Copyright © 2007 by Regina E. Herzlinger. Click here for terms of use.
Who killed Jack Morgan? The same people who killed health care.
As we have seen, the agents who were supposed to act on Jack's behalf sometimes acted for him, but all too often they did not. And they never consulted him about what he wanted and needed.
Because they did not, Jack Morgan is dead.
Yes, the U.S. health care system is a killer: it kills the people it was meant to keep alive, and it kills the U.S. economy, its hardworking wage-earners and taxpayers.
This system can be fixed. You and I can fix it by insisting that we take charge of it: not the HMOs that lost their soul, not the paternalistic U.S. Congress and HR staffs, not the millionaire nonprofit hospital CEOs and businesspeople, not the arrogant, self-serving Ivory Tower utopians, but you and me and the medical providers who take care of us.
We pay for health care. We need to take charge of it.
There is only one system that would have enabled Jack Morgan to live: one that would have allowed him to decide for himself how to spend his money. In this chapter, I describe the changes in demand and supply that will make consumer-driven health care (CDHC) happen, even for the poor and disabled. In Chapter 8, I analyze the evidence of the impact of consumer-driven systems elsewhere in the economy: the consumer-driven health care system in Switzerland, which has long used it, and the consumer-driven pension system in the United States.
I call the system that would have kept Jack Morgan alive consumer-driven health care. How does it work? Consumer-driven health care will not reshape the health care system because of some underlying magic in the free market. That view is as simplistic as that of the single-payer advocates who allege that governmental control will make health care cheaper and better.
Ideology does not transform how markets operate. Entrepreneurs and consumers do. Consumer-driven health care will work only if it makes basic economics happen—if it affects both supply and demand—and alters the way that consumers demand and providers supply.
Consider this hypothetical but very likely scenario of how the entrepreneurial innovations of consumer-driven health care would have kept Jack Morgan alive and at the same time lowered substantially the costs of his care.
When he was first diagnosed with kidney disease, decades ago, Jack Morgan was given an account with $40, 000 a year in it that he could draw down to buy kidney care, which was the average amount the federal government had spent on the kidney care needs of men his age at that time. He was legally required to use the money solely to buy health insurance that covered all financially catastrophic medical care and for any uninsured medical care needs. But if he spent less than $40, 000, he could keep some of the savings for his retirement or uninsured health care needs in a health savings account. The amount Jack received increased regularly as he aged.1
Jack was an able man, but he had been debilitated for years by the untreated symptoms of his disease (his HMO doctor had interpreted Jack's lassitude as depression rather than kidney disease), and he wanted some help in managing the illness. He looked around for neutral, authoritative advice on how best to use this money. He found it in a firm called "Kidney Care." The firm furnished Jack with an experienced nephrologist, who counseled him on his medical care options, and a nurse and a certified health advisor—a new occupation, similar to a certified financial planner—who helped him choose the insurance. The firm received payment for its services solely from Jack, so serving him was their only agenda. Their prices were reasonable; but if, for any reason, he did not like the firm, there were plenty of others available.
The nephrologist in Kidney Care advised Jack that many patients wanted transplants after a few years of dialysis and discussed with him the pros and cons of transplantation and its timing. Following guidance from his physicians, his nurse drew up a daily regimen to help him manage the disease and the diabetes and high blood pressure from which he was also suffering. She advised him to think about likely donors now.
She set up a personal medical record on which Jack could track his progress. All of Jack's doctors could access these data too. But Jack owned this record, not the doctors, and if he switched doctors, this information would be at the disposal of his new doctor too. The nurse communicated with him daily to see how he was coping with his challenging self-care regimens. Sometimes, when he got depressed and did not do everything he was supposed to, she gave him a pep talk. Once, when the depression deepened, she alerted his doctor, who referred him to a psychologist specializing in treating patients with kidney disease. Jack also joined a support group of people at his stage of kidney disease, organized by Kidney Care.
Jack called his nurse "my lifeline." The two of them mostly talked on the phone; but she would have used the computer to communicate with him or visited him at his home or at the dialysis center, as he preferred. She knew Jack's daughter well too.
The certified health advisor was a trained professional who helped Jack sort through a number of health insurance choices. Jack ultimately chose to buy insurance from a firm that focused exclusively on victims of kidney disease and that offered him access to a number of teams, each of which contained all the many different kinds of health care providers he needed to help him manage his disease—doctors, nurses, psychologists, social workers, and transport facilitators.
The team he chose was paid $35, 000 a year for providing everything Jack needed, including a transplant. He signed up with them for a five-year contract. They were not the cheapest team; but by looking at the audited information he had obtained about them, he determined that they clearly offered the best value for his needs.
An added appeal was that many of their providers were close to Jack's home. He no longer needed to travel for hours to reach his dialysis center. Last, Jack liked the long-term nature of the contract. It gave the team members an incentive to make sure that he was as healthy, if not healthier, in year 4 as in the first year. After all, they would be paid the same amount every year—so if he got healthier, they would earn higher profits. It was a classic win-win—he and the team were in a relationship, rather than on a casual date.
He understood that the team would benefit financially from his transplant. Despite the high costs of the procedure, it would make him so much healthier that it would pay for itself in two years.
His contract had clearly delineated escape clauses, so if Jack found the team did not deliver on their promises, he could easily cancel it. The contract also clearly stipulated that Jack needed to follow his end of the bargain and comply with the providers' recommendations or face financial penalties. If the arrangement did not work out, Jack could find many other teams. After all, many businesses would welcome a steady customer who would bring them $40, 000 in revenues, or more, each year.
When the time came for Jack's transplant, all the members of the team who had treated him and his daughter were like family. At this point in his treatment, they had all known each other for years. They knew his daughter loved mystery novels— Murder on the Orient Expres s was her favorite—so they gave her a selection of the world's best current mysteries. The lifeline nurse cried and gave Jack a hug when he emerged from the operating room. As all professionals would, they cared deeply about Jack. But in addition, because they were paid directly by him and because their results were regularly analyzed and published, they had every incentive to make sure that Jack was as healthy as possible.
In this consumer-driven system, Jack did not place his life in the hands of a big HMO or hospital that had lost its soul, or the good graces of the U.S. Congress, or the blessings of the Ivory Tower academics. No, he and his medical providers and advisors directly managed his care.
Jack would be alive today if he could have taken part in this consumer-driven health care system.
The first and crucial step in fixing our health care system is to give the Jack Morgans the $40, 000 tax free. That's right, $40, 000 tax free, the amount we currently spend on male end-stage renal disease victims of his age. The money comes with strings attached: he can spend it only on his medical care. (He can also use some of his savings for his retirement, as described above.) But the important point is that he is the one who decides how to spend it.
When Jack has $40, 000 to spend, the suppliers of kidney care will begin to think about him and his needs and how they can serve him best. They will no longer need to appeal to the government or to the HR people. They can give Jack what he wants: his kind of services, his kind of drugs, even his kind of transplant.
