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Tuesday, May 31, 2011

Medicare’s Elusive Search for the Ideal Success Criterion (Consult Specialists on the Soviet Economy Before They Are All Dead)

Medicare has a new success criterion for rewarding hospitals: “Medicare spending per beneficiary.” The unusual twist is that Medicare bureaucrats will include expenditures three days before and 90 days after the patient leaves the hospital. Medicare will pay hospitals that have lower than average “Medicare spending per beneficiary” a higher percentage of each claim.

Those of us who studied the Soviet economy find the announcement of a “new and better” Medicare success criterion familiar. We also know it will be one of many to come. As hospitals learn to game this criterion, Medicare bureaucrats will propose another one to close the gap. Hospitals will then learn to game that one, and so on. The cat-and-mouse game goes on forever, until the system itself ends.

Soviet planners began with quantity targets, such as tons of steel or numbers of tractors. Factories churned out nails too heavy to use and “incomplete” tractors (=lacking engines). Planners adjusted to this gaming by specifying both tons and steel assortments and requiring “complete” tractors. Planners could not keep track of the assortment; so factories still produced the heaviest of metal products and tractor producers left off the tires or the windshields.

Planners then discovered that steel and complete tractors were being produced with a huge waste of inputs. The next magic success criterion was cost reduction targets, but the bureaucrats discovered that cost reductions were being achieved at the expense of assortment and quality. The next silver bullet was to reward profits, but factories gamed profits by producing only high priced items. The next step was to put everything on computers, which were supposed to churn out magic “scientific norms” that would solve all problems. At about this time, the Soviet economic system collapsed.

If hospitals can find some ex-Soviet managers, they could put them to good use.

I can imagine some of the tricks: Accept only low-cost cases. Put patients recovering from serious operations in nursing homes and hospices for 90 days and hope that they survive to resume treatment. If a patient needs a complicated operation involving two procedures, do not do them at once. Wait ninety days for the second one.

The Medicare bureaucrats will respond with new rules that reward hospitals for taking on difficult cases and will prohibit the parking of patients in nursing homes and hospices. The hospitals will respond and the game will go on without end.

Hospitals will eventually decide the game is not worth playing and try to figure a way to exit Medicare entirely. But by that time, the Medicare bureaucrats will have figured out a way to keep them captive. In the Soviet case, we called this the “treadmill of reform.” Good luck to the hospitals out there with their treadmill.

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