America, Insure Thyself

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By Regina Herzlinger

From the Manhattan Institute

Saturday, March 29, 2008; 12:00 AM

As Hillary Clinton and Barack Obama continue their battle for the Democratic presidential nomination, they also sustain a debate over what constitutes universal health care. Obama says Clinton's "mandated" health-care plan is unaffordable for working-class Americans; Clinton says Obama's voluntary plan would leave millions uninsured.

Yet both candidates agree that affordability relies on government and big employers' continued involvement in deciding what kinds of products and services insurers can offer consumers -- and that's their big mistake. Instead, the candidates should step back and embrace a new way of thinking about health care: putting consumers first by empowering individuals to buy portable health coverage. Moving to a consumer-driven system will enable the universal coverage both candidates seek, because it will control costs and improve quality far better than governments or businesses can.

Since the 1970s, U.S. health-care financing has become increasingly centralized, with large employers and government programs now managing roughly 90 percent of spending. At the same time, health-care costs have routinely outstripped growth in GDP, wages and general inflation. The government's track record in picking winners and losers in health-care markets is terrible.

For example, Duke University Medical Center's innovative congestive heart failure program reduced costs by 40 percent by integrating the many providers needed to treat the disease and thus substantially improving patients' health. But Medicare pays only for fixed-price procedures, such as surgeries or doctor visits. The result? As Duke's enrollees became healthier and used hospitals less, Duke lost the revenues it once earned by filling those empty beds.One-size-fits-all payment systems used by massive buyers like Medicare help drive away the innovators who could lower health-care costs.

When it comes to embracing health-care innovation, however, Big Business fares no better than Big Government. In order for employers to get big discounts, they have to buy health care in bulk, offering just one or two basically identical plans to their employees. The result is consistent mediocrity. After all, how can Chrysler find a single health plan that works just as well for a 55-year-old diabetic with a bad back as it does for a 30-year-old triathlete who sees a doctor once every few years for a sprained ankle? Splitting the difference in these cases means that people do not get treated in the preventative or chronic-care settings that they really need.

Both Clinton and Obama support continuation of this dysfunctional model by leaving in place the existing employer tax deduction, and even offering additional federal spending to supplement it.

To expand health-care access and lower costs, our best option is to turn health-care purchasing over to the American people. Sectors driven by competition for consumer spending, like retail, display increasing specialization as providers offer niche products and services -- unlike our health-care sector, where, to paraphrase Henry Ford, you can have any plan you want as long as it's an HMO or a PPO.

Here's how to right the ship: First, as John McCain has proposed, end the employer tax deduction and give every American a tax credit to buy health care coverage -- in his proposal, $2,500 for individuals, $5,000 for families. This will almost instantly create an enormous "pull" mechanism for insurance competition. Next, make even the sickest patients into true health-care consumers by paying insurers more for sick patients than healthy ones. About 80 percent of America's health-care spending goes toward 20 percent of the patients, typically those with one or more chronic diseases like diabetes or cancer. Giving a chronically ill patient the ability to choose among competing private plans would transform not only the insurance industry but also the health-care delivery sector, by spurring competition to offer better treatment models at an affordable price. People with congestive heart failure, for example, would favor health insurance policies that offered them an integrated care program, like Duke's, over ones that feature today's fragmented providers.

For an example of how universal, consumer-driven coverage can help control costs and improve quality, consider the system in Switzerland. Swiss employers enforce universal coverage by requiring individual employees to provide proof of health insurance; the poor and the sick are subsidized so that they can buy health insurance as readily as everybody else. The Swiss have excellent health status, at far lower costs than ours. Switzerland's health-care consumer satisfaction ratings are the best in the world.

In arguing the issues of universal coverage and affordability, Clinton and Obama rightly focus on the critical pieces of the health-care puzzle. But unless they address the question of consumer choice, their debate is much ado about nothing: We won't have truly universal health care until we have a mechanism to bring everyone into the system, and it won't be affordable until individuals and families can choose their own insurance coverage from competing insurers. Only consumer-driven health care will give entrepreneurs the flexibility to fashion a wide variety of appealing plans and services while allowing consumers to choose the most cost-effective coverage for themselves. Americans need and deserve a health-care system that is universal, affordable and innovative.

Regina E. Herzlinger, a professor of business administration at Harvard Business School and a senior fellow at the Manhattan Institute, is the author of "Who Killed Health Care?"

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