Making you better or dead

Initially the hospital was a place almost like a hotel or an office, a kind of ancillary place for the doctor. The doctor was the star. But increasingly, the hospitals have won the power struggle, and the physicians are more or less the blue-collar workers.Professor Regina Herzlinger has been studying the U.S. health care system for decades, advocating for consumer-driven reform as the best remedy. But the slow pace of change, which she attributes to a fat-cat network of insurers, policymakers, hospitals, and even employers, has her fed up. Her new book, Who Killed Health Care? adopts the emotional language of a manifesto in demanding change to make health care more responsive to customers, affordable to those in need, and a hotbed of innovation and entrepreneurship. Key concepts include:

Today’s American health care system is set up structurally to reward the major players—hospitals, health insurers, and lawmakers—while short-changing patients and taxpayers. Health care is not the hotbed of innovation and entrepreneurial activity one might expect from a $2 trillion industry. Risk takers are often beaten down by established interests. Not only is the system underperforming, it is also killing patients through uncaring bureaucracies, over-stressed care providers, and poor management.

Professor Regina Herzlinger has been studying the U.S. health care system for decades, advocating for consumer-driven reform as the best remedy. But the slow pace of change, which she attributes to a fat-cat network of insurers, policymakers, hospitals, and even employers, has her fed up. Her new book, Who Killed Health Care? adopts the emotional language of a manifesto in demanding change to make health care more responsive to customers, affordable to those in need, and a hotbed of innovation and entrepreneurship.

Regina Herzlinger is not afraid to call them as she sees them. And what she sees looking at the American health care industry is a bunch of killers. Not only are hospitals, insurers, employers, Congress, and academics killing health care, they are also killing real patients, she asserts in a new book, Who Killed Health Care?

We asked Herzlinger, the Nancy R. McPherson Professor of Business Administration Chair at the Harvard Business School, to discuss her latest work and her more than 30 years of research in the health care industry.

Sean Silverthorne: Why write this book now?

Regina Herzlinger: I’ve had it. [Laughs.] Just had it! You know, I did my doctoral thesis really by accident in a hospital. That was in 1971, 36 years ago. And at the time, I was astonished at how mismanaged that hospital was and how the most rudimentary kinds of business processes—good accounting systems, good scheduling systems, ways of responding to the customer—were totally absent. And on the other hand, the science and the doctors were so awesome. I went to MIT—I’m not a great scientist, but I know it when I see it. You knew that they were on the verge of a real breakthrough in the science, but it was coupled with this delivery system that was, wittingly or not, heartless.

And I’ve been at it since then. I wrote Market-Driven Health Care, which was a very popular book. But the part of it that I thought was the most important, which is the restructuring of the health care delivery system around the needs of human beings, not around the needs of the status quo, didn’t happen. Consumer-Driven Health Care was another book that I wrote to help change the demand for health care, to get innovation in the insurance industry. That was more effective in launching new high-deductible products. I don’t think in any of these cases I launched a revolution, but I think I was helpful.

But the pace was so slow, and people were saying that these high deductibles represented consumer-driven health care. It’s ridiculous. Consumer markets have lots of choice. I thought I’ve got to lay out just how self-serving this system is.

Q: What strikes me about this book, and I think anyone who’s going to read it, is the tone. You’re actually calling players in the health care system “killers”? It’s more like a manifesto, a call to action. Is that deliberate?

A: Yes. When I was a young girl, my mother gave me a copy of The Jungle by Upton Sinclair. I was very struck by that book. I find the writing, in retrospect, really wretched, but the kind of passion that said, “Here is an awful system,” was pivotal in getting food and drug laws on the books.

Q: What about the timing? Could you have written this book when you were writing Market-Driven Health Care (1996) or Consumer-Driven Health Care (2004)?

A: I think at the time of Market-Driven Health Care, people were still delirious about the prospects of managed care. Some believed that the cure, the silver bullet, was this technocratic, top-down oversight of the health care system, as opposed to something organic, entrepreneurial. What I did in Market-Driven Health Care was to say, this emperor has no clothes. Managed care is just not working. But to say that the whole system is dysfunctional would have been laughable at that time.

