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Can the United States provide health care for all?

By Regina Herzlinger

18 May 2009

Of course.

After all, providing universal coverage, at, say, an average cost of $5,000 per person, will cost at most $250 billion annually and likely less because some of the uninsured can afford to pay part of the cost of their health insurance—a quarter earn more than $40,000- and many are lower-cost young people. Two hundred and fifty billion dollars is a large sum, for sure, but not overwhelming relative to the trillions of expenditures in the stimulus bills.

And United States citizens support universal coverage. Buffeted by a recessionary economy and locked into jobs they do not want only because they offer health insurance, Americans increasingly demand affordable access to health care.
So we’ve got the demand. We have an adequate supply of doctors, nurses, and facilities (though perhaps not forever if we continue on our current course). And we can afford a well-structured universal plan. To achieve such a plan, however, we need to impose the discipline of the marketplace so that patients can spend wisely, providers can price services correctly, and we can cut down on waste and inefficiency.

What are the obstacles?

US health care costs are already killing our economy. Prudent people on both the left and the right of the political spectrum worry that universal coverage that further expands these costs may be the final nail in the economy’s coffin.
At 17 percent of GDP, US costs are about 70 percent higher than those of our developed global competitors. The uniquely high proportion of health care funding funneled through employers forces US companies to carry this excess poundage into the global arena, unlike employers in countries that support expenditures through a broader tax base. Many employers, especially smaller ones, do not offer health insurance at attractive rates—a third of those who work for organizations with fewer than 25 employees are uninsured, for example. As a result, the allocation of labor in the economy is distorted by productivity-killing job lock, as employees spurn jobs in these smaller companies, which create about 80 percent of new jobs.

The experience of Massachusetts provides a sobering lesson about the results of expanding universal coverage without paying attention to cost control. As more than 300,000 people gained insurance, costs also increased. Not surprisingly, the number of enrollees who needed subsidies was higher than expected. When the recession hit once wealthy Massachusetts, the increase in health-care costs helped tip the state into a billion-dollar deficit. The Commonwealth is now contemplating cost control through all-payer regulation, in which the state effectively sets the prices for health insurance. If this Massachusetts solution seems like the road to a single-payer system, under which the state government controls all health care expenses, that’s because it is.

There is no question that single-payer systems control health care costs: Canada, in which private payment is virtually illegal , and the United Kingdom, in which most of the funding comes from the government, have substantially lower costs. But do single-payer health care systems achieve cost control in a manner that would be acceptable to the American people?

Single-payer systems control health care costs primarily by rationing services to the 20 percent of the people who account for 80 percent of the costs. The political calculus is cruel but irresistible: 80 percent of the people, the healthy ones, will love their system, while some of the sick, a mere 20 percent, will not. As a result, the United Kingdom has the lowest uptake of new cancer drugs among the Big Five European economies and commensurately low cancer survival statistics. The percentage of people treated for end-stage renal disease in the UK is roughly a third of that in the United States and about 50 percent less than it is in other Organisation for Economic Co-operation and Development (OECD) countries. Lack of treatment is essentially a death sentence because most people cannot afford to pay the high costs of treating these diseases from their own pockets.

The United States may render too much medical care to the sick but the United Kingdom does too little. The Americans who caused the managed-care backlash are unlikely to tolerate this kind of rationing.

Nevertheless, in the United States, Medicare is alleged to be a good cost controller and one that avoids the rationing tactics of the single-payer economies. So how does it achieve this miracle? Give considerable credit to government accounting: Medicare is low cost because the government accountants are permitted to ignore some inconvenient truths: $34 trillion in unfunded liabilities plus $89 billion in underpayments to medical care providers, which are ultimately paid by private insurers. With correct accounting, Medicare’s cost would increase by more than a trillion dollars. Further, if Medicare were the sole US health insurer, it would either increase its payments to providers by $89 billion or the current near-shortage in doctors would reach crisis proportions as medical students and graduates, burdened by huge debts and limited financial prospects, chose other professions.

