06 Jul 2009

HBS Faculty Comment on the Health Care Reform Bill


Regina Herzlinger, Nancy R. McPherson Professor of Business Administration
Excerpted from a 4/27/09 opinion on The Huffington Post coauthored with U.S. Senator Tom Coburn (R-OK), M.D.

Some Democrats view Medicare as a successful cost controller, pointing to its low administrative overhead, which they peg at 3 percent. But that figure ignores an inconvenient truth: Medicare's unfunded liabilities, estimated at about $34 trillion. They are omitted from Medicare's costs because the government uses cash accounting. If Medicare followed the accrual accounting, which private sector insurers must use, its administrative costs would increase by a trillion dollars($34 trillion multiplied by a marginal Federal borrowing cost of 3 percent), eliminating any price advantage of Medicare.

The comparison between the administrative expenses of private insurers and Medicare also ignores the fact that Medicare pays no taxes and, as a monopoly, need not incur marketing expenses. Further, the monopoly power of Medicare and Medicaid enable them to underpay providers by an estimated $90 billion, sums made up by private insurers. But if the market were entirely composed of public insurers, who would take up the slack? The looming doctor shortage could well become a national crisis as prospective physicians who must incur massive debt for their education reluctantly opt for other occupations in which the government is not their sole source of revenues.

A government market with an underpriced Medicare would likely lead to the death of private-sector markets and products. An authoritative report estimated that up to 118 million people would eventually move into Medicare and out of private-sector plans.

Are we surprised? Public markets and their products are administered by legislators and bureaucrats - competent people, to be sure, but lacking the entrepreneurial vision and skills to innovate the products that people want at a price they can afford. For example, while public-sector organizations are hardly renowned for convenience - think about the location of your Division of Motor Vehicles - entrepreneurs created medical clinics in neighborhood drug stores.

To picture how this public health insurance market might work, imagine an automobile dealership run by the feds that sells cars made by Toyota and others, along with cars made by the government itself, manufactured with money borrowed from our children. As in Massachusetts, the public market will standardize product design with features that many people may not consider to be good value for the money. To return to the car analogy, it might demand a heated seat in every vehicle .As for public insurance, it ignores real costs in its pricing and may well force talented health care providers to exit the sector because of its inadequate payments.

In the end, the Democrats' health care reform will require drastic rationing of health care for the sick to control its costs. The government-controlled UK health care system points the way it features, for example, the lowest uptake of cancer drugs among the big five European economies and correspondingly low cancer survival rates.

See also: Herzlinger, Regina. Who Killed Health Care? America's $2 Trillion Medical Problem-and the Consumer-Driven Cure. McGraw-Hill, 2007

Associate Professor
Robert Huckman
Photo: Stuart Cahill

Robert Huckman, Associate Professor of Business Administration

It is important to put the debate over a government-run plan into perspective. It is an issue related to health care reform, but it is not the only-or even most important-issue. Even if we reach consensus on this question, achieving meaningful reform will require further changes in how medical care is delivered and how information about patients is collected and tracked over time. These latter areas are where I see the questions of quality
improvement, cost containment, and value creation ultimately being decided.

That said, I see a government-run insurance option
neither as a panacea for the nation's health care crisis nor as a necessary cause of future problems. In particular, I do not share the concern that a government plan would use its scale to lower costs to a level that would drive private plans out of business. First, a large number of private plans already have significant scale in their own right. Second, to the extent most proposals would offer a government plan as one option among many, the scale achieved by the government plan would result from individuals selecting it over a private plan. If such a selection process leads to a large government plan, perhaps therein lies a lesson. Third, a well-structured proposal would prevent the government plan from being subsidized by funding from general revenue. That is, the costs of supporting the plan would need to be transparent to the American public. If, under the above conditions, a government plan succeeds in gaining enough enrollees to cause concern for private plans, I don't see that as a problem but rather as evidence that people see value in a public option. In the end, I think the chances of a government plan supplanting private options are slim. Creating the potential for that to occur, however, might provide the impetus that private plans need to increase the value they provide to patients and the system as a whole.

See also: Huckman, Robert; Pisano, Gary: "The Firm Specificity of Individual Performance: Evidence from Cardiac Surgery," Management Science

Huckman, Robert: "The Utilization of Competing Technologies Within the Firm: Evidence from Cardiac Procedures"

Professor Michael Porter
Photo: Stuart Cahill

Michael Porter, Bishop William Lawrence University Professor

In health insurance, the two fundamental issues are first, to achieve universal coverage, but second to change the way insurers compete for subscribers. Competition among health plans should be based on value for subscribers, where value is the health outcomes achieved per dollar spent. Today, health insurers' incentives are not aligned with value, and health plans compete by selecting healthier members, rationing access to costly services, and shifting costs to patients and providers.

Regulations are needed to end coverage and price discrimination based on health risks and preexisting conditions. Value-based competition also demands the measurement of value, and plans must be required to measure and report subscribers' health outcomes and associated costs.

There is much discussion about the merits of a public plan in health insurance reform. A public plan is not necessary to reorient health plan competition around value for patients; this can be accomplished through mandatory measurement and regulations such as those described above. A public plan structure will not necessarily reduce true costs, and it risks serving as a distraction from real reform of the health care delivery system. The "cost savings" a public plan might achieve through volume discounts due to its scale are one-time savings and not true ongoing outcome or efficiency improvements. Instead, costs are shifted to suppliers or other purchasers (i.e. private plans) and ultimately to patients.

The major risk of a public plan is that it will undermine competition, and reduce the choice of insurance plans for citizens in the medium and long run. Americans will not ultimately accept a health insurance monopoly no matter how attractive a public plan looks as a "solution" to the current crisis. Also, a public plan is subject to political distortions and interest group bias that will disadvantage some citizens over others and block needed fundamental reforms. Such political distortions are clearly evident in Medicare.

If we are to introduce a public plan, it must have independent governance and be subject to the same regulations as private plans. Public plan design should focus on plans targeting underserved subscriber groups, such as Special Needs Plans under the Medicare Advantage program. Private insurers might then follow suit, so that the public plan improves competition rather than undermines it.

See also: Porter, Michael E., "A Strategy for Health Care Reform - Toward a Value-Based System," New England Journal of Medicine

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