Herzlinger’s Meme on Switzerland and Consumer Driven Medicine

In today’s Wall Street Journal, Harvard Business School professor Regina Herzlinger offers an upside-down account of what’s right and what’s wrong with Switzerland’s health care system.  A leading advocate of “consumer driven” health care, Herzlinger assumes that because the Swiss pay for so much of their care out of their own pockets, consumer choice drives their system. 

But the truth is that Swiss patients have relatively little say over either the cost or the quality of the care they receive. Prices are regulated by the government, which also tries to make sure that consumers are getting value for their health care dollars by selecting which drugs, devices and tests insurance will cover. In fact, it is the very visible hand of a smart, largely efficient government that accounts for Switzerland’s relative success.

Before explaining how Herzlinger gets so much so wrong, let’s look at what she gets right. “The Swiss have achieved universal coverage,” Herzlinger points out “at a far lower cost than the U.S.”  In 2003 Switzerland spent 12 percent of GDP on health care while we laid out “a staggering 15 percent of GDP” while leaving roughly 14 percent of our population uncovered. Switzerland also has “far better health outcomes than the U.S., even when Switzerland is compared to socio-demographically similar U.S. states such as Connecticut and Massachusetts,” Herzlinger acknowledges. Moreover, while U.S. insurers in most states can shun sick customers, either by refusing to cover them—or by charging them astronomical premiums—in Switzerland you are not penalized for having cancer. The sick “can afford health insurance and pay the same price” as everyone else.

Finally, while the cost of care continues to snowball in both countries, the Swiss seem to have a better handle on health care inflation. From 1996 to 2003 health care spending in Switzerland rose by an average of 2.8 percent a year, Herzlinger says, versus 4.1 percent in the U.S.  Meanwhile “Switzerland boasts substantially more in the way of health-care resources and . . . tops the world in most measures of user satisfaction.”

Herzlinger attributes the good news to the fact that Swiss consumers are spending their own money to pay for health care. In the U.S. she points out, the government picks up roughly 50 percent of the nation’s health care bill; and in 2003, employers laid out roughly $8,000 toward the  average $11,000 premium for a family of four.

In Switzerland, by contrast, the government pays just 25 percent of the bill; employers make no contribution, and individual households cover 65 percent of the country’s health care bills themselves. Thus, to repeat the cliché that market enthusiasts favor, they have “skin in the game.”  The government provides subsidies for the poorest third of Switzerland’s 7.5 million residents, but those who can afford insurance are required to pay 100 percent of the cost themselves.

For those who try to evade the mandate, penalties are stiff: the government can tack on fines equally 30 percent to 50 percent of the price of the insurance. Misrepresenting whether you are covered is punishable by fines and prison terms. 

This may all sound rather draconian, but it’s worth noting that nearly all Swiss citizens had insurance before the law went into effect. Moreover, if Switzerland is going to guarantee universal coverage by insisting that private sector carriers enroll ailing patients, without penalty, it must make insurance compulsory. Otherwise, no one under 40 would sign up until they were sick, knowing that when they needed coverage, insurers would be forced to take them.

But Herzlinger misrepresents Switzerland’s program by suggesting that Swiss consumers have enough choice about how much health care they purchase, or how much they pay for it to drive the system. The truth is that Switzerland’s 1994 Health Insurance Law mandates a fairly comprehensive minimum package of health benefits that insurers must offer and households must purchase. Granted, customers can choose from more than 90 private insurance carriers who vie for their business, but when it comes to differentiating their products, insurers have relatively little wriggle room.

First, as Princeton economist Uwe Reinhardt points out in a 2004 article in the Journal of the American Medical Association, the premiums a Swiss insurer charges are subject to audit by the Federal Office of Social Insurance, which has the power to reduce the proposed premiums restrictions.

Secondly, an insurer cannot charge an 80-year old more than it bills a 25-year old for the same policy. (Premiums for children up to age 18 and students up to age 25 are somewhat lower.)

