Consumer-driven health care leads to reform, innovation

Even as the U.S. begins implementation of one of the most comprehensive healthcare policies ever passed, Regina Herzlinger, a professor at Harvard Business School and long-time advocate of consumer-driven healthcare, argues that policy cannot fix the broken healthcare system. According to Herzlinger, it will be consumer-focused entrepreneurial innovation that fixes the system – providing that politicians, providers, insurers and others with vested interests in the status quo get out of the way.

Speaking at the 2013 Mark McKenna Lecture, which was hosted by the Health Sector Supply Chain Research Consortium, a research group within the W. P. Carey School of Business, Herzlinger said that while the Affordable Care Act has expanded health insurance coverage, in terms of cost, quality and access, healthcare in the U.S. is still poor. “And that’s not going to change unless we move out of the status quo healthcare system.”

“Innovation,” Herzlinger said, “can help us do that.”

The problem, part 1: Costs are still rising

Of the three issues Herzlinger identified as serious problems with the status quo healthcare system in the U.S., one is cost. The rate of growth of healthcare spending “vastly” outstrips growth in GDP. “We currently spend about 18 percent of GDP on healthcare, and we’re heading for 25 percent.”

More significantly, Herzlinger said, is the fact that labor productivity of healthcare is negative. “That means the more money we pour into healthcare, the less we get out of the system. And that is a very serious economic problem.”

Then there is the issue of huge unfunded Medicare liabilities. In 2009, Medicare unfunded liabilities totaled $89.3 trillion – meaning that the government has promised almost $90 trillion in Medicare benefits that it has no way to pay for.

The problem of rapidly rising healthcare costs, negative labor productivity and unfunded Medicare liabilities is compounded by how we pay for healthcare. “The primary payers of healthcare costs are employers,” Herzlinger said. In contrast, she advocates a “consumer-driven” system in which the consumers of healthcare are the ones who pay for it.

“Right now I am oblivious to the cost of care because my employer pays it. If I were to know and be able to control what I pay for healthcare, then I might not want every procedure under the sun. What's missing is real competition, and we won't see it as long as consumers are oblivious to the cost of their healthcare.”

The problem, part 2: Quality is still poor

In addition to the problem of the cost of healthcare is the quality of it. “The quality of healthcare in the U.S. is really unknown,” Herzlinger said. “As consumers of healthcare, we don’t know much about what we’re buying. Quality is reputational – we go to one hospital or doctor because our neighbor said they were good.”

Even more problematic, Herzlinger said, is that current measures of healthcare quality are based on processes, not outcomes. “Entrepreneurial innovation has a hard time emerging in the science of medicine because we measure quality on whether A, B and C procedures were done, not on the outcome of those procedures. So if someone thinks X, Y and Z procedures would yield a better outcome, it’s very hard for them to break in.” In that way, Herzlinger said, “Medicine is notorious for obstructing innovation.”

The problem, part 3: Access is still limited

While the number of insured people in the United States has increased through the expansion of Medicaid, Herzlinger said, “It’s not clear that Medicaid is better than nothing.” Medicaid enrollees, she said, get worse care than patients with commercial insurance or enrollees in Medicare.

“The U.S. public healthcare system provides poor quality care,” Herzlinger said. That’s not a problem limited to America, but in other countries patients have something many Americans don’t: choice. “Brazil has universal coverage, but 45 percent of Brazilians have private insurance. In France and Spain, more than a third of people opt for private insurance over public insurance because they get better access.”

In those countries with national healthcare systems, Herzlinger said, “Public policy still doesn't provide the answer; it doesn't control cost, and it doesn't improve quality.”

Innovating the U.S. system

Controlling cost and improving quality and access, Herzlinger said, requires entrepreneurial innovation to completely overhaul the status quo healthcare system in the U.S. That means changing both the demand for and supply of healthcare, starting, she said, with giving consumers more choice.

One way to do that is to establish exchanges (just a fancy word, Herzlinger said, for markets). She said that such markets have been transformational for other industries. “As the air travel industry, for example, became more competitive and more consumerized – as people could go online and choose from among a range of airlines – the price of travel dropped,” Herzlinger explained.

Health insurance exchanges, Herzlinger said, will offer new types of policies. Those new policies will feature health promotion, high deductible options, medical travel and bundled care.

“When we stay healthy, our healthcare costs are lower, so why shouldn’t we get paid for it?” Herzlinger asked. So new policies with health promotion features give insured individuals points for eating healthy, working out and keeping chronic conditions like diabetes under control. “This type of health promotion changes behavior tremendously,” Herzlinger said. “It’s good for the individuals and it’s good for the system.”

High deductible options, Herzlinger explained, have been shown to keep healthcare costs down, without sacrificing health. “They get the best value for the money.”

Health insurance policies with medical travel options will offer premium reductions to patients who choose to receive elective procedures in lower-cost locations (internationally and within the U.S.).

The most important feature of new health insurance policies, Herzlinger said, will be bundled care for chronic diseases. “Chronic heart failure, for example, has 34 common co-morbidities (co-occurring conditions like kidney disease, diabetes and depression). The way it is now, that patient has to see 34 different doctors, all with records in systems that don’t talk to each other.”

In contrast, bundled care would provide all chronic heart failure-related care (including care for those related conditions) for a fixed price, within one system. “You could have a lot of competitive organizations focused on providing bundled care, and that would drive down the cost and improve the quality of care.” Herzlinger cited one study which found that if care were bundled, the cost of chronic heart failure care would be 2.5 times lower, and quality would be higher.

The second key to getting out of the status quo healthcare system in the U.S. is changing how healthcare is supplied, Herzlinger said. One supply change, she said, is to provide better value alternatives, such as retail medical clinics, which offer much lower prices than doctor’s offices and urgent care centers.

Retail medical clinics typically treat patients who don’t have a primary care doctor – those who are otherwise underserved. And, led by Walgreens, they’re moving into chronic disease management. “That’s a great idea from a public health perspective,” Herzlinger said, “because they’re providing management of self-care in a community setting” – again, higher-quality care at a lower cost.

America’s global competitiveness is at stake

While Herzlinger had very little good news to share about the current state of healthcare in the U.S., she said that this is an “exciting time” in healthcare “because the system can’t stay the way it is, and there are great opportunities for smart people to make great changes in demand and supply.”

The importance of innovative change in the U.S. healthcare system is hard to overstate, Herzlinger said. It’s an issue of global competitiveness. “We need leaders with the spine to take on the oligopolistic hospitals, intent on maintaining the status quo, which are very dangerous to the U.S. economy. If our leaders don’t, then the U.S. economy doesn’t have much of a future. Healthcare costs will cripple business here.”

Bottom line:

1. The Affordable Care Act has expanded health insurance coverage but in terms of cost, quality and access, healthcare in the U.S. is still poor.

  • Cost: Healthcare consumes an increasingly large percentage of our income; the more we put into the system, the less we get out of it; huge unfunded Medicare liabilities will burden future generations; and consumers are insulated from cost because employers (or the government) pay for our healthcare.
  • Quality: We don’t really know the quality of the medical providers we choose, our choices are largely based on the provider’s reputation; plus, current measures of the quality of healthcare are based on processes, not outcomes (which stifles innovation).
  • Access: Medicaid enrollees get worse care than patients with commercial insurance or enrollees in Medicare.

2. Innovation in demand will include health insurance exchanges – markets that will offer new types of policies, featuring health promotion, high deductible options, medical travel and bundled care to reduce cost and improve quality and access.

3. Innovation in supply will include providing better value alternatives, such as retail medical clinics, which offer much lower prices than doctor’s offices and urgent care centers.

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