Making the Case for Consumer-Driven Health Care

Even as so-called Obamacare becomes a central issue in the 2012 presidential election, policymakers and academics continue the debate on how best to deliver affordable and efficient health care services to millions of Americans. In this video interview, professor Regina Herzlinger makes the case that consumers should have more say over their own care.
by Carmen Nobel

While some consider it President Obama's greatest accomplishment, the Patient Protection and Affordable Care Act also has been the target of constant scrutiny and scorn since it was signed into law last year. Just last week, several news outlets reported a glitch in the law that would allow millions of middle-class Americans to receive Medicaid. It's also expected that the creation of so-called Obamacare will be a front-and-center issue debated in the 2012 presidential election.

This growing awareness that our current system is headed on an unsustainable track is one reason that the business of health care is a major research topic at Harvard Business School and its Healthcare Initiative, where some 40 faculty conduct research on questions as diverse as how "work-around" cultures develop in hospitals to the best ways deliver high-impact medical services in developing nations.

HBS professor Regina Herzlinger has been the foremost advocate for what she calls "consumer-driven health care." In this video, she argues that just as consumers drive the retail industry, so too should they drive health care.

Click to watch.

About the Author

Carmen Nobel is the senior editor of Harvard Business School Working Knowledge.
    • Anonymous
    The short sightedness of CDHP is very few are prepared "to shop" for medical services when there is a need.

    The dynamic of need is much different than purchasing a new shirt.

    The system needs to integrate healthy lifestyles and if we want to turn medical care into a "retail like" environment; change retail to be a health environment banning artificial or manufactured items from the grocery shelves.
    • James Angel
    • Assoc Professor of Finance, Georgetown University
    Right on!

    One problem with moving toward consumer driven health care is that in the current state of the health care market consumers cannot easily get accurate information about the price and quality of health care. It is virtually impossible get the information to really shop around.

    We learned in the 20th century from the failed experiments of Soviet communism and European socialism that governments are extremely inefficient at delivering basic goods and services. This is especially true when they resort to command and control central planning instead of harnessing the tremendous efficiency that markets force onto both providers and consumers. Markets work really well to deliver goods and services, but they only work well when consumers and producers have adequate information. By improving the information environment, Truth in Healthcare will help the market to work better.

    We have federal regulation of securities and banking, but not insurance. Insurance companies should be able to get an optional federal charter (and regulation) so that they don't have the added expense of dealing with 51 state insurance bureaucracies with different rules.

    The hard reality is that the average middle class American will pay on average for the average middle class American's care. There is no free lunch here. We can either do it cost effectively with consumer driven health care or pay much much more and get worse service with a non-market-based solution.

    One of the lessons we have learned in the financial markets is that they function a lot better when the government requires some transparency about prices and quality. We need a "Truth in Healthcare Act" that would require all large health care providers to disseminate accurate information about the actual prices they are accepting for services, not the fictitious list prices that they attempt to charge insurers. With transparency and truth in pricing, consumers will have the ability to easily shop around on the web for the services they need.
    • Phillip Gelman
    • Marketing Consultant, MARKETING MANAGEMENT, Pro Tempore
    One of the more important considerations in health care is that medical services are not fungible. Doctor A may be better than Doctor B - but one never knows until after treatments. Statistics may indicate extremes - mainly which doctor is bad news. Reputation and experience make for a realistic choice of doctors over the long run.
    When I needed the services of a urologist, both my cardiologist and internist named the same 3 choices.
    That's how I made my choice.
    Economics did not enter the picture: all my doctors accept Medicare which keeps prices low.
    • Guy Higgins
    • Principal, Performance2
    Given the recent naming of legislation, I can only hope that a "Truth in Healthcare Act" would, in fact, help provide clarity and an improved opportunity to see facts and truth.
    • Cliff Norman
    • Partner, API
    On target. To have a consumer driven market, we need the information to understand the Value relationship of: Value = Quality of Care/Price.

    The information for the numerator is not readily available. Patients have a right to transparency for the mortality rates of hospitals, infection rates, pending lawsuits for malpractice by doctors, etc. Some of this information is now being made available. Pricing is a horrible situation. One fellow tried to find out what the price tag of delivering a baby, he failed. He could not even get a range on the price. How does the consumer drive under these conditions. Providers, the insurance industry have used the government to protect their position at the expense of tax payers and the consumers. Adam Smith warned us about this collusion:

    "People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices."

    (Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations: B.I, Ch.10, Of Wages and Profit in the Different Employments of Labour and Stock in paragraph I.10.82)
    • Anonymous
    Query; I am 70 years old and entering into the highest health care cost phase of my life. Why on earth is any insurence company going to "compete" for my business vs. a 20 yr old?

