Why We Need Universal, Consumer-Driven Health Care

Health care reform has two goals: to control our gargantuan health care costs and to enable people, especially sick ones, to buy health insurance at an affordable price. The two goals are related -- the better we control health care costs, the more people can afford to buy health insurance.

Unfortunately, hardly anybody believes in the promise of congressional reform packages to control costs by creating a new public health insurance plan and Uncle Sam's Monopoly Health Insurance supermarket (obscurely called an "exchange"). The ostensible rationale for both is that the federal government's superb managerial skills will force down the costs of insurance and its distribution; but the American people do not believe it.

Rather, they believe that the only way Uncle Sam can control health care costs is by throwing roadblocks when the sick need ac cess to expensive medical care. The cancer outcomes of the United Kingdom's nationalized health care system support these concerns -- the U.K. has the lowest uptake rates for new cancer drugs among the five richest European economies and commensurately dismal relative cancer survival rates.

Most of the D.C. reformers likely do not believe their own message either.They probably believe that the public plan will ultimately morph into the only health insurance plan, so that the feds can practice medicine, U.K. style.

Yet, the disbelief about the congressional health reform packages should not obscure the fact that we have really serious problems with our health care system. For one, its costs -- at least 40 percent higher than those of other developed economies as a percentage of gross domestic product -- can hurt our economic competitiveness if we cannot point to commensurate special accomplishments that justify these costs. Yet, for all our spending, tens of millions of Americans would like to buy health insurance but cannot afford it.

There is a proven way to control costs, however, and one that would be credible to all. Switzerland's consumer-driven health care system shows the way.

The Swiss people control health care because they are the only purchasers of health insurance. There are no government health insurance programs in Switzerland -- those who cannot afford to buy it receive money from the government so they can shop for health insurance just like the average Swiss.

Our health care problems arose because we do not control our health care expenditures. Instead, someone else takes our money and spends it.

The government takes our tax money and spends it for Medicare and Medicaid, and our employers take money, which would otherwise come to us as salary or wages, and use it to buy our health insurance.

Are these agents doing a good job? Obviously not. How could they? After all, they have no idea of our differing value preferences. Further, we do not hold them accountable for how they spend our money.

A simple tax law change would enable us to get back the money our employers now use to buy our health insurance, if we choose to ask them for it, and to buy health insurance tax-free for ourselves, a tax status currently limited to employers.

It is instructive to compare the Swiss consumer-driven results with those in Virginia, which has virtually the same population.

Virginia's health insurance costs exceed the national average and grow in excess of the consumer price index, while about 16 percent of the population is uninsured. All too many of those enrolled in Medicaid find that doctors refuse to see them because of Medicaid's low payments.

In contrast, Swiss health care costs are 40 percent lower than ours as a percent of GDP, its consumer health care price index has declined since 2005, and it achieves universal coverage, world-class outcomes for the sick, and the highest equality in health care access across income groups in Europe.

The key to the difference is in who does the buying. In Virginia's system, dominated by government and employer purchasers of health insurance, there are only 19 private insurance firms, with two controlling about 60 percent of the market.

In Switzerland's highly competitive consumer-driven system, in contrast, there are 84 insurance companies and the top 10 control 80 percent of the market. Not surprisingly, the general and administrative expenses of Swiss insurers are 5 percent, while those of both for-profit and nonprofit U.S. insurers range between 15 percent and 20 percent.

But here is the catch: The Swiss system can work only if everyone buys health insurance. After all, if the health insurance market were voluntary, in a consumer-driven system, mostly sick people would be interested in buying it. Their health care insurance costs would be unaffordable -- the sick account for 80 percent of the costs but only 20 percent of the users. The only way sick people could afford health insurance in a voluntary system is if everybody else paid sky-high taxes to subsidize their purchase of health insurance. Do not count on that happening.

If the sick cannot afford to buy health insurance, what is the point of any health care reform? On the other hand, if everybody had to buy health insurance, the well would subsidize the sick. That is how all insurance works.

But there are some political problems with a consumer-driven system: When then-Sen. Barack Obama campaigned against Hillary Clinton, he deplored the individual mandate she would have required to enable universal coverage. And when he campaigned against Sen. John McCain, he demonized the tax proposal that would have enabled insured employees to buy their own health insurance.

Oh what a tangled web we weave when first we practice to deceive. The president's plaints were likely mere campaign rhetoric. But if he goes back on his word, the Republicans may eat his lunch. And if he does not, the best hope for real health care reform -- Swiss-style consumer-driven health care -- will be laid to rest.

Regina E. Herzlinger is the McPherson Professor at Harvard Business School and author of "Who Killed Health Care?" (McGraw Hill). She can be reached at reginaherzlinger.org.