How would this work? Some providers might offer Jack a five-year contract that would pay them $200, 000, equal to $40, 000 a year over its five-year term. In addition to their normal professional motives, under this contract, the providers have substantial financial incentives to make sure that Jack has a transplant ASAP. After all, once he receives the transplant, at a cost of about $100, 000, his annual treatment costs will drop considerably. In financial terms, this early transplant has a payback of 2.7 to 3.6 years.2 And the providers also have a financial incentive to keep him as healthy as possible. After all, while the average kidney patient of his age costs $40, 000, the really sick ones cost much more and the relatively healthy ones much less.3
This consumer-driven provision of health care is novel in two ways: it is long term, and it is offered by an integrated team of providers. The long-term contract motivates providers to ensure that he gets what he needs to make him as healthy as possible, as soon as possible. Further, because the contract pays a fixed price to an integrated team that provides all the services that Jack Morgan needs, rather than fees to each of its separate parts, the current destructive turf warfare among doctors, hospitals, and drug companies, each of whom is paid separately in today's system, disappears. The team members decide jointly among themselves how best to achieve their goals.
What will protect Jack (and any one of us) against their ripping him off, giving him lousy, cheap care, treating him like a slab of meat?
Data. There are excellent measures of health status for end-stage renal disease that Jack could easily obtain: death rates, ability to perform normal activities of daily life, anemia, kidney function, lengths of wait for care, and satisfaction with the dialysis center, for example.
In this system, Jack controls the money. If he does not like the care he receives, he can take his money and go someplace else. Many providers would be glad to see a customer who brings them $40, 000 a year.
As the ramifications of the new system sink in, providers will start to compete for Jack's business by cutting their prices. If Jack is allowed to keep some of these savings in his health savings account, he will have additional interest in enrolling with those that give him the best value for the money.
In this system, innovators who have great ideas about how to get more value for the money will be able to enter the space without having to line politicians' pockets or to curry favor with insurers to ensure that they get favorable reimbursement.
How can they cut prices without sacrificing the quality of care? Some, for example, will inevitably provide more of the testing and preventive care that all too many current kidney disease victims do not receive. Others may opt for more frequent dialysis.4 And, in a consumer-driven system, you can say good-bye to the $1.7 billion insurance executive, the $25 million a year dialysis CEO, and the other bloated executive compensation.
In the next few chapters, I will describe the essential elements of this new consumer-driven health care system—the role of government, the role of business, and the kind of legislation that can make it happen. In this chapter, I will describe how a consumer-led system will enable future Jack Morgans, rich or poor, well or disabled, to live.
Stick with me. The language necessary to describe—and the detail necessary to really bring to the light—a system as complex and as vast as our health care system can be daunting at times. Presenting the problem, as I have thus far in the book, is easier to get across than offering the elements of the solution, as I intend to do. My goal is to motivate entrepreneurs and affect public policy. As you have read, there are many powerful special interests who do not want these kinds of changes; they would like to keep things just as they are. I don't want to skimp on the details or give short shrift to real-world evidence supporting the consumer-driven health care ideas.
With the consumer-driven system, Jack would be alive, costs would go down, and the innovators who create more value for the money could easily enter the system.
This system would give all of us more control over our choices of insurance and providers. But it would be of special value to those with chronic diseases and disabilities. When they are given the money currently spent on their behalf, providers will be motivated to develop new services and approaches to attract business, driving innovation and cost reduction.
After working on this concept for three decades and consulting closely with elected officials and other experts, I know that two simple pieces of legislation and one complex one can make this happen.
First, enable individuals who purchase health insurance for themselves to receive the same tax advantages they now get when employers buy their health insurance.
Harvard University uses my pretax salary to pay for my health insurance. Give me the same tax protection too, and hand over to me the $10, 000 to $15, 000 of my hard-earned money the university now spends to buy my health insurance. Do it for those on Medicaid too—give them the money.
The academic health care policy wonks and Beltway crowd will hold press conferences and write papers about tax neutrality, and interest groups will lobby to gain some tax advantage. But the debate boils down to two approaches: a tax deduction or a tax credit for my expenditures. The only difference between the two approaches is that the deduction is worth more to someone who is in a high tax bracket, while the value of the tax credit is independent of the tax bracket.
Second piece of legislation: require all providers and payers to publish audited price and outcome statements, and make the statements easily accessible to the general public.
When I buy a car, I want to know how good it is: miles to the gallon, safety, reliability. I am not interested in how the car was made. I also want to know about the business practices of the automobile dealership that sells me the car. Similarly, when I purchase health care services, I want to know how well my provider has treated the kind of problem I have in people who are like me, not whether he follows somebody's theory of how my health care should be delivered. And I want to know how good my health insurer is in following through with its promises.
We already have a great model for how to create this kind of transparency in health care in the government agency that creates transparency in the financial markets—the Securities and Exchange Commission (SEC), discussed more fully in Chapter 10. Naturally, health care providers and insurers will resist this proposal because, like most people, they do not want to have their performance measured and made public. They will come up with many reasons why it is destructive, infeasible, and bad for your mother, but the bottom line is that transparency is essential in every aspect of our lives. Nothing can work properly if those who create the goods and services are not measured on their performance.
The third piece of legislation is not as simple, but it is nevertheless essential: the providers must be paid more for treating those who are sick than for treating those who are well or relatively healthier.
This process is called risk adjustment. In its absence, if providers are paid the same amount for every class of patient, their economic incentive is to target the healthier patients and to avoid thesick ones. On the other hand, if they are paid appropriately for how sick the patient is, they may well have the reverse incentive and seek out the sick, specifically if they think they can reverse or diminish the progress of illness. Switzerland, Holland, and our own Medicare system already have considerable experience with health care risk adjustment.5
Risk adjustment can be accomplished by risk-adjusting transfers of funds to consumers or by risk-adjusting insurers or providers. Ifthe funds were transferred to consumers, the cross-subsidization of the sick by the healthy would become transparent; for example, I would learn that my health care expenses were only $2, 000 a year, but that I had paid $15, 000 for my health insurance. Thus, although risk adjustment of consumers motivates them to find the best value for the money, employers and governments may not be comfortable with such transparency. Employees may not be pleased to learn how much of their salary and wages has been used to subsidize the health care expenses of their sick coworkers. Risk adjustment of insurers would avoid this problem. Under this system, insurers who enrolled sickerenrollees would receive more funds, and those with healthier enrollees would receive less. But risk adjustment of insurers creates other problems. Insurers may retain too much of the risk adjustment for themselves and pass too little of it on to the providers. Risk adjustment of providers avoids allof these problems; but it will burden them with substantial additional information processing needs so they can track the severity of illness of thei patients.
Risk adjustment is best performed by a coalition of thoseaffected, rather than by the government. In Switzerland, for example, the insurers risk-adjust one another. Insurers perform risk adjustment intelligently because they know best how to detect and value the level of illness ofthe enrollees. They also know that if they do not make the risk adjustment process work fairly and smoothly, the government will supplant them.
