The Centers for Medicare & Medicaid Services (CMS) conducts and sponsors a number of demonstration projects to test and measure the effect of potential program changes. These demonstration projects study the likely impact of new methods of service delivery, coverage of new types of service, and new payment approaches on beneficiaries, providers, health plans and others involved in the delivery and reimbursement of medical services. CMS considers the demonstration projects to be critical tools in validating research and helping to monitor the effectiveness of Medicare, Medicaid, and the Children’s Health Insurance Program (CHIP). Findings from demonstration projects have played a role in some of the program changes with the most major historical impact.

Currently CMS is coordinating more than 50 demonstration projects in various stages of the process, from announcement and solicitation of participants to publication of findings and analyses.  One such ongoing demonstration project that actually preceded the March 23, 2010 healthcare reform legislation (Patient Protection and Affordable Care Act or PPACA), is the Acute Care Episode (ACE) demonstration, which commenced in 2009. The ongoing ACE project studies a bundled payment on select orthopedic and cardiovascular procedures to ideally test the alignment of incentives for both hospitals and physicians. The demonstration will also test the effect of open price and quality information sharing on beneficiary choice for select inpatient care.

PPACA itself is highly focused on innovation and anticipates the implementation of dozens of new demonstration and pilot projects, including many aimed at coordinated care efforts.

But what do the results of these demonstrations and pilots mean for providers and investors?  How important are the results? The answers depend in part on the nature of the demonstration and the climate otherwise surrounding the industry at hand.  Harvard Professor David Cutler, a key advisor to the Obama administration on healthcare reform, trumpeted the import of the programs in order to save “enormous amounts of money while simultaneously improving the quality of care” in the June edition of Health Affairs. 

On the other hand, some massive Medicare changes, such as the complete overhaul of the reimbursement methodology for end stage renal disease (ESRD) dialysis providers into bundled payments finalized this summer did not even involve a demonstration project, although certainly other extensive analyses were used.  A demonstration project to study that major ESRD program change had been included in The Medicare Modernization Act of 2003 (MMA) but was later repealed. 

Casting additional doubt on the value of such projects, blogger Roger Collier of healthcarereformupdate.com believes the demonstration and pilot programs have been disappointing in their effectiveness, producing mixed results that are at times unreliable. Collier blames their ineffectiveness on the natural unwillingness by providers to participate in a pilot or demonstration if participation is likely to negatively impact income and on the fact that participating providers are likely to be those most able to achieve savings, which tends to skew results in a particular direction.

At the very least, because demonstration projects involve analysis of reimbursement methodologies and levels, as well as the scope of covered services and requirements for delivery of those services, the results of these projects (combined with financial impact analysis from the Congressional Budget Office and other key investigative government agencies and industry lobbying bodies) can serve as one of many influences CMS and Congressional thinking.  Demonstration and pilot programs can be early indicators of government philosophy toward a particular provider and reimbursement, which healthcare investors can track in order to stay far ahead of trends.