The health care consumer gospel according to Harvard Business School: a talk with Regina Herzlinger, DBA. (Consumer-Driven Health Care).

Q: LAST NOVEMBER I WAS invited to attend a conference you organized at Harvard Business School on consumer-driven health care. At that time this concept had just surfaced on America's radar screen. A lot has happened since then, hasn't it?

Herzlinger: There has certainly been a lot more attention paid to consumer-driven care.

Q: The consulting firm KPMG published a survey late last year on defined contributions, a cornerstone of a consumer-driven system. The survey found that among 14,626 employees, 73 percent liked the idea of a defined contribution that allowed them to shop for their own plans, and 46 percent of 301 chief executives were receptive to the idea. Choice is certainly the driving engine of a consumer-led system, isn't it?

Herzlinger: Of course. And there have been other articles by Booz-Allen and Deloite & Touche extolling the virtues of consumer-driven health care. Ron Winslow, a senior Wall Street Journal reporter who attended our conference on the condition that he would not report directly about it, wrote a front page article in the Journal in February entitled "Give Employees the Money and Let Them Buy the Policies."

Consumer-driven care is an idea people are talking about. Maybe its time has come. I was recently the keynote speaker at the Washington Business Group on Health, which represents the health care coordinators of large corporations. If I had spoken on this topic a year ago, people would not have been interested or would have viewed it as a wildly improbable pie in the sky proposal.

Q: Consumer-driven health care has been receiving legitimacy on the political front, too. Another attendee at your conference, Robert Levine, MD, of New York City, is an editor of Blueprint, a Democratic publication of the Progressive Policy Institute. His publication recently devoted an entire issue to consumer-driven care. You had an article in that issue, didn't you?

Herzlinger: I did. The Democratic Leadership Committee is a think tank that was formed by President Clinton when he was Governor of Arkansas. The Committee is the home of the Progressive Policy Institute, which publishes Blueprint. Another one of its editors, David Kendall, was also at our conference. Dr. Levine is a diabetologist who works with children. He and Kendall are advocates of consumers. There is evolving political backing from Democrats, who heretofore preferred government-sponsored care.

Even Bill Bradley, who was arguably the most liberal of the presidential candidates, has good words for it. His health care platform emphasized the Federal Employee Benefit Program, which is a defined contribution plan covering more than 10 million federal employees. People who are in favor of government as a solution are beginning to support a health care plan that empowers consumers more than the government.

Q: What's happening on the Republican side of the aisle?

Herzlinger: Republicans have always liked the idea. Bill Thomas, the Representative from California, has legislation to commit tax credits, which is a variation of the theme of consumer-driven care. His bill would enable uninsured and self-employed people to obtain tax credits and would empower them by giving them money and a tax subsidy to purchase health insurance.

Dick Armey, the House Leader and a Republican from Texas, has legislation to get rid of the "use it or lose it" feature of Flexible Savings Accounts, which are a perfect vehicle for consumer-driven health care. Employers can deposit the money they normally would spend to buy health insurance on behalf of their employees into Flexible Savings Accounts. Employees can buy the health insurance they want without paying taxes on that money.

The only problem with Flexible Savings Accounts is that if you don't use the money, you lose it. There is no incentive to save money or to use it for some other purpose. Armey has introduced legislation to get rid of the "use it or lose it" feature. If my employer gave me $6,000 and I spent only $4,000 on health insurance, I could use the $2,000 for future years.

Lastly, the Republicans have included riders on the various patient protection bills to increase the number of Medical Savings Accounts and to get rid of the inhibiting features that prevent their widespread use and acceptance. For example, they have introduced legislation to permit the sale of MSAs in large corporate settings.

Q: Do you predict the revised MSA legislation will pass?

Herzlinger: I don't know. But, employers can implement consumer-driven health care without tax penalty to their employees, either through the use of Flexible Savings Accounts or through the extension of the IRS code that has always treated money paid for an employee's health insurance as non-taxable. Employers can do that without any new legislation. Consumer-driven care does not need Congress to pass MSA legislation to make this version happen. It requires large corporations to say this is how I will do it and to make it happen.

Large corporations are driven by three things:

1. The KPMG survey showed that they would like to increase choice to achieve employee satisfaction.

2. The cost control measures promised by managed care have failed and many employers are facing double-digit inflation of health care costs.

3. If the ERISA shield should break and employers and HMOs were liable for pain and suffering under the premise that they practice medicine--just as physicians and hospitals practice medicine--then employers are obviously the deep pockets that many plaintiffs would target.