Finally, insurers are not allowed to make a profit on the mandated benefit. Switzerland’s private sector insurers are “not-for-profit” though they can profit from the sale of supplemental benefits—“mainly superior amenities,” Reinhardt explains.

Because insurers are so strictly regulated, consumers have fewer options. They can’t pick a bargain-basement plan that is less than comprehensive; it doesn’t exist. Cheap plans with a $10,000 deductible per family member also are not available; the government sets a mandated minimum and ceiling for deductibles. And households cannot choose between plans that offer high co-pays or no co-pays. In 2004, everyone paid the same 10 percent co-pay, up to an annual maximum of 700 SFr per year. 

Moreover, although the Swiss do have the option of paying significantly lower premiums if they are willing to shoulder a higher deductible, Reinhardt cites a survey which reveals that only a "minority, mostly younger population groups, have taken advantage of the ability to switch among insurers. "

Furthermore, only about half of the respondents to the survey could remember how much they currently pay for their health insurance, “which does not point to the alert, price-conscious consumer of consumer-choice theory,” Reinhardt observes dryly.

Yet even if the Swiss are not the world’s most conscientious health care shoppers, individuals in Switzerland spend about a third less on health care than the average American.  How can that be? Time and again, Herzlinger repeats the meme that consumer choice accounts for Switzerland’s lower costs. And if she says it often enough, without citing evidence, no doubt many Americans will believe her.  But it just isn’t so.

Even a cursory glance at Switzerland’s system reveals that government-enforced price controls on virtually everything from drugs to doctors keeps a lid on health care inflation.  The fees that providers charge “are negotiated by the cartel-like associations of insurers and clinicians under the watchful eye and heavy hand of government” Reinhardt observes. And “since all insurers are bound to the same prices for ambulatory care, and prices are negotiated between insurers and individual hospitals for inpatient care,” there is little room for the consumer to affect prices by comparison-shopping.

Finally, when it comes to ensuring that the Swiss are receiving effective care,   Switzerland's Federal Department of Home Affairs establishes the formulary for prescription drugs that it believes give good value, while the Federal Department of Home Affairs decides which lab tests and medical devices are to be covered by compulsory insurance.

In the end, Reinhardt suggests that “what is most impressive about the Swiss health system is the role tight government regulation plays  . . . . One can plausibly argue that this regulation is chiefly responsible for both the high quality and (relative to the United States) low cost of Swiss health care.” Determined to make the case for consumer-driven care, Herzlinger takes the opposite view arguing, in today’s WSJ that the Swiss government’s web of regulations, requiring “an extensive minimum benefit package,” while “micromanaging” both prices and products is precisely what keeps Switzerland from becoming the unfettered consumer’s  paradise that she would  like to see. 

Herzlinger ends her Op-ed by warning that we shouldn’t “latch onto” the Swiss model. After all, consider how much damage a government can do when it interferes with market forces: “Imagine a car market in which the government designs the vehicles and stringently oversees distributors' prices. Pretty soon,” Herzlinger speculates, “all the cars would come with features we do not necessarily want—heated seats—at a price we do not want to pay.”

Heated seats?? It’s hard to imagine even the most open-handed progressive arguing that Congress should mandate heated seats. Fuel-efficiency, on the other hand, along with safety features which would make a fiery explosion less likely . . . that’s something wise lawmakers might suggest. But don’t hold your breath. 

Remember how long it took us to get seat belts? 

Comments

[Lou]

I've lived in Switzerland and the health care system works damn well. I'd take it in a heartbeat over the dysfunctional mess we have here.
Maggie is correct that there must be a mandate for minimum coverage; insurers must provide it to anyone at standardized prices and there must be a severe penalty for not obtaining it.
The rich can still "upgrade" their policies to their heart's content through supplemental plans but the only way to fix this mess is to get everyone covered at some basic level so that the risk can be spread out over the entire population.

[Dr. Rick Lippin]

We are in genuine moral and ethical meltdown in the former profession of US Medicine.This is primarily because we have adopted a business model which has failed miserably over the past 15-20 years.

