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Thursday, November 8, 2007


Session 4: The Ethical Foundations of Health Care

Regina Herzlinger
Harvard Business School

CHAIRMAN PELLEGRINO:   We move on now to our next speaker, Regina Herzlinger, who is at the Harvard Business School—Professor Regina Herzlinger—who will discuss the ethical foundations of health care this fourth session, and a discussion will be led later by Nick Eberstadt, Council member.  Prof. Herzlinger?

PROF. HERZLINGER:  Thank you so much.  I'm thrilled to be here.  I am tethered to this computer, so, as you know, when you deal with technology, it is the master, not you, so I have to be up here at the podium.

So, Dr. Pellegrino, I'm so thrilled to be here.  Thank you for inviting me.  And Dan Davis wrote to me, and he said, "Are there competing diagnoses of what's wrong?  What is your diagnosis?  How does it differ from other diagnoses?  How would you propose to treat the problem or problems?  And how does your recommended therapy compare to others?"  So I have come prepared to answer those questions to the best of my ability and perhaps answer some of the questions that I heard you discussing while I was waiting here.  I hope you'll find it useful.

Here is a shameless plug for my new book, Who Killed Health Care, which, improbably enough, has wound up on Oprah's list, so just shows the—it has nothing to do with my book, but shows the intense interest in this subject.  So what are the problems with the healthcare system?  So one way of encapsulating these problems is that it's a bad value for the money.

This statistic is just staggering, and we have this statistic over and over again.  We had such a brouhaha about lead paint in toys that were imported from China, but somehow we seem almost inured to this horrifying piece of data.  We also have a major economic problem because of our healthcare system.  We spend roughly 2.2 trillion dollars on health care.  That money is our money.  It's not anybody else's money.  It's money that comes from taxes, and it's money—if you receive insurance from your employer, your employer is not doing you a favor.  You've made a tacit arrangement with your employer to be paid in health insurance rather than salary.  And I will explain why you might not want to make that arrangement. 

On the face of it, it's absurd.  Would you want your employer to buy your house, to buy your car, to buy your clothes?  You would not, because your employer has no idea of what you want or what you consider value for the money.  But because of a tax anomaly that occurred after World War II, employers can use pretax income to purchase health insurance, whereas if they cashed us out—in other words, if Harvard University gave me back the ten or fifteen thousand dollars that it takes from my salary and uses to buy health insurance—half my salary—that's a joke.  Professors are better paid than that—not much, but better paid than that.

So if I got back this money, I would have to pay taxes on the money.  So Harvard can use all of the ten to fifteen thousand to buy health insurance, but I would only be able to use $5,000 to $7,500 of the after-tax income.  So no matter how poor they are as purchasers of health insurance—and they are very poor—not because they're stupid—they're very smart—but because they have no idea what I want or what I would consider value for the money. 

We have American employers paying for health insurance.  This is unmatched in the rest of the world.  The degree of financing that comes out of the corporate sector for health insurance—now, it's not corporate money, it's our money, but it comes out of the corporate sector—is unmatched by any other part of the world.  And because we spend so much on health insurance, our employers who are globally competitive are at a huge disadvantage because they pay those costs, and the companies with whom they compete do not pay for those costs.

So, for example, General Motors, which is near bankruptcy, claims that it spends $1,600 per car on health insurance.  Toyota claims it spends $100 per car on health insurance.  Both of those numbers are likely apocryphal.  General Motors has puffed up the numbers in a way that no economist would accept.  Let's say the right number, by including unfunded retiree health insurance—Toyota has understated the numbers by understating how much it pays for taxes for health insurance in Japan.  Let's say the right numbers are $1,300 for General Motors for health insurance versus $300 for Toyota.  Can General Motors engineer $1,000 in non-healthcare costs out of its cars so it can be competitive with Toyota?  I submit to you that it is impossible. 

Other globally competitive firms face the same kinds of issues.  Not only do they face these issues, but I've been on the boards of fifteen publicly traded companies—not at the same time—since many of you are academics, hardly at the same time, but I'm so old that over the course of my career I could manage it.  So I do know many CEOs.  I've never had a CEO say to me, "You know what I love about my job?  I love buying health insurance."  I've had lots of CEOs say to me, "You know what I hate about my job?  I hate buying health insurance."  But because of this tax peculiarity—they could cash us out.  They could say, "Take the money and buy health insurance on your own account."  But because of this tax peculiarity, they have to buy health insurance.

I was on the board of the great company John Deere.  John Deere had to build its own healthcare system in the rural parts of the United States.  So here's John Deere, this excellent company, globally competitive, ferociously competitive market, and they have to worry about delivering health care, which, as you know, is so taxing in and of its own. 

There are other big problems.  The 40-million-plus uninsured is, of course, a huge problem.  It is a huge moral problem and may also be an economic problem.  Perhaps you don't know that over a quarter of the uninsured earn more than the median family income in the United States.  In fact, people who earn over $75,000 a year are among the fastest rising number of uninsured.  What is $75,000 a year?  That puts you in the top 20 percent of American wage earnings.  So people who are wealthy increasingly do not buy health insurance.  Why is that?  Well, you make $75,000.  You take home $37,500 after taxes.  If you live in Massachusetts, a family health insurance policy will cost you $15,000 out of your take-home pay of $37,500.  Not going to do it.

So another issue, another economic issue that people don't talk about much but to me is a major issue—the source of the wealth in this country is our incredible rate of growth of productivity.  The fact that we grow so rapidly is astonishing, because we're such a big economy that it's like an elephant doing a backflip.  So this productivity enables us to be charitable to do the things that we all wish, want to do. 

So where does the productivity come from?  It comes overwhelmingly from small companies.  They are the major sources of new jobs in the economies.  Small companies do not offer health insurance.  Most of the employed uninsured work in small companies.  So we have a lot of people who work in big companies who would love to work for small companies but are locked in their jobs because they fear the problems of getting insurance in the individual market.  And there are millions who are underinsured.  I'm going to talk about that.  That's my problem statement.  So how did this happen?

Well, I think it happened because we took this money—2.2 trillion dollars—and we turned it over to insurers, the U.S. Congress, the hospitals, and we said, "Here, you take it, and you're not going to be accountable for it."  So, for example, this morning, if you ate some Raisin Bran or a yogurt, and you looked at the side of the box, it would have a lot of information about the characteristics of that Raisin Bran or yogurt, and it would have the price pasted right on it.  If you needed a mastectomy or a prostatectomy, you would know nothing about the caliber of the surgeon who is doing that procedure, nothing about the hospital in which he or she practices.  You wouldn't even know the price, even the rack rate, which is the outrageous price that's saved only for the uninsured.  Even that number is very hard to get, and that is nowhere close to the real price.  When you don't hold people accountable and you just shovel money at them, well, it's never enough.