In the long run, employers may have no choice but to get out of the business of buying health insurance for their employees.

Q: Why hasn't the Federal Employees Health Benefit Program (FEHBP) caught on as a consumer empowering movement? After all, federal employees, including Congresspersons themselves, are covered by it, and it has been cost-effective and well-received. Isn't what's good enough for Congress good enough for the people?

Herzlinger: FEHBP is a good model and it should be widely emulated. It is a defined contribution plan. The federal government contributes a certain amount of money and offers a vast array of choices and if you want something that costs more, you go out and buy it. But for a while, employers believed the MCOs were the only answer.

Cost control has not been achieved with HMOs and many questions have been raised as to whether better health care has been achieved. Consumers are annoyed, even infuriated, with the restrictions of managed care. Besides, with all the individual mandates imposed upon them, HMOs are so handcuffed they have lost their capacity to manage either care or costs. A widespread managed care solution is clearly out.

Q: Has managed care had its day?

Herzlinger: No. Some people like managed care a lot. Young people embrace the broad array of services that a group like Kaiser offers. Kaiser is extremely progressive on disease management and is making a valiant effort to deal with chronic diseases, whose treatment is so fragmented in the present health care system. Some people would love to be in an HMO, but it's simply one of many options and not the option.

Q: HMOs will simply be one in a menu of choices?

Herzlinger: Right now people have no choice but managed care. In a consumer-driven system, they will have many choices. Consumers might have a group of providers who get together as they have in Minneapolis and offer a package of care directly to consumers without any insurance intermediary or consumers might have a high deductible health insurance policy. Consumers might have a health insurance policy that offers long-term care, which is not widely available nowadays. A broad range of policies can be conceptualized and this variety is what will be offered. Among the choices will be some managed care options.

Q: You have advanced the idea of a Securities Exchange Commission analogue for health care. The HEC, Health Exchange Commission, would level the playing field for all concerned. If the SEC works so well in such a complex and dynamic field as finance, surely an HEC would work in health care?

Herzlinger: The SEC enabled what is called the 'efficient market" for securities, Our securities markets are the wonder of the world-they are key to our prosperity. Entrepreneurial people can get access to capital efficiently and people who make bad use of the capital get punished because the stock market is so transparent.

Transparency means that there is very good information for everybody to look at. People can reward the excellent and punish the incompetent. The key is that the SEC requires disclosure of information and that the information is measured in a standardized way. The information must be audited and readily available. Before the SEC, there was no information in the securities markets and the transparency and efficiency of the market did not exist.

The analogue to the SEC in health care would assure accountability and would achieve similar results in making health care markets efficient. The HEC would make for good products that provide high quality care at a good price. It would lead to the chipping away of bad products, poor quality care, and high prices. Our health care markets and our system would become the wonder of the world.

Q: At the Harvard conference, you said that if consumers are smart enough to handle the complexities of the wealth and finance markets, surely they are smart enough to handle the intricacies of the health care market.

Herzlinger: Right. Many people don't understand how markets work. They believe that for a market to produce a good product, by which I mean a high quality product at a reasonable price, every purchaser needs to know what he or she is buying. Nonsense! If you look at the computer market, where prices have steadily decreased while the quality of products has increased, every person does not know what he or she is buying. In fact, quite the contrary is true. Most have no idea of what they are buying. The same is true in the automobile market. The quality has steadily gone up while the price as a percentage of income has gone down.

The computer and the automobile markets demonstrate that people can get access to good quality products at a reasonable price, even if not every single one of them is knowledgeable. The way that works is that we have thought leaders to determine the markets, and the rest of us piggyback on their shoulders and benefit from their expertise. Health care, too, can become a very efficient market, but it cannot do so without good, solid, and transparent information. That is why we need a health agency like the SEC.

Q: Will the Internet galvanize this transformation to a more efficient consumer-driven market?

Herzlinger: The Internet will be a catalyst in that it can offer consumers these three things:

1. Information. There were 30 million people who used the Internet for health care information last year, and that number is probably 70 million right now. More than 35 percent of Medline users are not physicians-they are ordinary people. The democratization of medical information has set in.

2. Health insurance. I can go to a website and define the characteristics and options and price that meet my specifications. A number of companies have formed to provide insurance sales on the Internet. These sales reduce the role of brokers and other intermediaries and take a lot of money out of the health care system.

3. Self-information and self-care. People who have chronic diseases will be able to use the Internet to interact with providers on a 24/7 basis to help manage their diseases and get the support they need.

