Copyright © 2007 by Regina E. Herzlinger. Click here for terms of use.
We have incrementalized our way, one law at a time, into the health care system that killed Jack Morgan. U.S. health care costs too much, and it does too little for too few. Let's toss out the old laws that empowered all the third parties who helped to kill Jack Morgan—the employers, hospitals, insurers, Congress, and academics. We need bold new laws that empower us and the entrepreneurial medical care providers who provide our health care so we can make the system work the way it should.
For political, policy, and corporate leaders, for families and children, for all of us who need and who practice health care, we are only a few major actions away from a consumer-driven system in the United States and from seeing similar benefits inCanada and Europe. In the United States, these actions will involve our federal and stategovernments, but most of all they will involve all of us as individuals using our influence to convince our governments to heal our $2 trillion health care problem.
To cure our health care problem, we need innovators and laws that sweep away the obstacles. Incremental changes to our laws without a clear vision of what we are trying to attain got us into this mess; for example, Richard Nixon's ad hoc stabs at health care public policy entangled us with managed care and congressional management of the care for kidney disease. Incremental changes to our laws will not solve the problem. We need vision and boldness, not politics as usual.
A consumer-driven health care system can keep the Jack Morgans hale and healthy without breaking the back of our economy or the spirit of our doctors. When you control the money in the health care system, the institutions that helped to kill Jack Morgan will either change their behavior or find themselves replaced by new, entrepreneurial, consumer-driven ones.
Consumer-driven insurers will design consumer-friendly insurance policies that give you the benefits, coverage, and doctors you want at a price you are willing to pay. If you want managed care, OK; but if you want another kind of policy, you will have access to that too.
Consumer-friendly hospitals will take part in integrated teams that give you everything you need for your disease or disability. They will abandon their quest to dominate the health care delivery system.
Consumer-friendly employers will direct their HR staff to give you back the part of your salary that they used to buy your health insurance, and then they will help you choose from the many new varieties of policies that become available.
The U.S. Congress will pass laws that enable you to buy your health insurance with tax-free income, help to create information about the quality and prices of medical care providers, and transfer money to the poor so they can shop for health insurance like all other Americans. Senators and representatives will stop practicing medicine and setting prices. They will get out of the way, and let the doctors do the doctoring and us do the shopping.
Last, the academics will research how to make this consumer-driven market work better, just like the Nobel Prize–winning economists who help to uncover inefficiencies in the financial markets and devise ways to correct them.
Sadly, on the federal government level, representatives from the Republicans and Democrats have quaffed deeply from the Beltway Kool-Aid well. Neither believes in the power of innovators and consumers to reshape markets. Neither is in the small-is-beautiful camp. Both believe that more oversight of health care by the government and the academics is the solution. Both believe that big-is-beautiful.
The big-is-beautiful group is typically termed "liberal, " and thus Democratic; but Thomas Jefferson, founder of the Democratic Party, is likely turning over in his grave at this use of the term. To Jefferson, the champion of small businesses and the nemesis of big government, "liberty" meant maintaining a range of choices. Liberty could flourish only when we could govern ourselves: "Were we directed from Washington when to sow and when to reap, we shall soon want bread."1 Clearly, Jefferson is much more aligned with the small-is-gorgeous camp that believes in entrepreneurial, consumer-driven markets and the possibilities of productivity than he is with current Democrats. Barry Goldwater, the founder of the conservative wing of the Republican Party, is similarly rolling around in his grave, dismayed by the big-government deficit spending and limitation of choice that are now standard Republican fare.
To appreciate the similarity of both parties' big-is-beautiful ideas, consider the Democrats' versus Republicans' views of Medicare. The Democrats want the federal government to negotiate drug prices on our behalf, while the Republicans want to set up a new government agency that would evaluate the value for the money of each drug and tell us which ones we can use.2 We had a good view of how the federal government deals with drugs when we reviewed the Congress's love affair with epo, the drug used for fighting anemia in victims of kidney disease. Do we really want the feds telling us which drugs we can buy and or negotiating the price for us? Federal control of drug pricing will distort and curtail the critically important innovations in biotechnology that could help the millionsof victims of genetic diseases.