So what have we gotten?  One thing that we have is the hospital sector has increasingly consolidated throughout the United States, become oligopolistic or monopolistic.  The hospital sector is the single biggest part of the U.S. healthcare system.  And in some parts of the United States 80 percent of all admissions are in one hospital system.  When you don't have competition, prices go up.  And there are excellent economic studies that show that prices have risen substantially over what they would have been because of this absence of competition, and that quality of care may have diminished.

Now, there was some comment earlier about the—I think it was you, Nick—about the amount that people spend on health care.  So it's well known that as incomes go up, countries spend more on health care, because people want to.  We may not like it, but they want to, and they do.  Nevertheless, the U.S. spends so much more than countries of similar wealth.  And McKinsey studied this issue.  I don't do any consulting—not that I'm deluged with offers, but I don't do it.  So I'm not shilling for McKinsey.  But McKinsey studied this issue, and they found that our healthcare system costs half a trillion dollars more than systems in countries of equal wealth, and there are countries that are as rich—not in total but per capita—as the United States.  The question is why, and the answer is lack of productivity, lack of competition, 80 percent of that caused by hospitals.

Now, I'm here in Washington, D.C., where Uncle Sam—I don't know if you can see this—he's got a stethoscope—has increasingly become Dr. Sam and intruded into the practice of medicine.  I call it intrusion because medicine is the youngest science.  You can compare the predictive power of a science like physics with a science like medicine.  There is absolutely no comparison.  And formulas that try to lock down cause and effect in the practice of medicine are pernicious. 

And I have in my book how the Congressional insistence on high doses of Epogen in the treatment of people with end-stage renal disease—my book focuses on a man who has end-stage renal disease.  It is something like Murder on the Orient Express.  All of you are too young to remember that.  But that was written by the great authoress and very smart businesswoman Agatha Christie.  And somebody dies on the train, the Orient Express, and the question is who killed him, and the answer is everybody on the train killed him.  Same thing with my character, who has end-stage renal disease. 

So what did the Congress do to kill him?  Well, one of the things they did is they have a recipe for the treatment of end-stage renal disease which is three days, three times a week, of dialysis, not much health promotion and testing, and a whole lot of Epo.  And I have a Senator who is talking about the level of hematocrit that you need, and the level of hematocrit in his view that you need is the same as the level of—now, this Senator—you cannot go into the Congress and not be overwhelmed by how smart these people are.  Uzbekistan, Iran—you know, it just goes on and on.  Nevertheless, are they physicians?  This particular Senator was a lawyer, and it turned out the Epo recommendation was quite a deadly recommendation.

Now, I teach a class at the Harvard Business School that's called "Innovating in Health Care."  I have eighty students.  Twenty of them are MDs.  They're not MD/MBAs.  They're fully trained MDs.  They're nearly as old as I am.  And they've given up.  They say, "I cannot practice medicine anymore.  I've lost my professional autonomy, and I've lost my financial ability."  Now, some people say, "Well, jeez, $120K doesn't sound bad to me."  But it sounds bad to them, and they have opportunity costs that are quite real, and they're deserting the medical profession, to me a tremendous tragedy, in part brought on because of Uncle Sam becoming Dr. Sam.  And the insurers are really beyond conversation.

But one problem with the insurers, with the private insurers, is the American economy is characterized by choice.  We have 240 models of automobiles.  We have 180,000 book titles.  As an old author and teacher, I'll tell you, people buy books.  They don't read books.  But okay.  Five hundred brands of chocolate, as if we needed them.  Now, why do we have so much choice?  Well, if you're a manufacturer, you're not going to offer choice unless you make money at it, and you're not going to make any money at it unless people respond to that choice.

Now, health insurance is greater than a trillion dollars.  How much choice do we have in health insurance?  We have one policy, which is called a PPO.  Most people haven't even got a clue as to what that is.  And then we have something that people call consumer-driven health care, which is an absurd title, for the second choice in what should be a market that's characterized by enormous choice.  When there's no choice, there's no competition.  When there's no competition, there's no productivity.

So where are we going?  Well, managed care used to be a solution, and if you like, I'll tell you about why it died.  But what we're looking at now—I think there is a broad consensus about the uninsured.  I think except for minor parts of the right, both Republicans and Democrats agree there should be universal coverage.  The question is how to do it.  And there are two frameworks.

One kind of thinking is big is beautiful.  Yeah, we'll have universal coverage, but that's not going to solve these costs and quality problems.  The way to solve it is to consolidate the healthcare system.  We have too many physicians who practice independently.  We have 650,000.  Seventy-five percent of them practice independently, nonsalaried.  Fifty-seven hundred hospitals, a lot of independent insurance companies—the economist would say there is too much fragmentation in this market.  Let's consolidate it, and big is beautiful.

An opposing point of view, totally different, is you've got this all wrong.  The only way we're going to make health care better and cheaper is to bring the entrepreneurs, and let the flowers bloom, let people who have different ideas about how to deliver health care and health insurance and health information into the mix.

So what are the "big is beautiful" techniques?  This is what the incoherent debate—incoherent at least to me—maybe not to you—at the Presidential and state levels is really about, these two techniques.  I think the uninsured issue is a nonissue anymore, in that there is agreement that everybody should be insured.  So the "big is beautiful" technique—one of them is single payer.  And the theory of the case here is not only universal coverage, because universal coverage does not require a single payer, but that the government will pay, and the idea is all these insurance companies—and I certainly am no booster of them—would be eliminated, and all the money that's wasted would be used for other purposes.

What's the problem with single payer?  If you believe that the U.S. economy owes its strength to entrepreneurialism, no entrepreneur will enter a single-payer system.  So, for example, Tony Blair, when he expanded the U.K. capacity to deliver health care, he sent out—the NHS sent out bids to firms in the U.S. saying, "Come to the U.K. and help us build up our capacity."  I have a friend who runs an entrepreneurial specialty hospital that specializes in orthopedic surgery.  This would've been a huge contract for him, would've made his business.  He refused to bid, and I asked him why, and he said, "It's suicidal.  Tony Blair leaves office.  The government changes its mind.  I've invested all this capacity.  I've wasted my money."

Managed competition is another "big is beautiful" technique.  It is oxymoronic, at least to me.  Competition is either competitive, or there is management, regulation of the sector.  We have this in Massachusetts.  So what do we have in Massachusetts?  If you're uninsured, you can buy health insurance, but you can buy it in only one store.  That store is run by the government of Massachusetts.  And you could buy a number of health insurance policies, but they're all designed by the government of Massachusetts.  And because—let's face it—you're not too smart, these insurance policies are very similar to each other. 

