01 Sep 2004

A Market-Based Prescription

Regina Herzlinger diagnoses the business of health care
by Deborah E. Blagg


The Bulletin caught up with HBS professor Regina E. Herzlinger this summer as she was en route to Nashville to accept the 2004 Healthcare Financial Management Association Board of Directors’ Award. The prestigious honor recognizes thought leaders in health-care financial management.

Widely known for her innovative research and teaching on the business of health care, Herzlinger has long predicted the unraveling of managed care in the United States, along with the rise of consumer-driven health care and health-care-focused factories, two terms she coined. Her most recent book, an edited volume, is titled Consumer-Driven Health Care (Jossey-Bass, 2004).

What is the fundamental difference between consumer-driven and managed health care?

Over two decades ago, managed care, which gives a third party control over patients’ access to physicians and other resources, was promoted as a way to curb cost increases while ensuring quality treatment. Those goals have not been reached, largely because patient and physician resistance to stringent gatekeeping has led to more relaxed controls and freedom to use out-of-network services, at ever-increasing costs.

A consumer-driven system recognizes the importance of giving patients and physicians more choices. Rather than imposing top-down controls, this approach enables users and providers to customize features such as benefits, levels of coverage, and bundling and payment of health-care services.

How would a consumer-driven system affect physicians’ services?

Health-care providers are as constrained by managed care as consumers. Other industries enjoy much greater freedom. Grocery retailers, for example, serve a variety of customers in outlets ranging from discount clubs to upscale health-food chains. What these stores offer and how they price their products depend on consumer demand, value, and traditional market forces.

Our present system suppresses these forces and innovation. Doctors can only provide services that fit static billing and payment codes. These codes have made some specialties — notably cardiology — excessively profitable, while areas such as emergency medicine and burn care are undervalued. In a consumer-driven system, market forces would operate to correct these disparities and create greater incentives for physicians to customize therapies and develop innovative approaches, such as health-care-focused factories.

Why are you such a strong advocate of a factory-like approach to health care?

What I call health-care-focused factories are a response to the reality that today 80 percent of health-care costs are spent on 20 percent of the users. Clearly that is where the greatest opportunities for efficiency and effectiveness lie.

The 20 percent have chronic diseases or disabilities, such as bad backs, heart disease, AIDS, diabetes, or asthma. These patients need the care of many different specialists: A diabetic, for instance, might need an endocrinologist, ophthalmologist, cardiologist, therapist, and nephrologist. In a focused factory, all these resources are integrated. These diabetic specialists jointly develop treatment protocols and pricing. Together, they offer a full range of services customized for this disease. Research shows that this integrated approach greatly reduces costs by improving health status.

Do consumers actually need the systemic protections provided under managed care?

I can’t tell you how many people I’ve talked with who say how difficult it is to try to navigate in managed care when you are sick and don’t have a loved one or other advocate to help you. If you are seriously ill or in pain, would you prefer a system where you have to find your own individual specialists, make sure they are communicating, and integrate your own care, or would you rather have a team that integrates itself around your needs?

Better care will result from a consumer-driven system because there will be fewer obstacles standing in the way of physician innovations, and because — if markets follow money, which we teach in business school — the successful management of chronic diseases and conditions is where the money is.

Do you think the country is ready for this kind of change?

Congress has already passed a piece of legislation that is tremendously important to the consumer-driven movement. Health savings accounts, established as part of the Medicare prescription drug bill in 2003, will allow the middle-class uninsured — who account for about 40 percent of those without coverage in the United States — to establish a tax-supported way to fund their health care.

That said, in my view, meaningful reform almost always begins in the private sector. I am encouraged that many employers are offering new choices in health insurance plans to their enrollees. Large insurance companies, such as UnitedHealthcare and Aetna, are investing heavily in consumer-driven health care. That investment will create a competent infrastructure. Once the approach is entrenched in employers’ markets, it will move into Medicare and Medicaid.

Is there a connection between the health-care needs of aging baby boomers and the time being right for consumer-driven health care?

Yes. These are people who were in college in the 1960s and 1970s and were very successful in bringing about social change in this country. They know how to get what they want, and in health care, they want something that will be tailored to their needs. They will not tolerate the fragmentation and hassles inherent in the present system.

How long will it take to implement a consumer-driven system in this country?

It took only about five years for us to go from an insurance system where there was no managed care to a system where it is all managed care. So even though the U.S. insurance system is large and decentralized, when we move, we actually move with dizzying rapidity.

Deborah E. Blagg


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