Although the Democrats tout various other magic bullets for health care cost control—invigorated health care IT, oodles of prevention, miraculous reversions of destructive lifestyles, and centers for measuring relative cost effectiveness, even President Obama’s budget director pooh-poohed their likely impact when he headed the Congressional Budget Office. Most Americans do not believe these miracle solutions will do the job, either. In their eyes, the key to slimming the US health care system lies in eliminating its waste and inefficiencies. After a thorough analysis, McKinsey claimed that plain old inefficiency accounted for about $500 billion of excess US costs relative to other countries, as adjusted for their wealth and other relevant characteristics.

So, can we control health-care costs by slimming down this sector, without rationing care, and thus make health care available to all?

It cannot be that difficult. After all, we have achieved this kind of cure in other sectors of the economy, even for complicated products such as cars and computers. Henry Ford, for example, singlehandedly slashed the price of a car from that of a house to something readily affordable by the middle class. Bill Gates, Gordon Moore, Michael Dell, and Steve Jobs transformed the finicky, volatile $150,000 minicomputers I reluctantly programmed (in a foreign language, Fortran) as an MIT student in the 1960s to the cheap, reliable, user-friendly devices we use today. Service industries have benefitted from productivity too. Another McKinsey study attributed a third of the 1995–1999 surge in US labor productivity and continuing growth through 2002 to retail’s managerial and organizational innovations, such as the new markets created by eBay and Amazon.com and the inexpensive and stylish products offered by IKEA and Target.

There were two key ingredients to these productivity surges: the consumers who bought goods and services that provided better value for the money and the brilliant entrepreneurs who supplied them. The only viable health care cost cure is to reform public policy so that we create a consumer-driven health care market that motivates and rewards productive innovations in supply.

On the demand side, most health insurance beneficiaries do not behave like real consumers: employer-insured consumers are not motivated to shop carefully because they do not recognize that their health insurance benefits are essentially taken from what would otherwise be their wages, and those insured by the government have someone else footing the bill. As a result, consumers do not exercise the normal value-for-the-money judgment that has caused goods and services in other markets to become simultaneously better and cheaper.

When people use their own money to purchase health care, they drive costs down without compromising their health. For example, Switzerland, where health insurance is totally purchased by consumers (the poor and sick are subsidized), has costs that are 40 percent lower than those in the United States, as well as excellent care and universal coverage. Similarly, high-deductible health insurance policies demonstrate that middle-class consumers who pay a meaningful fraction of their health care expenditures out of pocket reduce spending without damaging their health.

On the supply side, providers are compensated for delivering fragments of care by a Medicare payment system that compensates providers for a hospital stay, for example, rather than for all the treatment and followup needed to treat a disease or disability. This payment system is especially problematic for the treatment of chronic diseases and disabilities, which account for 80 percent of health care costs. Because the providers are not motivated to optimize the overall course of care, patients receive suboptimal care that ultimately results in higher costs. The experience of Duke University Medical Center in devising an integrated system of care for the treatment of congestive heart failure is instructive. Although its integrated system reduced costs by 40 percent in only one year, Duke as an institution lost virtually all the savings it generated because it receives substantially higher compensation for treating sick, hospitalized people than for creating improvements in health that keep people out of the hospital in the first place.

Effective cost control would motivate consumers to shop carefully for insurance policies that offer the best value for the money while giving providers incentives to supply the best value for the money. There are two reforms that can make this happen:

1) Reform the income-tax system so that employed enrollees understand that their income funds the purchase of health benefits. The most direct way would be to make the money spent on health insurance available as cash, tax free, to employees. For example, my employer, Harvard University, could offer me a tax-free raise for the $15,000 of my income that it currently spends to purchase my health insurance. Like me, many of Harvard’s employees would opt to take the money and buy their own insurance, creating a genuine consumer-driven market.

2) Insurers would then compete for customers with policies that offer better value for the money. Their most important innovation would be the creation of integrated networks of producers paid for providing the total care needed by victims of chronic diseases and disabilities. (The payment reform would be led by changes in Medicare’s payment formulas.) These networks would offer better and cheaper care because of their integration. Other policies might reward health promotion by offering up to 40 percent rebates—that would amount to $6,000 annually in Massachusetts where a family policy costs $15,000—for enrollees who demonstrated health promoting behaviors, such as smoking cessation or vigorous exercise regimens.

The combination of invigorated supply and demand is the only health care reform plan that will avert the economic disaster that otherwise awaits us and, simultaneously, make health care available to all.