There’s always a tipping point, and we’ve hit the tipping point here. I’ve read reviews of Michael Moore’s Sicko. I haven’t seen it as yet. But what strikes me is that his diagnosis and my diagnosis are very similar. He diagnoses the same problems—heartless, insensitive, greedy, self-serving status quo—but his cure is a government-run system, I gather from hearsay. I agree with the diagnosis, but my cure is, yes, everybody should have health insurance, but they should control it for themselves. It should be run by the people, not by the government.

I’m an economist; I take economics very personally. My own view is that the economic consequences of our present health care system are disastrous and grievously injure the economy. It’s not getting any better, and none of the cures work.

Q: What your book points out is that all the players and other parts of the system are interdependent. And although you may have a great doctor with the best intentions, the system may not allow him or her to give the quality of care they would like to.

A: Absolutely. My heart really goes out to physicians nowadays. They’re like little hamsters running on a track, and they’re measured for their productivity, how many people they see. They have lousy information systems to back them up. And then they have a public policy establishment that more or less continuously deprecates their ideas and squeezes down their income. Not a great occupation to be in.

Q: I wonder if your personal experiences with the health care system went in the book.

A: Oh, I remember the birth of my daughter, who’s now a doctor. I had a very long labor with her. My obstetrician, a lovely man, was giving me a hormone called pitocin to accelerate the contractions. And I said to him, “I don’t want this.” “I’m very strong, I can handle this.” And he said, “Well, you can’t make an omelet without breaking eggs.” And I thought, “Oh, could you have a more disgusting analogy for a woman who’s giving birth?” I was appalled. I was in the middle of labor. It’s very painful—labor is the right word—and I had to negotiate about this. That experience gave me a sense that you can’t be a passive person, even with the best of physicians. You have to understand what’s going to happen and to negotiate about all the possible twists and turns ahead of time rather than when you’re lying there in the labor room.

When I got home, I got a bill. I had never made it to the delivery room—pitocin acts suddenly. But I had a charge for the delivery room on my bill. And I called the clerk at the hospital who said, “Why are you even bothering? You’re not paying for this.” I had another epiphany. Of course I’m paying for this. We’re all paying for this.

Q: You devote 5 chapters to 5 health care players that you actually call “killers.” They are the hospitals, health insurers, employers, U.S. Congress, and academics. How do they all interact to make this such a bad or unresponsive or inefficient system?

A: I think there is a big 3 here, an iron triangle, and those are the hospitals, the insurers, and the government. They want power. It’s very understandable. Everybody wants to be powerful, and the way they will be powerful is to institutionalize their role in the system.

The insurers would love for a private health insurance system to remain. I, too, think that’s very important, but the easy way for it to remain is to offer just one product. If you offer a lot of products, suddenly you’re in actuary land. You’re in a real risky business. So they’ve done a lot to maintain just one product.

Hospitals want to control the health care delivery system, and they’ve become oligopolists or monopolists in many markets, thus obviating price and quality competition, and they’ve become vertically integrated by hiring physicians and using them. Initially the hospital was a place almost like a hotel or an office, a kind of ancillary place for the doctor. The doctor was the star. But increasingly, the hospitals have won the power struggle, and the physicians are more or less the blue-collar workers.

And then the government. Whether Democrat or Republican, power is seductive, and they are actually practicing medicine … by micromanaging the payment system. I tell the story in the book about how Congress motivated clinics and doctors with its payment formulas to use more of the antianemia substance epo. How can the U.S. congress—and I admire the people in all of these institutions—but how can 100 senators possibly know what a doctor in Dubuque, Iowa should receive for removing a mole?

So these 3 are the iron triangle, and they’ve got all the power in their hands. They’re abetted by the academics who, in a market-oriented system, are not going to be very powerful, but in a centralized, technocratic system, will be very powerful, because somebody has to do the research that informs all of this. The final group is the human resource people in corporations. They turn to limiting the choice of health care programs for employees as a solution, the belief that big is beautiful and will result in lower costs. Very poor idea, but in a way I’m the most sympathetic to this group. Suddenly human resource managers are asked to look into the bowels of this $2 trillion system and figure out how to make it simultaneously more effective and efficient. Is that insane, or what?

Q: But to say these groups are killing their patients is pretty strong language.

A: Well, 300,000 people die every 3 years in hospitals, not with the problems that brought them in. What killed these 300,000 people? It’s almost comic, and just a hairline removed from a tragedy. For example, you come in with a hammer toe, next thing you know you’re dead. What happened?

