percent by 2016.  

The bigger goal is to try to reduce the unnecessary care that many believe is encouraged by fee-for-service payment, which creates incentive to for doctors to do more, but offers little incentive to do better. The Institute of Medicine estimates that about $210 billion is spent each year on unnecessary care; not all of this is Medicare, but Medicare has a huge influence on the rest of the system. Erasing or weakening those fee-for-service incentives would, at least in theory, save money and also lead to better health outcomes.

As Vox's Sarah Kliff notes, there was a contingent of advisers pushing for this sort of explicit target to be included in Obamacare. Instead, the Obama administration opted for a series of pilot programs that could test payment reforms and then build on them later if they worked.

This is the scaling up. But what, exactly, is being scaled up? It's not clear, because the administration doesn't really know.

That's the biggest sign that this plan is heavy on the hype. The announcement says that the goal is for payments to be "tied to" quality or value, but doesn't say what that means. The quality component is rather vague, and so are the specific alternative payment models. As The Wall Street Journal notes, HHS "didn't set out specific plans for how it would increase the number of providers under a pay-for-performance system, saying the marker was intended to kick-start exploration of that."

This isn't a plan. It's a plan to develop a plan (or plans) in hopes of meeting a not-very-well-defined target.

Fine. The administration will eventually try to do something. And whatever that something is, it will likely be a bigger version of a program that has already been tried before. Medicare has tried out lots of experiments in alternative payment systems, attempting to influence provider behavior and health outcomes through bonuses, bundled payments, penalties, and various pay-for-performance measures.

And what we know from these experiments is that even in optimal conditions, it's very, very hard to make them work.

In a study of 34 different Medicare programs designed to reduce hospital admissions, the Congressional Budget Office found that, on average, there was no change in admissions, and that "in nearly every program, spending was either unchanged or increased relative to the spending that would have occurred in the absence of the program" once all fees were considered. Another study of four "value based" reforms relying on bonuses and payment bundles found one that showed promise, and three that "appear to have resulted in little or no savings for Medicare." As CBO director Douglas Elmendorf said in 2011 congressional testimony, the results of Medicare's demonstration projects are, on the whole, "disappointing" and "discouraging." It's very difficult to make these sorts of reforms work.

This is true even in small scale, under the best of circumstances. One of the administration's most notable health care reform flops has been its Pioneer ACO program, which in 2012 put 32 health systems into a kind of elite experiment with so-called Accountable Care Organizations—basically integrated provider networks designed to better coordinate and manage individuals and their cases, rather than provide fragmented, service-by-service treatment.

The Pioneer ACO program started out on the wrong foot when several of the most prominent and respected health care systems in the country, including the Cleveland Clinic, the Mayo Clinic, Intermountain Health, and Geisinger Health System, all opted not to participate in the Pioneer program. These clinics were widely touted as the original models for the administration's ACO program. But in the end, the poster children wanted no part of the administration's plans.

Since then, the Pioneer ACO program has struggled to maintain the support of its Pioneer ACOs. More than a dozen dropped out. Of the 32 that started the program in 2012, only 19  now remain. As one of the dropouts explained, even with "favorable underlying performance," the regulations and payment rules were just too onerous. It was too big a financial risk to stay in the program.

Some provider systems have had better luck with integrated care and payments experiments. But often the give and take from Medicare's complex mesh of payment incentives hammers providers hard—even when overall performance is improving.

As a Kaiser Health News analysis found just last week, of the 1700 hospitals that qualified for bonuses based on improved quality metrics this year, fewer than 800 will actually get any money. For the rest, the bonuses are consumed by penalties incurred by other incentive programs

That's another reason to be wary of these reforms: To the extent that they might save money, they'll hurt health providers financially. And that means that hospitals and others will work very hard to make sure that whatever systems and metrics are eventually put in place won't impact their bottom lines.

There's also the larger question of how to set the performance metrics. As Aaron Carroll, a skeptic of pay-for-performance systems whose writing has helped shape my own views, argued last year in The New York Times, defining "quality" is really, really hard. Typically what happens, then, is that we end up setting metrics that are easy to capture and record—or, less charitably, that industry groups feel are easy to game. Often those are not the right metrics.  

This gets to the larger question that comes with today's announcement: Will the new plan work? I hope so. It would be nice. It's probably right that there's lots of waste in the health care system, but it's also the case that there's no single, reliable way to weed it out. So I'm skeptical, in part because previous plans haven't worked all that well, but even more because right now, no one even knows what the plan actually is.