The Demand-Side Approach to Changing What Doctors Do

In many ways health care is like education. In both fields, we find a sea of mediocrity, punctuated by islands of excellence. Further, the islands of excellence appear to be randomly distributed. By and large, they are not correlated with anything. This is not only true in the United States. It is true all over the world.

The two sectors have two additional common features: (1) the individuals who receive the benefits of the services are separate from the entity that pays for them; and (2) we have completely suppressed the marketplace. As a result, there are no financial rewards for institutions to become excellent. In return for expending greater effort to improve performance, they receive the same (or even less) income.

After the publication of A Nation at Risk about a quarter of a century ago, alarmed reformers decided to study the best schools to determine what they do that works and to use various carrots and sticks to try to get all other schools to do the same. This is what I call the “demand-side approach” to education reform. How well has this approach worked? Miserably.

Inner-city schools are about as bad as they ever were. So what are we doing about it today? We are continuing with the very same reforms that have failed for 25 years!

And here is a shocker: The Obama Administration is committed to the very same approach in health care that has proved so unworkable in education!

Peter Orszag and his colleagues are chomping at the bit in anticipation of using the power of the purse to get doctors everywhere to shape up. In no time at all, those who are wasteful and inefficient will be practicing medicine just the way it’s practiced at the Mayo Clinic. At least that’s the goal.

Meanwhile, developments on the two sides of the market in health care are like two parallel universes. On the supply side, we have the islands of excellence (Mayo, Intermountain Healthcare, Cleveland Clinic, etc.). On the demand side, we have a whole slew of experiments with pay-for-performance and other pilot programs designed to see whether demand-side reforms can provoke supply-side behavioral improvements. And never the twain shall meet.

We cannot find a single institution providing high-quality, low-cost care that was created by any demand-side buyer of care. Not CMS. Not Medicare. Not BlueCross. Not any employer. Not any payer, anytime, anywhere. As for the pilot programs, I don’t think a single pay-for-performance experiment has actually lowered health care costs.

What about other demand-side reforms: forcing/inducing/coaxing providers to adopt electronic medical records, to coordinate care, to integrate care, to manage care, to emphasize preventive care, to adopt evidence-based medicine, etc.? The Congressional Budget Office (CBO) has reviewed the evidence on all these reforms and concluded that the savings will be meager, if they materialize at all.

Scholarly researchers have weighed in as well. As part of the effort to follow in the footsteps of the education reformers, a research project by Atul Gawande, Donald Berwick, Elliott Fisher and Mark McClellan has identified 10 hospital referral regions (HRRs) as health care islands of excellence and carefully studied what makes them tick.

What did they learn from this exercise? Not very much. For example:

  • Despite the conventional wisdom that ideal medicine requires salaried doctors, only two follow the Mayo Clinic in this respect.
  • Two others pay on a traditional fee-for-service basis; and the rest have mixed-payment schemes.
  • Despite the conventional wisdom that a greater ratio of primary care physicians to specialists is essential, the regions are all over the map in this regard as well.
  • One is twice the national average; two are below it; and the others ranged from 14% to 52% above the national average.

So how do we get everyone else to practice medicine as successfully as these 10? As summarized by Gawande, the top performers have these characteristics:

  1. Leadership
  2. Altering financial incentives
  3. Using measurement to provide a force for restraint
  4. Engaging with the community to help others see “how much high costs and poor quality are harming the greater good.”

So let’s see. To have really top-notch medical care: First find a leader……… oh, and don’t forget to engage.

Not exactly the recipe you were hoping for? Sorry, that’s the best we have at this point.

Comments (21)

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  1. Joe S. says:


  2. Neil H. says:

    John, you are the only person I know in health policy who is saying anything like this. Everybody else (Republican/Democrat, conservative/liberal, etc.) is taking a “demand-side” approach.

  3. Bruce says:

    This is the first sensible thing I’v read on this subject. Everyone else justs assumes there is some easy way to force every provider to practice the way medicine is practiced at Mayo. Obviously, this is not the case.

  4. David R. Henderson says:

    Good post.
    One big counterexample, though, which I learned from you years ago. Many of the successes in health care are due to demand-side factors, specifically, people paying out of their own pockets for their own health care. Agreed?

  5. Jim Morrison says:

    You nailed it!

  6. Arthur Middleton Hughes says:

    John: your paper is very insightful. We have excellent health care here in Fort Lauderdale. Reason: people here have money and they shop around. We got several doctors who were really bad, and we dropped them. We can choose any doctor we want with Medicare and Coventry Health Care. We think that the best solution to the HC problem is to let people buy insurance from any company in any state. Coventry is in North Carolina, not Florida. Our Auto Insurance is Geico, and our Long Term Care insurance is with CNA in Hartford. What is wrong with that? If we lived in New York, I am sure we could find a good policy at half the NY rates somewhere else. Result: the problems would go away.

  7. Chris says:

    Excellent Health Alert….
    Very insightful comments.

  8. John Goodman says:

    Response to David Henderson: Having patients control the mony is very important. But patients are not going to tell doctors how to practice medicine. If doctors are free to repackage and reprice their serices, they will do so if it increases their incomes. And this is exactly what would happen if doctors were competing for patients based on price and quality.

    What we now have with Health Savings Accounts is a cash account completely tied to third party reimbursement formulas. So even though patients are free to buy or not buy and they reap rewards for prudent buying, doctors cannot repackage or reprice their services. The fees they are paid and what they can be paid for doing are already negotiated long before the patient ever gets to the doctor’s office.