Well, “failure to rescue” is a big one. Something happened to you, your respiration got compromised, you couldn’t breathe, and they didn’t get to you in time. Infection is another reason. In a hospital, the scope of work is so broad that the possibility of cross-infection is monumental. If you go into a general hospital, there’s no way they can keep those walls and floors clean and free from all bacteria.

Plus, the people who work in these settings are stressed and confused. You and I, we have very focused jobs. But if you’re a nurse in a hospital, you’re dealing with hundreds of different cases constantly. It’s tremendously stressful. Every single care event is de novo. So of course, hospitals kill people.

Q: One of the hospitals and health care providers mentioned often in your book is Kaiser Permanente in California, which started out as a very innovative, customer-focused institution that at some point “lost its soul,” as you write. What does the Kaiser story tell us?

A: It tells us that it would be great if we had a health care system that would permit Kaisers and other innovations and entrepreneurs in health services to spring up. But we don’t. I have an acquaintance, Garrison Bliss, who is a Harvard Medical School doctor, and his brother-in-law is Norman Wu, a software guy who went to the MBA program. They created a system to bring concierge medicine to the uninsured and the middle class. For $70 dollars a month, you get 24/7 access to a doctor. And the reason I told you about who they are is this is not naïve or idealistic—this is a team that can execute. They’re bankable.

But the insurance industry charged that they were insurers and that they should be regulated the way insurers are regulated. Those words, insurance regulation, that’s like striking a knife into the heart of an entrepreneur. It means you need a huge finance department to fill out forms, and so they hired a lobbyist just to deflect it.

My point is, if Garfield and Kaiser were alive today, I don’t know how the hell they would get this idea started. The other point is that the health care system policy thinking is dominated by the idea of economies of scale. But there are diseconomies of scale. You get too big and you lose touch with the core of what made you great. I think that’s what happened to Kaiser.

Q: Your HBS colleague, Richard Bohmer, talks favorably about clinics now sprouting up in malls and big chains that offer very basic services at affordable prices. Is that a sample of innovation now starting to take root?

A: It’s also about why innovation in health care is so hard. About 20 years ago, I did a series of cases on a retail health clinic called Health Stop. It was at the mall, and I thought it was great. The idea was, just like these guys now, you’re sick, we’re quick. Rather than going to an emergency room for your child’s earache, you could go there. And because they were a chain, they were a business; they had very advanced processes like very good information systems. Health Stop grew to be a $100 million company. But these guys were run out of business by the hospitals and by the community physicians who attacked them relentlessly.

So what makes the current mode of innovation, the MinuteClinic, the Ready Care Clinic, feasible today? They’ve got very powerful protectors. They’re housed in Wal-Mart. They’re housed in Target. These guys have got very powerful allies who have very good business reasons for making it happen. But it took 20 years for this to happen.

Q: There’s an interesting phenomenon going on, and that’s basically outsourcing fairly complex surgeries to India for much cheaper prices. Does this actually pose a threat to the institutionalized health care system at some point?

A: Not yet. I have 3 student teams who focused on this, and their analysis was that employers are very worried about sending their employees to India, so they’re unlikely to ask their insurers to offer India or Thailand as an option. It’s the human resource person, not the CEO, making this decision. So this poor human resource person says, “Oh my God, if I have an insurance policy that says you can go to Thailand or India for surgery, and something goes wrong, I’m going to be on the front page of The New York Times for outsourcing surgery.” If you can’t get the employers to buy in, the insurers are not going to do it independently. On the other hand, I’m sure it’s going to happen.

There are four big hospital companies in India, and I’ve talked with their CEOs, with these teams of students. They’re very focused on this market. And one of the things they’re all doing is getting accredited, so that the fear that they don’t meet the standards of U.S. hospitals will be minimized. Of course, the accreditation agency is a creature of the hospital system, so how much protection do you really get from that? But they will have the same kind of accreditation as the American hospitals.

Some of them have a fabulous strategy, and that is they’re very specialized. Rather than build a 1,000-bed hospital, they have hub-and-spoke systems. Hub is for trauma, and spoke are specialized hospitals that deal with specialized needs. They have a fundamentally different delivery system, and the reason they can have it is they’re not dealing with the status quo that mashes down every kind of innovation.

