Taxing Our Health

Market Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry, by Regina Herzlinger, Reading, Mass.: Addison-Wesley, 416 pages, $25.00

Even within the "free minds, free markets" crowd, just what constitutes a free market in health care is controversial (See "Medical Meddling,"December 1996, and Letters, March 1997). Is managed care a product of the market, of government distortions of the market, or of some mixture? What would America's health care system look like if it were truly operating under a free market?

Regina Herzlinger, a chaired professor at the Harvard Business School, enters this fray with Market Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry. Billed as an "indispensable guide for policy makers, practitioners, and anyone interested in the future of this vital and complex industry," Herzlinger's book provides less a road map of the rapidly changing health care market-- which now includes government, indemnity insurance, various levels of managed care, and even medical savings accounts--than a vision of the way it ought to be. While her vision is compelling, she fails to do it justice.

Like a political speech, Market Driven Health Care too often lurches from one applause line to the next, issuing crowd pleasers such as "patients will not be patient"but shirking the responsibility of providing the tough analysis of how the world Herzlinger envisions will actually come about, given the current regulatory, legal, and political environment. In the end, she knocks the legs out from under her own argument for consumer-driven health care by calling on Congress to determine, and the IRS to enforce, how much insurance individuals purchase.

Herzlinger designed and teaches a Harvard course on creating new health care ventures. She has written on this subject for the Harvard Business Review, and her book is remarkably similar to a cogent article she wrote for The Public Interest in 1994. Her straightforward vision for the future of health care is based as much on the system that produces the McDonald's french fry as it is on the now ubiquitous eye care centers. In the future, America's health care industry will comprise a plethora of competing "focused factories,"freestanding centers of excellence that deliver one product--be it complete cancer treatment, foot care, or asthma therapy--and deliver it well. Focused factories "could be established that specialize in any of the millions of high-volume procedures, such as births, cataract surgeries, and bypass operations,"she writes. "Others could provide all the services required to care for the chronic diseases or conditions that account for the bulk of our health care costs, like asthma, diabetes, foot pain, and cancer."

The transformation will be spurred by "activist consumers,"who are more time-sensitive than ever and demand convenience and quality. Just as time-pressed consumers forced a revolution in retailing, eschewing unwieldy department stores such as Montgomery Ward and Walgreens in favor of specialty superstores such as Staples, Home Depot, and Toys "R"Us, they will transform the health care industry from one organized around the needs of the producers to one centered on the needs of the consumers.

Herzlinger's new world is also one in which reliable information is abundant. Acknowledging that it is currently difficult for consumers to find out even the most basic information on the cost and quality of various health care providers, institutions, and insurers, Herzlinger describes an era in which such information is as easily available as information on cars from J.D. Power, stereos from Consumer Reports, and restaurants from the Zagat Survey.

Empowered consumers--people spending their own money--will drive these changes by deciding whether to get their foot corns removed at Sal's Sole Repair or Al's Ankles & Feet, two of the hundreds of focused factories excelling in the treatment of toes. "When consumers pay directly for health care, the services they receive are economical and convenient,"Herzlinger writes.

True enough. But herein lies the crippling defect of Herzlinger's book: She never adequately explains how we move to a system in which the consumer spends his own money, rather than that of his employer or government, when he shows up at a hospital or focused factory.

She does a good job of describing--with both anecdotes and statistics--what is wrong with the current system. It is inconvenient because "most of the health care system is organized around the needs of its providers, doctors, and hospitals, not around the needs of consumers."And she nails the reason--Americans don't purchase their own health care. "When people pay for their health care services directly from their own pocket those services are invariably convenient and helpful information is readily available. When people pay only partly out of their own pockets, as is common in the United States, the services are inconvenient and consumer-oriented information is largely unavailable."But she fails to adequately explain how the system will evolve so that individuals pay for a larger proportion of their health care.

It's not that Herzlinger doesn't recognize serious barriers to the development of her consumer-driven focused-factory health delivery environment, it is that she doesn't pay these barriers the attention they deserve. Herzlinger places barriers in three categories: insufficient demand due to a third-party-payer system; insurers wanting to control cost more than provide convenience; and regulatory barriers.

Consider those pesky regulatory barriers. "Licensing requirements needlessly restrict managers' ability to select appropriate personnel, while various legal roadblocks against the union of medical and business skills are in place,"readers are told. Herzlinger cites restrictions on the ability of physician assistants to prescribe medicine as one such example, and the list could certainly be longer. But after identifying this problem, she is content to slip back into the warm fuzzies of "everything will work itself out"rhetoric.

Her solution to this classic concentrated-benefit and diffuse-cost situation is that "Americans want convenience from their health care system"and "ultimately the public will get its way; as it should."In her defense, her writings--this book included--are part of a necessary campaign to educate policy makers and consumers on the diffuse cost barriers. Still, as with many other areas this book touches on, the informed reader will wish that she treated this issue with greater depth.

Herzlinger's whole vision rests on the premise that individuals, not government or employers, will someday pay for a significant amount of their own health care. It is unfortunate that she waits until the second to last chapter of her book to address this fundamental issue.

Health insurance is employment-based for a majority of privately insured Americans, as most REASON readers know, because it is tax-free compensation. As a result, there is an incentive to buy more health insurance (or health care) with those pre-tax dollars than employees would purchase if--like food, clothing, housing, or entertainment--the cost were coming from their net incomes. The tendency, then, is for the employer to purchase not just catastrophic insurance � la homeowner's or auto insurance but routine maintenance and first-dollar coverage. There are two ways to correct this distortion: let individuals buy their own health care with pre-tax dollars (as in medical savings accounts) or make health benefits taxable compensation.