Five questions for Regina E. Herzlinger

by Martha Lagace

Professor Herzlinger shared her vision for health care in an email interview with HBS Working Knowledge senior editor Martha Lagace. Herzlinger's next book, Consumer-Driven Health Care, will be published in January 2003 by Jossey-Bass.

Lagace: You have a bold idea for transforming the current health care system into a consumer-driven model. What, in a nutshell, are the advantages to your proposal? And the risks?

Herzlinger: The pros of consumer-driven health care:

  • Unlike today's cookie-cutter insurance policies, under consumer-driven health care enrollees can tailor health insurance policies to their specific needs—e.g., insurance for long-term care and drugs; easy access to integrated teams that specialize in treating chronic diseases and disabilities; pre-tax savings accounts for uninsured health care needs, such as hearing aids and support in modifying lifestyles; and "bonus" long-term policies that reward those who switch to healthy lifestyles.
  • Insurers and providers will receive risk-adjusted payments, so the sick will become financially attractive enrollees and patients. With today's pricing—the same for the sick and the well—insurers and providers lose money with the sick.
  • The resulting competition for consumers with differentiated products will control costs by increasing quality of care—e.g., integrated teams for congestive heart failure have reduced costs by $8,000 per year per enrollee. This higher-quality effect is especially important for the sick.

The risks of consumer-driven health care:

  • Overall, relative to the current system, the risk of consumer-driven health care is low. After all, the current system has led to quality problems, double-digit cost increases, little information, and dispirited providers.
  • The risks [brought by] undercapitalized, incompetent insurance entrants will be reduced by competition and regulation by state regulatory bodies.

Q: In your new article in Harvard Business Review, you write, "The current health insurance system in the United States has its share of defenders—people and institutions that would stand to lose money or power should the status quo be overturned." What kind of money and power stands to be lost, and by whom? How did we get to this homogenized pricing of the present insurance system in the first place?

A: Homogenized prices and benefits in insurance policies arose with the best of intentions. Uniform prices were thought to enable the sick to buy insurance, and uniform benefits would simplify shopping. But the unintended effect was to shackle competition and to make sick enrollees unprofitable.

The architects of the present system, status quo insurers, stand to lose in a consumer-driven health care system if they do not innovate. But, as indicated in the complimentary letters from Aetna's president and Wellpoint's CEO received by the Harvard Business Review, some of the insurers are not barriers to change.

The community of health policy experts, most of whom favor a system of standardized benefits selected by experts like them, are likely to be the most vocal opponents.

Q: Your article mentions several "scare stories" that are told to frighten people away from a consumer-driven model. These scare stories include the idea that health care will cater to the rich at the expense of the poor, and to the healthy at the expense of the sick. How would you like to reassure employees that your idea is in their best interests?

A: Consumer-driven health care will improve health care quality by inducing competition among providers that respond to consumers' needs; risk-adjustment of payment will make the sick much more attractive enrollees than the present uniform pricing system.

All boats rise in a rising sea. Other consumer-driven markets demonstrate that suppliers innovate to reach all income classes with cost-effective products. For example, automobiles that once cost more than a house are now cheaper, better, and available to all income classes. Indeed, the word "Toyota" is now used as shorthand to identify low-cost, high-quality goods and services.

Q: Your article draws a parallel between consumer-driven health care and the now-fairly-common American practice of employees getting more control of their own retirement allocations. You assert that the switch to employee control vis-à-vis retirement plans has been successful. Given the current economic jitters, do you think the timing is good to introduce a different health care model?

A: Employers that currently provide insurance benefits advocate consumer-driven health care because it cannot be worse than the present managed care system, whose costs escalate at double-digit [rates] while quality concerns and employee unhappiness escalate. Employers that would like to provide health insurance, but who cannot afford it, will find new, lower-cost consumer-driven health care policies, such as those offered by California's Wellpoint, that help them achieve their goal.

Employees in defined-contribution pension plans have shown their mettle. They earned a better rate of return than those in defined benefit plans. A similar effect will take place in health care. People do better when they shop for themselves than when a professional shops on their behalf.

Where the analogy between consumer-driven health care and pension plans is not appropriate is in the funding. While employers will likely maintain their present funding for health insurance, consumer-driven pension plans have been primarily self-funded since 1999.

Q: What steps are you taking to move your idea forward, and what has been the reception from business and government?

A: I held a large conference at Harvard Business School on consumer-driven health care to discuss the topic. The conference was attended by CEOs and other leading thinkers. I have published and lectured on the topic since then.

The reception from business and providers has been far stronger than the one from government. Many businesses see consumer-driven health care as a way of relieving high costs and employee discontent, while providers see it as a way of relieving themselves from the strictures of managed care.

But the receptivity of governments has been virtually nil. I have long advocated the creation of a new government agency to require disclosure of performance metrics of insurers and providers and to regulate their probity and solvency. People cannot shop in the absence of information and, in my view, performance data will not be disclosed in the absence of governmental requirements. My urgings have fallen on deaf ears to date, unfortunately.

About the Author

Martha Lagace is senior editor of Working Knowledge.