Sadly, it is a solution that the Washington, DC, establishment, which doubts the wisdom of consumers and the competence of entrepreneurs, is most reluctant to effect.

Comment [38]

Agree? Disagree? Let us know what you think. Please include your full name with your comment. Comments may be edited.

1) Thank you Rachel Lewis for making the key point that the administration of treatment is not necessarily equivalent to quality of care from the provider side nor quality of life for the patient/consumer! The most recent report from the Dartmouth Health Care Atlas project, published in February in the New England Journal of Medicine (and referenced in Atul Gawande’s deeply challenging piece in the June 1 New Yorker), found that “patients in high-cost regions have access to the same technology as those in low-cost regions, and those in low-cost regions are not deprived of needed care. On the contrary, . . . . care is often better in low-cost areas. The authors argue that the differences in [cost] growth are largely due to discretionary decisions by physicians that are influenced by the local availability of hospital beds, imaging centers and other resources-and a payment system that rewards growth and higher utilization.”

2) How would Ms. Herzlinger’s putatively free market solution, making every health insurance purchaser into a group of one, improve individuals’ options? Insurance companies would continue to be motivated to charge lower premiums to the young and the healthy and higher ones to the older and the sicker (if the companies were willing to cover the older/sicker at all, as many already do not). No individual would have the modest but real advantage of being averaged in with a larger group whose healthy members’ participation would lower the companies’ risk of paying out and thereby lower the cost of premiums to the sicker members.

3) It isn’t really about who writes the check, is it? It’s about who makes the treatment decision and on what grounds.

Posted 5 June 2009, 10:35 by Ann-Marie Scheidt
Sure things are getting out of hand
break down maintainance is always more expensive.
The solution to the problem lies in PREVENTIVE HEALTH CARE
It is obsrved globally that most of the health problems are due to improper eating habits.of late with changing trends towards fast foods and sedentry life style coupled with modern day stress more & more people are falling prey to life style diseases.

The solution is simple
empathise, educate,& empower the people to correct their eating habits
use food as medicine,need to eat to live rather than live to eat should be the mantra.

a nation wide eductional campaign for the same could be started.
conultation centre for the same could be started.
& i am sure the health of the entire population of the country can start improving.
with in a reasonable time.There by reducing the the expenses of break down maintainance on the government.

Posted 5 June 2009, 02:58 by Anil Chandanani
As a British renal nurse (on a health fellowship in Boston), I take issue with Dr Herzlinger’s comment regarding the number of people being dialysed in England. It may be a third of the number of those dialysed in the US, but that is because we clinically discriminate between those people who will benefit and those in whom any benefit it terms of longevity, will be massively outweighed by the traumas of dialysis. In fact, research has shown that for many older people with co-morbidities, dialysis does not prolong their life, just commits them to a roundabout of hospital visits and painful procedures which can in fact accelerate death. Just because we can dialyse people doesn’t mean we should. How will that 89 year old Boston woman with dementia, who lives in a nursing home and hasn’t been out of bed for a year, benefit from dialysis?? Well she won’t, but the decision is not a clinical one,or even a humane one. The facility will be paid to dialyse her so why not?

Posted 4 June 2009, 20:27 by Rachel Lewis
I definitely agree with you that healthcare costs can be further lowered. However, there are fixed costs in place – the cost of physicians, hospital stays, prescription drugs – that will not disappear with a single-payer system.

I think you hit the point home with your comparison with US and the UK. When it really comes down to it, the costly procedures that are covered for in the US are just that – too costly. While it may be true that the quality of life improvement may be well worth the cost, can the US bear this cost and average americans bear the higher insurance premiums?

Yes, I think universal coverage is possible, but I think the SFC has yet to come up with a way to a) provide a clear way to expand coverage and b) contain the costs of the healthcare system

Posted 4 June 2009, 17:41 by Jason
Congress is fearful of doing the obvious. The elephant in the living room is the Drug War. By legalizing drugs, MIDDLE Clash points out we could save $300 billion a year which is twice as much as insuring the uninsured would cost.
But Congress rather than solve problems is too concerned about keeping power and staying in office. MIDDLE CLASH states the real solution is to vote out all members of Congress and then to establish a third party that represents good old fashioned American Pragmatism.

