As might be expected of reform legislation, the Patient Protection and Affordable Care Act (PPACA) places a lot of emphasis on innovation.

Reasonably enough, most of the potential changes—at least in Medicare—are to be preceded by pilot or demonstration projects designed to test their feasibility. In fact, according to one health care blogger with time on his hands, PPACA includes no less than 312 mentions of demonstrations and 80 mentions of pilots.

Just how important are all these pilots and demos? Harvard’s David Cutler, who served as a key advisor to the Obama administration in developing the reform strategy, clearly believes they are vital. Writing in the June Health Affairs, he stresses the need for rapid implementation of the pilots and demonstrations in order to help achieve eventual savings of “enormous amounts of money while simultaneously improving the quality of care.”

How realistic are Professor Cutler’s expectations?

CMS’ Medicare chronic care demonstrations provide some clues. With data showing that the costliest 25 percent of beneficiaries account for 85 percent of total Medicare spending and that 75 percent of the high-cost beneficiaries have one or more major chronic conditions, the demonstrations were expected to show big benefits from care coordination—the major theme of PPACA’s proposed demos.

The outcomes were decidedly discouraging, as noted by MedPac’s 2009 report to Congress: “Results suggest that some of these programs may have modest effects on the quality of care and mixed impacts on Medicare costs, with most programs costing Medicare more than would have been spent had they not been implemented … In almost all cases, the cost to Medicare of the intervention exceeded the savings generated by reduced use of inpatient hospitalizations and other medical services.”

What went wrong with such a promising effort? And what are the implications for PPACA’s pilots and demos?

The simple answer is that few providers will participate in a pilot or demonstration if it’s likely to cause their income to drop. As a result, CMS must attract “volunteers” with generous promises of shared savings or payments for additional services–essentially, bribes to compensate for lost revenue and the time-consuming process of dealing with CMS bureaucracy. So far, the bribes have outweighed the savings in almost every case. Worse still, and often overlooked in evaluations of pilots, participating providers are likely to be those most able to achieve savings—the “good guys,” rather than the typical—with resultant optimistic skewing of the results.

Will the PPACA projects be more successful? Even assuming that the heavy hand of government can be lightened to speed up project implementation and minimize the oversight burden, the picture is gloomy. PPACA includes four main categories of pilot and demonstration projects: bundling, accountable care organizations, pay-for-performance, and coordinated care. Of these, only some aspects of pay-for-performance avoid the problems of trying to tie together activities of multiple providers—exactly the problems that sank the chronic care demos.

While new IT systems might facilitate coordination of care, the jealously guarded independence of providers (and their jealously protected incomes) will continue to be a huge obstacle. Theoretically, the Independent Payment Advisory Board could recommend implementation of some changes (for example, bundling) without the PPACA pilots and demos, but this could leave IPAB without the required actuarial justification for such recommendations.

The bottom line? Trying to fix our fragmented and unorganized health care system from the bottom up, through pilots and demos, probably isn’t going to work, at least in any acceptable timeframe—and certainly isn’t going to lead to Professor Cutler’s hoped-for savings of enormous amounts of money.

Roger Collier is a consultant specializing in health care policy issues who blogs at Health Care Reform Update.

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