Doesn't the good professor see this? Oops- She teaches at an Ivy League Business school. Wharton(PENN) in Philly is equally as blind to the reality of this national tragedy.

Dr. Rick Lippin
http://medicalcrises.blogspot.com

[Maggie Mahar]

Jack, Joe, Tim
Thanks for your comments!

Jack, I agree that what people need is health CARE, not necessarily health insurance. But of course insurance (whether public or private) is the mechanism that we need to spead risk while funding healthcare.

Joe--
I also don't know why H. is such a fan of consumerism, though as a prof at the Business School it's not surprising that she believes the free market is the solution. And in most markets, the consumer does have some power to keep a lid on prices while comparison-shopping for quality.

(Though I don't know why she always uses the U.S. auto industry as her example. It's one of the least responsive industries in terms of meeting consumers needs and desires.)

I also find her work thin. But for whatever reason, it has become very popular and she has had quite a bit of influence on how many people think about healthcare.
As a result, as you say, "we have to spend a lot of time debunking this stuff" --but I think that is part of the process of raising understanding of the true problems in our
system. . .

Tim--
I agree that the polarization along ideological lines is making heatlhcare reform much harder than it needs to be.

But I have to point out that it is politicians in both the executive and legislative branch of goverment who lable themsevles as Conservatives who insist that government should not be too involved in health care.

That is why they voted against SCHIP--ignoring what most Americans pretty clearly wanted.

Thus, "the people's business" is being ignored by those who are sticking firmly to their ideological positions

On the more liberal side of the fence, none of the leading Democratic candidates is calling for a "single-payer" govt-run system. All three are proposing a public/private solution that would allow Americans to keep the private-sector insurance that they have, or sign up for priate sector Or public sector insurance, as they choose.

This seems to me an ideal compromise between the extremes of "privatization" on the one hand (which those who call themselves Conservatives have said they favor not only for healthcare but for Social Secuity ) and single-payor, govt' run on the other.

Finally, while you and I may find it "disgusting the way both extremes in Washington play political games and treat serious issues like a game of tug of war between two teams, or like one side is the Yankees and the other side is the Red Sox," we can't ignore the reality that Washington is polarized, along ideological lines.

The vote on SCHIP made that clear. I really thought that more conservatives and moderate Republicans would be persuadable, but they weren't. And the main objection was not the cost (this administration and this Congress has open-handed when it comes to spending.)

The main objection was that SCHIP opens the door to govt' healthcare.

Tim--

[Maggie Mahar]

Jack, Joe, Tim
Thanks for your comments!

Jack, I agree that what people need is health CARE, not necessarily health insurance. But of course insurance (whether public or private) is the mechanism that we need to spead risk while funding healthcare.

Joe--
I also don't know why H. is such a fan of consumerism, though as a prof at the Business School it's not surprising that she believes the free market is the solution. And in most markets, the consumer does have some power to keep a lid on prices while comparison-shopping for quality.

(Though I don't know why she always uses the U.S. auto industry as her example. It's one of the least responsive industries in terms of meeting consumers needs and desires.)

I also find her work thin. But for whatever reason, it has become very popular and she has had quite a bit of influence on how many people think about healthcare.
As a result, as you say, "we have to spend a lot of time debunking this stuff" --but I think that is part of the process of raising understanding of the true problems in our
system. . .

Tim--
I agree that the polarization along ideological lines is making heatlhcare reform much harder than it needs to be.

But I have to point out that it is politicians in both the executive and legislative branch of goverment who lable themsevles as Conservatives who insist that government should not be too involved in health care.

That is why they voted against SCHIP--ignoring what most Americans pretty clearly wanted.

Thus, "the people's business" is being ignored by those who are sticking firmly to their ideological positions

On the more liberal side of the fence, none of the leading Democratic candidates is calling for a "single-payer" govt-run system. All three are proposing a public/private solution that would allow Americans to keep the private-sector insurance that they have, or sign up for priate sector Or public sector insurance, as they choose.