Q: Well, that’s the next subject I want to get to, which is innovation and entrepreneurship, which you say are sadly lacking in the health care system. There are no Bill Gates- or Michael Dell-type innovators in health care. Why don’t we see more entrepreneurship, more innovation, outside of technological innovation in the system? What’s stamping down on that?

A: This iron triangle, it kills you. So first of all, if we want to start a health delivery innovation, we need to get paid. The consumer’s not paying us. It’s these third parties operating either through the government or an insurance company that’s paying. We would need a code. A code comes from the AMA [American Medical Association]. Will the AMA give us a code? Well, not easily, because the doctors are all competitive with each other. So that’s a barrier to begin with.

Then we need a coverage decision. The insurer or the government will say, I’m going to cover him, but I’m not going to cover Martha. That takes 1 year, 2 years, 3 years. And then they tell us what the price is going to be. We have no negotiating power in this unless we are a lifesaving technological innovation, which is how the biotechs and some of the medical devices can get through these hurdles. But for a health service innovation, the payment hurdles are so massive it’s masochistic.

Then if you go into competition with a hospital, may the force be with you, because they’re going to run to Congress and they’re going to say, “We’re so charitable and wonderful, and this venal competitor’s taking away our best business.” And we’ve seen how sympathetic Congress is in mashing down entrepreneurs by saying, “Oh, you’re such a wonderful charity, how can we permit anybody to compete with you?”

Q: Aren’t improved techniques for minimally invasive surgery an innovation? It gets you out of your bed quicker, gets you back to work quicker, fewer costs, more productivity.

A: Do you know how that came to be? It came through the community hospitals. The big academic medical centers didn’t want minimally invasive surgery because it threatened the surgeons and it threatened the hospitals; their real profit centers are the surgical suites. It came through community hospitals and community doctors who communed with their patients, and the patient said, “I have to get back to work, I make $50,000 a year, I can’t spend 6 months in recovery.” That’s how it came about and then it moved up the food chain to the big academic medical centers.

Q: You have generated and advocated for many years this concept of consumer-driven or market-driven health care. What is the idea?

A: It basically is giving us back the money we now hand over to our employers for health insurance, so we can buy our own. And if we’re poor, the government will transfer money to us so that we can go and buy it for ourselves.

But there is no individual insurance market right now. How do you solve this problem?

Well, one idea is the one (former Massachusetts Governor Mitt) Romney put together, which is called the Connector. It offers individuals a tax-sheltered market for different insurance products. I’m not crazy about that solution, because one market means no competition, and the products on that market are designed by the government, which is not exactly my idea of how products ought to be designed.

I think what’s going to happen is once we have an individual mandate to have health insurance, and you and I get back the money that somebody used to spend on our behalf, there’ll be a lot of entrepreneurs who’ll create these markets.

The analogy is in the mutual fund market. Vanguard came along with the 401(k), and John Bogle, the amazing man who created Vanguard, knew that consumers were going to have to shop for retirement income choices, and what the hell would they buy? There were a lot of stinky products around. He created Vanguard and he created terrific products, these indexed mutual funds. Lots of employers picked up Vanguard, or Fidelity, or T. Rowe Price, and they said, “We’re not doing the investing for you anymore. We’re giving you the money, and we’re giving it in tax-sheltered ways so you can use your own money, and we’re also giving you a great supermarket that has very good products in it.” So I think that will happen.

There’s always a tipping point, and we’ve hit the tipping point here. The other part that the government must do is to require transparency, to require the quality metrics that we need in order to be good shoppers. If I had stage four breast cancer and were going in a hospital, I need to know how good that hospital is for women like me who are having a lumpectomy. The only way, in my view, that we’re going to get there—this is a classic public good—is for the government to require this kind of disclosure, and to have something like generally accepted accounting principles and audits so it goes beyond “trust us.”

I think that’s what we need, and I honestly believe that we will have it by the end of the term of the next President. We’ll have the mechanism that will bring transparency and have this tax support that will make it possible for people to buy health insurance with pre-tax money.

Q: And why are the 5 forces that are killing health care going to roll over in the next 6 or more years?