Posted 1 June 2009, 13:36 by Mr. Big
Universal health care at $5,000 per person, times 300 million people in the U.S. is $1.5 Trillion, not $250 billion. If Dr. Herzlinger meant to use the “45 million” uninsured number that is so often quoted, she should have been a little more specific. However, once 45 million people get their $5,000 per person/yr subsidy, won’t the other 250 million people demand their fair share, too? It would sure be appealing to me to get $25,000 of “free” insurance instead of paying out $15,000/yr as I now am for a family of five.
But as a taxpayer, all the $250 billion would do is raise my tax bill by $1,850/yr, so in effect, I would now be paying $16,850/yr instead of $15,000/yr for sick care insurance.

However, after reading Dr. Herzlinger’s 900 page book “Consumer Driven Health Care” I came to a startling conclusion. If we did everything we already know how to do, we could cut health insurance costs and premiums by 30 to 50 percent.
She certainly hits the nail on the head that rewards for improving one’s health would be a great incentive.

Posted 28 May 2009, 14:38 by Jim Porterfield
“Because the providers are not motivated to optimize the overall course of care, patients receive suboptimal care that ultimately results in higher costs.”

The problem with business school professors – even those at my undergraduate alma mater – telling doctors how to practice medicine is that they don’t know what they’re talking about. Professor RH is a great writer but she doesn’t understand that doctors are motivated by their ethics and their calling to do the best for their patients. Who started this stupid idea that fee for service doctors let patients stay sick so they can make more money? This country tried lumpsum payments in the form of capitation in HMOs in the 1990’s and it was a disaster. Wasn’t that a form of motivation designed to optimize care? Fragmented care exists in all health care systems because of the nature of humans and human illness. Has Professor RH ever taken care of a demented couple with heart failure who live alone and don’t want to follow medical advice? I have. As for high deductible health insurance, Professor RH has it wrong again. The late Harry Schwartz who wrote for the NY Times ( about Russia), had a PHD in economics, and was an expert on U.S. health care, once explained that people’s concerns about the cost of care were inversely proportional to how sick they were. Put another way: If you are really sick —or even think you are — you don’t care how much it costs to get well.
I don’t think any of these grand schemes cooked up by the Harvard faculty will be an easy fix for an intractable problem. What we did develop at Duke – my medical alma mater – over 40 years ago – the Duke Cardiovascular Database – is a way to deliver more rational care – not less expensive care – but that idea was cast aside by all the gurus – including the Robert Wood Johnson Foundation – long ago. We prefer to have “experts” tell doctors the right way to practice medicine. Soon your doctor will be a nurse at Wal Mart. And who cares as long as they consult the Harvard B School?

Posted 26 May 2009, 14:20 by Brant S Mittler MD JD
The article states the problems well, but sometimes arrives at the wrong conclusion. She is astute to point out that Americans are increasingly abandoning the single-payor models of Canada and the UK, and more closely examining the Continental models such as Switzerland and France. Her emphasis on an integrated, rather than the often fragmented, model of delivery is welcome.

But the literature is decidedly mixed on Ms. Herzlinger’s assertion that “high-deductible health insurance policies demonstrate that middle-class consumers who pay a meaningful fraction of their health care expenditures out of pocket reduce spending without damaging their health.” Some literature has documented cost-driven delay or avoidance of healthcare because of the barrier presented by high deductibles. Other literature has shown that although HDHPs result in less being spent on premiums, the out-of-pocket costs of HDHP enrollees is fairly similar to that of those enrolled in more traditional plans. That is, employers save money, but patients don’t.

Some studies have demonstrated that HDHP enrollees are more value conscious, but this is not without problems. Cost does not necessarily equal value for health care, since consumers are poorly equipped to judge the clinical quality of services; nor do they have access to, or skill in evaluating, robust data on comparative outcomes.

HDHPs are highly regressive, since the amount of the deductible is uniform for policyholders. As a result, lower- and middle-income enrollees are at risk for a much higher proportion of income than a more affluent enrollee. There is also evidence that HDHPs tend to attract younger, healthier enrollees because of their lower premiums, leaving more traditional plans as risk magnets, with commensurate growth in medical expenses and premiums.

Posted 21 May 2009, 14:49 by Michael Mundorff
Healthcare reform is a big issue for every country in the world.

I do believe that the incentives for individuals to take care of their own health and medical fund is a critical part for people to have healthy behavior and keep the cost lower.