So what would you expect in a system like this?  The federal employees health benefit program is a very similar kind of system.  One thing you would expect is that the products would all be Mercedes, because they're not designing products for the consumers' point of view, they're designing what they think you need.  So if this were a car, you would have a market where every car came with a heated seat, because, after all, you need it for your little tushie.  And you might say, "No, I don't need it, because it costs $2,000.  I will put a little pillow with wool on it, and that'll do just fine for me."  But you don't have that choice.  So already in Massachusetts we've excused some of the uninsured from participation, because the plans are too expensive.  And the federal employees health benefit program for the very well paid federal employees had 5 percent uninsured, likely because they cannot afford those rich plans.

Pay for performance—that sounds fabulous.  You pay a good doctor more than you pay a bad doctor.  Although that's a little funny.  Which is the better car?  The Toyota or the Mercedes?  I know what the better car is, because I own a Mercedes.  Unquestionably the Toyota is the better car, and it is a much cheaper car.  So the idea that high price equals high quality is not true in most of the market.  But, okay, let's say that it is—do you really get paid for performance under "pay for performance," or do you get paid for conformance, for conformance with recipes that have been cooked up?  Now, the danger of being paid for conformance is those recipes better be bulletproof, which is very dubious, given the youthfulness of the science of medicine. 

Why don't we pay for performance?  Performance in a car means miles per gallon.  What happens when I hit a wall at thirty miles per hour?  What is the fuel efficiency?  That's what I'd like to know when I go to see a doctor or a hospital.  I don't care whether they conform with somebody's ideas about how to render medical care.  I really would like to know how many of their patients on a risk-adjusted basis die.  What kind of morbidity do they have?  What kind of clots, infections, readmissions within thirty days?  Well, we don't have this data, so we can't have that.

So "let the flowers bloom" is very different.  I'm going to tell you about that, and then I'll open this up.  This is called—I call it consumer-driven health care.  So every consumer is required to buy health insurance.  If they're poor, they get enough monies so they can go and buy it themselves.  They have information, which we do not have now—which doesn't exist.  It's not that somebody, some secret cabal has this information.  It doesn't exist.  But they are empowered with information.  Government helps the poor; prosecutes fraud and abuse, which it's done not very well; enables transparency; and stops being Dr. Sam, gets out of the way.

Now, what's the theory here?  This is a kind of strange theory.  So the theory in consumer-driven health care is consumers—if you give them—give me ten to fifteen thousand dollars.  I am going to look for totally different health insurance from what I have right now.  I don't want what I have.  And I will likely change also the out-of-pocket healthcare services and technology.  Now, what I want may not be what you want or you want or you want.  We're all going to change it.

Second part—much more important—is if you put consumers—you give them the money—you all know the 80/20 rule?  This is Pareto's law.  Pareto's law is that 20 percent of the possible causes, cause 80 percent of what happens.  For example, 80 percent of the beer in the United States is drunk by 20 percent of the beer drinkers.  And as a teacher in a graduate school of business, I know them all intimately.  So when businesspeople talk about low-hanging fruit, and you think, "What the heck are you talking about," they're talking about 80/20.  They're going to go after the 20 percent of the market that accounts for 80 percent of what happens.

So if we want to remedy the cost and quality problems in health care, a very obvious place to start is 20/80, if it applies, and of course it applies.  Twenty percent of the users account for 80 percent of the costs.  They're very sick.  They have a handful of diseases.  They have diabetes, cancer, AIDS, heart disease, and so on.  What they want is personalized medicine.  They want care that's integrated around their needs.  They don't have that.  So if you're diabetic right now, you have to run all over town to get your ophthalmologist, your nephrologist, your cardiologist, your podiatrist, your neurologist, your social support.  But in a consumer-driven system, these units would spring up.  Why would they spring up?  Because that's what people want, and they will pay for the things that they want, and also personalized technology.

Do we have the model for this?  Well, sort of.  Secretary Leavitt happens to be there right now.  He was there yesterday.  This is the country of Switzerland.  Switzerland has kind of a non-wacko country, really a remarkable country, very wealthy despite the absence of any natural assets other than terrific milk that makes the milk chocolate.  But the Swiss have a universal-coverage, consumer-driven system. 

So here's how it works in Switzerland.  You buy your own health insurance in Switzerland.  You have to buy it.  These Swiss, they're not fooling around.  You lose a critical body part if you don't buy it.  It's actually enforced through the employers.  You cannot hire somebody who doesn't have health insurance.  So if you're poor—we talked about how doctors don't accept Medicare.  The real tragedy is doctors who don't accept Medicaid.  Forty percent of physicians in some states will not take Medicaid patients, and I don't blame them.  They're very poorly paid.  So should physicians be the instruments of something that should be funded by all of us?  All of us should pay for the poor and not make it a burden on physicians. 

So if you're Swiss, there is no Medicaid.  There is no Medicare.  There's no government program.  You go out in the private market.  Poor get money transferred to them.  They go out and shop like everybody else.  Now, the Achilles' heel of the individual consumer-driven market is the problem of 80/20.  If I had end-stage renal disease at my age, my costs would be $65,000 a year.  If Harvard gave me back 10 to 15 thousand, and I said, "Here I am," no insurer would insure me, or would not insure me for more than one year. 

So how do the Swiss deal with this?  Well, the private insurers have formed a cartel, and they risk-adjust each other.  So, for example, if I am in Switzerland, and I live in Zurich, I would pay the insurance for a woman of my age, 35.  Now, if the insurers on this end of the table over here were very devious, and they got only the healthy 35-year-old women, they would make a bundle, because they pay the average.  These guys were so well intended and wonderful but hapless business people.  They would lose their shirts if they enrolled all the sick 35-year-olds.  So the Swiss insurance industry has formed a cartel, and they take the profits out from these guys that have been earned solely by cherry-picking the population, and they give them to these guys.  So they enable an individual market where the sick can get health insurance.

And there's terrific consumer information.  Why is there terrific information?  Why is there such great information on your little yogurt, on your Raisin Bran, about your cars, about Zagat's ratings?  People don't want to be stupid.  If there's a consumer market, there's a huge demand for information.  Bloomberg—how did Bloomberg become a billionaire?  Bloomberg understood—as an old accounting teacher, I'll tell you what he understood.  Most people don't know a debit from a credit, cannot possibly interpret financial statements, and he made financial information easy for them to access.  And if you use Morningstar—know what it is?  Star rating for mutual funds?  Terrific rating system.  You can be as thick as a brick, and if you rely on Morningstar, you'll do pretty well in your investments.  So consumer markets create information.

So what are the results?  The Swiss spend 40 percent less than we do.  Do they spend 40 percent less by rationing care to the sick?  That's a very easy way to spend less money.  You know, you can have a universal health insurance system which is great, except for the sick.  Do the Swiss have that?  No, they do not have that.  And I compared in this boring article that I think you have—I compared Switzerland not to the U.S., because that's a slam-dunk.  Everybody's better than the U.S.  I compared Switzerland to the state in the U.S. that is most Swiss-like—very undiverse, very urbanized, highly educated, very wealthy.  What is that state?