A: No, they’re not going to roll over. They’re going to kick and scream. But I think the tipping point, the fact that Michael Moore and I—who could be stranger bedmates?—have reached the same point is an indication of how pervasive the recognition of this problem is, the economic problem and, more importantly, the human problem, the lack of quality and the lack of assets.

Q: It seems a hard case to make. As you described, in the current system the consumer has no power, no leverage, basically.

A: The reason I’m sanguine about it is managed care went from zero penetration to 100 percent penetration in 4 years, and we weren’t as badly off at that time. So, elephantine though this economy is, we can transform ourselves with astonishing rapidity if we permit the transformative forces to work, if we unleash consumers, unleash entrepreneurs, don’t keep binding them up. It will happen very fast.

Also the insurers stand to win in this in some ways, because with universal coverage the market gets much bigger. The hospitals are going to be huge losers, because once consumers buy health insurance, they will want cheaper health insurance policies. The only way to get them cheaper is to cheapen down the health care delivery system, and the most bloated part of it is the hospital, and these health care delivery entrepreneurs will start popping up.

And I expect tremendous resistance to transparency. Nobody wants to be measured. The argument will be, “It’s not feasible.” So, we can unravel the genetic code, we can measure tau neutrinos, but nope, the quality of this doctor or hospital is unmeasurable? I think these are very self-serving arguments.

Q: Well, you almost automatically get transparency if you have the money in the hands of the consumers, because they’re going to demand to know what they’re buying.

A: Absolutely. The critical lever is getting the money to the consumers. That transforms the whole, causes transparency, also changes the delivery system. It lets consumers ask, “Why does it cost $100,000 to have surgery in the U.S. but it costs $7,000 with American-trained doctors in India?” Help me understand this.

Chapter One (From Who Killed Health Care? by Regina Herzlinger)

This book is an attack on our present health care system as well as a presentation of a new, future health care system that differs from everything we have today. I am not conducting a minor skirmish or merely suggesting adjustments to your insurance plan’s benefits or adding customer-friendly practices to your hospital. This is a full-blown attack on the structures and the architects of our present system.

Our $2 trillion health care system is as large as the economy of China. And yet, despite all this spending, millions of people cannot get the care they need because it costs too much or because our fragmented health care system cannot efficiently supply integrated, multifaceted treatment for their chronic diseases or disabilities. If they are uninsured, our primarily nonprofit hospitals all too often gouge them with the highest prices they charge and then use criminal-like collection tactics to ensure payment.

You may not realize it, but we all pay for all of this. If we are employed, our boss takes part of our salary and uses it to pay for this system.1 If we are self-employed, we pay horrendously high premiums for insurance plans. And as taxpayers, we funded the government’s 44 percent share of 2004 health care costs.2

The system giveth and the system taketh away. It takes your money, time, and health, and it gives generously to Wall Street and fat-cat businesspeople and hospital executives who earn millions of dollars. Dr. William W. McGuire, the former CEO of United Healthcare, one of the country’s largest health consumers, not only received $1.7 billion worth of stock options during his tenure,3 but also had a jet at his disposal and a red carpet reportedly rolled out to meet his limo so his tootsies did not have to meet the same ground on which we ordinary mortals step.4 This money, or at least some of it, could have provided better health care or lower costs for United Healthcare’s enrollees, but instead it wound up in Dr. McGuire’s very large bank account and literally fell under his feet.

I am not suggesting that we put more money into our health care system. At close to $2 trillion, or nearly 20 percent of our economy, we put more than enough money into it. Nor do I think that we must set up yet another bureaucracy that will take our money and then ration our health care. All of us can likely have all the care we need with current spending levels. What I am advocating is using the money we currently spend differently and more effectively so that we can get the health care we want and even cover those who are now forced to go without health insurance because they cannot afford it.

The solution I will discuss here goes by the name consumer-driven health care. It’s a term that I popularized, and it’s become a common way to describe this new health care solution. Google it and see for yourself. Consumer-driven health care empowers individuals and brings their force to bear on the offerings of doctors, hospitals, and insurance and pharmaceutical companies. It converts the entire system to one that is responsive to you and me as the ultimate consumers of its goods and services.

