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strategy and business
 / Spring 2007 / Issue 46(originally published by Booz & Company)


Does Health Care Have a Future?

We get closer to the nub with a pair of books about how society can fund health-care coverage: Arnold S. Kling’s slim Crisis of Abundance: Rethinking How We Pay for Health Care, and a massive tome edited by Regina E. Herzlinger, Consumer-Driven Healthcare: Implications for Providers, Payers, and Policymakers. Kling’s book advocates greater government involvement in the care of the very sick, the chronically ill, and the very poor — those who really need it. His principal argument is that governments waste their tax dollars with a number of policies: by paying for the care of all people over 65, including those who are not poor or sick; by making health insurance tax deductible for everyone, whether they need it or not; and by stinting on services for the very poor and uninsured, who end up spending more than they would otherwise need to because they tend to wait to seek care until the last minute, when their condition has become acute. Kling offers a number of specific insurance mechanisms for shifting tax-supported health care to those who really need it, and away from those who need it less, such as healthy, childless adults. Yet none of his solutions are self-generating or self-sustaining. All require major legislation and central direction. And oddly, considering the libertarian bent of the publisher, the Cato Institute, he does not focus on the capacity of competition to shape the health-care market.

By contrast, Regina Herzlinger, a professor at Harvard Business School, does focus on competition. Consumer-Driven Healthcare examines the power of the new “consumer-directed health plans” (CDHPs), which combine high-deductible catastrophic insurance with health savings accounts to remold health care around consumers’ needs and desires. CDHPs, she argues, will open health care to new levels and types of competition, bringing us savings and higher quality — the usual products of market competition. You can gather the core of her argument in the first section of the book, a cogent and knowledgeable 202 pages written by Herzlinger herself, leaving aside the subsequent hundreds of pages by 92 other authors. She gets the key points right: What is missing in health care is true competition, driven by information and the power of the consumer to choose. For the first time, CDHPs allow for that possibility. If even a significant fraction of health-care consumers begin operating like true retail buyers, then the market as a whole will begin to act like a true retail market.

Redefining Competition
But Michael E. Porter and Elizabeth Olmsted Teisberg carry the argument a crucial step further in Redefining Health Care: Creating Value-Based Competition on Results. Porter and Teisberg — he is a professor at Harvard Business School and she at the Darden School of Business at the University of Virginia — ask the key question: Why has competition failed to work the same wonders in health care that it has in so many other industries? Their answer: because competition has taken place at the wrong level and over the wrong goals. Further exacerbating the problem is the complete absence of feedback loops (information channels that help a system govern itself). Very little in health care has a real price or a real, measurable result. This book comes closest of all to getting at the core problem of the U.S. health-care system and, for that reason, is the single indispensable work in the current field.

Competition in health care has consisted, in the main, of health plans’ and providers’ attempts to push cost and risk off themselves and onto each other or onto employers — and now, in some cases with CDHPs, onto the consumer. To the extent that providers have competed against one another, it has been as massive institutions that claim to do everything well. The first key insight of Porter and Teisberg is that, as health-care consumers, we are not looking to embrace an institution, but for a solution to a particular medical condition. We want the baby successfully delivered, the knee fixed, the diabetes managed. It is at this level, the level of the medical condition, that any true competition must occur.

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Health-Care Resources
Works mentioned in this review.

  1. Donald L. Barlett and James B. Steele, Critical Condition: How Health Care in America Became Big Business and Bad Medicine (2004; Broadway, 2005), 286 pages, $14.95
  2. Susan Starr Sered and Rushika Fernandopulle, Uninsured in America: Life and Death in the Land of Opportunity (University of California Press, 2005), 272 pages, $15.95
  3. The Institute of Medicine, Insuring America’s Health: Principles and Recommendations (National Academies Press, 2004), 222 pages, $26.10, or download PDF for $22.50 at Click here.
  4. Charles R. Morris, Apart at the Seams: The Collapse of Private Pension and Health Care Protections (Century Foundation Press, 2006), 86 pages, $14.95
  5. Jill S. Quadagno, One Nation, Uninsured: Why the U.S. Has No National Health Insurance (Oxford University Press, 2005), 286 pages, $28
  6. Arnold S. Kling, Crisis of Abundance: Rethinking How We Pay for Health Care (Cato Institute, 2006), 120 pages, $16.95
  7. Regina E. Herzlinger, editor, Consumer-Driven Healthcare: Implications for Providers, Payers, and Policymakers (Jossey-Bass, 2004), 926 pages, $55
  8. Michael E. Porter and Elizabeth Olmsted Teisberg, Redefining Health Care: Creating Value-Based Competition on Results (Harvard Business School Press, 2006), 524 pages, $35
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