How to price the priceless

Amid the fuss over Democratic front-runner John Kerry’s latest 10-year plan to expand health-care coverage to the tune (according to some Republicans) of $900 billion, and renewed allegations that the Bush administration has suppressed Medicare costs predictions, Harvard Business School’s Regina E. Herzlinger shrugs her shoulders, and smiles. She’s not surprised by the continued political rigmarole and she’s not intimidated by this stickiest of issues. In fact, her ideas, scores of health-care professionals contend, could solve the conundrum of “pricing the priceless” – care for the sick.

Herzlinger, the first female professor to be tenured at the Business School (HBS), says, “health care, like everything else in our economy, must follow market principles. I’m an equal-opportunity basher. Cost estimates for health-care expenditures [by the Democrats and Republicans], whether malevolently or not, typically underestimate the level of expenditures.”

According to Herzlinger, Bush’s ideas, while more liberal than those of some of his prececessors (who believed in strong government management of managed care), stop well short of a total market-based health-care system. The present administration’s plans offer expanded tax-support for consumers’ purchase of health care in the form of tax-sheltered options like the high-deductible health insurance plan. Nevertheless, as it stands now, American health-care suppliers remain in what Herzlinger calls, “the government’s micromanagement straitjacket.”

Herzlinger is a proponent of a liberated health-care economy. The first holder of the Nancy R. McPherson Professor of Business Administration chair, Herzlinger, a stately and articulate speaker and mother of two Harvard grads, has been championing her popular alternative to government-managed care, homogenized pricing models, and dispirited providers for years.

“Most of us want insurance against financial and health catastrophes. [This is why] I love the health savings account (HSA) feature [of the Bush plan],” a plan she goes on to describe: “If you buy a high-deductible health insurance policy,” she says, “HSAs can be purchased by employers, employees, and/or their families who can set aside money to use for uninsured health-care expenditures.” This means that, “the employee can use the money for other incredibly costly financial catastrophes, such as long-term care insurance, which is often beyond the means of the average American. Health savings accounts allow you to build up capital.”

Riding the backlash against managed care, Herzlinger is the ambassador for consumers who demand a broad choice of providers within managed-care products. In a recent opinion piece for the Wall Street Journal, she wrote, “Do you want “managed computer,” “managed investments,” or “managed car” insurance? Who is more capable of selecting the right computers, cars, and financial investments for you – an anonymous third party, who can ration your money? Or you?”

In her new book, “Consumer-Driven Health Care: Implications for Providers, Payers and Policy Makers” (Jossey-Bass, April 2004), Herzlinger redefines the boundaries of market-influenced health care she first set for a consumer-driven transformation in the health-care industry in the late 1990s with her oft cited, “Market-Driven Health Care” (Addison-Wesley, 1997). “Market-Driven” contended that the baby boomer generation, a self-actualizing, effective cohort of Americans actively using health insurance, would cry out for an architectural makeover. She was right; her ideas on how to transform the health-care industry are the demographic’s battle cry.

Herzlinger predicts that employer and government payment of employee health insurance, so called “third-party purchasing,” will give way to health insurance consumer purchasing choice. And in turn, the trend toward “vertical integration,” a system whereby a health-care organization offers, either directly or through others, a broad range of patient care and support services – think Kaiser Permanente – will succumb to “focused factories” like that at Duke University. At Duke, where, thanks to innovation in treating congestive heart failure, the hospital reduced the per person cost by about $8,600. Hospitals like Duke’s that focus their resources strictly on measures like those performed on congestive heart failure, chronic disease, frequently performed procedures, and primary and diagnostic care, seem to generate clear outcome data, charge lower prices, and enhance customer satisfaction simultaneously. “‘Focused factories’ can integrate not only around a disease but around intractable problems and underserved or special needs communities,” Herzlinger adds.

In Herzlinger’s view, understanding the competing interests of health care means appreciating these competing interests: the payment system; how to measure accountability; what consumers desire from innovations; how technology is vetted; and, finally, foreseeing how society will respond to a new innovation on the front page of a major newspaper. “Perceiving health care through the prism of these forces,” she says, resonates with students and helps them to their own discoveries.

An enlightened mind-set

Contemplating her work, Herzlinger reflects, “Years and years ago, when I went to work for [Massachusetts Governor Francis] Sargent [at a time when the budget was in turmoil because of spending increases on welfare, and tightening of other benefits for qualifying for Medicaid], I was his assistant secretary of human services … my bailiwick was health care. One day, a heroin addict in withdrawal came into the office; there were 600 people in there and none of us had any idea how we could do anything useful for him. It was ludicrous! His own tragic circumstance underscored how I felt that layers of government were far removed from actually dealing with the needs of the people.”

Today, in a time when consumers have no way of knowing how to qualify the performance of many health-care professionals, (“How does the consumer measure whether the hip operation was done in the best way possible?”), Herzlinger contends that perhaps an SEC model of accountability (looser oversight by government) or a nod to the Swiss may be a step in the direction of better health care in America.

“Switzerland is the only country in the world with a consumer-driven system,” Herzlinger says. “It liberates demand. If you were a Swiss citizen you would have to buy insurance, but you could buy a wide variety of policies. There is product differentiation, supply is as constrained as in the United States, but unlike Canada or the U.K., the quality of care is excellent. People go there from all over the world. The only comparison to Switzerland in our United States is Connecticut. And even there, Switzerland has better resources at 30 percent lower costs.”