Some governmental officials—like Massachusetts'former governor Mitt Romney and officials in Switzerland—advocate a fourth piece of legislation: a requirement that everybody has to buy health insurance. The Commonwealth of Massachusetts' novel universal coverage plan, for example, requires citizens to buy health insurance and subsidizes those who cannot afford it. The money for the subsidies comes from the funds once given to hospitals to pay for their "free care" to uninsured patients.
But this approach has its critics. Some object on the grounds of ideology. They argue that people should buy health care because they want to, not because the government forces them to do it. Others also question the practicality of enforcing this requirement: states that require the purchase of automobile insurance have virtually the same number of people insured as states that do not, for example.6
Health care draws utopian ideologists of all types. The single-payer crowd rhapsodizes about the transformative powers of government control. But simplistic ideology is not limited to single-payer advocates. Market-oriented adherents also exhibit it.
For example, President George W. Bush's administration asserted that the transformations of consumer-driven health care will occur solely through the implementation of high-deductible health insurance policies.7 They avowed that when people shop for health care services that are not covered by health insurance—from $1, 000 to $5, 000 in the typical high-deductible health insurance policy—they will restrict their usage without damaging their healthstatus. But this plan is only partially consumer driven because it focuses solely on changing demand, which is only part of the picture, and does not allow for the impact of a change in demand on the supply of health care services. If hospitals and other providers of health care services are not motivated to change their ways, the change in demand will accomplish little. After all, the potential impact of high-deductible policies in transforming the supply of health care is limited. Once the deductible is met, most catastrophic expenses are fully insured. And it is the sick who account for thebulk of health care costs.
To be fair, the Bush administration was partially correct—high-deductible health insurance policies, in which the enrollee pays for the first $1, 000 to $5, 000 of health care expenses out of her own pocket, unquestionably lead to lower health care expenditures. For example, a 2006 four-year study of 1.6 million health insurance enrollees found that costs increased by only 3 percent from 2002 to 2005 among those enrolled in high-deductible plans. 8 These cost controls were occasioned by reduced use of hospital emergency rooms. Yet high-deductible enrollees with chronic diseases either maintained or improved their health status.9 High-deductible policies are also a good choice for the uninsured, primarily because those policies cost so much less than traditional policies yet provide insurance for financially catastrophic events.
But high deductibles are not for everyone. After all, if deductibles are not adjusted for income, the average American household, whose after-tax 2004 income was around $45, 000, may well struggle to pay a $2, 000 deductible.10 (On the other hand, the health savings account will enable low-income people to accumulate some much-needed assets for uninsured care.)
High-deductible health insurance policies are one important choice in a consumer-driven system, but they cannot be the only choice. Consumer-driven markets rely on considerable choice, not a choice of one. Consumer-driven health care can improve the productivity of health care only through many varieties of new insurance policies that are tailored to your needs and that increase the health care system's responsiveness to individuals. That is, by changing the form of consumer demand, consumer-driven health care will change supply.
Consumer-driven health care will encourage three revolutionary innovations in the supply of health care: (1) Health care focused factories will bring specialists and generalists into one integrated "stop-and-shop" system of care. (2) Consumer-based medical records will create one information access point for patients and providers. (3) Medical technology will be personalized for the needs of individual patients.
We observed two of these three changes—focused factories and a personal medical record—in the scenario describing Jack Morgan's new consumer-driven care. As we have seen in Jack's case, consumer-driven insurers will bundle these innovations. For example, victims of genetically linked diseases, such as diabetes, may be offered multiyear policies that feature focused factories and personalized medical technologies, supported by integrated information records.
Below I will explain these three innovations in some detail because they are the heart and soul of a new system that is about consumers and doctors finally being in charge.
We organize our current health care system around health care providers and not around the needs of users. The result is fragmentation of care that directly and negatively affects the welfare of patients and the costs of the system.
The 20-plus million diabetics in the United States illustrate the problem. Many suffer from several diseases at the same time. Among diabetics, nearly half also suffer from high blood pressure and up to a tenth from asthma, heart disease, and behavioral problems. 11 Diabetics require a team that devises and provides appropriate plans for their complex medical care—endocrinologists, cardiologists, nephrologists, dermatologists, podiatrists, and behavioral support specialists, among others. Yet even though this integrated team represents the most sensible way to deliver treatment to diabetics, most victims of the disease cannot find it. Instead, they are treated by many different specialists spread out in several different offices and practices. As a result, many diabetics receive inadequate care. For example, only 36 percent of fully insured elderly diabetics had a crucially important test that measures long-term levels of sugar in the blood. These abysmal results are even worse for African-Americans and poor people.12
This kind of fragmentation of care imposes devastating consequences on patients' health and, ultimately, on costs. An integrated regimen of diet and drugs has achieved impressive results, quickly, through improvements in the signs of diabetes, including greatly reduced absenteeism, restricted activity days, and hospital stays.13 Improvements in health would likely significantly reduce the direct costs of diabetes, $132 billion in 2002,14 the billions more wasted in lost days of work, and the yet another $54 billion lost through premature death and disability.15
The mismatch between the needs of patients with chronic diseases and disabilities for integrated care and the fragmented structure of the current health care system leads to devastating medical and financial results beyond diabetes.16 The economic consequences are suggested by the magnitude of the expenditures. Only five diseases—mood disorders, diabetes, heart disease, hypertension, and asthma—accounted for 49 percent of total 1996 health care costs and causedan additional $36 billion in work loss.17
We are blessed with excellent individual doctors, nurses, and researchers, but in the absence of integrated care, too many patients fall between the cracks. Integrated teams of health care providers, organized around the needs of victims of chronic diseases and disabilities, such asback pain, and other undertreated populations, such as African-Americans Native Americans, and women, will lead to a better, lower-cost health care system.
I call these integrated teams "focused factories" because they resemble current focused, mass-customization factories thatachieve higher-quality, lower-cost results by inverting conventional notions of manufacturing excellence. Old-economy manufacturers reduced costs by producing huge volumes of goods in cavernous, assembly-line factories. Individual workers created small components of the end product. New-economy mass-customization factories, in contrast, tailor products to specific customers in flexible factories so small that workers can see the whole before their eyes. One mass customization factory, for example, has been able to increase quality by 55 percent while reducing work space and capacity by 50 percent or more.18
I call them "focused" because they are organized to meet special consumers' needs. But a more important aspect of this innovation, one that will be inspired by consumer-driven health care, is suggested by the word factory. Factories scale up the work of brilliant individuals and make it available to all of us. The Ford factories scaled up Henry Ford's brilliant views on how to make cars; Microsoft scaled up Bill Gates's ideas about how to operate computers; and General Electric scaled up Thomas Edison's visions of how to light space.