Similarly, when it comes to health insurance, while the Republicans rely more than the Democrats on private-sector initiatives, they are hardly small-is-beautiful stalwarts. Yes, they promise greater choices of insurance options in Medicare, but the Republican idea of choice boils down to either traditional Medicare or Medicare managed care plans. The many Republican fans of managed care intend to lure seniors with a $60 billion subsidy. Their idea of a competitive health care market harkens back to Richard Nixon. Like him, they stack the decks for managed care by using federal coffers to subsidize it. And the George W. Bush administrators of Medicare who stringently micromanage the prices and processes of health care providers in their pay-for-conformance initiatives, put innovators in a straitjacket or drive them to desert the health care sector.
Last, while the Republicans trumpet the need for an information-based consumer-driven health care system, their idea of information is hardly consumer driven. They want it to emanate from the federal government. Under Republican control, from 2000 to 2006, the federal government not only specified what should be measured but also the protocols that health care providers must follow. These monopolistic powers were cloaked inthe pseudoscientific mantle of "evidence-based medicine." The title implied that the guidelines were shaped by intelligent saints, devoid of a shred of self-interest or vanity, guided only by "evidence." Try that one on the many medical innovators who have been derided or ignored by the establishment for the last 50 years because their ideas have run counter to medical orthodoxy, like Joe Murray, who, for many years, received little federal research support because his ideas about transplantation ran afoul of those whose entire careers had been staked on different ways of dealing with kidney disease.
With the unraveling of the human genome, we can begin to conquer diseases and not merely palliate them. Consumer-driven competition among brilliant independent scientists and doctors, each with different theories about the causes and cures of illness, can better fulfill these possibilities than a monopolistic government bureaucracy dictating the process of care.
At the level of the federal government, both Democrats and Republicans are so deeply committed to the big-is-beautiful vision and so indebted to so many special interests that they may prove incapable of the bold health care plan that will empower the future Jack Morgans and prevent their needless deaths at the hands of a health care system that has lost its soul. But our brilliant Founding Fathers once again will save our nation with their amazing prescience in creating a confederation of states, rather than one country: many of the consumer-driven changes in health care will likely emanate from the states.
Reflecting the diversity our Founding Fathers sought, two states have implemented considerably different systems that help the Jack Morgans stay alive. These two, Maryland and Massachusetts, have both decided to require universal health care. The devil, though, is in the details: Maryland's system is all wrong, while Massachusetts' is mostly right.
The Maryland legislature's decision to require that its big businesses spend 8 percent of payroll on health insurance has turbocharged an AFL-CIO "Fair Share Health Care" campaign to enact similar legislation in other states. As always, the word fair should make your hair stand on end: it is a strong signal that someone's pocket is about to be picked. In this case, it is the pockets of the American business community.3
Don't get me wrong. The problem the legislation addresses is serious: the lack of health insurance diminishes health status, and we all pay for the care that the uninsured receive in a round-about, ineffective way. But, however urgent the problem of the uninsured, the solution that requires businesses to spend 8 percent of payroll on health insurance is awful. Superficially, it may appear to be just: after all, requiring businesses to pay for health insurance appears to lower the burden on individuals. But it will hurt the intended beneficiaries because business payments for health insurance reduce wages. By increasing the costs of workers, the legislation also causes businesses to distort their hiring practices.
In Hawaii, for example, the requirement that businesses provide health insurance for all employees who work more than 20 hours a week substantially increased the part-time workforce from 1990 to 2000, while the number of full-timers grew by only 2.5 percent.4 Hawaii employers' reluctance to hire weekly workers for 30 or 35 hours, the standard elsewhere, forced part-timers to hold multiple jobs.5 Some businesses in states with an employer mandate have chosen to relocate or curtail expansions. Wal-Mart has already slowed its plans to put a large distribution center in one of Maryland's poorest counties. If the federal government were to require all businesses to pay for health insurance, some would simply go out of business, while others would find yet another reason to move their facilities abroad.
The mandate is known as the "Wal-Mart Bill" because Wal-Mart is the only larger employer that fails to meet the statutory requirement. But how long will it take for the mandate to be imposed on all but the smallest businesses? All business owners in Maryland are no doubt asking themselves that question and perhaps already putting off making new hires and examining new business locations.
Although Maryland's Fair Share Health Care Fund Act (what a name!) was overturned in an ERISA challenge, the lure to legislators of requiring employers to provide health insurance is like light to a moth.6 Itwill reemerge in various guises in the future.