As I will show in the course of the book, there are consumer-driven health insurers that give you the health care you need at a price you are willing to pay; there are lower-cost hospitals that do not treat you like a slab of meat; and there are governments that do what they are supposed to—help the poor, provide transparency, and protect against fraud and abuse—rather than telling your doctor how to practice medicine. There is a way to create dynamic markets for health services that are more effective, more efficient, and more responsive to the patient-consumer—and her doctor—than anything we have today. The last chapters are devoted to describing that system, how to make it work, the proper roles of government and business in creating and sustaining it, and the benefits and good health it will bring to you.

Who killed health care?
The day I learned Jack Morgan had died of kidney disease was the day I knew our health care system had died along with him.

Jack needed a kidney transplant, a complex but not uncommon procedure. He found a donor in his loving daughter, who was willing to undergo surgery to have one of her own healthy kidneys removed and given to her dad. Jack’s health insurance was paid up and functioning.

What could go wrong? Everything. Jack never got the transplant. Instead, he died of his disease.

The kidney is the body’s filtering system. Kidney disease victims are essentially poisoned and drowned. The filters in Jack’s kidneys, which were functioning at less than 20 percent of normal, could not effectively remove waste and keep his fluids regulated.

When the disease first struck, the people around Jack, who was normally a lean bundle of energy, noticed that he had become lethargic and puffy. His usually glowing skin was dry and scaly. His HMO doctor thought he was depressed, and he gave Jack a prescription for a generic drug. But, after repeated visits, when his symptoms did not improve, Jack was correctly diagnosed. An artificial kidney, called a dialysis machine, replicated the function of his natural kidneys. But after many years of dialysis, it was no longer enough. Jack needed a new kidney, a good one, transplanted into his body.

What could go wrong? Everything. Everything went wrong, and Jack never got the transplant. Instead, he died of his disease.

His death was not painful, at least not for him. He died quickly, poisoned by his own waste, drowned by his own fluids. But it was painful for the many people who loved him because they knew his death was premature. With a new kidney, Jack could have lived another 20 or more years.

What happened?

Jack was killed by an inept, malfunctioning, costly health care system that he thought was protecting him. A system that for all intents and purposes is dead.
He was killed …

Who exactly killed him? And why?

Remember the book and film Murder on the Orient Express, Agatha Christie’s story of a man murdered on a train? It turns out that all the passengers had a hand in his death.5

That’s what happened to Jack Morgan—every part of the health care system failed him. Unlike the killers in the Christie mystery, they didn’t mean to do it, but they did it anyway. They were so caught up in their self-interest that they forgot what their work was all about—Jack Morgan’s health. In the U.S. health care system, and in the United Kingdom, Europe, and Canada, trillions of dollars are spent on health care, but no one gives a voice to its consumers. In these nations, this means that you and I are not being heard. Jack could not speak for himself, and there was no ombudsman to speak for him.

The killers work in insurance and hospital firms that have lost their souls, firms that have become more interested in money and perpetuating themselves than in providing health. Employers, as well as the U.S. Congress and a bevy of health policy academics, are also implicated. They were satisfied with substituting simple, utopian abstractions, like the idea that an insurer or a government can “manage health care” cheaper and better than your doctor, for the thousands of complex interactions that should guide the practice of medicine.

The problem begins with the hospitals—the bloated behemoths that account for the largest part of our health care system, nearly a trillion dollars’ worth, and represent the major reason for its cost increases. Their costs rise at a pace that generally exceeds the growth of their services. They have managed this through shameless manipulation of their nonprofit image and massive political contributions. The hospitals have convinced the U.S. Congress to suppress potential competitors, such as physician-controlled specialty hospitals, which could provide better and cheaper services, and to grant them valuable tax exemptions. They’ve also persuaded local judges and juries to strangle competition by allowing mergers of hospitals and other consolidations.

Clearly, the term nonprofit when applied to these hospitals is a joke. The reality behind the saintly caregiver image they like to promote is startling. These supposedly altruistic institutions earn hundreds of millions of dollars in profit, keep billions of dollars in cash reserves, and pay their executives millions in salary. They play hardball, screwing the uninsured with inflated charges and collection tactics worthy of criminals.

Outrageous hospital costs have gravely injured the employers who buy their employees’ health insurance. Since 2000, health insurance premiums have increased by 73 percent compared to cumulative increases in inflation and wages of about 15 percent.6 Although they themselves are victimized by the system, employers, in their turn, have become killers.

