Nina Bernstein has a really good piece in the New York Times about how an initiative from Andrew Cuomo to reduce New York State's long-term care costs under Medicaid has completely failed. What Cuomo wanted to do, essentially, was switch elderly New Yorkers in need of long-term care out of costly fee-for-service programs and into managed care programs that would have a capitation-style compensation structure. A provider would get a per-person fee, and thus have a financial incentive to provide care in as cost-effective a way as possible. Providers would also have an incentive to try to provide quality care because they'd be competing with one another to sign up patients.
It all sounds reasonable enough, except it turns out that the pool of elderly New Yorkers in need of long-term care is not some fixed pool of individuals.
Now, rather than competing with one another to provide the most cost-effective care to the long-term care population, New York providers are essentially competing with one another to expand the pool of eligible seniors by signing up more and more old people as clients. Coca-Cola could try to poach Pepsi's customers in the United States, but it probably makes more sense to try to convert new cola drinkers in India and China. By the same token, it makes more sense to expand marketing and recruiting efforts to currently un-served populations of senior citizens—especially because patients with fewer needs are more profitable—than to do what Cuomo wanted and compete on efficiency for the existing pool of clients.
Long story short, a total failure.
At least that's how Bernstein portrays it. And certainly it is a total failure from the standpoint of Cuomo's fiscal policy objectives. On the other hand, what this amounts to is the Cuomo administration having engineered a substantial expansion of the welfare state. The seniors who are signing up for these "social adult day care" centers appear to be enjoying the experience. If the stated objective of the policy change had been to increase the pool of elderly New Yorkers with access to part-time assistance, maybe we'd judge the program a huge success. But this is a powerful reminder that in the health care sector it's very difficult for market competition to have the kind of impacts that policymakers want. Individuals differ enormously in both their health status and their subjective attitudes toward receiving health care services. The dominant competitive strategy is always to sign up the low-cost patients rather than to treat the high-needs patients cost-effectively.
An appropriately strong, competent, independent, and noncorrupt regulatory agency can oversee a well-designed competitive market but an appropriately strong, competent, independent, and noncorrupt publicly owned provider could do a good job too. In either case you face an identical challenge of building an effective public sector institution. There's no magic in the marketplace that will deliver the desired outcome.