The American Spectator

A LEADING CRITICISM of a consumer-driven approach is that health care simply cannot be compared to other aspects of the economy in which technology has brought down prices, because shopping for something like hip-replacement surgery is not the same as choosing a television. But the evidence we do have from the types of surgical procedures that exist in a competitive market suggest otherwise. For instance, the cost of LASIK eye surgery has declined by 30 percent in the past decade, and the inflation-adjusted price of cosmetic surgery has declined over the past 15 years despite a six-fold increase in demand, according to information cited by the National Center for Policy Analysis.

Still, critics argue, most medical decisions are made under stressful conditions, and, especially in emergency situations, consumers are not going to have the time or be in the emotional state to rationally choose among alternatives. Besides, the whole discussion is moot, they say, because insurance will be picking up the tab for the most expensive procedures anyway, so consumers will never be concerned with shopping around for the cheapest price.

But Herzlinger is dismissive of such criticisms, because most medical decisions are not made in emergency situations, and to the extent that they are, when a people choose their health plans in a consumer system, they would also decide where they would want to be taken in an emergency. The important thing to keep in mind about a consumer-driven system, she says, is that people wouldn’t be shopping for each and every procedure, but for a health plan — and the price of the health plan would be determined by what providers and centers are included in the policy.

Furthermore, the system would lead to a wide variety of choices, not just in terms of price and quality, but also in the length of a policy — which could revolutionize the health insurance market. Currently, insurance policies have to be renewed each year.

“If you are morbidly obese, an insurer doesn’t have an incentive to permit you to have bariatric surgery, because five years from now, when you’re slim and trim, you’re likely to be on somebody else’s insurance policy,” Herzlinger explained. “In a consumer-driven market, you can have these long-term policies because the consumer framework is different. The consumer may be interested in a long-term policy that says, ‘Look, you get in shape, you lower your health-care costs. We’re going to share half the savings with you.’”

Another significant advantage of having a free market for health care is that it would allow entrepreneurs to develop what Herzlinger calls “focused factories.” An example would be specialty hospitals that concentrate on one type of medical treatment, such as heart disease, hoarding all the latest technologies and expertise into one building that is smaller and more humane than behemoth hospitals that handle everything. While some doctor-owned specialty hospitals have enjoyed success, they have faced huge obstacles, including a moratorium imposed by the U.S. Congress, and hardball tactics by large hospitals that exploit their non-profit status, and fear competition.

VIII

HEALTH-CARE ANALYSTS OFFER several ideas for reforms that would usher in a consumer-based market. Most pressing is the need to change the tax code that makes the country overly dependent on employer-based policies. The purist free market reaction would be to simply scrap the benefit altogether, which would lead to higher salaries with which individuals could purchase their own insurance and which would save the government $200 billion in tax subsidies. The more politically palatable option would be to extend the same tax status to individuals purchasing insurance on their own, which would lower the ranks of the uninsured and allow people to maintain their insurance when they leave their jobs.

Another reform would be to allow individuals to purchase insurance across state lines, which would create a national market that would help consumers get around onerous regulations.

A change that Herzlinger believes is crucial to an efficiently functioning market would be requiring hospitals and doctors to disclose data on patient outcomes and publish prices, so that consumers can make informed choices.

The biggest challenge of any health-care system is answering the question of how those with pre-existing conditions and chronic illnesses such as diabetes would get covered, because it often isn’t profitable for insurers to take on the risk.

To some extent, opening up the market would help, because if it were easier for people to purchase cheaper, high-deductible insurance policies in the individual market, insurance companies could capture premiums from healthier people and bring them into the risk pool, thus offsetting potential losses from higher-risk patients.

John Goodman, the president of the National Center for Policy Analysis, says that “what we need is a market for sick people….In normal markets, entrepreneurs go after unmet needs. That’s how entrepreneurs make money, but in health care we’ve made it very difficult for people to make a profit by meeting the needs of sick people.”

Beyond that, there are several other solutions offered for how to cover the very sick. One option is to create risk pools, which have already been experimented with in some states. Under this system, all the riskiest patients would be taken out of the normal insurance market and given the option to choose among a number of plans. At the end of each year, an administrator would tally up the cost of the losses for treating those patients, and insurers would divide up the cost among themselves. The result is that the losses get spread out, so no single insurer has to worry about getting stuck with a high concentration of the difficult cases.

Herzlinger would prefer organizing things the way they do in Switzerland, where there is a consortium of insurance companies. The companies that take on the higher-risk patients receive compensation from the companies that get the healthier patients in a system that resembles revenue sharing in Major League Baseball.