This seems to me an ideal compromise between the extremes of "privatization" on the one hand (which those who call themselves Conservatives have said they favor not only for healthcare but for Social Secuity ) and single-payor, govt' run on the other.

Finally, while you and I may find it "disgusting the way both extremes in Washington play political games and treat serious issues like a game of tug of war between two teams, or like one side is the Yankees and the other side is the Red Sox," we can't ignore the reality that Washington is polarized, along ideological lines.

The vote on SCHIP made that clear. I really thought that more conservatives and moderate Republicans would be persuadable, but they weren't. And the main objection was not the cost (this administration and this Congress has open-handed when it comes to spending.)

The main objection was that SCHIP opens the door to govt' healthcare.

Tim--

[Jack Lohman]

Tim, I consider myself a fiscal conservative as well, and for that reason I despise the waste that is fostered by our inefficient health care system.

But my experience has been in Wisconsin that those who call themselves conservatives also oppose any fix of the system that involves public funding and they believe in "privatization" at any cost. How's that for logic?

I am trying to get them to be a little more pragmatic in viewing the financial benefits of a single risk pool.

[Tim]

Jack -- in my opinion, it's the labeling of "conservative this," "liberal that" which is leading to the type of polarization and political acrimony we're seeing today.

People are seeing themselves as flag-bearers for an ideology rather than people united for a common good.

For what it's worth, I consider myself a political conservative on most issues, but a "radical moderate" when it comes to health care reform -- moderate in wanting both sides to stop trying to claim a "win" for their own side, and "radical" in that I think serious and sweeping changes are needed, not just tinkering around the edges. Both sides have good ideas. But if each side plays "my way or the highway," we're stuck.

As a result I'm a little taken aback by stereotyping and pigeonholing. I'm also disgusted with the way both extremes in Washington play political games and treat serious issues like a game of tug of war between two teams, or like one side is the Yankees and the other side is the Red Sox.

[Joe Paduda]

Maggie - excellent work. I don't know Dr. H, and can't make any assumptions as to why she is such a strong advocate of consumerism.

Nonetheless, I'm continually puzzled as to how anyone that bases their opinions on such shaky ground ever got to such a prominent position at Harvard. Her leaps of logic wouldn't garner a passing grade in a state school, much less an ivy.

It is troubling that we have to spend so much time debunking this stuff instead of working towards a solution. Then again, perhaps this is just part of the education process.

Joe

[Jack Lohman]

Mandating “insurance” is not what we need, especially when the insurance bureaucracy consumes (actually, wastes) one third of our healthcare dollars. We need mandated “care” instead.

>>> “…..the lack of solidarity in this country is an enormous obstacle to reform. In its own away, it's as big an obstacle as the lobbyists.”

I’ve just published a blog article on this “free market” push at http://tinyurl.com/ytgyf7

I think conservatives are too easily influenced by those whose job it is to convince the public that privatization works in health care. It doesn’t, but there is one hell of a lot of cash being spent to convince us otherwise.

[Maggie Mahar]

Roy--
You make a very good point.
I'd say that Herzlinger's ideology also tells her that it's okay to sit on the boards of health care companies while also writing about health care.
I don't own any health care stocks--and wouldn't--because I would see it as a conflict of interest.

[Roy M. Poses MD]

Could it be that Herzlinger's writings are influenced by conflicts of interest?

After all, she sits on the boards of directors of, and hence has fiduciary responsibility for the financial health of biotechnology company ChemoCentryx:
http://www.chemocentryx.com/about/board.html
and of for-profit managed care organization Wellcare:
http://ir.wellcare.com/phoenix.zhtml?c=176521&p=irol-govboard

So maybe its more than ideology that drives Herzlinger's re-interpretation of Switzerland as a paradise of free market health care?

[maggie mahar]

Barry and Tim--
I'm always glad to hear your comments.

Barry--Those are all very good questions.