A bizarre 2006 photograph shows Senator Edward (Teddy) Kennedy (D-Massachusetts) uncomfortably smiling while standing in back of seated Republican Massachusetts Governor Mitt Romney. Not so long ago, these two were bitter rival candidates for a U.S. Senate seat. What united this odd couple? It was the bipartisan 2006 Massachusetts universal health care legislation: Kennedy got what he wanted, required universal health insurance coverage, while Romney achieved what he wanted, consumer-driven health care solutions.
Massachusetts points the way to a better solution than Maryland'semployer mandate. The Massachusetts solution is consumer driven in that it primarily requires individuals, rather than businesses, to buy health insurance. It finances the poor uninsured directly with the $1 billion now used to subsidize nonprofit hospitals to deliver ostensibly "free" care for them.
The new universal health care system created by Massachusetts is not perfect. It retains excessive government meddling in the design of insurance plans and compensation for providers: individuals can purchase low-cost insurance only in a market that the Commonwealth runs and can choose from among only the plans it has designed. And because Romney left the governor's office to seek nomination as the Republican presidential candidate in 2008, he could not fully exercise his considerable administrative skills in the implementation of this law.
(Some critics also wonder about the feasibility of requiring the purchase of health insurance. Roughly the same percentage of Americans are uninsured, 17.2 percent in 2004, as lack automobile insurance, 14.6 percent. But the purchase of automobile insurance is required in all but three states, while the purchase of health insurance is voluntary.7 )
Better systems could be implemented in states that do not share the Massachusetts legislature's impulse to regulate. They would feature multiple insurance markets and plans designed by entrepreneurs, not bureaucrats. The role of the state would be limited to ensuring that the requirement for universal coverage was implemented—that is, that all citizens purchase at least a catastrophic care health insurance policy—to providing audited outcome and price data; and to ensuring the financial integrity of insurers.
Yet despite its drawbacks, a health care plan similar to the new Massachusetts system would be substantially better than our present one, in which millions are uninsured while the economy reels from the massive costs of third-party control of health care by private health insurers, the hospitals, the HR crowd, the academics, and the U.S. Congress. While the Maryland Fair Share system only entrenches the flaws of our present system, the new Massachusetts plan points the way to universal coverage, controlled costs, and greater consumer choice and satisfaction.
If Jack lived in the Terrapin State and owned a highly competitive, low-profit-margin sort of business, he might leave the state or offer his employees only part-time work to limit the impact on his bottom line of meeting the inevitable state requirement that he spend 8 percent of his payroll on health insurance benefits. On the other hand, if Jack lived in the Bay State and owned the same sort of business, he could buy affordable health insurance from a health insurance supermarket that would offer him a variety of policies that he could buy with his pretax income. If Jack were poor, the state would subsidize him directly in his purchase of these policies.
You don't need a CPA to figure out which of these two choices is better for Jack.
The best state consumer-driven health care system would contain the following features:
1. It would require that everybody be insured. Subsidize those consumers who cannot afford it
2. It would provide the funding for the cost of universal coverage from uninsured individuals who can afford to buy it and from subsidies once given to hospitals and other health care providers. It would not tax businesses for this funding nor use federal government "reinsurance" to fund it either. The cost of treating the uninsured who cannot afford to pay for their care is heavily subsidized by state and local governments, especially for hospitals. But, as we have seen, hospitals do not necessarily use these subsidies to provide lower-priced services to the uninsured. Absent universal insurance, the hospitals and other health care providers will continue to demand subsidies to cover their "free care." It would make more sense to give these funds directly to the poor uninsured rather than to the hospitals that may or may not use them for these purposes.
Requiring businesses to buy health insurance will not only exacerbate the destructive role employers currently play but also distort employment patterns, as in Hawaii, and reduce wages. It is more sensible to require individuals to buy health insurance and to use some of their wages for this purchase. Individuals will buy the insurance they want at a price they are willing to pay. In contrast, employers, as we have seen, force all employees into cookie-cutter health insurance programs.
The Democrats have a different twist on the funding issue. They promise that the federal government will "repay" businesses for their catastrophic health care expenses. Although this promise is sanitized as federal "reinsurance, " it represents the draconian intrusion of the federal government into the care of the sick. Once the federal government pays, the U.S. Congress will insist on managing this care. We saw how well it did this job in the case of kidney disease. When the federal government "reinsures" catastrophically expensive health care, the United States will have essentially transitioned to a single-payer health care system.
