May 19, 2009
Tuesday PM

Saying that America's semi-private, semi-public health care system needs a complete overhaul, President Obama last week challenged Congress to send him a health care reform bill he can sign by the end of the year. The president said that a new health care system would have to meet three strict criteria, however: it'd have to lower costs, allow patients to choose their own doctors and provide affordable, quality care to everyone.

To get an expert's reaction to the president's ambitious dream, on Wednesday, May 13, I called economist Regina Herzlinger of Harvard Business School. Herzlinger, dubbed the "Godmother" of consumer-driven health care by Money magazine, is widely regarded in Washington and elsewhere for her innovative research in health care and for writing books like her latest, "Who Killed Health Care?" (2007).

Q: President Obama said our health care system needs a complete overhaul because it is broken and because families, businesses and governments can no longer afford it. Is this an accurate assessment of our health care system ­ broken and unaffordable?

A: Yes and no. We have of course wonderful doctors and wonderful hospitals. For example, the transplant center at the University of Pittsburgh Medical Center is world class. And Thomas Starzl, who started it, is a genius, a great man. Many people would not be alive today if it were not for him and for the hospital's courage in backing him.

And of course we have this great technology that the U.S. leads the world on, which is called "personalized medicine," which is essentially figuring out the linkage between mutated genes and genetic diseases, and it promises to actually cure these diseases rather than palliate them. I believe this is a technological innovation that is as profound as the Industrial Revolution, in terms of its impact on the welfare and productivity of human beings.

However, President Obama is absolutely right ­ the costs are unaffordable and they are unaffordable in the following ways: First of all, we pay 70 percent (more) than other developed countries as a percentage of GDP for health care.

Secondly, because we have an employer-based system, our employers have to pack these outside costs into their goods and services in a globalized economy. Their foreign competitors pay 70 percent less and usually the employers don't pay anything at all. It is a broad-based tax system that pays for health care or individuals pay for it themselves. So in a globally competitive world, our business sector is really like it is going into the arena and it has got a huge layer of fat that the other guys do not have.

The last thing that is bad about our health care system, cost-wise, is that most of the uninsured work, but they work for small companies or are independent contractors and they don't have health insurance because it is so expensive to buy as an individual. If a company buys it on your behalf, they can use your pre-tax income to buy it. But if you buy it within a small company for yourself, you can only use after-tax income.

These small companies are the engine of growth in the U.S. And a lot of people do not work for these businesses only because the business doesn't offer health insurance. So as a matter of public policy, it is a gross distortion of the allocation of labor. It stops people from going to where they would create the most for the GDP just because of the way we pay for health care.

So he's partially right and partially wrong. To call it "broken" is very dispiriting, especially to the doctors and nurses and scientists, many of whom are genuinely very good, devoted people. It can't be great to hear that what you are working with is broken -- economically broken, for sure.

Q: Do you think his goals for Congress to bring down the costs, make sure everyone gets to pick their doctors and that health care is affordable quality care for everybody?

A: I don't see how that's going to happen. I don't know of any remedy that we have had in the U.S. ­ and we've tried a lot ­ that has controlled health care costs and produced quality care. The only thing that has controlled cost is managed care and it did it by rationing care. And the American people said, "'Hey, wait a second. That's my money and you're not giving me access to health care." This is not a solution the American people will accept.

I wish Obama well. I hope he will succeed. But let me talk about the Democrats in general. The Democrats had hoped that they could get Medicare as an option on this market that they are going to create. Their hope was -- because Medicare is so low-priced relative to private insurance -- that people would sign up for Medicare. One very good analysis predicted that 112 million people would move into Medicare. And then they would have a de facto single-payer system.

However, there was a little inconvenient truth about Medicare. Due to the eccentricities of government accounting, the fact that Medicare owes you and me and people like us who have been paying into Medicare all our working lives ­ because we believed that we were going to get services -- the amount of money Medicare would need to have in the bank right now to make good on that promises is $34 trillion. That is about three times the GDP of the United States. Medicare does not have $34 trillion. So if we enlarge Medicare ­ it's about 40 million now ­ another 112 million people and the Congress is as parsimonious in pricing it correctly ­ the reason we have this liability is that Medicare is mispriced and is a bargain ­ the United States would just die.

I've spent a lot of time in D.C. since October explaining this $34 trillion and what it means. I believe -- not because of my efforts but because of my and similar efforts -- that Medicare will not be offered. That's dead. So what is he going to do? I'll be damned if I know. The only thing that has worked is the Swiss health care system, and I hope he goes to it.

Q: Speaking of the Swiss health system, why can't health insurance be like car insurance ­ where it's mandated that you have it but then the government gets out of the way and the marketplace provides a vast array of plans?

