Regina Herzlinger makes the case for change in health care

Regina Herzlinger has been dubbed "the Godmother of Consumer-Driven Health Care," and without question she is a revolutionary in her field. It was Herzlinger who pulled back the curtain to reveal the unraveling of managed care, and who predicted the rise of consumer-driven health care and health care-focused factories. What would this forward-thinker have to say about alternatives to the current single-payer-by-employer health insurance system? Probably not replacing it with a similar single-payer-by-government health insurance system. Herzlinger recently delivered the Second Annual Health Economics and Policy Lecture at the W. P. Carey School.

Regina Herzlinger has been dubbed “the Godmother of Consumer-Driven Health Care,” and without question she is a revolutionary in her field.

She is the first woman to achieve tenure and a chair at the Harvard Business School, and the first to serve on 15 corporate boards. It was Herzlinger who pulled back the curtain to reveal the unraveling of managed care, and who predicted the rise of consumer-driven health care and health care-focused factories. Her most recent book, “Who Killed Health Care?” was named in 2008 by the U.S. Chamber of Commerce as one of 10 books that changed the debate on health care.

What does this forward-thinker have to say about alternatives to the current employer-based health insurance system? Probably not replacing it with a single-payer by government health insurance system.

Herzlinger recently delivered the Second Annual Health Economics and Policy Lecture hosted by the School of Health Management and Policy at the W. P. Carey School. In her talk she advocated a system built on consumers, who decide for themselves what they need and what they are willing to pay.

“Trust the market to create the innovative solutions that will provide [the health care consumers want], at a price they are willing to pay,” she continued. Innovative companies in other industries — automobiles, computers, cancer care, even poultry — have proven it, she said.

In Herzlinger’s scenario, consumers receive their health care from providers ranging from Wal-Mart clinics to specialty hospitals. Consumers could choose among an array of health insurance plans and everyone would be covered. “If I had diabetes, I would look for a network of specialists who provide kidney dialysis, neuropathy treatment, amputation, heart disease, eye problems and wound care for ulcers that don’t heal,” she said.

The case for change

Herzlinger noted that employers want to exit from the health insurance business. Providing this fringe benefit is costly and reduces the firms’ global competitiveness. A good example is the dilemma of the U.S. automotive industry. To pay for its employee health insurance plan, General Motors spends $1,500 more per vehicle produced than do its Japanese competitors, Herzlinger said. Even corporations that initially found it smarter to become self-insured are ready to look at a different approach.

Herzlinger also questions why our current system allows employers to buy health insurance with pre-tax dollars, but doesn’t do the same for self-employed/small business consumers. They must buy purchase health insurance with after-tax income and many cannot afford to do so. “It’s a travesty that what may be the richest country that ever existed has nearly 50 million people without health insurance,” Herzlinger said.

“The problem of the uninsured is a major public policy issue, because in the U.S., between 80 and 90 percent of new jobs come from the small business world. Thus, most of our uninsured people work in small businesses that cannot afford to provide health insurance or cannot bother shopping for it. So how many skilled people working in small, exciting new companies on the cutting edge wind up having to leave to work for an employer that offers insurance?” she asked.

Solving the 80/20 puzzle

Swiss consumers like their health system, Herzlinger said. There is no Medicare or Medicaid to navigate, people pay for themselves, and everyone is insured. But the Swiss system, like the U.S. system, has an Achilles heel: the 80/20 problem. That is, 80 percent of healthcare dollars go to just 20 percent of the insured. The 20 percent usually have chronic diseases that gobble health care dollars.

In Switzerland insurers who cover a disproportionate number of the chronically ill get help from other providers that have more than their share of the 80 percent who are generally well. The Swiss solution is to form a re-insurance pool, and use it to smooth out adverse selection problems, she said. Lately, people from other countries have begun traveling to Switzerland for care — evidence that the quality, not just the cost, is more than satisfactory.

Switzerland is not the only medical tourism destination. An increasing number of people have been traveling to India for health care treatment. India spends about $14 per person on health care infrastructure, Herzlinger said, forming a foundation for a network of facilities. “Rather than massive tertiary hospitals, they use a hub and spoke model with spokes of auxiliary hospitals. Some give money-back guarantees for surgical procedures,” Herzlinger explains.

Buyer beware

Here’s an interesting thought: Herzlinger said the average employer spends $15,000 annually for an employee’s health benefits. That money is part of an employee’s compensation, yet the employee has virtually no say over how it is spent. She asked, is there any other $15,000 annual purchase you allow your employer, or anyone else, to make on your behalf?

“How did we get here? We spend $2.3 trillion on health insurance. That compares with the gross domestic product of China. Here, we have marvelous doctors, marvelous facilities, marvelous technology. But in a three-year period, more than 300,000 people died from errors committed in those hospitals,” she noted.

“We hand health insurance premiums over to third parties but know zero about what happens to our money. I don’t even know anything about the quality of the surgeon who does my mastectomy. What does not get measured, does not get managed,” Herzlinger added.

Herzlinger favors a shift toward “personalized medicine,” which means targeting a consumer’s specific health conditions, disabilities and diseases. “Personalized medicine has the same kind of profound promise to change the human condition as the industrial revolution,” she said.