Arnold Kling  

Consumer-driven Health Care

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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?


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TRACKBACKS (1 to date)
TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/60
The author at The Proximal Tubule in a related article titled This Week's Top Five writes:
    3. Arnold Kling examines the market for health care. Read a related article by him here. [Tracked on March 25, 2004 7:30 PM]
COMMENTS (23 to date)
Dan Perrin writes:

For those looking to save money on their health care, and put cash in their pocket each month (instead of sending a hefty check to their insurer) check out the state by state listing of all HSA insurers now offering HSA products.

In addition, the Joint Economic Committee Graph in Exhibit A of my testimony before the U.S. Small Business Committee explains, very clearly, the reason for the explosion in health care costs in the United States over the last four and a half decades. Both the list of states, and my testimony can be found at www.hsainsider.com.

Mcwop writes:

There are many innovative ways to cut costs. For example, the emergence of "urgent care centers". This is a place you can go for urgent medical needs without an appointment, but it is much less expensive than the emergency room. I had to get 8 stitches a month ago (bloody frozen english muffin). The cost was $298 at the urgent care center. An emergency room would have charged around $600. You would not go there with a heart attack, but maybe people with colds can be pointed away from the emergency room.

If this country ever does decide to go to universal care, I will only support a catastrphic based system with an allowable free checkup. The deductible can be based on need/income.

Eric Krieg writes:

>>bloody frozen english muffin

What exactly were you doing with that english muffin?!?

ScottN writes:

As a reader of John Updike's "Lover or Money" column, it occurs to me that a switch to HSA/catastrophic insurance would create many more spousal arguments regarding doctor visit vs. saving money.

Will a switch to HSA be interpreted a signal that family is less important than money? Would this be an example where consumers will give up efficiency for simplicity?

Mcwop writes:

Eric,
I was trying to cut it - and yes I did a little defrost on it. Knife slipped.

ScottN writes:
HSA/catastrophic insurance would create many more spousal arguments regarding doctor visit vs. saving money.

God I hope that is not the driving force in creating a universal system. The driving force should be a financially sustainable system.

Eric Krieg writes:

Yeah, you know, marriage is MUCH more vibrant institution in the Euro zone. Socialized medicine is better for so many different reasons, so lets add better marriages to the list.

This falls along the lines of the latest talking point to drag itself out of the marxist swamps of academia: capitalism is bad because it offers too many choices.

Boonton writes:
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.

This sounds like a roundabout implementation of my health care reform plan. Just in case you haven't heard it, here is a summary:

1. Allocate a tax to raise funds for healthcare vouchers to be given to each American.

2. A voucher can be cashed in against employer provided insurance, against direct medical expenses, against health insurance of any type, or donated to charity.

3. As a condition of accepting vouchers, health insurance companies would agree to limit premium increases based on risk. This way those who are flagged as the most sick will not be effectively denied insurance by astronomical rates.

The Swiss system seems to have captured that in a roundabout way. By taxing insurance companies who insure only the healthy and subsidizing those that insure more sick people, they are indirectly providing their citizens with a voucher-like benefit. A Swiss citizen who is sick can buy insurance on the free market at a rate lower than he would if gov't was not involved.

Boonton writes:

Benefits of my proposal:

1. The Free market is preserved, if HMO B can provide the same coverage for less than HMO A the individual is better off choosing B. Those who can provide innovation in either managing healthcare (HMO) or directly providing it (Heart Centers, Hospitals etc.) will benefit financially.

2. Individuals are free to choose how much they want to spend on healthcare. If they want a fancier plan than the voucher can pay for, they are free to use their personal money towards the plan or care they desire.

3. All Americans are provided with universal access to a basic level of healthcare no matter what their income or status. Losing a job, getting very sick etc. will not mean going without health coverage.

4. Unlike open ended entitlements, the voucher is tied directly to a tax. If Americans want a higher universal coverage they must vote to support a tax increase. If Americans want lower taxes they must support a cut in the voucher.