Many in health care believe that the "factory" process, that of scaling up the ideas of brilliant innovators, cannot be applied to health care. But they are wrong. For example, many of our best treatment facilities, such as the Texas Heart Institute, employ the scaled-up ideas of individual doctors such as Dr. Denton Cooley, its founder. Cooley, a brilliant, daring heart surgeon, is also a brilliant manager who trained his disciples to perform his kind of cardiac surgery and created an organization that would support his work.19
Toronto, Canada's Shouldice Hospital provides such aclassic case study example of this scaling-up process that it has been widely used in the Harvard Business School and similar schools to teach how to scale up service organizations. The Shouldice Hospital performs a surgical technique for hernias that was developed by its founder, Dr. Edward Shouldice. He trained the surgeons who work in the hospital in the technique and designed a hospital that would support it. The hospital, for example, features beautifully landscaped grounds with gentle slopes so that newly operatedon patients can walk easily on them. A smiling nurse guides them through a daily aerobics routine. This ambulation and exercise speeds the healing process. You might think that Shouldice Hospital's focus on the patient would raise costs. But it is substantially cheaper than neighboring everything-for-everybody hospitals. The surgeons' exclusive focus on one surgical procedure increases quality; the hospital's focus reduces cross-infection rates; and the patients' active healing process speeds and improves recuperation.20
Brilliant entrepreneurial doctors, such as Denton Cooley and Edward Shouldice, and other medical personnel, will likely originate health care focused factories. Like them, the entrepreneurs will not only innovate new focused treatment protocols but also scale them up so that they can be made widely available.
A consumer-driven health care system will naturally inspire focused factories because consumers will seek them out. For example, diabetics who can freely choose among many differentiated health insurance products will likely opt out of an everything-for-everybody insurance plan system, choosing those that offer diabetic focused factories that provide integrated, demonstrably excellent diabetic care at a lower cost. These types of consumer-driven health insurance policies will no longer pay every provider the same price for a limited range of covered services. Instead, they will pay teams of providers the prices they quote for the bundle of services their team members have jointly designed. With this new reimbursement, focused factory innovators will avoid the economic consequences imposed by current, fragmented reimbursement.
When it comes to health care, the solutions conventionally suggested for the problem of fragmentation differ in scale from focused factories and instead hark back to the factories created at the birth of theIndustrial Revolution. Most experts favor massive consolidation of health care through large physician group practices,21 hospitals vertically integrated with physicians and insurers,22 and other large-scale integration schemes.23 What these utopians ignore is theinfeasibility of their recommendations—any kind of integration is immensely difficult to pull off; the larger the scale, the larger the problems encountered.24 For that reason, we see very little vertical integration elsewhere in the economy. For example, retailers rarely manufacture their own products. Indeed, many of the companies that design and market brand-name products, such as Dove soap, Calvin Klein jeans, and Coca-Cola, do not manufacture them.25 Delltoo relies on external suppliers, using its excellent information systems todeliver a customized product.26
The failures of vertical integration elsewhere led me to predict in my 1997 book, Market-Driven Health Care, that the then-prevalent vertical integration of hospitals and insurers with physicians, toprovide everything-for-everybody health care, was a recipe for disaster. In one area of the health care system, for example, the number of physician practices purchased by hospitals jumped from 6,600 in 1995 to 19,200 in 1998, growing at a 30.5 percent annual rate.27 The results? In 1998, hospitals lost an average of $80, 000 per physician.28 Physicians' productivity decreased by 15 to 20 percent two years afteracquisition. Low growth in referrals of new patients to the acquiring hospital failed to offset these losses.29
Hospitals that integrated with health plans experienced difficulties too. Market-Driven Health Care spotlighted the conflictsof interest and loss of focus that the then-hospital firm Humana encountered when it created an insurance division. While Humana's hospital division wanted to maximize occupancy, the insurance division wanted to minimizeit. Ultimately, the firm shed its hospital division to resolve this conflict.30
Small wonder that by 2002, an industry journal noted, "Health-care organizations spent a good deal of 2001 taking apart what they had previously pieced together, " 31 and a 2004 survey found that many of the integrated delivery systems were disintegrating, spurred by mounting losses from operations and anemic profits.32
Because health care focused factories are more modest in scale than the integration schemes typically recommended, they represent more feasible solutions. Their modest scale enables an integrated view of thepatient. Yet their scale is not so modest as to make their creation financially impossible or their resources inaccessible. For example, the expenditures on diabetes in an average state would enable the construction of a number of 300-bed hospitals and hundreds of community facilities.33
The revolutionary promise of focused factories is indicated by one of their earliest manifestations—specialized hospitals. Although these are not true focused factories, as they concentrate on procedures rather than diseases, they nonetheless, do indicate the benefits of specialization with their increased quality and lowered costs.34 The massive, effective resistance of status quo hospitalsto specialty hospitals also indicates why focused factories can be formed only in a consumer-driven system.
The need for a personal medical record that contains the results of every medical event of every person, from a doctor's checkup to a kidney transplant, is widely acknowledged. I first urged it in a 1978 article, for example.35 Yet, nearly 30years later, these records still do not exist, resulting in errors of commission—for example, adverse drug interactions from prescriptions by physicians unaware of others' recommendations—and omission—lapses in appropriate medical intervention.36
Currently, data are stored in the warehouses of providers and insurers, who lack incentives to integrate them. They keep only those data needed to support the bills sent to insurers. The radiolo-gist who has records of your X rays and uses them to support his or her bill may never share them with your family doctor. Neither the radiologist nor your family doctor is paid to send or to receive your X rays from the other.
In a consumer-driven health care system, on the other hand, consumers will demand these records to help them manage their health andinsurance, and innovative providers will respond. Intuit, for example, which developed Quicken to fulfill consumer demands for integrated financial records,37 has already entered the consumer health information market. As this is being written, a consortium of several large U.S. corporations, including Wal-Mart and Intel, has announced their intention to create a digital database of their employees' health records. Their goal is to "cut costs by having consumers coordinate their own health care among doctors and hospitals." Craig R. Barrett, Intel's chairman, calls portable electronic records "the building block to modify the U.S. health industry" into a more responsive and cost-conscious system.38
Personalized medicine—medical care that is tailored to your unique needs—can be applied to both drugs and devices. By drawing on advances in genetics, doctors, hospitals, and research units willdis cover and store in databases each patient's genetic variations and howthose affect their need for specific drugs and ability to metabolize them. For example, 40 percent of asthmatics respond differently to the same medicines,39 and drugs have already been tailored to mutations that cause some diseases.40 Personalized medicine also includes medical devices that enable monitoring of the body's function. For example, one implanted device enables the victims of congestive heart failure to monitor their condition automatically.41
Personalized medicine promises to increase national productivity by preventing or curing disease. Nevertheless, some of the health policy experts we met before in this book dismiss innovations in personalized medicine as so costly that they will require rationing. One study concluded, for example, that "in an era of finite resources, the question is how to balance providing access to as many of these innovative, life-saving drugs as possible without increasing premiums beyond (the) ability to pay."42
The view that we cannot afford personalized medicine ignores the effects of increasing costs in one sector on the overall costs of health care and its productivity. This analytic framework is unique to health care. We do not use such narrow views of the impact of high technology, for example, because most of us recognize that increased computerization expenditures increase productivity. Although we spend more on computers, the entire economy will improve as a result.
