June 2007

Who Killed Health Care? Is It Really Dead?

Health insurers, hospitals, doctors, and the government are fighting each other to gain control over the $2 trillion health-care system, and patients could be the losers in this battle for power and profit. In her new book, Who Killed Health Care? (McGraw-Hill, June 2007), Harvard Business School professor Regina Herzlinger argues that the health-care system can be redesigned to produce better, less costly health care only if individuals are allowed to take back control over the decisions that deeply affect their health and their pocketbooks. Herzlinger makes the case that consumers would be better off buying their own insurance coverage rather than allowing employers and government to decide what health coverage they must have--a coverage paid for by lower wages and higher taxes.

Could consumer-directed health care cure the problems plaguing the U.S. health system? What are the actual prospects for reform? Following Herzlinger's presentation at AEI on June 7, 2007, panelists discussed these and other issues. Panelists included Paul Fronstin, director of the health research and education program at the Employee Benefit Research Institute; Michael O'Grady, former assistant secretary for planning and evaluation at the U.S. Department of Health and Human Services; and Joel White, former staff director of the House Ways and Means Health Subcommittee. AEI's Robert B. Helms moderated the discussion.

Regina Herzlinger
Harvard Business School

Health care in this country is dead. Although we have good doctors, great technology, plenty of innovators, hospitals, and scientists, the $2 trillion spent on health care each year is a bad investment for the money. Uneven quality of care is rampant, especially in hospitals, where about 300,000 fatal errors are made each year. The high cost of the system is also bad for American business: in a globally competitive market, it provides another distraction that hurts companies. Perhaps the greatest symptom of the dying health-care system in this country are the over 40 million uninsured, many of whom earn over $75,000 a year (in the top 20 percent of earners).

In the health-care battle, there are victims (the American public and economy), heroes (physicians and researchers), and an iron triangle of villains: hospitals, Congress, and insurers. The hospitals have become oligopolies or monopolies, the sole source to which many people turn for health care, causing costs to skyrocket. Congress is also to blame, writing recipes for doctors to follow and restricting physician-driven innovation. Given that medicine is more art than science, and that doctors know best how to treat their patients, legislators' self-imposed prescriptive role is inappropriate and unnecessary. Finally, the insurers' promise of managed care (higher quality at a lower cost) has been difficult to achieve widely.

There are two main options for reforming health care: a single-payer system, in which the government is the sole buyer of all health care, and a consumer-driven system, in which individuals make their own health-care decisions. Consumer-driven health care is the ideal route: under such a plan, supply would change with varying demand, personalized services would be provided, and everyone would benefit.

Switzerland is an excellent example of a consumer-driven system that works. Under their scheme, everyone must purchase their own health care; those that cannot afford it receive a transfer of funds from their canton for that purpose. The insurers do not have health information on their buyers; rather, each company must participate in an insurance exchange, which covers risk. Money is taken from those that cover healthy individuals and given to those who cover the sick; in this way, the system is self-risk-adjusting.

The benefits of such a system are numerous. Far from being paralyzed by choices (as some say consumers would be), individuals would be able to make the decisions best suited to their lifestyle and concerns. Consumer-driven health care would also strongly promote personalized care within the system: personalized diagnostics and imaging could be purchased and convenient retail medical centers (such as CVS and Wal-Mart) could become the frontiers for management of chronic ailments. There would also be greater incentive to stay healthy. Switzerland, for example, offers five-year insurance policies: if an individual is as healthy or healthier at the end of the five years, he gets half of his money back.

We need to change demand for healthcare so that individuals can purchase their own coverage from tax-sheltered income. We need to redistribute money so that the poor can buy their own health care. We need a change in the supply of health care, unshackling our entrepreneurs and doctors so they can bring innovation and vision to the system. Where does the government fit into all this? The government's job is to institute tax relief, redistribute funds, prosecute fraud and abuse, and--at last--to get out of the way.

Paul Fronstin
Employee Benefit Research Institute

Managed-care health insurance is not dead quite yet. Currently, the United States has a system that could be called consumer-driven healthcare lite, full of PPO networks with negotiated discounts. Informed consumers are essential for real consumer-driven care. There must be government requirements for available data on performance. In this way, individuals can make rational decisions for themselves.

The Employee Benefit Research Institute, along with the Commonwealth Fund, conducted a study comparing those with high deductibles in their health insurance (consumer-driven care) with those using a comprehensive plan (a deductible under $1,000 per month). In general, those with consumer-driven plans disproportionately worked for smaller firms, had higher incomes and were older. Those with high deductibles were less likely to say they were "extremely satisfied" with their insurance or with their out-of-pocket costs. They were also less likely to say that their plans were easy to understand (although it is possible that these individuals had not been with their plans for as long). Those under the consumer-driven plans also responded that their plan made them consider the costs of their medical treatment.

Michael O'Grady
University of Chicago, National Opinion Research Center

The goal of health care is to protect consumers from unexpected, catastrophic health-care costs. The problem with this is that it also dulls the consumer's sense of what health-care services actually cost. High-deductible health savings accounts attempt to reintroduce price sensitivity for routine costs into the market while still keeping comprehensive protections in place.

Consumer-based competition has aspects other than price competition. Quality competition as well as access competition will come into play in a consumer-driven system. There is also a new trend involving competition for innovation in health care. For example, an artificial pancreas has been developed that is now being put through trials by the Juvenile Diabetes Research Foundation.

There is a price to consumerism that cannot be ignored. With choice comes responsibility and the ability to make bad decisions; in these cases, the individual is left with no one else to blame. The bad decisions of others also need to be considered: to what extent is our society willing to let others make mistakes?

The jury is still out on numerous issues, from the impact of individually purchased insurance to the need for government-mandated data publications on performance. But if consumers do not claim responsibility for their own health care, a crushing financial burden will result.

Joel White
Galen Institute

There are several important issues: how to change the aspects of supply and demand in the health-care system in order to reach a consumer-driven environment, what Congress has done toward this goal, and where we should go from here.

The culpability of doctors and patients in health-care problems has not been given much attention. These sectors have ceded their authority and allowed large coverage plans to take over the system. Hospitals are also to blame; nonprofits have hidden behind the tax structure that is meant to give them means to help the community; in the end, nonprofits provide less charity care than for-profit institutions.

Three basic changes in the health-care structure have been proposed today in order to reach a more consumer-driven system, the first of which is changing the tax code. Employer exclusion from taxes amounts to a $115 billion subsidy per year, leading to an explosion of expensive "Cadillac" plans. Unfortunately, there is no political motivation on Capitol Hill to change this inefficient and outdated result. We also need more transparency for an efficient market to function, both in terms of prices and quality. Finally, risk adjustment must be factored into any proposed system.

The main goals in the future must be increased transparency, readily available technology, abolition of the employer preferential tax benefit, more stringent charity requirements for non-taxed hospitals, and subsidies for those in need.

AEI research assistant Tal Manor prepared this summary.