Regina E. Herzlinger, PhD, keynote speaker at the 2009 AAHKS annual meeting, called for a transformation in health care to a consumer-driven system.


Published 1/1/2010
Mary Ann Porucznik

The consumer-driven cure to healthcare reform

AAHKS keynote speaker calls for tax equity, transparency, innovation

“Why has this brilliant president taken on healthcare reform—a challenge that has electrocuted others?” asked Harvard economist Regina E. Herzlinger. “Because he believes it is a bad value for the money. We have a great healthcare system, great hospitals, great doctors, and—most importantly in my view—we have personalized medicine that will likely change medicine from palliative to curative. But the value for the money isn’t there.”

Dr. Herzlinger went on to identify two crucial issues that brought Democrats to healthcare reform—global competitiveness and the number of uninsured.

“Americans spend 70 percent more than developed countries with whom we compete on health care,” she noted. “We are alone among most developed countries in having the business community pay for health care, which means that businesses that compete globally have to contain the costs of health care within the goods and services that they ship abroad.”

As for the uninsured, she said, “The fastest growing percentage of uninsured earn more than $75,000 per year. Anyone who earns that much is in the top 20 percent of American wage earners.” Many people are uninsured because their employers don’t offer coverage, she noted, and they’d have to use after-tax dollars to purchase personal coverage.

Unfortunately, this creates a public policy problem, because small companies, which typically do not provide health insurance benefits, create 80 percent of new jobs.

The “saviors” of the system
Although health insurance is a $1 trillion industry, Dr. Herzlinger identified lack of competition as a core problem. “In many areas hospitals are monopolies or oligopolies, and without competition, costs go up and quality deteriorates or becomes variable,” she said.

“Doctors, who—in my opinion—are going to be the saviors of the healthcare system with their ability and innovativeness, are suppressed by Stark laws,” she said. Orthopaedic surgeons are the “movie stars” of medicine; “patients love you,” she said.

With universal coverage, she continued, the question is: how do we control costs? If the government is in charge of controlling costs through the implementation of a public plan, she predicted, Congress would underprice the coverage as it has with Medicare and pass the bill on to future generations. “If they underprice,” she said, “two things happen: everyone moves into the public plan, and the economy goes down the toilet.”

The other alternative, she said, would be to create a consumer-driven system. Companies that currently provide health insurance would, instead of paying premiums to insurance companies, allocate those funds to their employees, who would be required to use them to purchase health insurance. Any monies used as premium payments would be tax-free.

This consumer-driven market would, she believes, generate innovation in healthcare policies and personalization in medicine, both of which would help reduce costs.

“What makes things cheaper and better is a consumer-driven market and a group of people, most of whom are narcissistic and self-seeking individuals like Henry Ford, Thomas Edison, and John C. Bogle (creator of index funds). Can you see them working for the government?”

Pointing out that consumers don’t want fragmented care, Dr. Herzlinger said that a consumer-driven market would result in networks of providers who would deliver care the way consumers want it. “I call it personalized healthcare services,” she said.

High deductible plans would create a retail medicine industry; concierge practices would boom; elective surgery would explode, and medical travel will happen, she predicted. “If you integrate providers, quality goes up, and costs go down. It can be done on a local level and can be used to hold people accountable,” she said.

What’s really needed
Entrepreneurs don’t need to be lawyers or have MBA degrees, she pointed out, but they do need a deep knowledge of underlying process. Physicians could be healthcare innovators, but for this to occur, the role of government in health care would have to change.

“Government’s role in business is traditionally antitrust; it provides transparency, prosecutes against fraud and abuse, and makes it possible for the poor to get what they need. But the role of government in health care has been to set prices, coverage, and benefits and to tell doctors how to practice medicine,” said Dr. Herzlinger.

“Clearly, to liberate the entrepreneur and enable innovators, we have to change the role of government and remove the payment burdens that are so difficult when you try to integrate care.

“For this transformation, we need tax equality so that individuals could buy health insurance on a tax-free basis just as their employers do; we need transparency, so that physicians can compete on the basis of information, not just rumor; and we need universal coverage,” she continued.

To address concerns about transparency, Dr. Herzlinger made an analogy to financial markets and the creation of the Securities and Exchange Commission in 1933. “It’s been a miserable failure in regulating, but fantastic in creating transparency; and countries with financial transparency in markets have lower costs of capital and better resource allocation than those without,” she said.

But government-created transparency, such as providing data on 30-day risk-adjusted mortality, isn’t sufficient because, as she pointed out, “everyone is average in the land of political correctness.” Instead, she called for the creation of private-sector transparency, such as that provided by Consumer Reports.

“It will be a long journey,” she concluded, “but we can move quickly when we want.”

Mary Ann Porucznik is managing editor of AAOS Now. She can be reached at

Editor’s note: Regina E. Herzlinger, PhD, author of Who Killed Health Care? (N.Y.: Mc-Graw-Hill, 2007), was the keynote speaker at the 2009 annual meeting of the American Association of Hip and Knee Surgeons (AAHKS). Dr. Herzlinger, who coined the term “consumer-driven health care,” was the first woman to be tenured and chaired at Harvard Business School and is widely recognized for her innovative research in health care.