An increasing body of evidence supports the productivity gains to be had from improvements in medical technology. One broad evaluation documented productivity and quality of life benefits that exceeded the additional costs of new technologies for heart attacks, low birth weight infants, depression, and cataracts.43 Similarly, studies have revealed that drugs frequently cause overwhelming reductions in hospital costs.44 Not every new technology is cost-effective; but taken as a whole, new medical technologies create benefits in excess of their costs.
The American people are unlikely to accept the experts' doubts about technology. Americans are staunch supporters of new technology; we embrace it, and large sectors of the population are knowledgeable about it. We persist in what policy experts view as a muddle-headed belief that payment for technology is feasible.45 To meet consumer expectations, some consumer-driven health insurance policies will incorporate the personalized medicine that could significantly improve health care productivity and allow consumers to judge for themselves the value for the money that personalized medicine creates.
Consumer-driven health care will create substantial innovations in the supply of health care. Consumers will be offered these innovations through new types of health insurance policies.
As I've tried to make clear throughout the book, thecharacteristics of control, choice¸ and information to guide provider selection are sadly lacking in most current healthinsurance plans. The trends tell it all: since 1996, many employers have narrowed the choices. By 2005, 90 percent of all employers and 93 percent of small ones offered only one plan.46
But even when employees are offered a choice of more than one health insurance plan, they find the "choice" to be largely illusory.47 Large employers' managedcare plans are remarkably standardized—containing the same benefits, offering virtually identical coverage, reimbursing providers for a limited array of traditional services, generally paying all local providers at similar rates or discounts, and lasting for only one year. The only difference among them is found in the ease of accessing the providers—restrictive plans where consumers must contend with "gatekeepers" come at a lower price than the looser ones.48
One frustrated buyer notes that three managed care plans have most of the market, and their plans have less than 10 percent variation.49 Employees complain too. In one Democratic Party poll,64 percent agreed that "individuals are best able to choose the health care coverage they want.…[T]hey should have that option and not have totake just what…their employer provides."50
Not surprisingly, Americans so strongly dislike the health insurance industry, which gives them virtually no choice, that consumer satisfaction with the U.S. Postal Service exceeds that of health insurance.51
These one-size-fits-all insurance plans leave important needs uncovered. Some of the many new kinds of health insurance policies that a consumer-driven system will offer are described below.
People like Jack Morgan with debilitating, chronic diseases, such as kidney disease, AIDS, diabetes, or asthma, frequently cannot find integrated care because individual providers are paid for fragments ofcare. Payments for fragmented care cause a great many problems: they deter innovations that would integrate care and they encourage turf warfare. As we saw in Jack Morgan's case, the drug companies appear to have out-lobbied the doctors in getting an ever-bigger share of the money spent on kidney care, and because patients don't pay directly, they lack the clout to get the type of medical care they really need, as opposed to what the government says they need.
While providers wage turf warfare chronic disease patients must wend their way from one provider to the next to obtain full treatment. Focused care providers have little chance to compete and survive, despite their ability to provide better comprehensive care. When Rush Presbyterian's CEO instituted a comprehensive facility for AIDS—with all the many services that AIDS victims needed, including primary and complementary care, diagnostic facilities, and behavioral support—he confronted the irony that the healthier his patients, the lower their utilization of hishospital, and the worse his bottom line. In today's topsy-turvy system, he had to find a substantial endowment to compensate for the losses he incurred from improving the health status of AIDS patients.52
In a consumer-driven health care system, provider teams will name their price for bundles of care they create, reversing current, insurer-dictated prices for fragmented care and enabling consumers to reward excellence. The sick will, thus, have access to integrated teams. Forexample, Jack will be offered a bundle of kidney care services from teams that offer him everything he needs for appropriate care for his disease. Theteam members will jointly figure out what treatment and care options are best for Jack.
In contrast, under today's system, what is good for the transplant surgeon is not so good for the dialysis center or for Amgen. After all, once Jack receives a transplant, he will not need so much dialysis or epo, if any. But if these providers are all members of the same team, the aim will be to maximize their joint profits by improving Jack's health. The healthier he is, the better off they are.
These "focused factory" bundles will likely be offered through multiyear insurance policies. These kinds of policies will appeal to the sick people who now struggle to comply with their daunting, painful, minutely detailed, quotidian self-care regimens, such as diabetics' enduring up to eight painful sticks per day to determine the level of sugar in their blood. Despite the challenges of managing their complex illnesses, they typically cannot find psychological support to help them maintain their health. Insurers may not offer such support because, although the economic rewards of helping sick people adhere to their demanding self-care regimens are well known, the payoffs derived from supporting people tohelp themselves are thought to be generally long term.53 Because many insurers lose 20 percent, or more, of enrollees annually, they lack incentives to invest in health promoting activities that may benefit their competitors in the future.54
In a consumer-driven health insurance system, multiyear insurance policies will motivate insurers to provide support that enables enrollees to comply with daunting self-care regimens over the long term.
The overwhelmingly most common answer to "What do you think is the most important reason to have health care insurance coverage?" is "to cover the costs associated with major, life-threatening illness or accidents."55 Yet health insurance does not protect people against financial catastrophe. Despiteall the money we spend on insurance coverage, middle-class Americans are left to pay for uninsured, expensive medical events out of their own pockets, such as drugs and devices labeled as experimental and medical events that cost more than $1 million, the maximum most insurance policies will pay. In 2001, 11 percent of households spent 10 percent or more of their income on out-of-pocket health care costs,56 and 27 percent of bankruptcy filings resulted primarily from medical debts.57 Further, 15 million, or more, Americans pay for the uninsured medical needs of their parents, such as the $74, 000 of annual costs for their loved ones' nursing home care.58
In a consumer-driven health care system, enrollees will be able to buy insurance coverage for desired benefits, such as catastrophically expensive care, including long-term care, whose costs exceed $1 million.
A consumer-driven system will also help the employees and employers who now lose work time and wages because of perverse incentives in the present insurance system. Unscheduled absences for medical reasons, many caused by the present fragmentation and lack of consumer focus in the health care system, accounted for as much as 60 percent of the cost of illness in 2004.59 Insurers and providers may be rewarded for increasing this problem. For example, because the surgical time for an open gallbladder repair can be substantially lower than thatof a minimally invasive one, insurers and providers may direct patients toward it. Yet those who have minimally invasive surgery return to work much faster than those who endure open procedures. What benefits the employer and employee does not necessarily benefit insurers and hospitals.60
In a consumer-driven health care insurance system, policies will highlight convenience from the consumers' perspective, permitting them to trade off the cost of the more convenient care, if any, against the value of their time.
Finally, the doctors who are shortchanged by today's insurance system in which the insurer dictates coverage and price will be able to regain some measure of control over the practice of medicine in a consumer-driven system.
Doctors are so defeated by the present insurance system that a majority of them have lied to insurers so that their patients could obtain the medical care they need. Although they worried about the consequences, physicians overwhelmingly believed that "today, it is necessary to game the system to provide high-quality care."61 And they surely resent the fact that insurers often pay the efficient, skilled, and compassionate doctor the same as her slothful, unskilled, or indifferent colleague.62
In a consumer-driven health care system, providerswill be free to create focused factories and to name their own prices. To be sure, providers will face increased risks with this new pricing system. Consumers can either accept or reject these newly price-differentiated offerings. But consumer-driven health care will create a corresponding benefit: the doctors will regain the freedom to provide the kind of medical care they feel is appropriate.