3. It would provide for tax-free purchase of health insurance. It would not limit health insurance shoppers to a government-run supermarket as the sole means of obtaining health insurance. The Massachusetts law cleverly uses an existing aspect of the federal tax code to enable the uninsured to buy insurance with pretax income. But there is a catch. The uninsured can buy their insurance in only one market, which is managed by the state government. Further, this market sells only those products designed by the government.This process is like buying government-designed cars only in a government-run dealership. The states should neither design the insurance policies nor monopolize the site of sale.
4. It would require insurance for financially catastrophic care. It would not require insurance for specific benefits, such as hospital care, doctors, and drugs. Instead, it would require health insurance that covers, for example, all medical expenses greater than $3, 000 for a family earning $50, 000. Insurance for benefits has caused the fragmentation of U.S. health care. It also brings out the benefit lobbyists, who manipulate the government to maximize the amount paid to them. This process caused epo's use and revenues to grow enormously: congressional demand for increased use of epo not only cost billions of dollars but also caused some kidney disease patients grave harm. Further, payment for benefits penalizes providers who increase the patient's health. The healthier the patient, the less money is paid to the hospitals and other medical providers.
Insurance for financially catastrophic levels, in contrast, will enable nnovative providers to integrate all the health care resources that the sick patient requires and to price them as a bundle. They will, for example, offer Jack Morgan a complete bundle of everything he needs for kidney care for $40,000. This price for integrated care not only improves quality and convenience for the patient but also ensures that providers are rewarded for improving the patient's health.
5. It would provide transparency about the quality of individual providers of health care and their prices. It would not dictate the process of health care delivery. As we have seen, the government's "performance" measures dictate the process of health care delivery to doctors and hospitals. Do we want the government to tell car manufacturers how to make cars, or do we want it to force the manufacturers to reveal their cars' safety, fuel efficiency, environmental friendliness, and price?
Who would want the government to supplant our doctor? But we do want it to help us understand just how good a doctor she is.
Consumer-driven health care has powerful enemies, the status quo fat cats or single-payer ideologues who spin powerful, seductive tales about its dangers.
The only ones who can make it happen are you and I.
So I am ending this book not with the literary equivalent of a flurry of drums but with a list of the five points that we should ensure are in the legislative plans that will make consumer-driven health care happen.
If we want excellent health care and insurance for all Americans at a price that citizens and taxpayers can afford, here then is the bold legislative solution, to be implemented in state legislatures and the U.S. Congress, that will create it:
1. Everyone is required to buy his or her own insurance, using tax-sheltered income. This step creates a consumer-driven system. To protect against bankruptcy because of medical needs, individuals are required to purchase health insurance that covers all expenses exceeding some percentage of their income and liquid assets.
Employees get back, in salary and employer contributions, the sums that their employers currently use to pay for their health insurance and other health care needs. The employees do not pay taxes on this sum as long as they use it for health insurance and related medical needs.
2. Government helps those who cannot afford to buy health insurance by subsidizing them. This step enables the poor to buy health insurance just like everybody else.
3. Providers are free to bundle care as they want to and to quote their own prices. This step enables market-based pricing so that entrepreneurial providers can innovate freely without asking for permission to do so from insurance or government bureaucrats. This will prevent smothering new ideas with requirements for government-issued new codes, coverage, or payment schemes for every innovation. If entrepreneurs create integrated bundles of care, for example, for the needs of a kidney disease victim in his fifties and price that bundle at, say, $65, 000a year, they will be motivated to offer preventive care and to assist the patient in managing his illness. The reason? There are actually many reasons, but one particularly good one is that when they receive a total price for the bundle of care, they can earn more profits as their patient's health improves. The ideal bundle would be a long-term payment so that the providers are motivated to take a long-term view of the patients' health.
4. Government requires publication of data on the performance of all medical providers. This step enables consumers to make informed decisions and protects them against providers who skimp on care, are incompetent, and/or deliver a bad value for the money.
5. Prices are risk adjusted. This step ensures that while sick people pay the same price for their insurance as everybody else, providers and/or insurers will receive more money for treatment of the sick. They are thus financially rewarded for attracting the sick. Because the sick account for the bulk of health care costs, we want providers to be interested in innovating cost-effective delivery systems of care for them and insurers to be interested in covering them.