DR. MCHUGH:  Massachusetts.

PROF. HERZLINGER:  Massachusetts—no.  Massachusetts was number 2.  It's Connecticut.  I thought it would be Utah, Minnesota.  Nothing like looking at data.  No, it was Connecticut.  So you think about a rich state, which actually Connecticut, Massachusetts, and Maryland are the three Swiss states in the United States—most Swiss-like.  The Swiss have much better health care and much more in the way of resources, yet they spend 40 percent less.

So do people want choice?  Netflix has 60,000 titles.  You're all too busy to watch Netflix.  But, anyway, how many are rented once a day?  You'll never see me again, right?   You've never seen me before; you'll never see me again.  So what is the answer to this?  Do people like choice?

SPEAKER:  To a degree, they do.

PROF. HERZLINGER:  How much of a degree here?

SPEAKER:  Five percent?

PROF. HERZLINGER:  Five percent—that's what I thought, exactly that.  That was so wrong.  Thirty-five to forty thousand titles rented every day.  So people like choice.  Do they want choice in health insurance?  Well, the health insurance sector is lucky that the postal service exists, because the only sector in the U.S. that's more disliked than them is the postal service.  So people think consumer-driven health care is high deductible.  That's ridiculous.  High deductible is one of many options that will emerge in a consumer-driven market.

In the Swiss market it is by far the cheapest kind of policy.  Like, no kidding, if you have a deductible of $1,000 to $7,000, the policy's going to be cheaper.  But only 40 percent of the Swiss sign up for it.  They want to pay more to get different kinds of health insurance.  And I can tell you what we know about them.  We do know they reduce costs by reducing utilization of health care. 

What does this do to health status?  Do people reduce utilization of health care in a way that diminishes the health status?  The Rand experiment, that old experiment, said no for middle class and upper class; yes for lower income people.  What we do know so far, and it's very early on—we've only had these for three years—is actually people with chronic diseases who used to be in a PPO who have switched over in a high deductible take better care of themselves.  This is amazing.  I was astonished to see this.  They actually complied more with their medications—and as you know, for chronic disease, self-care and compliance with medications is critically important. 

And McKinsey again said to these people, "What happened to you?  You used to be completely negligent and a slob, and suddenly you're taking much better care of yourself with this high deductible."  Not everybody—this is average data.  People said, "Well, you know, it's my money.  I have to take care of myself, because I'm spending my money."  So the psychology changed behavior.  And this is just some more.

Let me tell you what I'm going to buy if you give me my ten to fifteen thousand dollars, and if you come to the Harvard Business School—anybody here?  No?  Right next door is a building—come visit me—that looks like a church.  It's a drug factory, but it's in Cambridge, so it has to look like a church.  So what does this drug factory make?  Makes a personalized-medicine drug, makes a drug—the company is called Genzyme.  The drug is called Cerezyme, for people who have mutated genes and get a disease called Gaucher's disease.  Genzyme earns 1.2 billion dollars a year from this drug, and this isn't Claritin or Pepcid.  This is—you take the drug, you live; you don't take the drug, you die.  One-point-two billion—how many people take this drug?

DR. McHUGH:  A thousand?

PROF. HERZLINGER:  Three thousand.  Three thousand into 1.2 billion is $400,000 per person per year.  My insurance policy, and likely yours, unless you're on Medicare, tops out at a million dollars.  Two and a half years on Cerezyme, you're uninsured and uninsurable.  So if I bought my own health insurance since I went to MIT—and clearly the only reason you would go to MIT is—because it's not a party school—is that you love technology—I understand these things are going to cost a lot of money, and I would buy insurance for 25 or 50 million, likely taking a year cut on some other features.

How about this policy?  How many of you go to the gym three times a week or more?   How many of you torture yourself in what you eat or do not eat, your alcohol intake, your management of stress, your drug use?  Right?  Horrible life.  You torture, torture every single day.  What reward do you get for this?  Zero reward.  Now, in Switzerland you could sign up for a health insurance policy—it's a five-year policy—measures your health in the beginning of the five years.  Now, these Swiss, they're not nice.  They're going to measure every aspect of your health.  They predict what your health will be five years from now.  If you're that healthy or healthier, you get half your money back.  In Massachusetts that means for all the torture I put myself through, if I stay healthy, I will get back not a weekend at the Doubletree but $38,000—you know, serious money. 

Now, you can only do this in a five-year policy.  The reason is, if you're morbidly obese at the beginning of this period, it's going to take you a long time to change your habits so that you're healthier.  It's not going to be done one, two, or three.  Why don't we have these policies?  No employer wants to sign a five-year policy.  First of all, they have too much turnover in their employees.  Secondly, the typical employer fires their insurance company every three to five years.  If they sign up for a five-year policy, they're stuck with them forever. 

Consumer-driven market totally—in other words, we could get health insurance policies that financially reward health promotion, that aren't hoarded—don't say do this, do that, do that—but instead they hand out a carrot—and what a carrot—a 38-thousand-dollar carrot.  So we had this before.  What's going to happen in supply is radical restructuring of the healthcare system to personalized health services, personalized diagnosis, personalized therapy that deals with the fragmentation of the present system.  We've seen this in breast cancer, and in part as a result of this we've had lower deaths and lower costs. 

Why don't we have personalized health care now?  Why don't we have organized teams for diabetics, for people who have AIDS, for people who have congestive heart failure?  So Duke University understood 80/20 very well, and they started an integrated program for people who have congestive heart failure.  As opposed to top-down technocratic dictates about how to manage care, they came up themselves organically with a new idea.  They increased the visits to cardiologists sixfold.  They improved health status so much that they reduced the number of hospitalizations and lengths of stay in one year—one year. 

I'll tell you this as an economist.  This is an astonishing entrepreneurial innovation.  In one year they reduced total costs by 40 percent by making people healthier.  Not by saying no, just by making people healthier.  What reward did Duke University get for this innovation?  Henry Ford—he became wealthy.  Bill Gates, wealthiest man in the world.  What about this?  Have you ever heard of this?  No.  The reason is they lost every penny they saved, and they reason they lost every penny they saved is in today's system providers don't get paid for making people healthy.  They get paid for treating the sick.  So the healthier they made people, the more money they lost.  Can you imagine how pernicious this payment system is?  And it all comes out of CMS and the insurers, that not only dictate price but dictate the bundles in which you render care.  So entrepreneurial—you know what they say—no good deed goes unpunished.  Right now that's what happens in healthcare services.

