State of the Debate: Dr. Business


George Anders, Health Against Wealth: HMOs and the Breakdown
of Medical Trust
(Houghton Mifflin, 1996).

Regina Herzlinger, Market-Driven Health Care: Who Wins, Who
Loses in the Transformation of America's Largest Service Industry

(Addison-Wesley, 1997).

amazon.comYou can buy any linked book through our associate program with

Health care remains one of the most intractable domestic
problems facing the United States today. To compound the issue,
there isn't even agreement on what health care really is, or what
it ought to be. To most physicians, like me, it involves at its
core a professional relationship between patients who are sick
or injured and the physicians to whom they entrust their care.
But to a business school professor, like Regina Herzlinger, it
is a "service industry," the products of which ought
to be selected by consumers (let's not call them "patients")
in a competitive marketplace, on the basis of price, convenience,
and quality.

Herzlinger, who teaches at Harvard University, is on one side
of a profound debate about health care and the marketplace. Can
the disciplines of the market be brought to bear to control medical
costs while assuring access, choice, and quality—as they do in
ordinary industries? Or is health care such a far cry from a free
market to begin with that recourse to the marketplace only makes
its problems worse?

The market view is currently ascendant. We have been witnessing
a massive shift in the control and ownership of medical care to
private, for-profit businesses. Most of the control is indirectly
exercised through investor-owned, managed care insurance plans,
but an increasing number of inpatient and outpatient medical facilities
are also being acquired and managed by investor-owned corporations.
These medical care businesses have become one of the largest sectors
of the U.S. economy.


Herzlinger's new book is a blueprint for transforming the health
care system into a more explicitly consumer-driven market. As
she sees it, buying medical care is like buying any other service
or commodity the market economy offers. Smart shoppers, properly
armed with information from the medical equivalent of Consumer
, should be able to seek out the vendors of the services
they have decided they need and choose from among them based not
only on price but on quality and convenience. Seeking to gain
new customers, competing medical vendors would make every effort
to provide a satisfactory product. If the market worked its usual
magic, consumers would get what they wanted, efficient producers
of medical services would be rewarded, prices would be kept down,
and quality and innovation would be encouraged.

There are multiple problems with this general view. For one thing,
most medical consumers are not free to shop around. In the age
of managed care and medical underwriting, a patient with a serious
illness who doesn't like her care is often simply stuck, because
no other insurer will take her. For another, tens of millions
of consumers cannot afford to buy health coverage. Further, most
experienced physicians will question Herzlinger's breezy assertion
that consumers of medical care are like consumers of other services
who, given enough information, can shop for the services they

People may be "consumers" when they are well and are
shopping for elective or routine medical services, but they are
"patients" when they get sick. Those with major illnesses
or injuries do not and cannot shop around for what they want.
They rarely know enough to choose their own treatment. They are
dependent on professional help, and they rely on their physicians
to provide it. Even very intelligent, well-informed people know
better than to attempt self-diagnosis when they are in serious
trouble. There are few "consumers" or "smart shoppers"
in hospital emergency rooms or intensive care units. Healthy economists
and MBAs who talk about medical care as if it were just another
business haven't yet learned that lesson.

It is fine to encourage people to become better-informed "health
consumers" in the choices they make in their physicians and
their treatments. But Herzlinger pushes the point beyond its
logical limits. The essence of the relationship between a sick
patient and a physician is trust by the patient in the competence
and beneficence of the physician, and a commitment by the physician
to meet his or her professional fiduciary obligations to the patient.
There is nothing like that in the commercial transactions between
customers and vendors that take place in service industries, even
when the service is technical and beyond the understanding of
most customers. "Caveat emptor" may be the watchword
in commerce, but it cannot apply in medicine.