Mcwop writes:

Boonton writes:
4. Unlike open ended entitlements, the voucher is tied directly to a tax. If Americans want a higher universal coverage they must vote to support a tax increase. If Americans want lower taxes they must support a cut in the voucher.

Are you saying the citizens vote by referendum? I am afraid it will be like medicare mess (or social security) where the payroll tax may double as a fix. Politicians can make that change without a direct vote of the people. I want a system where there are checks/balances that taxes won't spiral out of control to satisy politician's need for giveaways/spending.

Kevin Brennan writes:

"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."

If someone can point me to an actual example of this last and not "my brother's friend at work was at a Detroit hospital and saw lots of Canadian license plates" I'd very much appreciate it.

I've known several people diagnosed with serious (as in life-threatening) cancer in the last year here in Canada. Not one has had to wait a month to begin treatment, let alone the year quoted here.

Canadian health care is not perfect by any means, but it succeeds at providing coverage to all Canadians at a significantly lower cost (in fact, the per capita GOVERNMENT expenditure on health care is about the same in both countries). Canadians live longer than Americans, have a lower infant mortality rate (and BTW, the lower infant mortality rate doesn't fully account for the longer lifespans) and are as or more likely to survive a serious illness.

Eric Krieg writes:

>>Canadians live longer than Americans, have a lower infant mortality rate (and BTW, the lower infant mortality rate doesn't fully account for the longer lifespans) and are as or more likely to survive a serious illness.

Which can all be explained by the different demoagraphics between Canada and the US.

If Canada had an urban black underclass, like the US does, it would not have such rosy health statistics. It would be fairer to compare white Americans with Canadians.

There is a Quebecois independent film out about the shortfalls of the Canadan medical system (and of the Quebecois lifestyle in general). "The Invasion" or something (I'm sure it sounds better in French).

Boonton writes:
Are you saying the citizens vote by referendum? I am afraid it will be like medicare mess (or social security) where the payroll tax may double as a fix. Politicians can make that change without a direct vote of the people. I want a system where there are checks/balances that taxes won't spiral out of control to satisy politician's need for giveaways/spending.

No the tax would simply be dedicated to the vouchers so the voucher would be roughly the revenue raised by the tax divided by the number of people covered. IMO, the tax & voucher should be raised or lowered thru the normal political process...not a direct referendum.

The checks and balances are obvious. Raise the tax bite too high and voters will buckle, let the voucher fall to low and they will also gripe. The political process makes dramatic changes in tax rates difficult so it's unlikely that the voucher will go up and down wildly.

dsquared writes:

Colour me unimpressed by the "uninsured rich" anecdotes. You ought to be talking about wealth rather than income when looking at whether people with "incomes greater than $75k choose to be uninsured". After all, the difference between a successful small businessman with an income of $75k, and a broke small businessman is all too often, a serious illness.

Sandy P. writes:

A country where dying like dogs would be an improvement

In Canada they wouldn't let you die like a dog. Which is too bad.

...If the vets get the go-ahead, you could take your dog to it by the end of this year. But you won't be able to go yourself unless, like that guy who was going to have to wait six weeks for a crucial MRI until his doctor discovered the local hospital machine was leased to veterinarians at night, you book yourself in as "Fido."...

... Ten years ago, in the April, 1993 issue of the Fraser Institute's Fraser Forum, I wrote about a CAT scan machine at a Toronto hospital that could only be used on people for a few hours a day because it cost so much, but could be used on animals during other times because their owners were allowed to pay. Indeed, the money pet owners spent enabled the machine to run longer for human clients. I thought there was a lesson there, and I thought a decade was long enough to learn it. I was wrong.
The situation was seen as an outrage. But apparently the problem was that animals were getting treated because the market was allowed to operate, not that humans weren't because it wasn't. Another hospital in London, Ont., briefly offered midnight MRIs to pets until an angry outcry from humans on waiting lists made it stop. So the bad news is you can't get treatment. The good news is neither can your dog....

From the Ottawa Citizen earlier this year or late last year, I didn't save the date.

Sandy P. writes:

Which is what a catastrophic HC policy is for, right, d???