So who's going to change all this?  Who started Microsoft?  Bill Gates.  Who started General Electric?  Thomas Edison.  I knew you guys were smart.  Who started Ford?  Well, that's a gift.  Who started Genentech?  Genentech used to be called Herbob, as if it were an automobile dealership.  Herb was the Nobel-worthy scientist; Bob was a businessman, Bob Swanson.  Who started Vanguard, the world's best mutual fund, that introduced the innovation of the index funds?  John Bogle.

What did these people share other than they're all white men? Please help me.  This is ridiculous here.  What else did these people share?  They're rich.  Actually, John Bogle is not that rich.  John Bogle could have­—well, you don't want to hear about that.  But he's rich.  He's not crying poverty, but he's nowhere near as rich as his counterpart, the head of Fidelity, because Vanguard is owned by its employees.  He's quite a charitable man.  I wish he would win the Nobel in economics before he gets too old.

So clearly these are all path-breaking businesses.  These aren't minor innovations.  And all these people are not only very good business people, but they really know what they're doing.  So Bill Gates is a software writer, is extraordinary software writer.  John Bogle could manage money like nobody's business. 

So if you're that kind of person in healthcare right now, you're completely shackled.  The payment system shackles innovations in services.  Insurance regulation shackles innovations in insurance.  And if you're a technology entrepreneur, come take my course, where I spend a lobotomizing two weeks on how to navigate the shoals of coverage, coding, and pricing, so that you can actually get paid for your entrepreneurship.

So there are  a lot of scare stories, but I'm going to tell you­—just deal with a couple of them.  One of them is there is no information.  And there is no information.  So how can you have a consumer-driven market when there is no information?

We had this situation.  In 1934 we had a great depression.  Accounting was discovered in the middle of the fifteenth century.  We talk about globalization as if it's brand new.  Of course, that's ridiculous.  So the Italians discovered accounting because they were trading all over the world, and they needed some way to keep track of what they were trading.

We did not have financial statements for corporations until 1934.  When you bought a stock before 1934, that was like going to a hospital or a doctor right now.  You had zero information.  So what happened?  What changed things in 1934?  Franklin Delano Roosevelt gets elected.  He is urged—same debate:  big is beautiful versus let the flowers bloom.  He is urged to take over the U. S. economy.

Franklin Delano Roosevelt is an aristocrat, a very wealthy man, whose money came totally from his mother, Sarah, who lived with him and Eleanor.  So you wonder why this wasn't a happy marriage.  So he is, of course, an incredible genius, a genius in so many ways, and he invented transparency—what now trips off our tongue: transparency; there was no transparency—with the SEC, which said, "You'd better measure.  You'd better make it pubic.  You'd better get it audited, or you won't have access to any money." 

So we need an SEC in healthcare, and we need it because of information like this.  This came from Engenics, which is a subdivision of United Health Care, a small subdivision, a mere billion dollars.  So this is a cost-quality relationship for physicians.  It's like the Toyota relationship.  The highest price is not necessarily the highest quality, but in the absence of disclosure who the hell knows this?

Here is what I do know.  This is information I got off the website in Massachusetts on the hospital 30-day, risk-adjusted mortality from heart attack compared to U.S. national rate.  Of all the great hospitals in Boston, and they're either average, better than average, or worse than average.  Gee, funny thing.  They're all average.

What is the probability of all of those hospitals being average?  What kind of distribution and standard deviation do you have to get so that they are all average?  These are political data rather than informative kind of data.  They're the kinds of information we now get. 

Class warfare: the sick are going to get better healthcare than the poor.  Do the sick get better healthcare than the poor once they get care?  Poor have clearly much worse access.  Yes or no?  The rich get better healthcare than the poor. That's the class warfare.  That's what they say about consumer-driven healthcare.  The answer is no, in the lobotomizing prose of The New England Journal of Medicine.  So what you see at the bottom here is—this is the Rand team­­, this wonderful team at Rand that studies these questions.

The reason you needed an army to answer this question is we have no measures of quality.  So, you know, it is a very difficult question to answer.  Of course, the rich think they get better healthcare because they are rich and connected and powerful, but in the absence of data about quality of care, in their opinion, no, it's not true.  Whereas  I can get terrific data about as trivial a purchase as a car or a donut or a yogurt, no information—we won't get it until we get the SEC.

So here is where I think we're going.  We're going to have—whether Hillary or whoever on the Democratic side or whatever Republican.  We're going to get tax relief so that consumers can buy on the individual market.  Poor people will be subsidized.  I have pitched this healthcare SEC to every politician I know.  None of them have bitten.  They're terrified of the backlash from providers of measuring performance.  No provider—nobody wants to have their performance measured, including professors.  You know, we want other people's performance to be measured but not our own.  But it will come.  We cannot have a consumer-driven market without it.  And on the supply side, we need to get rid of these restrictions that inhibit fabulous entrepreneurial activities like the Duke innovation or the insurance innovation.

So that's it.  I'd be glad to—is this the format?  I'll just sit down.

CHAIRMAN PELLEGRINO:  We've asked our council member Nick Eberstadt to open the discussion. 

DR. EBERSTADTWell, Professor Herzlinger, first of all thank you for a wonderful presentation, which was both informative and enjoyable. 

DR. HERZLINGER  Thank you. 

DR. EBERSTADT: Very nice to see those two qualities together in one neat package.

DR. HERZLINGER  Well, you know, if you teach accounting you better be funny.

DR. EBERSTADTAnd thank you also for two submissions to our folders, the JAMA article and the chapter from your book.  Having been trained a little bit in economics, I have to say that I'm in violent agreement with you about the benefits of competition and certainly the propitiary effects of more market-oriented approaches.  And naturally when one thinks about healthcare, the logical agents or units here are what we call the healthcare consumer, so that consumer-driven healthcare seems to me to have an awful lot of potential benefits, certainly on the margin and maybe even further than that, the sorts of basic things that we expect in sort of an economic system from more competition of this sort, more efficiency, more consumer welfare, and even some measure of improved equity.

I think that you've made very persuasive cases for all of these.  If I have to quibble—and I think that my assigned task here is to quibble a little bit—how would I go about it?  In the Swiss example, certainly the results that one sees in Switzerland in terms of public heath are really impressive.  To some degree I think that one has to bear in mind that public habits are also somewhat different in Switzerland, even from Massachusetts and New England.  One looks at things like body mass index and things like that.  People who are going up and down the mountains all the time just have a lot lower incidence of obesity and other things which may predispose them towards better health results to begin with. 

I think we also want to bear in mind that, big as that difference is, Switzerland, I believe,  has the second highest ratio of health expenditures to GDP of any country.

DR. HERZLINGER  It's next to us. 

DR. EBERSTADTThey're the silver medalists, right, on this one?

DR. HERZLINGER  Right. In a contest nobody wants to be the gold medalist in.