Subscribe to The American Prospect


Herzlinger offers another idea that conforms more to ordinary
commerce than to medical care—single-service firms and facilities.
She recommends that general care hospitals and large integrated
managed care companies be replaced wherever possible by what she
calls "focused factories," specialized facilities and
clinics devoted to one particular disease or surgical procedure—like
diabetes or asthma, or hernia repairs or open-heart surgery. She
claims these "carve-out" organizations would provide
care more efficiently and cheaply than the old-fashioned multipurpose
hospitals and clinics, and she believes they would make shopping
for health care more convenient for customers. As Herzlinger envisions
the future, these "focused factories" would compete
vigorously for customers and, through market forces, would transform
health care into a more consumer-friendly and affordable system.
This new era is almost at hand, she says, despite the resistance
of stuffy old medical school professors (she names me as an example),
who resent outside interference in their traditional domain.

But Herzlinger's vision of "focused factories" for medical
care will be criticized not just by old professors but by most
clinicians. They know that diseases are usually not compartmentalized
and that the sicker the patient is, the more important it is to
deal with him or her as a whole human being, rather than as an
ailing body part or organ. Patients often have more than one disease
or, even when they have only one disease, they often have complications
involving several organ systems. They cannot be properly treated
without considering the interrelations among the several parts
and dealing with the whole person. Herzlinger briefly acknowledges
this problem by suggesting that each "focused factory"
should have on hand the specialists and facilities needed to manage
the common complications of the disease upon which the institution
is focused. But that simply integrates the care of one disease
at the cost of fragmenting and duplicating the resources needed
for the care of other diseases. Seriously ill patients are best
treated by multispecialty teams of doctors, including primary
care physicians and different kinds of specialists, and these
teams should work together in one multipurpose inpatient facility.

While it may make sense to integrate care for particular problems
within a general hospital, freestanding specialized institutions
for single diseases or procedures are of dubious value, particularly
when they separate inpatients from the hospital facilities they
may need in unexpected emergencies. Every large hospital center
has wings or floors that can function as "focused factories"
for particular diseases, but they are still an integral part of
a general hospital that can deal with any complication, whether
or not it is based on the condition for which the patient first
sought treatment. Narrowly specialized freestanding institutions
are inherently risky for sick patients. This is not to say that
no freestanding specialized facilities make clinical sense. Some
kinds do, particularly those that treat relatively low-risk problems
on an ambulatory basis. A few of the largest and most completely
staffed cancer hospitals also can provide comprehensive care when
it is needed. But if Professor Herzlinger means to suggest that
most general care hospitals should be broken up into physically
separated and independently managed "focused factories,"
she doesn't understand the medical purposes of a general hospital.


Having devoted most of her book to extolling the virtues of "market-driven"
health care, Herzlinger spends only one chapter at the end on
how to change the current private health insurance system to establish
the market she envisions. Ironically, Herzlinger's market system
is heavily dependent on government. She recognizes, quite correctly,
that the present system of managed care does not allow the consumers
of medical services to make their own choices with their own money.
She is opposed to employers holding the money and making most
of the choices of managed care plans for their employees. I share
that view.

What she proposes, therefore, is a "tax-neutral," government-regulated
transfer of health benefit funds from employers to employees
("based on the employee's health characteristics"),
and a government requirement that em ployees use these funds to
purchase a catastrophic health insurance policy to pay for all
expenses beyond "what they can reasonably afford to pay out
of their pockets." Government would also "assure the
quality and availability of information about health care providers;
and it would prosecute consumer and provider fraud." Large
deductibles would encourage employees to shop carefully for their
initial medical services each year because they would be spending
their own money. Beyond that initial outlay, they would be comprehensively
insured by policies they would choose themselves, using the funds
paid to them by their employers.

Herzlinger gives only sketchy outlines of how her "consumer-controlled
health insurance system" might work, and leaves many important
questions unanswered. Many of these questions are probably unanswerable.
For example, how would government carry out all the complicated
regulatory functions she lists? How would it adjust transfers
according to the "health status" of an employee and
his or her family? Risk adjustment for health status is not developed
enough to ensure fair payment of this kind for coverage of an
individual employee, let alone a family. How would government
discourage low-income employees from delaying necessary care simply
to avoid out-of-pocket expenses? And, once the deductible had
been exceeded, what would prevent employees who chose an indemnity
type of plan from overusing the insurance benefits and driving
up premium costs? In short, Herzlinger fails to explain how the
wide-open insurance market she advocates could be expected to
work without extensive cost and quality controls by government
that would inevitably constrain free choice by consumers. She
cites the Federal Employees Health Benefits Program (FEHBP) as
a model of what informed consumer choice can achieve, but she
neglects to mention that the majority of the choices offered to
federal employees (after careful screening by the government)
are managed care plans—to which she is opposed.

