Who Killed Health Care? America's $2 Trillion Medical Problem—And the Consumer-Driven Cure

Business Economics,  Jan, 2008  by Merrill Matthews

• E-mail
• Print
• Link

Who Killed Health Care? America's $2 Trillion Medical Problem--And the Consumer-Driven Cure

By Regina Herzlinger, 2007. New York, NY: McGraw-Hill, Pp.304, $24.95 hardcover.

There are two powerful, well-respected and highly accomplished women who are driving the health care reform debate in the United States. And yet their agendas for reform are as different as night and day--or perhaps better yet, left and right. One is Senator Hillary Clinton (D-NY), former first lady and a presidential hopeful whose first attempt at dramatically reforming the U.S. health care system turned into a political disaster. The other is Harvard Business School economist Regina Herzlinger, one of the country's most knowledgeable and articulate experts on the U.S. health care system, who has been pointing the way toward a "consumer-driven" system for years.

These two reformers have radically different visions for how the health care system should work--though Senator Clinton might challenge that statement, claiming she has learned from her past efforts. One vision gives the government more control over the health insurers, health care providers, and the options available to consumers; the other embraces an unabashedly strong commitment to putting the consumer in control.

Herzlinger herself identifies these two visions:

    There are two broad sets of beliefs here. One group believes in the
  transformative powers of big, organized institutions, such as
  governments and large insurance firms. The other camp believes that
  small is beautiful. To them, only consumers and entrepreneurial
  institutions that serve them can transform health care.

One of these two visions will likely take precedence over the next few years, as the country engages in a prolonged debate over health care reform. It's important that economic principles, rather than political demands, guide that vision. With the publication of her very readable book, Who Killed Health Care?, Prof. Herzlinger has increased the chances that economic principles will rule.

There are two ideas underlying what Herzlinger calls the "big-is-beautiful" crowd: "First, this group believes that as a service industry, the health care sector is incapable of the kind of productivity gains that characterize the rest of the economy. Just as an orchestra's productivity cannot be increased by making it play faster, so too the productivity of health care is fixed." But there is also a human side to the big-is-beautiful group: "Further, you and I are incapable of the kind of complex decision making that health care requires."

By contrast, the "small-is-beautiful" group trusts consumers, in consultation with their doctors, to make good decisions, especially when there is abundant information available. And those consumers--especially "marginal consumers"--will control costs. "The discerning, last-to-buy group consists of the picky, assertive people ... who drive down price and improve quality for all the rest of us." Combine those empowered consumers with entrepreneurial innovators and you have, according to Herzlinger, a prescription for a high-quality, low-cost health care system.

What Herzlinger does have in common with those who want more government control is the tendency to see a system that's broken. And not just broken but actually killing people. A recurring theme is a patient--or maybe I should say "victim"--named Jack Morgan, who dies because he needs a kidney transplant he never gets. The author also identifies what would have happened to Jack had the health care system functioned like a real market. Although Morgan is really just a composite of many patients, Herzlinger uses him as a foil to point out the five problems--what she designates as the "killers"--in the U.S. health care system: health insurers, general hospitals, employers, Congress, and the academics.

There is a bit of hyperbole in her approach. For example, although there is a chapter devoted to health insurers as killers--it's a little unclear whether they, and the others indicted, are killers of people or killers of a good health care system, or both--it really focuses on the rise and fall of Kaiser. A noble and innovative enterprise providing excellent care when it started, Herzlinger argues that the Kaiser HMO eventually lost its soul. And so lost its patients and a lot of money. She also discusses the problems with the more restrictive HMOs, why they flourished in the 1980s and '90s, and why they could never be the solution they were promised to be.

Of course, there are many insurers who never adopted the HMO business model, much less the restrictive attitude that typified so many of them. While she does mention some of them in the book, such as Definity Health, she doesn't do much to juxtapose the good insurers against the "killers."

Some of her strongest criticisms are leveled at the hospitals, which for a number of years have engaged in a practice of charging the uninsured significantly higher prices than those with health coverage (and therefore likely to be in a network that negotiates reduced prices). "But some of the top executives of U.S. hospitals are cut from a different cloth ... They are, purely and simply, empire builders. To support their empire building, they have suppressed the kind of competition and managerial innovations that could control costs, and they have acted less than charitably toward the poor uninsured."