DR. EBERSTADTAm I correct in remembering that there are quit a few criticisms within Switzerland of the existing model, especially the cantonal basis of health insurance?  I mean that probably is irrelevant to this particular discussion.

DR. HERZLINGER  Yes.

DR. EBERSTADT:  But one thing which I'll mention, which I just came across after I read your materials, OECD keeps a great big health database, and one of the things that they ask is they ask the public­­—or they compile answers from the public from people age 15 on, do you consider your health to be poor, good excellent and the like.  And if one takes a look at these data, it's a very curious result, and I'm not quite sure how to explain it. I'd say it's somewhat paradoxical.

The country that always comes in as number one or number two is the United States.  Somewhere between 88 and 92 percent of the U. S. public surveyed always says their health is good or better, and this is a few points higher than Switzerland consistently, and it's about 50 points higher than Japan, which actually has the longest life expectancy of any country in the world. 

Now, whether this tell us anything about our satisfaction with our crazy quilt medical system or is just public misinformation, it's a curious result, and it's even more curious because it's so stable over time.  It's been stable this way for about 25 years. 

DR. HERZLINGER Yeah, it's interesting.

DR. EBERSTADT: Since we are a bioethics council, I suppose I have to try to speak to some of the ethical questions which come from consumer-driven health, which, as I say, I'm very sympathetic towards.

The question I suppose that some of our other council members may wish to entertain is whether there are ethical questions which arise from this idea of consumer self-remedy in the health and medical field.  Most economic markets are supposed to work best when the agents are fully informed, when there aren't asymmetries of information, when technology is relatively fixed, and when the rules of the game—the ethical precepts—are, you know, firmly accepted.  None of these things apply fully in our examination of healthcare at the moment. 

If we looked at  universities and we asked whether we would want to have consumer-driven education, which to some degree we do, we can see where a fully consumer-driven thing might take us with respect to healthcare. 

There's also the question of who are the consumers?  Do children get to serve as their own agents as consumers?  Are there other people who wouldn't have full voice as consumers?  This takes us beyond the margin, of course.  This takes us into big changes in any sort of system.  And then finally there's the question of a healthcare system oriented toward consumers. The economist in me likes this a whole lot, but I also realize that there are other arguments that could be brought to bear, and I think that some of the MDs on our panel might have things to say about the transmutation of individuals from patients to clients to consumers.  That's not a totally, perhaps, costless transition for us.

Thank you very much.   I really enjoyed your stuff. 

DR. HERZLINGER Thank you so much. 

CHAIRMAN PELLEGRINO:  Thank you very much, Nick.

DR. HERZLINGER  May I respond to one of the­­—

CHAIRMAN PELLEGRINO:   Yes, please.

DR. HERZLINGER:    People think of the Swiss as being very healthy, and I think 34 percent of them are obese, as opposed to 50 or 60 percent in the U.S., but Switzerland is where Needle Park exists, and they have, as far as overuse of illicit drugs, alcohol, and smoking, which may have something to do with the obesities in ways, perhaps, we don't want to explore.  But they smoke much more, drink much more, and use illicit drugs much more than Americans. 

I'll never be able to answer, nor would anybody else—it's a fair point.  But the Swiss are not exactly the idyllic, slim Swiss yodeling on top of the Alps that you might picture there.

CHAIRMAN PELLEGRINO Thank you very much.  Comments?  Dan?

DR. FOSTER:  If one gives every person, particularly let's say the poor, the means to buy in a competitive fashion, is there any evidence about how the poor might use the money to buy a car or education instead of health insurance?

DR. HERZLINGER Yes.   In my view, health insurance purchase must be mandatory.  You have to buy it, to obviate that kind of question.  Will the poor be intelligent consumers?  Of course, the poor are as intelligent as anybody else, in my view, but there are some data about this in a program called—what happens when you cash out the poor?  In a program called Cash and Counseling, which took people who were disabled, on Medicaid, who were poor plus disabled, some of whom had emotional disabilities and intellectual disabilities as well as physical disabilities, and cashed them out, said, "Here is the money that we spend on your behalf"­­—and it's a huge amount of money—the cash out came with a counselor.  The Swiss actually have it that one of the benefits that you are required to buy in Switzerland is a counselor who will work with you on evaluating different things.

You could use him or her or not use him, but it is a required benefit.  The Cash and Counseling Program wound up with much greater satisfaction.  Some of the disabled, for example, had been abused by the aides that they'd hired, and they hired them because that was the benefit.  When they could use their money in ways that they controlled, they had much higher satisfaction, and the rate of growth of costs was the same.  So I take that as very heartening evidence. 

The other thing that gives me heart is that in most markets the mass-market product is very good even if the consumer is an idiot.  For example, my Treo, which cost $200.  When I graduated from MIT I had to program a PDP 11.  I had to program it in machine language.  It solved a trivial problem.  It cost $150,000 and had far less computing capacity than this Treo.  So that was 40 years ago. 

Who made this Treo so good? Not me.  Maybe you did.  I have no idea how this thing works.  I haven't got a clue.  I think most of the people who buy this don't have a clue how it works, but it got better and cheaper.  And the answer is that in most markets, if 20 percent of the market is very aggressive and can buy the product and has good information, they make it better and cheaper.

So in the computer market—I have a friend who has Computer Engineering News as light reading in his bathroom.  He clearly made this product better and cheaper.  It wasn't me.  This 20 percent, so that all of us would have access to better healthcare even if we were idiots—as long as there is this assertive marginal group in the market that makes it better and cheaper. 

Does it exist in healthcare?  I just looked at who is looking on the Internet at healthcare information.  It's all kinds of people, but it's predominately well-educated, professional people.  These are the kinds of people who made this Treo better, and healthcare just crossed pornography as the number one viewed site on the Internet. I think it's 40 percent of Americans look at this.

So I think it's a very important point, but I take­­—if we have the information.  If we don't have the information, forget about it.  If we do have the information, this marginal group will use that information to reward the good and punish the bad. 

CHAIRMAN PELLEGRINO Dr. Carson? 

DR. CARSON:  Thank you for that.  I must say I resonated very strongly with just about everything you said.  A couple of questions.  Do politicians not know about these things that you're talking about, or are they just afraid to join the battle against the special interest groups in order to make the changes that would be necessary?  That's question number one.  And number two, what do you think about the concept of removing from the list of responsibilities of insurance companies catastrophic healthcare, making them only responsible for routine healthcare, which could then be monitored, predicted, and controlled, and making the government responsible for catastrophic healthcare?

