Consumer-driven Health Care
By Arnold Kling
Last night, I went to hear a talk by Regina E. Herzlinger, author of Consumer-driven Health Care. Her philosophy of health care is the opposite of the conventional wisdom that I derided in America is Crazy.
The talk was given at a dinner event sponsored by the local alumni of the Harvard Business School, where Herzlinger teaches. I was an interloper, having been put on and kept on the group’s email list during the dotcom boom.
I sat at an interesting table, which included battle-scarred political activists Grover Norquist of Americans for Tax Reform and Dan Perrin of American Defense Council. However, on the health care issue, the most passionate believer at our table probably was Bill McIntosh, a Canadian emigre who works for America Online.
During the Q&A after Herzlinger’s talk, someone in the audience asked about Canada’s health care system. McIntosh signaled a desire to speak on the topic and was recognized. He started to rattle off negative anecdotes (of what clearly were many). First, he said that because hospital staff “empties out on weekends,” his father suffered a heart attack and a stroke when he needed care. Another example was of Canadian doctors advising cancer patients to cross the border to the United States, unless they were prepared to wait twelve months to begin treatment.
In the talk itself, Herzlinger’s main thesis is that markets work, and they could work in health care. In PowerPoint-ese, she said that consumers need CCI–choice, control, and information. She said that if consumers were given these capabilities, then “Henry Fords” would emerge to provide better health care at lower cost.
For example, she compared all-purpose hospitals with department stores–an outmoded, inefficient model. As an alternative, she pointed to “focused factories”–institutions that specialize in particular areas of care, such as the Texas Heart Institute or the Shouldice Hernia Centre.
Herzlinger is a big fan of high-deductible health insurance policies that contain incentives for consumers to remain healthy. She pointed out that the high rate of turnover in health insurance (20 percent of consumers change insurers every year) gives insurance companies little incentive to promote long-term health. She argued that if consumers and insurance companies could choose terms of, say, five or ten years, then this could change. She said that under those circumstances, insurance companies would be more likely to reward consumers who make lifestyle changes to improve their health.
Herzlinger said that 20 percent of the people without health insurance in the United States have incomes over $50,000, and that the fastest-growing income segment of people without health insurance is incomes over $75,000. She said that the absence of high-deductible, consumer-driven health plans is a big reason for this.
Herzlinger is very skeptical of international comparisons of health care costs and outcomes. She pointed out that Europe’s greater population density should make it easy to deliver care at lower cost. She pointed out that Canada’s homogeneous population should make it easy to have overall good health care statistics. Controlling for population characteristics and population density is necessary in order to evaluate international data.
Herzlinger argued that the Swiss system of health care has features to emulate. One challenge for market-oriented health insurance is that insurance companies have an incentive to try to weed out risky patients. The Swiss system counters that by a risk-rating system which in effect taxes insurance companies that select low-risk patients and subsidizes those that select high-risk patients.
Overall, I thought that a theme of the talk could be, “You get what you pay for.” Today, hospitals are paid for “procedures,” so we get lots of procedures. If instead health care providers were paid for outcomes, we might see better outcomes, along with an attempt to hold down costs.
For Discussion. What is the Swiss approach to health care, and how well could it be applied here?