Whenever we contemplate something new, we give it a unique face and shape in our mind's eye, one that reflects our life experiences and world views. When I read a book that interests me, for example, I picture the protagonists clearly. My personal portrait is so vivid that I am typically disappointed when I see or hear a media version of the work. The actors rarely conform to my vision.
Joseph Fiennes was Shakespeare in the film Shakespeare in Love. The slim, darkly handsome, foppish Fiennes is a beauty, no question, but Shakespeare? Forget about it. My William Shakespeare is sensuous, greedy, brilliant, and sly, replete with a reddish beard, gold glints within it, who manipulates his identity, toying with his public. He cloaks his genius under the guise of a common man.
I have a vague mental picture of Shakespeare's appearance from the common image of a Van Dyke–bearded man who resembles a corporate executive—stout, well-groomed, bluff. But my mind has cut a very different picture of how the world's greatest wordsmith would look. To me, great poets, like Shakespeare, look foxy—sly, incisive, and secretive—not like golf-playing executives.
So it is with consumer-driven health care, and with the groups that oppose it. They visualize it through a filter woven by their preconceived notions.
One such filter is used by the academics. Like overly protective parents, they simply cannot accept the idea that consumers can function without their oversight. Viewed through their filter, solo consumers in the health care market are vulnerable and timid. They must be protected and informed by the technocrats' superior knowledge and strength. Another filter is used by status quo advocates, those who flourish under the present, employer-based system. We have met them all in this book—the HR crowd, the Congress, the HMOs, and the hospitals. Although their motives are professional, they must also worry that consumer-driven health care will upset their cozy, lucrative apple cart. Yet another filter is that of the universal health insurance ideologues, who typically pair access to health care with control by a central government. Looking through this filter, they likely fear that decentralization of health insurance purchasing to individuals will undermine their goals. In their world view, the ideal purchaser of health insurance is a government; large employers are next best; and a decentralized market is the nightmare that keeps them up at night.
These three groups have disseminated a number of scare stories intended to diminish the adoption of consumer-driven health care. They allege that CDHC will favor the rich; screw the sick and the poor; lead to the desertion of health insurance by employers, with venal firms enteringthe market; and create even worse problems than we currently have in accessing the system.
Let's take a look at a number of these more widely promulgated stories and lift the filters that shape them.
According to the class warfare scare story, consumer-driven health care will stratify the market, so that poor people will receive much worse health care than the rich and powerful. Exponents of the class warfare story typically espouse a classic academic solution for achieving equality—a government-controlled system with standardized benefits, overseen by selfless, superbly able elites, namely, themselves, whose sole interest is in protecting us.63
The class warfare story is based on three false assertions. The first is that the rich obtain better health care than others. But how do the rich know that they have received better health care? Sure, their country club buddies who are doctors or hospital trustees may assure them of the fact; but do they have any data to back up their assertions that their doctor or their hospital is simply fantastic? No. One analysis of the subject found no such differences. And the analysis required back-breaking compilation of data because the quality evaluations that we can readily obtainwhen we are buying any other consumer good are notable for their absence inhealth care.64
The other false assertions in the class warfare scare story are that good-quality health care is more expensive than poor-quality health care and that suppliers are interested in serving only the rich and will not innovate to reach the other, much more numerous part of the population. These assertions are mistaken too. High-quality health care—integrated, wired, and personalized—often costs less than poor-quality health care. As consumer-driven health care increases quality, more health care will be available at a better price. Further, suppliers are vitally interested in serving the large number of consumers who are not rich.
The automobile industry provides a good example of these points. First, consumer pressures forced continuous improvements in automobile quality. In 2001, for example, problems in five-year-old cars diminished by 9 percent.65 As cars became better, they also became cheaper. Car manufacturers who improved quality also reduced costs.
Automobile manufacturers focus on innovations primarily for the middle-class market. Paralleling their quality and price improvements was a narrowing of the gap in quality between the best car and the average one. For example, in 2000, 88 percent of the cars tested for safety by the government were in the top two categories, versus only 31 percent in 1979.66 Although a top-of-the-line Mercedes costs substantially more than a Toyota, by 2005, Mercedes had more quality problems than the average car.67
When health care is consumer driven, it too will produce better, cheaper services, and the quality differential between the best andthe average will narrow. All the options will deliver safe, effective health care services, just as all of today's cars meet basic consumer and societal needs for safety, reliability, and fuel efficiency. This is not to say that all differentials will be eliminated. To the contrary, distinctivefeatures will fulfill different consumer preferences. For example, althoughthe retail stores Wal-Mart and Target both successfully serve the discount market, they serve it in different ways. Wal-Mart caters to the rock-bottom-price crowd, and Target serves those who are willing to pay a little more for cutting-edge style.68 Similarly, asquality improved and costs dropped in the automobile market, choice increased from 140 models in the early 1970s to 260 in 1999.69
Similar differentiation will occur in consumer-driven health care.
A frequent image painted by the academics is of a child cast out into a mystifying health insurance market, like a babe innocently entering a haunted house. Fierce creatures jump out—health insurance policies offered by venal, fraudulent vendors. Consumers lose their tax protection and wander about aimlessly, futilely, without a map or a sense of direction—only to emerge diminished by the experience, their health insurancethreatened and their confidence shaken.
This image was invoked, for example, when Xerox announcedthat it hoped at some time in the future to give each of its employees $5, 000 to $6, 000 to buy health insurance. "This could totally unravel American health care, " noted one booster of a government-controlled model in response to the proposal. A chastened Xerox hastily retracted its tentative plans.70
This scare story misrepresents the consumer-driven health care movement in two ways. First, it sets up the frightening prospect of hundreds of millions of individuals futilely shopping for health insurance in a market that is not prepared to handle them. Second, it asserts that consumer-driven health care will cause the loss of the tax-advantaged status of corporate health insurance purchases.71
Neither is valid.
For the employees with health insurance, consumer-driven health care will initially be implemented primarily under the employer's umbrella. Says the CEO of the Pacific Business Group on Health, a consortium of large employers: "Virtually none of our members is looking at [consumer-driven health care] in terms of capping financial contributions and walking away."72 The corporate umbrellas are the appropriate home for consumer-driven health care initiatives because employers have the infrastructure to nourish and support the small, innovative health insurance offerings that could otherwise get lost in the vast consumer ocean. But as these products and the measures of their performance mature, they will be offered to individual consumers as well. The uninsured will be served by large insurers; Internet-and phone-based marketplaces; and state-run markets, like those in Massachusetts, described more fully in Chapters 9 and 11.