DR. HERZLINGER  Political?  I don't know.  You've listened to me.  I'm apolitical to a fault.  I've talked with, I think, all the major candidates or their domestic policy advisors other than Barack Obama and Dennis Kucinich and Edwards. So I've talked with Hillary and I've talked with the major Republican candidates, and I think they are all on this.  You know, Senator Clinton's plan, for example, for the uninsured is a consumer-driven plan.  You cash out the uninsured, either give them tax protection and/or give them enough money so they can go and buy and let them buy in the market.

She would create a Medicare-like choice in the federal employee health benefit program in addition to private insurance, but to me that's clearly consumer-driven.  What I think—and this may be pure hubris on my part—is healthcare is incredibly complicated, and the one politician who understands it in the present race is Senator Clinton.  The other ones are dying to avoid the topic, just "Stop it.  I don't want to talk about it" because they know that even the Clintons, who are so politically adept, got killed two times.

I don't know if you remember this, but Clinton proposed expanding catastrophic coverage for Medicare.  You would think people would be out in the streets cheering.  He got killed on this.  So they know it's the third rail, and they want to avoid it. 

I think we're going to have very good debate on healthcare.  Right now the Republicans are punting, and they're saying, "Leave it to the states," which means, "Don't ask me any questions because I'm afraid it will go too much."  The other one who knows quite a bit about it is Romney but nowhere near as much, in my view as an old teacher, as Senator Clinton.  But she's going to force it.  It's a woman's issue.  She knows the issue.  People are very concerned about this.  This consensus that we must have universal coverage has come about because the American people have said we want this, you know.  We want this to happen.

Now, what about catastrophic coverage by the government and standard coverage by private insurance firms?  You are a very great physician, and you've done the most courageous things.  I personally worry about the politicization of medical care and the fact that peer review can sometimes be used as a wedge to suppress innovation, to suppress out-of-the-box thinkers.  I saw it in Boston with Judah Folkman, whose incredible about angiogenesis didn't receive NIH funding for ten years. 

My daughter is a physician, my husband is a scientist.  I have the greatest admiration.  But medicine is very political, and I worry if the power were all in the hands of one agent, not necessarily because it's the government, that important innovations would be suppressed.  I particularly worry about it now because we're in the—medicine is about to become a real science.

So I am not wild about this.  We can have reinsurance of catastrophic care through the normal private sector reinsurance markets.  It's a seven- to nine-billion-dollar industry in the U.S.  There are great big companies.  You know, I like a lot of eggs in that basket so that no great scientist is suppressed because he or she is politically incorrect.

CHAIRMAN PELLEGRINO:   Paul?

DR. McHUGH:  Professor Herzlinger, I loved that presentation­—

DR. HERZLINGER Thank you.

DR. McHUGH:  —because of a number of reasons, but one of them I discussed with our friend here.  A senior moment. 

DR. HERZLINGER:    I have that.   You know, when I meet my students, my children used to say to me, "Who is that?"  And I would say, "Don't ask me."

DR. McHUGH:  That's the problem.  Nick and I were sitting, talking between sessions, and part of the conversation we've been having here is between the doctors and other people.  You might have been listening to it.  And one of the real things that turns up, of course, in the present healthcare system is that we doctors are living under a different culture than the healthcare system is.

I live my life in relationship to my patients' benefits and very much the attitudes and assumptions and rewards and punishments I get from doctors I admire.  If Dan Foster doesn't like what I am doing even for an individual patient, I am crushed, and I change.  Okay? 

DR. HERZLINGER:    Right.

DR. McHUGH:  But whether my health manager thinks I should use this routine or that routine, I try my best to get around him because I'm on the patient's side, okay? 

DR. HERZLINGER Of course.

DR. McHUGH:  So we need something that restores the sense that we're all on the same page.

DR. HERZLINGER  Absolutely.

DR. McHUGH: And what you're proposing here would put us at least, it seems to me, on the same page.  Nick asked the question would we worry about them being consumers.  I think you can be a consumer and a patient as well.  Those two things are not incompatible.  It might be that being a client and a patient might be two different things, but we can talk about that with the lawyers. But a consumer and a patient might well be things you could do together.

So I like that very much, but you also have to remember that I'm a psychiatrist. 

DR. HERZLINGER  I liked you up until now.

DR. McHUGHUp until now you liked me.  But that might be because of your Massachusetts experience with psychiatrists, and that's why I left Massachusetts.  But that's another story.  That has to be done in the Swiss way. 

The things that concern us as psychiatrists are two things.  The first thing and obviously the most important thing is I'm looking for equity for my patients, my mentally ill patients.  I believe that they have illnesses of the same kind as they have if they have epilepsy and things of that sort.  And would this consumer-driven thing be sure to provide that kind of equity and that my patients would get it? 

But the second thing is, in relationship to psychiatry, which is very ideologically driven in many places—it's school driven often rather than science driven.  Would the data that you want to acquire be the kinds of data that would alter practice, would lead to the improvement of things, or would it continue to support, because X and Y thinks this is the way to do, still speak about ids, egos, and superegos and all of that kind of stuff and keep that going that way or would it change?  Because it needs to change. 

And, by the way, I don't think that most of us doctors, at least at this table, would be at all concerned about being graded regularly.  I think, you know, when I was graded I improved my performance.  I think maybe I'd do better.  I'm not worried about that.  But I am worried if the grading system is corrupt, and so those are my questions.

DR. HERZLINGER:    I think the way the insurance should be written is that everything that is viewed as medically necessary is covered but that the coverage is catastrophic, meaning if you earn $30,000 you would have to buy a very full insurance policy.  If you're Bill Gates you would probably not have to buy anything at all.  You could self-insure.  And that mental health is widely accepted as being part of medical care.

The way the measurement process works in accounting, in economic disclosure of the performance of firms, I like the model a lot.  The process is that all the people involved decide what should be measured and how it should be measured, so it not in the hands of any­­—for example, there is an organization called the Financial Accounting Standards Board.  It's comprised of business people, of academics like me.  I was on one of these fascinating standards, which I really deserve a vote of thanks for that.  It's an excruciating process.

There are relevant business groups, there are consumers—anybody who is part of the process is involved.  Who is not involved is any form of government.  It's a totally private sector process.  It would be trickier in medicine, no question, because of the political ideas about different practices of medicine.  But one thing about the FASB is it's very transparent.  You may not have heard of it, but if you're in the field, if you are a financial analyst or whatever.  If you're interested in this, a financial economist, you follow those hearings religiously and you write about the hearings and, you know, there's a lot of transparency.  It's not buried in the bowels of CMS out in Baltimore to see the light of day very obscurely.

CHAIRMAN PELLEGRINO:   Dr. Hurlbut?

DR. HURLBUT: I want to ask you a broad question, but first I want to ask for something I've never been able to figure out.  When they talk about the number of people who are uninsured, and you pointed out that 25 percent of them actually make above median income, what percentage are we talking about are the kind of patients that I saw in the county hospital in my training who probably couldn't even handle dealing with getting their own insurance at all.  I mean indigent people, people who are mentally ill, and so forth.  There are a number of those people around.  What is going on with those­—

DR. HERZLINGER A number of them are insured also.