On the other hand, the healthcare system should be monitored/controlled by the government, and to ensure the primary healthcare and the big diseases to be taken care for majority of citizens.

Maybe we can look at the Signpore system. Let us also look at the new system in China, where people get an individual personal account for the out patient healthcare cost—so people can save it if they do not use it. how wonderful it is! There is a deductable policy for in patient, so people also have strong incentives to keep healthy!

Posted 21 May 2009, 05:16 by aili zhang
I may be picking at words, but if the question is truly CAN we provide coverage for all, the answer is YES. However, the real question is HOW. That is a much more difficult question. Some argue, as you do, that because other industries have managed to transform themselves, healthcare can do the same. I think that logic is incorrect for two main reasons. First, healthcare has already built a massive infrastructure that simply cannot be ignored in the “new world healthcare order”. There are billions of dollars in debt supporting massive oversupply of hospitals, technology, other facilities and services. Healthcare related debt is another area of great vulnerability in the US banking system. There are literally fortunes of debt at risk if those buildings, technology, servies, etc are either less utilized, or shut down. It is estimated by some that somewhere between 25 and 40% of American hospitals are in some form of technical default on the debt obligations and yet there has been relatively little reported about the potential impact of healthcare defaults as we focus on the banking and auto industry disasters today. Healthcare may well be not far behind. The impact on the economy, as well as the banking and debt markets would be significant. Second, healthcare is not a traditional “market” even though many persist in perpetuating that myth. People do not choose to be sick or injured. And, depending on the particular situation, they may well not even be able to advocate for themselves at a time when critical decisions need to be made. Even with the availability of information via the internet, patients are reticent to make decisions without the counsel of their doctor and are averse to countermanding their orders, even if WebMD tells them something different. We have been taught for 100 years to not worry about making a value decision when it comes to your health. Rather, don’t worry about the cost and do what your doctor tells you to do. While that culture can and should change, it will take time before measureabel change occurs. Hence, the notion that people will behave relative to healthcare like they do other purchase decisions, is fundamentally flawed and more importantly, incorrect.
To me, the facts are pretty clear. There is massive oversupply (excess capactiy) in the delivery system (hospitals, imaging centers, surger centers, boutique hospitals, etc) Doctors have been permitted to refer to themselves and drive costs and utilization even higher. And, in their defense, the fear of malpractice claims has driven massive unnecessary testing in the care delivery system, usually with minimal marginal utility. Insurance companies extract literal fortunes from the system in the name of “administrative costs” that proved little to no value and provide zero care. Findally, drug companies and technology manufacturers have been permitted pursue sales and revenue from the system without regard for the impact of the overall cost increases those sales create. The final point is that 5% of Medicare recipients utilize 80% of the resources. There is no way around the need to ration who gets what.
All of these factors create a monumental mess that ensures ONE thing for sure. Costs will continue to rise beyond affordability.
In my mind, a sustainable system will require huge changes in virtually every facet of the current system.
THere are too many hospitals in America. Our businesses cannot afford to support the excess capactiy these inefficiently utilized structures cost. Doctors who own pieces of their production process have an economic conflict of interest that we cannot afford. It must stop.
For profit insurance, as an entire industry, extracts more money than the systme can afford. One universal bill, used by all providers, sent to one place for efficient remediation would save the system untold amounts of money. And on and on and on.
I am frustrated that our elected officials and many academics try to tell us we can tweak the current system and it will serve us for the future. I believe that to be catagorically false. It cannot.
If the American government was force to conduct it’s accounting practices consistent with other American business, the unfunded liability of Medicare alone would show our country to be bankrupt. Add Social Security and Medicaid to the total and the numbers are staggering.
CAN we cover all Americans?? Yes. Do we have the intestinal fortitude to make the difficult decisions to build a model that covers all Americans AND is financailly sustainable. I doubt that seriously, especially if the legislative branch is give the task. Under that scenario, I fear a continued process of tweaks on the margins of the system until the day American wakes up to inflation rates never before experienced in our society, or our debtors (mostly the Pacific rim) determine there is a better risk-return proposition somewhere else in the world and our ability to borrow is drastically affected. At that point, the question is truly moot.

Posted 20 May 2009, 23:18 by Scott Malaney