Consumers, Market Should Drive Healthcare Change

by John Manley

Name a major industry in the United States that is unable to quote a price for their goods or services. This industry is forced to accept payment dictated by an entity outside their industry. This industry is not permitted to design the goods or services they deliver without constraint.

Can’t name one? I have just described our healthcare industry in the United States.

The Medicare program determines prices and the set of services for which it will pay. Private health insurers follow Medicare’s lead, as does the state-run Medicaid program. The only difference among them is that private insurers usu-ally pay a little more than Medicare, while Medicaid pays considerably less.

In 2002, CMS reported that total hospital care expenditures were $486.5 billion, of which $165.0 billion (34%) was paid by private health insurance, $149.2 billion (31%) by Medicare, and $83.1 billion (17%) by Medicaid.

The federal government controls both the measure of quality and amount of pay. Medicare rewards conformance, not performance. These conformance rules are set primarily through “peer review,” not innovation or experimentation. The government demands minutely detailed records that demonstrate adherence to every step.

Consider the consequences of this system in the case of Duke Medical Center as edited in The Manhattan Institute Center for Medical Progress by Harvard professor, Regina Herzlinger. Duke created a new program for patients with congestive heart failure that substantially improved their health status and reduced the need for hospital admissions. The program saved more than $8,000 per patient.

Was Duke rewarded for this innovative program? No, Duke was penalized. Duke gets paid for hospital days, not for improvements in health status, so the more it improved health status, the more money it lost. Duke could not freely price its new product due to Medicare’s micromanagement system.

Medical consumers have almost no way to judge the quality and cost of healthcare services. Dr. Henry Simmons, president of The National Coalition on Health Care in Washington says, “It’s right now such a complex pricing mechanism that even experts on the inside have trouble deciphering it. How in the world is an individual consumer going to?”

A new solution being proposed is a Consumer-Driven model. In a consumer-driven healthcare industry, consumers would get product differentiation and information (demand) and healthcare providers could price and design services, absent government and insurer micromanagement (supply). This would result in market-driven competition that would reward innovation and efficiency that could broaden access to healthcare.

In a consumer-driven world the federal government’s role should be to measure the outcomes of doctors and hospitals, not to establish pricing and procedure. Consumers need the federal government to standardize information with full disclosure from the providers.

After the Great Depression, Franklin Roosevelt created the Securities and Exchange Commission to regulate, (not micromanage) the financial industry. The resulting transparency of the SEC rewarded good firms and penalized poor ones in the financial industry, while protecting and improving the outcome for consumers.

The Swiss have a consumer-driven system that provides evidence of how this could work. All citizens must purchase health insurance. The government’s role is to subsidize those who cannot afford it and to adjust insurers’ premiums by corrections for insurers’ profits and losses incurred solely because of the health status of the enrollees. The premium adjustment drives innovation of products that focus on the sick. Consumer control drives product differentiation and many different insurance products are offered. Does Switzerland’s program work? The Swiss have excellent health status, resources and capacity at costs 30% less than the United States.

Consumer-driven models work in virtually every other segment of our economy. It is time for the government to change its role in our health delivery system and let the consumer and market create change.

John Manley is ?a principal of The Resource Group, L.C., an employee benefit firm based in Overland
Park. He can be reached via phone at 913.339.0800 or by email at jmanley@trglc.com.