Some employers, especially small ones, no longer can afford to offer health insurance. As for the other larger employers, in an effort to control costs, they have allowed their human resources (HR) staffs to restrict employees’ choice of health insurance plans, frequently offering only one—a managed care insurance plan. The HR types believe that by restricting choice and giving the insurance companies a large volume of enrollees, they can achieve meaningful cost control. But they are profoundly wrong in their belief: to the contrary, choice supports competition, competition fuels innovation, and innovation is the only way to make things better and cheaper.

The paternalistic HR staff became convinced that the managed care insurers would control costs better than the consumers or the doctors. But they put their faith in the wrong institution; the managed care sector has strayed from its early spiritual roots in the Kaiser organization that originally created the concept of “managed care” as a fundamentally different way of providing better, cheaper health care. As managed care organizations transitioned into an industry, rather than a movement, they lost their souls—all too many were focused on profits at the expense of their enrollees’ health care.

Next, the U.S. government’s Congress and executive branch enabled this series of disastrous events not only by helping hospitals suppress competition but also by passing legislation that forced U.S. employers to offer managed care options whether they wanted to or not. In addition, the Congress has wrung vast, unwitting subsidies out of us to shower on the managed care insurers and drugs they favor. As a final blow, our Congress has begun to practice medicine, through “pay-for-performance” schemes that reward health service providers who follow Uncle Sam’s medical cookbook.

Former government executives who sit on the boards of directors of insurance and health services firms keep congressional relationships well oiled. They are well compensated for their work. The person who once ran the U.S. government’s massive Medicare program, for example, was a member of the board of directors at United-Healthcare that approved $1.6 billion in payments to Dr. William McGuire, the firm’s former CEO and chairman. She did pretty well herself—earning nearly $15 million in stock, in addition to other compensation, for her board services.7

The health policy academics also enabled Jack’s death, motivated by their self-interest and belief in their superior intellects to advocate for a large role in the control of the system. They paved the way, through their intellectual discourse and public policy papers, for technocrats to oversee physicians and usurp their judgments and treatment preferences—the ugly core of managed care and pay-forperformance systems.

The academics succeeded in blaming the failures of health care in this country on the doctors who actually treat patients. They claimed that practicing physicians made mistakes that would be eliminated if they were controlled by academic researchers who, somehow, know how to practice better medicine. Their efforts were all about placing the individual doctor under their control or that of their technocrat surrogates. The last few recent studies of the Institute of Medicine, one of the National Academies and a group of health policy experts set up to advise the U.S. Congress, focus on how terrible the doctors are.8 Their solution? Just give us more power to tell the clinical how to do it right.

But, presently, medicine is more art than science. Unlike the powerful, universal laws of physics that inform the practice of engineering, there are few inviolate rules in the sciences of biology and biochemistry to inform the practice of medicine. Scientists are just beginning to understand how our bodies function, as new human genome research decodes the uncertainty of our biology, fate, and health. So where is the science that will enable some bureaucrat to tell your doctor, who knows you so much better than the bureaucrat, how to practice medicine on you? It does not exist.

Some academics accuse the practicing doctors of unbridled greed too, claiming that they give patients medical services they do not need just to jack up their income. Yes, some do, but the majority do not.9 To the contrary, many doctors lie to insurers only to make sure that their patients can get the medical care they need, and two-thirds donate 11 hours each month of their time to patients for free.10

The academics and policy makers had their way. After decades of brainwashing with this kind of academic preaching, the U.S. Congress passed a whole set of laws, twice as long as the King James Bible of 1,377 pages, that constrain doctors who want to go into the health care services business.11 But in its rush to pass these restrictive laws, Congress was abandoning this nation’s passion for innovations and the entrepreneurs who bring them to life. Many of our most important companies were founded by businesspeople who deeply understood their core technologies, in the way that doctors, and only doctors, understand the practice of medicine. Thomas Edison was not only the brilliant businessman who started General Electric; he was also a brilliant inventor. Henry Ford not only founded the Ford Motor Company; he was also a genius mechanical engineer who in only eight years slashed the price of automobiles by more than half with his technological and managerial innovations.12 Bill Gates was not only the visionary founder of the great business, Microsoft, but also an excellent software writer. But if these guys were doctors, they would likely not be allowed to create the same sort of excellent, effective, efficient businesses in health care.