The history of mutual funds, the innovations that enabled consumer-driven investment in financial assets, is instructive in projecting the likely dissemination of consumer-driven health insurance. The employers who adopted 401(k) plans were a key element in the initial success of mutual funds. For example, in 1976, when the first indexed, consumer-oriented mutual fund was introduced for investors on the New York Stock Exchange, it met with a poor reception, and its founder was portrayed as a wild-eye zealot.73 But as 401(k)s under a corporate sponsor became widespread and as excellent evaluations of mutual fund performance became widely available, the consumer-driven part of the industry flourished. By 2006, half of U.S. households owned mutual funds. Although most consumers were introduced to these investments through an employer-backed defined-contribution (dc) plan, nearly 40 million households now own mutual funds purchased outside the employer's site.74
As for the consumer-oriented fund company that introduced the first index fund, its name is Vanguard. By 2006, it controlled about a trillion dollars of assets, and its brilliant founder, John Bogle, was appropriately lionized.75 (In the early twenty-first century, a number of mutual funds were found to have permitted special trading privileges to large investors, such as union executives. I view the fact that these activities were discovered as an indication of the vigor of a consumer-driven industry. Special privileges to the wealthy and powerful are granted in health care too, especially in single-payer systems, but we do not hear of them.)
Consumer-driven health insurance will likely follow the mutual fund pattern. Consumer-driven health insurance plans will be introduced under the corporate umbrella. With time, as the industry matures, highly differentiated insurance products will migrate from the corporate to the individual consumer market, along with reliable evaluations of their performance. Some of these new health insurance products will likely appeal to those who are now uninsured.
As for the assertion that consumer-driven health care will cause corporate health insurance payments to lose their tax-advantaged status, that is simply a canard. Employees are currently exempted from income taxes on their health insurance payments because the tax code does not consider them to be income. If the employer continues to pay for the employees' choice of health insurance, consumer-driven health care will not affect this situation. And, with time, the tax exemption will pass to the individual. President George W. Bush had already proposed it in 2007.
A variant on the haunted house story is that consumer-driven health insurance will cause individuals to lose the negotiating clout of big groups in determining insurance prices. But if the clout of group purchasing were actually so powerful, every consumer prod-uct—cars, homes, and food—would be purchased under the employer's group-purchasing models. The Achilles heel of group purchasing is that it inhibits product differentiation. The fundamental tenet of a market-based economy is that competition among differentiated products is much more effective in controlling costs than the clout of group purchases.
The screw the sick story would have us believe that under consumer-driven health insurance, sick employees will no longer be able to buy affordable health insurance. This contention defies simple mathematical reasoning. Presently, most large employers pay the actual health care costs incurred by their enrollees.76 The role of insurers is solely to administer the plans for the firms. This process is called "self-funding." The underlying pool of self-funded employer health care costs is unaffected by the insurance pricing formula. The self-funded employers who currently pay for the care of their employees will continue to do so under consumer-driven health care.
Indeed, the screw the sick scare story is exactly wrong. New consumer-driven health insurance will help the sick with innovative products that are designed for their special needs. Currently, as I have discussed throughout this book, health insurance fosters a system that is not for the sick. This fault can be traced directly to the absence of risk-adjusted payment. The risk adjustment of insurance prices and provider payments that is inherent in instilling competition through consumer-driven health insurance will correct this failure. Adjusting prices to the enrollees' level of sickness will reward those who attract sick enrollees by paying them more and paying those who attract well enrollees less. It is precisely by undermining the homogenized pricing of the present insurance system that the sick will, finally, receive the excellent focused care they deserve.
Some ask of consumer-driven health care initiatives, "Aren't they just obscuring a disappearance of benefits?" The disappearance of the health insurance story argues that consumer-driven health care is a wolf in sheep's clothing. Employers will use it to backout of paying for health insurance benefits. And employees will opt out of buying health insurance. They will insure themselves only if they are sick.
This scare story is promulgated mostly by those who worry that consumer-driven health care will undermine access to health insurance. Labor unions are among the most ardent advocates of the disappearance of health insurance scare story.77
But this scare story too is dubious because most employers do not want to back out of providing health insurance. For example, a detailed analysis of the correlation between the returns of small business owners and their health insurance benefits concluded: "The business's owner and the employees are in the venture together;…they jointly prosper and they jointly fail."78 Employers understand that health insurance is a highly valued corporate benefit. For example, as one expert notes, a Generation Xer "who believes that the employer is not making a commitment to him, will leave."79
Employers' willingness to offer insurance is influenced primarily by their profitability. Notes one study: "As long as the economy is strong, employers do not cut back on benefits."80 Indeed, since 1993, as the U.S. economy prospered, the number of workers who received health insurance through their employers steadily increased, and the employers' share of premiums increased from 69 percent in 1987 to 76.4 percent in 2000.81 But since then, as the economy declined, the percentage of those with job-based health insurance slipped to about 60 percent in 2004.82 The employers who did not offer health insurance typically could not afford it. By far the lowest insurance rates were in the trade and personal service sectors, whose paltry profit rates ranged from a loss to a maximum of 2 percent.83
Contrary to the disappearance of health insurance scare story, the lower-cost, high-deductible insurance options that the consumer-driven health care movement has already created may expand or maintain coverage. In tough economic times, employers are more likely to offer consumer-driven health insurance products than conventional ones because of their lower costs. The availability of this lower-cost option may even keep them from giving up the health insurance benefit.
A variant on the disappearance of health insurance theme is that employees will no longer insure themselves under consumer-driven health care. Instead, they will prefer to take the money over the insurance and will insure themselves only when they are sick.
But once again, the allegation defies logic. First, in a consumer-driven health care system, everyone will be required to buy insurance that, at a minimum, protects them against financially catastrophic medical events. Further, most people want to buy health insurance. The main obstacle is its high cost. By 2005, more than a quarter of the uninsured declined their employer's offer of health insurance, likely because it cost too much.84 When Blue Cross of California offered 2002 plans that cost as little as $1, 400 a year for a mother and her children in Los Angeles, 800, 000 people signed up in one year alone. High-deductible health policies also expand the opportunities for the previously uninsured who work for firms of 2 to 50 employees. Blue Cross of California's FlexSCAPE program, for a good example, was priced at only $80 per employee per month ($960 a year). This feature created budget predictability and an affordable price for employers who might otherwise hesitate to offer insurance.85
As these examples suggest, rather than diminishing the number of people with insurance, consumer-driven health care will likely increase that number by offering innovative, lower-cost insurance policies.
The limited access story, promulgated by hospitals and the single-payer crowd, tries to tell us that consumer-driven health care will reduce choice of providers and insurers.
The allegation that consumer-driven health care will limit access to providers is promulgated primarily by the hospitals because they are fixated on a bricks-and-mortar version of health care delivery, one that is anchored by a megalith hospital. In a consumer-driven health care system, in contrast, focused factories for chronic diseases will integrate different providers in many different locations—ranging from the home for continual support, to the community for checkups, to a centralized tertiary care facility for complex, high-end care.86
The allegation that we cannot afford this decentralization of care is belied by the magnitude of the expenditures on chronic diseases. They are so enormous per person that a relatively small number of chronically ill individuals can justify extensive decentralization. For example, the $132 billion spent in 2002 on the care of individuals with diabetes could support, in an average state, one 500-bed hospital, five 200-to 299-bed hospitals, and 30 community facilities at a cost of $10 million each. This enormous delivery system would be entirely focused on diabetes and the manyother diseases associated with it. It would largely replace the current inadequate system in which patients must assemble their own care teams.