    Hope this makes things a bit clearer.

  9. Greg Scandlen says:


    Excellent analysis, except I wouldn’t call what you are describing as a “demand side” approach, but a “command and control” approach. Because individual consumers control so little of the money today, their “demands” are meaningless. Instead we have bureaucracies substituting their judgment for that of consumers. Any system of third party payment perverts the demand side of the supply and demand equation.

  10. Linda Gorman says:

    Cash & Counseling type programs are “demand side” programs that do cut costs. They do it by giving Medicaid clients a budget to spend on home care as they see fit. Since Medicaid clients are allowed to buy home care from anyone they like under Cash & Counseling, it effectively “repackages” care in forms not normally allowed by Medicaid.

    Various Cash & Counseling look alike programs have lowered costs by 20 percent, received rave reviews, and greatly improved quality.

    They conclusively showed that health care can be improved by freeing people to spend what they regard as their own money free of excess regulation. This deregulation made everyone better off except, perhaps, the many fans of government run “command and control” medicine.

  11. John R. Graham says:

    My reading of examples of success in government-run health systems also comes down to idiosyncratically effective leadership. For example, the North Karelia Health Project in Finland, which is associated with sigificant improvement in cardiovascular indicators, is generally credited to Dr. Pekka Puska. The VHA’s success in the 1990s, associated with improved HIT, is generally credited to Dr. Ken Kaiser. Just like in all areas of life, effective leadership is key. The idea that the government can pass a law to make it happen is ridiculous. The best you can do is allow people to spend their own health-care dollars as they see fit, and then the leaders arise.

  12. Jennie Fiedler says:

    I think the scary part is that all health care is expensive. If you’re poor you can eat top ramen instead of steak, live in a studio apartment instead of a house, ride a bike, take a bus or drive a beater if you can’t afford a new car, and hit the thrift stores for everything else. But where do you go for medical treatment? What do you do when you don’t make enough to “spend your own health care dollars?” And considering how quickly the middle class is disappearing and the number of “working poor” is rising, there are a good many of us that could end up in that boat. Where do you go when your employer doesn’t offer health insurance and you can’t afford an individual policy? This is becoming an extremely relevant question in this current climate, but I sure haven’t seen any answers. Free clinics? “Income-based” health care? What is “affordable” health care and where do you find it?

  13. David R. Henderson says:

    Jennie Fiedler asks, “What is “affordable” health care and where do you find it?” I answer, “Wal-Mart.”

  14. Nancy says:

    I agree with David. There are walk-in clinics all over the country. They are reasonably priced and there is very little waiting. That’s why some are called “Minute Clinics.” There are also surgi centers and free standing emergency care clinics that are reasonably priced.

    Major surgery is a totally different animal. For that you have to cross the border to find reasonable prices.

  15. John Goodman says:

    The Ford Foundation just announced a $100 million grant to encourage education reform. The recipient? Teachers unions! See the Wall Street Journal editorial here.

  16. Ronald Feldman MD says:

    Having spent a few days a year at Mayo Clinic Rochester and witnessed the incredible amount of expensive equipment, the number of special procedures and specialty consultations, and it’s opulent surroundings, it seems clear to me that it can’t really be cost effective.

    It isn’t quite nervana. Cross dept. coordination is not always efficient. Physicians have been fighting amoung themselves over work output inequities for years.

    Some things stand out to me. 1. Donations to the Clinic have left a huge endowment, along with royalties for trademarks. 2. People often come for short stays from all over the world, many paying large sums of cash. Long-term continuity is not the responsibility many of us face. 3. The cost of living in Rochester, Minn. is very low, allowing for a lower salary structure.4. Mayo’s response to Gawande’s articles was to say Mayo can’t make it on fee-for-service Medicare pay, just like the rest of us can’t.

  17. Dave says:

    At the risk of sounding like a conspiracy theorist, here is something that has occurred to me over the last six months. Vouchers could be an important means of solving the uninsured problem while working with, rather than against, competition in a very transparent way. But as important as this would be for solving the problem of the uninsured, the potential gain to our society of vouchers being used in education is far greater. We are literally a nation that is making itself dumber over time. That is not sustainable.

    I believe one reason for the hostility toward implementing a voucher program as a part of SERIOUS health care reform is that having vouchers prove their mettle with respect to something as complex and important as health care is terrifying to the NEA.

  18. Bob B says:

    This is an interesting discussion. I think the bottom line is that people,us, need to have skin in the game to make a difference.
    go to and check the book for a great disertation on this subject.

  19. […] as in the field of education (see my previous Alert), the only reform that can pass is one that does little more than spend more […]

  20. […] Here’s the hitch. In order to find low-cost, high-quality medicine, you have to go to places where (a) the third-party payers are absent and (b) normal market forces have not been systematically suppressed. (The only exceptions to this rule are few and far between and appear to be distributed randomly.) […]

  21. Jerry says:

    You are SO right! And I say the top two indicators the research revealed:

    Altering financial incentives

    are the same two that Governor Daniels Utilized when he effected the greatest change in state employee health benefits: HDHP-HSA with 70% participation rate, and in Medicaid where he implemented the Healty Indiana Plan that gave eligible uninsured Hoosiers a Power account of $1100.00 plus a defined level of insurance.

    Once again, you are right on target! Thanks for your passion and perseverence on all our accounts!


    Altering financial incentives
    Using measurement to provide a force for restraint
    Engaging with the community to help others see “how much high costs and poor quality are harming the greater good.”