We are jumping from a system led by providers to one led by consumers. The Internet is a democratizing medium. It makes things accessible to everybody. It is transparent. It gives consumers information and access to a host of options. When the Internet is coupled with employers giving employees money to use as they choose, we will have a revolution.

Q: There's no doubt profound changes are under way on a grand scale. Take the phenomenon you call disintermediation, or maybe we should call it unbrokering, or simply eliminating the middlemen.

Herzlinger: Many brokers will be disintermediated. Consumers and providers can take on that role themselves.

Q: Or consider disestablishmentarianism, by which I mean the dismantling of such top-down medical establishment organizations as academic health centers, integrated delivery systems, and large HMOs.

Herzlinger: Large organizations will have to reconfigure themselves to meet the demands of consumers. We have a very inward looking system, organized by providers for the providers' convenience, not for the consumers' needs. If I had HIV or AIDS or cancer, I would need an integrated solution geared to my needs, not what we have now. The health care system will have to be reorganized do that, and that will be a major revolution.

Q: Three years have passed since you wrote Market-Driven Health Care: Who Wins, Who Loses in the Transformation of America's Largest Service Industry (Addison-Wesley, 1997). Who is losing and who is winning?

Herzlinger: I predicted the losers accurately. The winners are still a question.

The health policy community detested the book because it anticipated the end of HMOs and the problems that integrated delivery systems would encounter. In essence, it predicted the end of the power of expert intermediaries over the health care system. The average vertically integrated health care system loses about $100,000 per physician it owns, and most of the IDSs can't wait to dismantle themselves. The HMOs are undergoing tremendous problems as indicated by the Harvard Pilgrim Community Health Plan's problems here in Massachusetts and Aetna's problems nationwide.

Q: As integrated delivery systems have integrated structurally, they have disintegrated culturally. There has been a widening chasm between the managers in the executive suites and the physicians in the clinical trenches.

Herzlinger: No matter how competent its executives, there is no organization that can handle all the diverse activities that a vertically integrated "soup to nuts" health care system demands. It is simply beyond human competence. Only markets can cope with these diverse activities!

Q: When is your book based on the Harvard Business School's consumer-driven health care conference being published?

Herzlinger: It will come out in late 2000. It consists of the papers given at the conference, as well as those from some new participants. The book will address four issues:

1. What are the models for consumer-driven health care?

2. Who will be the new intermediaries that will help consumers be intelligent and effective in shopping for health care?

3. How will providers respond to the challenge of consumer-driven health care?

4. What is the role of government?

Q: And what is the role of government outside the SEC-type health commission?

Herzlinger: To provide oversight and the truth so people can make up their own minds. The role of the federal government is also to take some of our redistributed money and use it to enlarge the safety net so that the poor and the old and the frail and the uninsured have access to the same kind of health care as the rest of us. This will happen when a consumer-driven system moderates the cost of health care. At that point, Congress will feel comfortable about enlarging the safety net and not worry that costs will explode as they did after Medicare and Medicaid were enacted.

Q: And so in this new consumer-driven world, there will be truth, transparency, democratization, and universal access to information.

Herzlinger: ...and federal oversight.

Q: ...and death and taxes.

RELATED ARTICLE: About Regina Herzlinger, DBA...

Regina Herzlinger, DBA, is the Nancy R. McPherson Professor of Business Administration at Harvard Business School. She has taught at the Business School for 28 years and is a tenured professor. She specializes in health care matters and conducts a course for future MBA health care entrepreneurs. She wrote the best selling book Market-Driven Health Care; Who Wins, Who Loses in the Transformation of America 's Largest Service Industry (now available in paperback from Perseus Books). On November 18-19, 1999, she hosted a conference on consumer-driven health care at Harvard Business School. She invited guests from across the health care spectrum--policymakers, corporate chief executives, benefits officers, venture capitalists, HMO executives, AMA officials, reporters, consumer marketing experts, physician political leaders, practicing physicians, health care economists, conservative and liberal think tank leaders, Internet entrepreneurs, congressional staffers--to submit papers and to debate about what a consumer-driven model would require to implement and sustain and what it would achieve. These papers will form the nucleus of a new book, Consumer-Driven Health Care (Jossey-Bass), which will be published in late 2000. She can be reached by calling 617/495-6646 or via email at [e-mail].

Richard L. Reece, MD, is a health care writer and Editor-in-Chief of Physician Practice Options. He is on the board of VPmanager.com, an Internet start-up company that provides independent physicians with business support services. He can he reached by calling 888/457-8800 or via email at [e-mail].