Embargoed Until:
July 24, 2007
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Christopher Fleming

The Consumer Revolution In Health Care Has Barely Begun

Says Harvard Business School Professor Herzlinger In
Conversation With GE Global Health Care Director Galvin

Bethesda, MD -- In the decade since the publication of Regina Herzlinger’s seminal book, Market-Driven Health Care, the United States has seen the advent of consumer-directed health benefit designs and specialty hospitals. “Is this the kind of change you were hoping for when you wrote the book?” Robert Galvin asks Herzlinger, the Nancy M. McPherson Professor of Business Administration at the Harvard Business School, in a Health Affairs Web Exclusive interview published today. http://content.healthaffairs.org/cgi/content/abstract/hlthaff.26.5.w552

“The changes haven’t gone far enough” on either the supply or the demand side of the market, Herzlinger tells Galvin, the director of global health care for General Electric. “When it comes to demand, what people call ‘consumer-directed benefit design’ is a far cry from true consumer-driven markets, in which there’s tremendous choice. Look at the number of different light bulbs that GE makes in a far smaller market. To think that a high deductible and a PPO [preferred provider organization] define the consumer-driven market in an industry that’s two trillion dollars!”

On the supply side, consumer-driven innovations like retail clinics and middle-class concierge medicine “have run into barriers created by powerful status quo institutions,” says Herzlinger, whose most recent book, Who Killed Health Care?, came out last month. Real growth in the specialty hospital industry has been stifled by “the general hospitals, which are so powerful and so territorial, . . . [and by] micromanagement of the payment system, both by Medicare and by the private insurers.”

Herzlinger says that specialty hospitals are a far cry from the “focused factories” she has advocated, which would be “integrated, total lifestyle solutions” for diseases such as AIDS and diabetes. She explains, “Focused factories provide everything you need: hospitals, dialysis centers, doctors, nurses, etc., all within an integrated system. So they’re vertically integrated, unlike a multispecialty physician practice.” Asked by Galvin whether the concept of a “medical home” advanced by primary care physicians could be a focused factory, Herzlinger answers: “It could be, but let the market speak.”

Herzlinger: Consumer Choice Can Drive Health Care
As It Drives Other Industries

Galvin notes that many observers have questioned whether consumer choice can operate in health care as it does in other industries; these critics have raised objections such as the information asymmetry between providers and patients and the fact that individual physicians often treat too few patients with a given disease to provide statistically significant outcome data. But Herzlinger responds that these arguments are “put forth, whether consciously or not, to protect the status quo.” She states: “If a typical doctor does not have enough sample size to produce reliable data about diabetics, should that doctor be treating diabetics? I don’t think so.”

Herzlinger says the information asymmetry argument is used by “a group of people in the health policy community who fundamentally believe that they’re smarter than everybody else” to justify the idea that this group “must play a central role in advising and managing the system.” She wants the government to empower consumers by mandating the “collection, auditing, and widespread dissemination” of health care outcomes data. Consumers will then pay organizations such as Consumers Union or health care equivalents of Zagat’s restaurant guide to present that information in consumer-friendly formats, she predicts.

Other interview highlights:

Pay-For-Performance. “P4P is a good idea overall,” but current versions of P4P are not “about paying for superior outcomes, but rather about paying for following cookbook recipes, dictated by the U.S. government or insurers for delivering medical care,” according to Herzlinger. She also argues that “P4P on the basis of process measures [rather than outcome measures] is part of the fundamental flaw of this industry, which is controlled by the status quo providers who use schemes like this to suppress innovators who could supplant them.”

The Future Of Health Insurance. “I believe that there isn’t going to be as big a role for insurers in the future,” Herzlinger says. “More than likely, the insurers will be disintermediated.” She predicts, “This industry is going to move the way the pension retirement industry moved. We’re going to have defined-contribution platforms.”


Health Affairs, published by Project HOPE, is the leading journal of health policy. The peer-reviewed journal appears bimonthly in print with additional online-only papers published weekly as Health Affairs Web Exclusives at www.healthaffairs.org.


©2007 Project HOPE–The People-to-People Health Foundation, Inc.