    More to the point, how i am going to be sure that i don't end up buying the equivalent of a sub-prime mortgage? Wall Street has shown the the for-profit carrot can drive funny behavior. If the goal of the company is to maximize its profits then why wont they use techno jargon to get me to buy what i don't need?
    • Davis Liu, MD
    If healthcare was as simple as retail, then no country in the world would have problems with their health care system. Certainly patients should be engaged more in their health, however, as groups like Google Health have discovered (and note how the program has recently folded), it isn't easy to fix. If Dr. Herzlinger argues that payment reform should occur and innovative CHF program like Duke should be rewarded then that is a different story. If Dr. Herzlinger suggests that people will make more rational decisions if they, not the employer, purchase health insurance, I would ask a different question - how did shifting retirement benefits from defined benefit (pension) to defined contribution (401k) work out?
    • Anonymous
    In fact, a consumer driven market for healthcare is already starting to happen. See:

    Doctors who are committed to providing CARE instead of administrating insurance paperwork, and patients who are tired of being treated like broken factory parts are finding ways to go around, under and behind the current system to do good, caring passionate healthcare delivery.

    We just need to make these experiments easier and stay out of their way.
    • Don Hutchinson
    • Former founding director, Delta Dental of Massachusetts
    The medical insurance has been suffering for 70 years of distortion, where the customer patient has had little or no say in the cost of treatment, and where providers have had little incentive to rein in their costs. It will take many years to overcome this legacy.

    Whn Medicare, Medicaid and insurance companies, drive down reimbursement rates the result is the individuals without coverage are in fact being charged far above the norm. This can easily be confirmed by looking at patient invoices showing fees billed by physicians for services and the credits actually received from Medicare et al. The differences are "written off" - meaning that insured patients without group coverage are paying sometimes double or more the cost charged to group coverage. Thus while politicians bemoan the cost of private (non Group) insurance, they are looking at grossly distorted figures.

    Rather than tax Cadillac health plans, the IRS should progressively lower the deductibility of the premiums, at the same time providing tax deductibility to individuals, for their coverage.

    Ryan's plan envisages individuals paying more. A better incentive might be to parallel Social Security, where individuals have separate accounts that "belong to them" and with a portion contributed by the employers. They would thus directly benefit from thrift, and accumulate a nest egg for retirement. Those below the poverty line could be subsidized directly.

    I fully agree with Professor Herzlinger that individual market driven forces are needed to limit the expansion of cost, but that it will take many years to wring out the inflationary pressures. I see nothing in Obamacare that moves in hat direction
    • Bob Kinford
    Why is it no one seems to have a grasp of the obvious? When any business that is providing a service, adds employees it raises the cost of that service. This is exactly what medical insurance does, adds to the cost without improving service.
    Forty years ago you would go into a doctor or dentist office and there would be only one other person besides the doctor. Now when you go into a doctor or dentist office there is a minimum of three other people besides the doctor (who are visible). Not visible are the insurance agent and claims adjuster's making sure you are not out trying to get treatment you are not covered for.
    • Barry Shere
    • Controller & Director of Finance, LACIPC
    The initial comments were a perfect analysis of why the mislabeled " Patient Protection and Affordable Care Act" will be a disaster.
    Giving patients control over their health care is not a novel idea. It is where we came from before the government interceded with everything from deductions for company paid group insurance to medi- and obama-care.
    One shouldn't need much higher education to understand that the only way to control health care costs and to get good health care is (for consumers) to take control of and have personal responsibility for that care. Unfortunately, many do not trust the American people and believe that "they" (or government, or someone else) have a right to take responsibility (and control) on behalf of the people (consumers). Earlier posts on this subject exhibit this belief.
    As for what should be done with/for "the poor," that is a different subject. Whether we should help/take control of the poor, to what extent, who is defined as poor (and who makes that definition) are all matters that should be determined separately from the health care issue. "Helping" 30 million people without insurance by doing harm to the health care of 270 million, as obamacare does, makes no sense.
    • Annie McLean
    • Entrepreneur, Self-employed
    The key to an effective competitive market for insurance is REGULATION!!! Insurance companies do what they do.. cause they can! Just as the DEregulation (under Pres. W's administration) ...Sarbanes Oxley went away... and OMG!! Wall street had a field day. Plundering the investment sector... to bring the collapse of the real estate investment market. How many stockbrokers do ya think have their money in Insurance??? Regulation is the first step...
    • Anonymous
    @ Barry Shere: "Helping" 30 million people without insurance by doing harm to the health care of 270 million, as obamacare does, makes no sense.

    I disagree. Your statement makes no sense. You fail to acknowledge that the 270 million with healthcare were on the verge of no longer being able to afford healthcare with costs escalating meteorically. Healthcare was a major issue of the 2008 presidential race; Americans demanded a government solution. Small business was suffocating from spiraling employee insurance costs. Obama forced Congress to address the issue as Bob Dole, Clinton and others had attempted but previously failed to table. Obama's initial plan (before special-interest and ideological partisan politics carved it up) mirrored what Gov. Mitt Romney had implemented in MA which by all accounts is successful. Something had to be done, bottom line. We can agree/disagree to the contents and variants in the 'new' healthcare act (obamacare as you call it) but as a small business owner I can tell you that I'm more optimistic now than I was in 2008 about arresting the crippling hikes we were experiencing in medical in
    surance fees.
    • Adriana Valtierra
    • highschool student, Centro Escolar Los Altos
    OK. And what about mental health care? Constantly we are being polluted by consumerism, pornography, and other trash on the media. But this have a deepness, day by day we're affected in our conducts acting guided by our passions like beasts, not like real humans. If we created a healthier environment, our preoccupations and results wuold be completely different.