DR. HURLBUT:  Yes.  But what I'd like to get a sense of is who those uninsured people are.  I mean, a lot of them must be young college-age students and stuff. 

DR. HERZLINGER The majority are young.  The majority are employed.  So to the extent that employment obviates people who are nonfunctional, which may or may not be true, but to the extent that it obviates that, most of them are functioning human beings.  Six percent of them judge themselves to be very sick, only six percent.  Probably it's 20 percent, you know.  It's the same 20/80 out of this large population.

As to how many cannot function?  I don't know.  Probably a greater number than those in the insured population. That's why I found this Cash and Counseling Program such an interesting program.  The disabled on Medicaid include people with Tourette's, people with emotional illnesses, people with not only physical disabilities, people with intellectual limitations.  And yet with the counselor, the program worked better than the alternative.

DR. HURLBUT: Then the broader question I wanted to ask you—this is a little bit like Paul's question.  You started out and you showed us this figure of $300,000, the iatrogenic deaths.  I never did quite figure out, first of all, why you showed us that, what it means in relationship to your program, and the broader question is this. I assume you showed it to us because there is not competition for not killing or something like that.  Is that what you're implying?

DR. HERZLINGER:   There is no data that would enable consumers to make judgments about where they might get care where they have a lower probability of having some untoward event.

DR. HURLBUT: You think that that 300,000 deaths is remediable if only somebody were paying attention?

DR. HERZLINGER If there were more transparency, unquestionably.  When New York state published data about CABGs and risk-adjusted mortality and morbidity and clots and reinfection rates and blah blah blah, the results improved substantially.  Those data were published.  They were published not because Mark Chiasson, who was then the Commissioner of Public Health in New York, wanted them published.  He wanted them kept private, but a newspaper sued under the Freedom of Information Act and made those data published.

So what happened?  The caliber of care went way up.  Some people said, "Well, the docs now wouldn't do very risky cases because the data were published."  There's been a lot of analysis of that issue.  Did physicians avoid risky cases? The average age of the people who were operated on for a CABG went up during this period and there were some other data.  I don't think that's what happened.  I've read a lot of testimony from physicians who were on the bottom of that list, and the physicians said, "I didn't realize how bad I was."  And they either changed the way they practiced—and they changed things like how you admit somebody who has a CABG, not necessarily the surgery itself but the entire process—or they went out business. 

So I have no doubt that transparency changes behavior, not only consumer behavior but provider behavior.  You know, when I get poor student ratings, which I've had more than I wanted, there's a very clear message in here.  You're not being relevant; you're not satisfying what the students want.  And I'm not compromising the content of what I teach, but it's a real wake-up call to change the way I do it.

DR. HURLBUT: Just as a little follow-up on this.  I mean, I feel the weight of what you're saying. We did a study in this council on in vitro fertilization or assisted reproductive technologies.  We ran across some things that we weren't—I think we weren't very harsh on this almost industry, if you will, in medicine.  But there were some things we ran into that were very, very—

DR. HERZLINGER:    Troubling?

DR. HURLBUT:  Troubling.  And that should—since that's not funded by federal funds, at least, it should be very much like a consumer-driven dimension of medicine already.  Now, maybe that's just not the structure you have in mind for it.  Maybe there are no kind of IVFs counseling organizations to send you. But, for example, there's a procedure called ICSI, intracytoplasmic sperm injection, where in cases of male infertility primarily they will inject the sperm directly into the egg.

Well, it turns out you can have a much higher rate of pregnancy from this.  It's a little more expensive because it involves another procedure, but it's also medically uncertain.  In other words, it's probably adding an element of additional medical risk to the outcome for not just the parents who want a child but for the child him or herself. 

So that's a weird situation, isn't it?  There might be a whole different set of values that would have to be looked at by—now, maybe a private counseling system could do this and would do it honorably.  On the other hand—you see where my question is, right?

DR. HERZLINGER  I do.  It's actually very interesting to me.  I was just talking with a former student of mine who is a pediatric cardiac anesthesiologist and MBA.  He and his wife had sought in vitro fertilization.  He is extremely knowledgeable, and it's clearly a terrible market in many ways, just a horrible market.  I don't know why that is.  I don't know enough about the market, but in the medical ways you've mentioned, the lack of transparency, the requirement to do tests.  I can't answer your question.  I haven't looked at the industry enough.

In other consumer purchases, like LASIK surgery or eyeglasses, which are consumer-driven markets, the products have steadily improved and the price has gone way down.  So it may be that in vitro fertilization is so expensive and there is not real competition, that there's limited factors.  As it exists right now, it clearly needs regulation.  It's terrible. 

But I really—I wish I could answer your question.  I cannot.  But I wouldn't say that that's generally true of consumer-driven healthcare.  The examples we do have—most pervasive is the eyewear industry—is of steady technological innovation, improvements in products, lowering in costs, standardization, and quality. 

DR. HURLBUT:  One final question here.  What do you see as the role of what's been called medical tourism and travel abroad in this competitive—

DR. HERZLINGER Yeah, I knew you were going there.  Right.  So I don't like the phrase "medical tourism" because it trivializes what is a very important issue, which is if you're uninsured and you need a medical procedure, a very good option is to go abroad.

I have a series of case studies which I've done that I would be happy to share with you on four Indian companies that have started hospitals in India.  They are first aiming at the Indian market.  The Indians spend $42 per person on healthcare, so clearly there is a lot of unbuilt capacity in India, but they are also aiming at the American market, ultimately aiming at the uninsured market. 

Some countries really have tremendous specialties.  You know, Thailand in gender changing—I don't know what the term is for it, but that's clearly—what is it?  Gender reassignment.  That's it.  It's fabulous in gender reassignment.  Costa Rico is fantastic in dentistry.  Hungary is a real center of excellence in dentistry.  I think this is going to be a very viable market. 

JCAHO has moved to accrediting, for whatever that is worth.  That also process accreditation.  But the Indian hospitals,  Bumrungrad—this huge hospital in Thailand—they're all accredited.  There are political problems now with having people go abroad, but if we stay the way we are, which I don't think we are.  But if they stay the way they are, I think it is imperative that we solve these political problems because you can go to a brand new, first-rate hospital in India and have surgery for a tenth or a quarter of the cost in the United States with appropriate aftercare.  To bar people from doing that seems to me really unfair. 

Chairman Pellegrino: Thank you very much. We have reached the end our meeting. We thank you very much again for your presentation to the Council, and we will gather tomorrow morning at nine o’clock.


  - The President's Council on Bioethics -  
 
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