As for access to insurance, those who advocate a single-payer system question the explosion of choice of insurance under consumer-driven health care. The Commonwealth Fund worries that as the choices offeredto workers grow, patients are likely to be spread out more thinly across providers, meaning less volume for each. There may not be enough volume to allow providers to continue offering discounts and they may not be willing toparticipate at all in health plans that have large provider networks.87 In other words, increased choice will lead tohigher costs and ultimately to reductions in choices. But health care costshave not been controlled through economies of scale. For example, the massive consolidation of the hospital sector has increased costs. The bigis-beautiful, limited choice theory forms the basis of our present, failed system.
Consumer-driven health care, in contrast, will control costs because choice promotes competition and competition promotes innovation. It is through innovations such as focused factories and integrated medical teams productivity increases can best be achieved, not through "discounts" from large networks.
The message of the wrong time and the wrong place story is that consumers will be forced to negotiate the price of their health care when they are at their weakest—at the point of care. To dramatize this point, consider the picture of a bullet-riddled person, perhaps the unlucky passerby to a gang war, forced to negotiate the price of admission atthe emergency room desk.
But this is the wrong picture.
In a consumer-driven health care system, consumers make their choices when they buy insurance, not when they use health care. In thequiet of their homes, people review helpful information to select the policy that best meets their needs. At a time of emergency, they use the insuredproviders they have previously specified. Even those who have selected high-deductible plans, under which they can shop for any providers, can find ready access through the network of doctors and hospitals that the insurer has assembled. And the high-cost emergency situations depicted in the wrong time and wrong place plot are almost fully insured.
Is CDHC strictly for the middle and upper classes? Could the poor and disabled also benefit from it? The answer to the second question is a resounding "Yes!" as the vignette below illustrates.
The Chicago lecture room was packed. But it was like no lecture audience I had ever addressed before: there were people in wheel chairs, walking with crutches, and expostulating wildly with what I assumedwas Tourette's syndrome.
My host was a tall man with gray hair, about my age. But unlike me, he had a ponytail, and I sensed that he was more comfortable in jeans than in the suit he wore that day.
Tom Nerney is his name, and he is a missionary for the disabled. And, despite our dissimilar outer appearances, we are soul mates. Both of us are advocates for consumer-driven health care.
Nerney familiarized me with the remarkable results achieved by consumer-driven programs for the disabled. Like other health insurers, Medicaid, the prime insurer for the needs of the disabled, typically doles out money for covered benefits—a doctor's visit, home health workers, and so on. But the consumer-driven programs work differently. They typically feature individual budgets, free choice of care providers, and unbiased "brokers" to assist adults to work and contribute to the community.
The results are heartening: for example, nearly 1, 800 disabled participants in Arkansas' Cash & Counseling program found greatly enhanced satisfaction with caregivers and reductions in unmet needs, without impairment of health and safety. Direct consumer control caused a 38 percent reduction in neglect by caregivers and minimized fraud and abuse.88 What a difference from a New York Medicaid program that was characterized by a senior official as one "that almost begs people to steal."89 Smallwonder that 11 states have since adopted programs similar to the one in Arkansas.90
These experiments are one way the state governments have come to grips with reality. Like corporate health insurance, Medicaid needsfundamental change. Although it helps 52 million low-income people, Medicaid's price tag threatens financial stability. South Carolina's expenses, for instance, have virtually doubled in the past decade and may consume nearly one-fourth of the state's budget in 2010.91 Nationwide, Medicaid spending grew by nearly 10 percent in 2004 alone, and it is projected to consume nearly half a trillion dollarsin less than a decade.92
Fiscally conscious governors and state legislators have traditionally controlled Medicaid expenses through reductions in enrollment, benefits, and provider reimbursement. Tennessee governor Phil Bredesen, forinstance, culled 190, 000 from the Medicaid rolls. But letting consumers drive the system is better for both the health of patients and the solvency of their home states.
Oklahoma, South Carolina, and Florida have embarked on a path that is at once less draconian and yet more radical. All three states have taken the step of permitting consumer-driven Medicaid enrollees to choose health services and providers for themselves. South Carolina, for example, puts a set amount every year into each enrollee's personal health account (PHA), to be spent as he or she sees fit. In Oklahoma, the PHA would be established for annual out-of-pocket expenses without a "use it or lose it" penalty—that is, the unspent balance could be used for future health care needs. The state would not mandate a homogeneous set of benefits; instead, it would provide financial assistance and patient counseling.
With consumer-driven health care, Medicaid enrollees can shop for care and increase their chances of receiving the care they need. (Not surprisingly, current Medicaid enrollees have more unmet needs than similar adults with private health insurance.) Health care providers, compelled to compete for Medicaid customers, will likely offer more consumer-oriented services at competitive costs.
Critics of Medicaid choice argue that such plans have several intrinsic flaws. Some view the plans as wasteful, citing Medicaid's already low per patient cost. But these "low costs" come at the participants' expense. Physicians, scared off by the drastically low level of state reimbursement for Medicaid providers, refuse to take them on as clients. In South Carolina, 30 percent of physicians refuse to accept any new Medicaid enrollees. Nationally, the percentage of physicians declining to take on new Medicaid patients grew by a third from 1996 to 2005.93 With the new consumer-driven regime, physicians will have increased freedom to price competitively.
But the real opponents of Medicaid choice inevitably trot out a familiar, patronizing argument. Medicaid enrollees, they claim, either are not educated enough to be trusted with their own health or lack access to necessary sources of information. Yet patients make intelligent decisions—when we let them do it. The disabled people in the "cash and counseling" programs consistently receive bettercare than those who lack discretion.
You don't need a CPA to figure out what happens when people feel a greater sense of control and ownership over their health care: they get better care at better prices. For example, health care providers who compete for Medicaid customers may offer more coordinated, responsive service—Saturday hours, more preventative care, and so on—at costs that give the enrollees value for the money. Plenty of evidence indicates that when people spend money that they perceive as their own on health care, they control costs and get better care. For example, the nearly 9 million Americans enrolled in national health savings account types of programs incur substantially lower costs, use more preventative services, and comply more with chronic care regimens than those enrolled in standard insurance.94 All kinds of people like these programs. For example, 83 percent of the supermarket chain Whole Foods' largely blue-collar team members voted for a consumer-driven health plan in preference to the old managed care plans. After three years, the firm's health care costs increased by only 3.3 percent annually, while turnover plummeted.95
Conventional wisdom is usually posed against consumer-driven reform. It seems even less trustworthy regarding Medicaid. Strong-arming enrollees and providers with rationing tactics is a poor way to improve quality and control costs. Consumer-driven health care, which liberates both health care providers and consumers, is a much better solution.