A: Yeah. Yeah. Health insurance plans. Be darned if I know. I believe that Medicare is dead. I may be wrong, but I'm tenured, so I can afford to be wrong. I believe that Medicare ­ which is a code word for a single-payer approach to controlling health care cost ­ is not going to happen.

Q: So what will?

A: I think we need to create a consumer market. An easy way to do that is right now harbored by my health insurance only because they can do it pretax and I can't. I would like that tax exemption passed on to me so that they give me back the $15,000 they now take out of what would otherwise be my salary to buy a health insurance plan that is not remotely like what I would want. If they give it to me -- I can use it tax-free, too. I would not buy $15,000 worth of health insurance. There is no way in hell that I am going to spend that much money. And people like me are going to put a lot of pressure on this system. That's the way to do it.

Q: So instead of getting $15,000 worth of health insurance, you'd get maybe $8,000 and you'd have another $7,000 in your pocket to spend?

A: Yeah. Yeah. Well, I'd probably have to pay taxes on what I didn't spend. But my personal welfare would be much better off. I would buy a high deductible. I'd probably buy much more catastrophic coverage than I now have. And I'd pay less for something that would give me peace of mind.

Q: What's the worst damage that Congress could do?

A: Medicare -- if they permit Medicare as an option (for all ages) and don't price it correctly. If Medicare were a private company it could not exist. With a $34 trillion unfunded net present value liability, it would be bankrupt. What companies do that have these big unfunded liabilities is they amortize them. They take a charge of some amount and then they reduce liability on their current income statement by that amount. I could tell you how that is done, but you don't want to know.

Let's say that the charge would be 3 percent, which is the marginal federal government borrowing rate; 3 percent of $34 trillion is $1 trillion. So if Medicare were to be priced right ­ it costs about half a trillion dollars now ­ it should be priced at least at $1.5 trillion. If Congress were to do that, OK. But there is no way in the world that they have the courage to do that.

I just read some survey where somebody found that people loved Medicare and I laughed out loud. Why wouldn't you love a thing where your children and grandchildren wind up paying the bill? Of course they'd love it.

So I don't have any confidence the Congress would act differently once another 112 million were in Medicare. The reason they don't price it correctly is they are afraid of the voters' backlash of doing that. So they keep postponing the bad news. The worst thing ­ the absolutely worst thing ­ would be to permit Medicare as an option and price it the way it is now priced. The U.S. economy would collapse and we'd become a second-rate economic power.

Q: You mentioned the Swiss model. Is that a country Congress should look to as a role model?

A: Yeah. They have universal coverage. They don't have rationing, unlike the Brits in the UK. You can get transplants. You can get dialyzed. People who are sick get good health care in Switzerland and they spend 40 percent less as a percentage of GDP than we do. The reason is, the Swiss buy their own health insurance. Actually, Switzerland has no Medicare and has no Medicaid.

Q: Individual Swiss citizens buy health insurance the way we buy car insurance?

A: Absolutely. In Switzerland, instead of being relegated to a really degrading program like M ­ a lot of doctors won't see M patients because they get paid terribly for those M patients -- a poor person gets in effect a voucher equal to the average expenditures of the average Swiss. Then she goes and she buys health insurance like everybody else. I think that is a much better system.

Q: What are the chances that Congress will make things better and not worse?

A: I believe they are going to go for the Swiss system, which would be better. The recession has made so many people nervous about their health insurance that it seems to me, rightly or wrongly, that they really want universal coverage. The only way to do it is the automobile insurance-Swiss model.

The Swiss model is a real model. It's not some BS, theoretical "We'll promote health! We'll have IT, blah, blah, blah." This country has been doing it since 1996. It's a very stable and not terribly wacko country. It works there. It works in very precise ways. Everybody has universal coverage. The care is great; 40 percent less cost. So I think that's where we are going to go. It's just going to take a while for us to get there.

Q: Will Obama get his wish for a health care plan by the year's end?

A: That I can't tell you. I'm really Alice in Wonderland when it comes to the machinations of Congress. But since he has put his prestige on the line and the American people do like him, that certainly puts a lot of impetus on Congress to get on with it. So I think it's more likely to happen than not. Of course, you know, when we left Vietnam, we declared victory. So there are many ways he can declare victory.

Something else that I believe will happen, and which I think is very important, is the Congress will pass a Healthcare Transparency Act, so that consumers will know how good their doctors are, how good their hospitals are, how good their insurance plans are, not only in terms of consumer satisfaction but in terms of clinical measures; like how many people have died within 30 days when this doctor operated on them; how many people wait on the line for 30 minutes when they called to complain with this health insurance company, and so on. I believe we are going to get that and I couldn't be happier. I've been lobbying for that in my own way for about 12 years.

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