Healthy Competition

(by Marvin Olasky, WorldMag.com) – We decide which goods and services to purchase from an amazing array offered to us in many areas of our lives. But, for most Americans, two of the most critical areas are exceptions to our national emphasis on consumer choice. One is education, with its public-school system maintained by union power. The other is health care, run by what Regina Herzlinger calls an “iron triangle” of third-party institutions-Congress, health insurers, and hospitals-that stand in the way of consumer-driven health care.

Herzlinger, a Harvard Business School professor and a senior fellow at the Manhattan Institute, succinctly lays out her analysis in Who Killed Health Care? (McGraw-Hill, 2007).

Question #1: Why do many hospitals and other health-care providers oppose letting the American people know the price of the medical services we use and the results doctors and hospitals achieve?

Sunshine is the best disinfectant. Providers fear that they will be the victims of transparency. After all, the only ones who will benefit are those who achieve higher quality at a better price. And what we do know about U.S. health care is not overwhelmingly positive; we spend 40 percent more as a percentage of GDP, as the next highest-spending country, and yet over 300,000 people are killed by hospital errors every few years.

Question #2: Is the problem greed-driven doctors?

The problem is that you and I do not control health care. As a result, insurers, service providers, and the government can use our money without being responsible for the results they achieve. All the money spent is ours but we have no accountability for it.

Question #3: In what ways has Congress acted to suppress competition in order to protect powerful, entrenched status quo health-care institutions?

Congress has not enabled the transparency in health care as it has in the financial sector. It is much more responsive to the status quo providers and insurers, who want to squash transparency, than to you and me. So while the government has enabled us to know quarterly earnings per share through the SEC, we know nothing about the death rate of a surgeon who does open-heart surgeries on people like us. Which statistic is more important?

The U.S. Congress also pays for health care in ways that inhibit competition. It sets the price-not the free market. Perversely, the government pays mostly for surgical and medical interventions. So if doctors develop a new service that will keep sick people healthier, they will lose money.

Last, the U.S. Congress has a thick sheaf of laws that prohibit physicians from owning health-care facilities. These laws are akin to prohibiting Michael Dell and Bill Gates, two subject matter geniuses who are also brilliant business people, from entering the technology sector.

Question #4: What’s big-is-beautiful health care, and how does consumer-driven health care differ from it?

The status-quo wants to increasingly centralize its powers, through consolidation of hospitals and insurers and increased government micro- management of health-care delivery. They argue that big is beautiful, but the economies of scale and standardization of quality they promise has yet to materialize. Rather, the increased consolidation of hospitals has increased prices and even, at times, diminished quality.

In contrast, consumer-driven health care decentralizes health-care and insurance-purchase decisions to us and gives us the money and information we need to make smart decisions about what we consider value for the money. The Swiss consumer-driven health-care system spends 40 percent less than the U.S., as a percentage of GDP, and achieves universal coverage and world-class quality results.

Question #5: Aren’t nonprofit hospitals dedicated to public service?

Some are-these safety-net hospitals serve the poor and uninsured. But all too many nonprofit hospitals have sacrificed their charitable mission in the pursuit of market share and profits. Some earn more than $500 million per year in profits while the uninsured are shunted to municipal safety-net hospitals. Sadly, these hospitals use their nonprofit status to inhibit their transparency and to cost the taxpayers forgone tax revenues, yet they do not bring commensurate charitable results.

Question #6: Are HMOs the problem or the solution?

HMOs are great for those who like them and not great for those who don’t. We need a consumer-driven system so we can select HMOs if we like them and choose other kinds of health insurance policies if we do not.

When human resources tried to stuff managed care insurance policies down the throats of employees, many rebelled. They did not want their money to be used to pay for insurers who sometimes stopped them from accessing health-care services. Who can blame them? We are entitled to as much free choice in health insurance as in every other aspect of our lives.

Question #7: How can Congress make consumer-driven health care happen-and do you think Congress will?

A simple tax law change will do the job. Right now I permit my employer to take money that would otherwise be my salary and to use it to buy my health insurance. Yet I would not want my bosses to buy my food, clothes, or housing. They simply cannot obtain what I consider value for the money and will likely simplify their lives by offering me a narrow range of choices.

For example, if my boss bought housing for me, I would likely have a much smaller range of choice that I do in the open housing market. Similarly, when my employers buy my health insurance, I have very little choice. Without choice, there is no competition. Without competition, there is no incentive for productivity.

I permit my employer to buy my health insurance only because she can use my pre-tax salary-but if I bought health insurance myself, I could use only after-tax salary. A tax shelter for the purchase of health insurance would dramatically transform this situation and enable consumer-driven health care.

Watch the Swiss

Herzlinger writes that “Switzerland is the only developed country with a long-standing consumer-driven health-care system. In essence, consumers purchase their own insurance and everyone is required to insure themselves. Those in financial need are not simply left out in the cold; there are tax-financed, means-tested subsidies for them. Furthermore, health insurance plan options vary substantially in price and coverage, providing options to the health-care consumers.

“The Swiss model is a good one. There, the price for health insurance is determined by gender and age, not the level of sickness; but the insurers have formed an exchange where they risk-adjust each other. They remove the profits earned by insurers solely by enrolling people who are healthier than the average for their gender and age and redistribute this profit to the insurers who have enrolled those who are sicker than the average.

“These risk-adjusted prices mean that sick people pay the same price for their insurance as everyone else, but providers receive more money for treatment of the sick. This way, health providers are encouraged, rather than dissuaded, to help those who need it most.” –

Consumers in charge

Herzlinger argues that consumer-driven care will lead to lower costs because “consumers will be rewarded by the entrepreneurial innovation that can simultaneously improve quality and control costs. Examples include convenient, inexpensive, ‘you’re sick, we’re quick’ retail medical centers; competition among doctor-owned, specialty hospitals; and integrated teams for the treatment of chronic diseases or disabilities.

“Other examples include global health services in developing countries that offer care to international patients; this enables countries to minimize the capital investment health facilities require. This also helps by reducing waiting times and capacity pressures in single-payer countries-and the services offered are typically cheaper than those in developed countries.”

Copyright ©2009 WORLD Magazine, January 17, 2009.  Reprinted here January 6th with permission from World Magazine. Visit the website at www.WorldMag.com.