Professor Herzlinger's book is unpersuasive largely because the
consumer-driven market she envisions simply isn't compatible with
the realities of medical care. Her proposal for reform also falls
short because it doesn't deal with the whole health care system. Not surprisingly, given her profession, she focuses on the part
of the system that is funded through employment-based insurance
(by now, almost entirely under managed care). The other part,
including Medicare and Medicaid and the growing army of the uninsured,
is barely mentioned. This omission means that the book is mostly
about medical services for the relatively young, healthy, educated,
and employed members of society—like the author herself. Herzlinger's
book is therefore not a proposal for general health care reform.
It is instead a call for a kind of medical "gentrification"—a
reconfiguration of the system to make it more accessible and convenient
for those able to shop for what they want, and able to pay for
it out of pocket.

Despite its obvious limitations, Herzlinger's book will probably
appeal to the growing number of free-market enthusiasts who are
becoming uncomfortable with the restraints and aberrations of
the present managed care market. Managed care, in one form or
another, may be the only viable alternative to the fee-for-service,
indemnity-insured system it is replacing, but its present configuration
is certainly not consumer-friendly. Furthermore, managed care
plans have an inherent conflict of interest with the employees
they are supposed to be serving. The less medical care a plan
provides, the more of the premium the plan gets to keep. It is
easy to understand why a backlash against managed care is growing
so rapidly. Herzlinger's book will add strength to that protest,
although it offers little in the way of practical solutions to
the problem.


The best current book about managed care is George Anders's Health
Against Wealth
. The author, a Wall Street Journal medical
reporter, tells the story of "HMOs and the Breakdown of Medical
Trust." He describes how physicians, unable to contain rising
health care costs, lost control of the medical care system to
a rapidly expanding managed care industry. That industry, increasingly
owned by for-profit corporations, acts as a middleman between
employers and the providers of health care. Employers have negotiated
lower premiums with the HMOs, but the latter have drastically
reduced payments to providers, thereby assuring high profits to
themselves. The winners in this new system are the employers and
the HMOs. The losers are the providers and the employees.

Managed care is often described as a "market" solution
to the problem of health care costs, but it isn't much like the
consumer-oriented market Herzlinger advocates. As Anders explains,
the "market" in managed care is largely limited to the
negotiations between employers and the managed care plans they
choose for their employees. The real consumers of health care,
employees, have little or no choice of plan, limited choice of
physician, and—unless they want to pay the costs of seeking care
outside their plan—virtually no opportunity to shop for the services
they think they need.

Anders illustrates all of these limitations and predicts that
the system will inevitably change. He is probably right. What
will replace it is not at all clear at the moment. Anders suggests
the next phase may be direct negotiation of managed care contracts
between employers and the providers of medical care (physician
groups and hospitals), thus bypassing the HMO companies. That
would be an improvement over the present system, but it would
still not allow the consumers of care to choose their own providers.
Why should employers decide which doctors and hospitals their
employees can use? Herzlinger is right in her objection to that
arrangement, although the rest of her proposal for a consumer-driven,
price-competitive market for medical care is unconvincing.

Both books make clear how far we still are from an equitable and
workable health care system. To solve the manifold problems of
health care in America, we will have to develop a system that
deals with economic and medical realities while moving the responsibility
for ownership back into the community and putting the reins of
management in the hands of those who deliver and receive the care.
Before we can reach that goal, we will have to accept the notion
of health care as a social good rather than an economic commodity.
What the public and the medical profession are learning from their
current unhappy experience with commercialized medical care is
that the free market cannot by itself produce the system we need.
Sooner or later, we will realize that more regulation and new
policies are required. What then happens will depend on how strongly
physicians, patients, and not-for-profit community health care
institutions press for real reform.

You need to be logged in to comment.
(If there's one thing we know about comment trolls, it's that they're lazy)