    The health care insurance has turned completely to a market, and I'm not worrying about that, but it's important to see everybody's benefit, YOU WIN, I WIN.
    • Anonymous
    Dead on about the hospitals and health providers making more money through their own inefficiency.

    Noble goals and thoughts regarding the equal care of the rich, middle class, and poor.

    Generally she seems a wonderful individual.

    One blind spot though.

    The consumer economy has not increased the value delivered in their products over the last 20 years. The consumer economy is driven by the same parameters that drive the health care industry, P&E ratios and leveraging the value of their stock for bonuses and short-term competitive advantage.

    Mark-up's on consumer products have increased by over 50% in the last 15 years. European luxury products are marked up on average at 4 x cost. Hermes bags are made in India and sold for $10,000. Italian suits are made in Romania and Algeria and pressed in Italy and sold with 75% margins. Our DVD players and other CE products might cost 50% of what they did ten years ago but are all made in China with extremely poor quality control. How many times has your $40 DVD player inexplicably broken within 2 years or the screen on your laptop gone permanently dark all because the chipsets are made and assembled in China. And the mark-up on these devices is well in excess of the 50% margin that was standard years ago.

    Consumer economies (at least our kind) combined with the drivers of the stock market inevitably sort toward disposable low quality products with higher margins. Why? Better recurring revenues streams and more churn and burn profit for the "market-makers" and the type of short-sight executives the market sorts for.

    "Free" market's do not elevate except through social pressure. Left to their own devices the devolve to the lowest common denominator.

    People actually eat MacDonald's with great joy despite the fact that it kills them. Obesity has increased by over 300%. Every aspect of our consumer economy and our stock markets serves to milk the cow (the consumer) as dry as possible to the benefit of the few's (very short sighted if you ask me or any dairy farmer) short term gain.

    Do we really believe that if we turn healthcare into a consumer driven system that suddenly despite the observable long-term problems in every other aspect of the consumer economy that somehow healthcare is going to get better?

    I do not know the answer here, but I am pretty sure the problem runs a lot deeper than product strategy and bundling.

    The problem seems to me to be structural. Healthcare is the latest profit center and growth opportunity. Nice to see that we are now creating bubbles with people's lives instead of just their internet usage.
    • Eric McNulty
    • Co-author, Renegotiating Health Care
    CDHC is part, but not all, of the solution. There are significant issues around health literacy that need to be addressed -- and having recently had to help a family member with cancer care options I can attest that it is not easy for even a well-informed, well-educated generalist to make choices about specialized medical treatments. This isn't like buying soap powder.

    The larger issue is to reorient the system from "health care" to "health" and then empower consumers to make more rational choices about staying healthy -- something they are better equipped if not currently well motivated to do.

    Every role in health care is currently being renegotiated -- from patient to care giver to administrators and payers. Clarity around the purpose of the system and the values by which we expect it to operate are as important as the business model. Clarity and leadership will help us make the negotiations as positive and productive as possible.
    • Anna
    • For, Student
    • Chris Holland
    • President, The Holland Group
    Thank you Reggie for continuing to articulate the importance of consumer driven healthcare.

    Your recommendation to place the money in the hands of the consumer reminds me of Milton Friedman's observation that we spend our own money on ourselves very carefully, spend other people's money on ourselves less carefully, and spend other people's money on other people, the least carefully.

    Whole Foods experiment with healthcare coverage is a good example.

    Since my work is focused on the effectiveness of care teams, management, and system leadership I find myself wondering how "patients" having the money would effect their interactions with the care team and how the care teams would functions differently if this one factor would change.

    Concierge medicine might be one place to examine the impact. I'd be very interested in other examples within healthcare where this dynamic would provide the convincing evidence for your argument?

    Are there more examples of the money being put in the hands of the healthcare consumer that would support the proposal?
    • Marie Jones
    • President, MTP Strategies, Inc.
    Regina is right on with many excellent examples of how consumer driven healthcare can work and save money.

    It all starts with the consumer taking responsibility for their health including owning their health history and all associated information. We have put that burden on the medical providers when consumers should own this information. We keep records for taxes and investments. Why don't we keep all our health history? The consnumer should own it and allow access to the provider when medical services are required. Add consumers paying for their healthcare instead of insurance companies and you have freed the providers from an administrative nightmare which allows the medical providers to do what they do best ..........diagnose and treat consumers.