While the Congress and academics pounded away at the practicing doctors’ failures, they did not celebrate their successes. Some of the leaders in the physician community also lost sight of the purpose of health care, having been caught up in the politics. But of all the manyparticipants in the health care system, it is the doctors who have more steadfastly adhered to their ethics as professionals. Through scientific innovations in the practice of medicine, we have witnessed a dramatic increase in life span and decrease in illness. Yet physicians’ inflation-adjusted incomes dropped by 7 percent from 1995 to 2003, while those of professional and technical workers increased by 7 percent.13 And, increasingly, physicians are asked to follow medical care recipes concocted by insurers and government bureaucrats. With their professional autonomy and financial well-being compromised, small wonder that the number of applicants to medical schools decreased by nearly 20 percent between 1996 and 2006.14 When I ask my MD students why they have enrolled in the Harvard Business School for an MBA, many say, “I cannot practice medicine anymore.”

The kind of system that exists now hates innovation. It hates outsiders with good ideas. Yet sometimes, against all odds, the outsiders succeed. Two brilliant scientists who helped Jack to stay alive as long as he did fit into that category. Their genius profoundly altered the pattern of care for kidney disease.

One was the classic academic—a wiry Dutch MD/Ph.D. with a long face, big nose, and Euro-style goatee, clad in the scientific researcher uniform of rumpled chinos, T shirt, and sneakers. Willem Kolff is his name, and he is a raving genius. When I met him, a decade ago, he was a twenty-something in vitality and intellect boxed into an eighty-something body. He invented an artificial kidney that filters the blood of impurities in a lengthy, painful, but life-saving process called dialysis. The second was more your idea of a good doctor—grandfatherly, pious, smiling, noble Joe Murray, from Boston’s Brigham and Women’s Hospital. He introduced kidney transplantation from a living donor.

Mother Nature is the best of engineers: because kidneys are so important, she has given us two of them. But, despite the security blanket, they may both fail, largely because of diabetes (nearly half of new cases) and/or high blood pressure (25 percent).15

Transplants are a great solution. Joe Murray performed the first transplant of a kidney taken from a living donor. But as recently as August 15, 2006, there were 67,328 people waiting for a kidney but only 13,268 kidneys available. Sadly, the demand far outstrips the supply.16

Dialysis, which rids the body of impurities, is the only alternative to transplants. Roman sweat baths were likely among the first sites for dialysis. Romans who sweated impurities from their bodies were purified but desiccated, trading profound thirst for kidney failure.

The key to an artificial kidney lay in the most mundane of materials—plastics: a membrane so porous that it allowed the impurities in the blood to leach out but sufficiently strong to withstand the pressure created by the flow of blood. During World War II, in Nazi-occupied Holland, Willem Kolff found this membrane in sausage casing made of cellulose acetate. He wound yards and yards of it around a drum, seated it in a vat of liquid, used an engine scavenged from a lawn mower as a power source, and thus created the first artificial kidney.

No good deed goes unpunished in health care. Sure, these two helped people with kidney disease to live good and useful lives, but these doctors also took a lot of abuse along the way. They persevered in the face of unrelenting opposition to their innovations in kidney disease treatment by the status quo medical establishment. You’ll hear more about that later.

In the course of my attack, you will meet some other riveting personalities amid the hundreds of thousands of faceless businesspeople, hospital executives, politicians, academics, and bureaucrats who created this destructive system. One was the Prince of Darkness, former President Richard Nixon, who kick-started the managed care insurance movement with legislation that forced employers to offer HMOs as health insurance options to their employees and supported these HMOs with massive federal government subsidies that were funded by the taxpayers and that lowered the prices of the HMOs. They also include the Odd Couple who created Kaiser, a large California HMO—a can-do, huffing, puffing entrepreneur, Henry Kaiser, and Dr. Sidney Garfield, who so admired Kaiser, 24 years his elder, that he married the sister of Kaiser’s wife so he could become Kaiser’s brother-in-law. Believe it or not, there are some heroes, too, such as doctors Willem Kolff and Joe Murray, whom you’ve already briefly met, and Richard “Dickie” Scruggs, a Mississippi plaintiff lawyer who, despite his boyish nickname, is as huggable as a shark. Scruggs is bringing the hospitals to their knees in suits about their outrageous overcharges of uninsured patients.


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