I've read on more than one blog that companies might be better off providing catastrophic policies and giving what the company spends per employee to each employee and let them make their own decision and purchase the best policy for themselves.

Or put it into the medical account and what's left over is theirs.

And I don't the the &75K a year is anecdotal, I've read it from more than one place, a think tank in Dallas, IIRC, for one. In 2000, out of the 40m "uninsured, 15M were 20-somethings+++ making $50K and above. Unlike most people on this blog, I'm lucky I got thru geometry, but in my book, 15 of 40 is over 25%. That's a lot of anecdote there, too, BTW. Besides, the US government FINALLY allowed small business owners only a few years ago to write off their insurance as much as the big boys do.

And just curious, where did you learn to spell colour?

$75K is a lot of money if you live in Mississippi or down South and Southwest. Actually, most parts of the country.

Mcwop writes:

Sandy,
My company just started offering such a policy, with a cash account for the small stuff.

Kari writes:

One side note: You said the speaker likes boutique health care facilities such as heart hospitals, but did she explain how they make their money? You've heard the "skimming the cream" argument, I assume: Most boutiques don't take Medicaid or indigent patients, and the physician-owners sometimes refer more complicated (read: costlier) cases to the general hospitals she compares to department stores, which typically are better-equipped for higher-risk cases. Last year's GAO study, though hardly complete, provided results that confirmed that boutiques select less-acute patients.

But boutiques also pick and choose specialties that pay well -- especially those for which the GOVERNMENT pays well. Heart hospitals exist largely because of favorable Medicare reimbursement for cardiac care. They're playing by the rules everybody else is, but it's hardly a pure free market.

Lawrance George Lux writes:
What is the Swiss approach to health care, and how well could it be applied here?

The Swiss system is not a market-driven system, but it is run by market-driven Bankers. Health insurance is a fundamental element of Employee pay packages there, but it is a primary Care program which is not exotic: specific listing of coverage without easy introduction of new medical techniques or Drugs. Employee pay packages are mandated lower, where both Business and Labor insist twenty percent of Pay comes in the form of social services and retirement benefits. I get this information from a friend who should know, without checking on it's veracity. lgl

dsquared writes:

Which is what a catastrophic HC policy is for, right, d???

No, not really. Migraine isn't a "catastrophic" illness, but a really bad one can be more or less catastrophic for your graphic design business. More generally, your catastrophic HC policy will cover the cost of treating your heart attack, but it won't replace the income you lose because you're no longer able to work, or to work as hard.

So what happens is that you go into the hospital as being a person with a decent income and catastrophic health cover and come out as a person with a much lower income, a pre-existing condition and catastrophic health cover.

Mcwop writes:

D2,
Catastrophic coverage is simply a high deductible policy. Migraine headache or heart attack expenses that exceed the deductible would be covered the same. You are bringing disability insurance into the health insurance equation. These policies are usually seperate.

Patrick R. Sullivan writes:

I've known several people diagnosed with serious (as in life-threatening) cancer in the last year here in Canada. Not one has had to wait a month to begin treatment, let alone the year quoted here.

A friend of mine in Thunder Bay, Ontario is out of pocket $50,000 for sending his father to the Mayo Clinic, when the provincial doctors put him on a waiting list for testing.

Not treatment. Tests. He had stomach cancer, and had his tests and his surgery before he would have even had his tests in Canada.

Patrick R. Sullivan writes:

Another problem for health care is occupational licensing, which prohibits professionals without an MD to practice medicine. I've known many RNs who know more about some illnesses than the doctors.

Pharmaceutical reps usually know more about drugs than the MDs who prescribe them. A true market oriented health care would utilize these resources more efficiently than we do now.

Eric Krieg writes:

>>Another problem for health care is occupational licensing

Not just licensing, but the fact that the AMA controls the medical schools, and thus has a say in how many new doctors graduate per year. This is why you have people going to Baby Doc schools in third world countries.

We could graduate A LOT more doctors per year if we wanted to. We could flood the market with doctors. Getting into and graduating from medical school does not need to be as difficult as the AMA makes it.

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