Unfortunately, it's very hard to get much specific information about health care in other countries.

When I go online to read medical journals or papers, I find that most of the reserach is written in the language of the country in question. (Which makes sense: in the past readers in the U.S. were not that interested in health care in other countries. But that is changing.)

I'm hoping to go to an international conference in Berlin in the spring where the leaders of Europe's health care systems will be speaking--most in English, others in simultaneous translation.

If I can do that, I'll be able to make contact with sources that could really give HealthBeat an inside look at what works in other countries, what doesn't, and what we might borrow.

Tim--

You wrote: "right now, people are just too partisan and polarized to give away anything that can be seen as giving 'the other guys' the political victory."

I agree.

Like your father, I was much more hopeful before 9/11.

Unfortunately, conservatives used 9/11 as an occasion to fan fears and divide the nation. To be fair, progressives also squared off against conservatives. But they didn't use the fear card--that's what really polarized things.

I also don't wish for a "political, international or economic calamity." But that's what it may take before Americans being to circle the wagons (not against immigrants or foreigners, but against those Americans who would divide us) and unite.

[Barry Carol]

Maggie,

I would love to see some data or discussion about the differences between Switzerland and the U.S. with respect to the litigation system used to resolve medical disputes, the approach to end of life care, and the extent to which electronic medical records are used. How much of the difference in healthcare costs between our two countries relates to those factors as compared to government price controls on hospitals, doctors' fees, and drugs?

[Tim]

Maggie, you're probably right in the last two paragraphs. Usually it takes a national calamity of epic proportions to bring Americans together philosophically and politically, and to remind them that we all have a lot more in common than we realize. And that's usually what it takes to undergo such a massive change to the status quo.

My late father once commented to me in e-mail, a few days after 9/11, that he was seeing a shared sense of national unity and spirit that he hadn't seen since he was a child, just a few days after Peal Harbor Day. Subsequent events (which I don't want to get into here for obvious reasons) as well as the passage of time seemed to make that shared sense of purpose dissipate. Any opportunity to deliver massive changes in a spirit of national cooperation has long since fizzled.

No one wants political, international or economic calamity, but they do have the potential to cause the people to "circle the wagons" together, and that could result in getting things done that otherwise would never be accomplished. Such an unfortunate event would -- to find a silver lining -- be a chance to strike while the iron is hot, especially if the calamity involved problems with the health care funding and delivery system.

But right now, people are just too partisan and polarized to give away anything that can be seen as giving "the other guys" the political victory.

[maggie mahar]

Tim--
You may be right. But it's worth remembering that it didn't seem possible there either, until they did it.
It wasn't that long ago that insurers in Switzerland were able to charge older people and sicker people much higher premiums.
It wasn't until insurance began to become unaffordable for more and more older people that Switzerland finally began to really regulate its insurance industry.
Requiring everyone to buy insurance is the other element that many people in this country would resist. But if we want universal coverage, we have to have a universal mandate. Otherwise, as I explain in the post, people will just wait until they are sick before signing up for insurance.
And because everyone in the insurance pool will be sick or old, insurance will be very, very expensive.
But I agree with you: the lack of solidarity in this country is an enormous obstacle to reform. In its own away, it's as big an obstacle as the lobbyists.
Though as more and more Americans find that they can't afford healthcare--and are either uninsured or underinsured--more and more of the middle-class and even upper-middle-class will find themselves in the same position as the lower-middle class and working poor.
The Great Depression did bring disparate people together, and maybe that's what it will take for healthcare.
What we really need, I think, is leadership that could bring conservative and liberal working class and middle-class people together, be they black, white or brown, religous or not, Northerners or Southerners, to recognize that we all have the same economic and social needs.

[maggie mahar]

Tim--
You may be right. But it's worth remembering that it didn't seem possible there either, until they did it.
It wasn't that long ago that insurers in Switzerland were able to charge older people and sicker people much higher premiums.
It wasn't until insurance began to become unaffordable for more and more older people that Switzerland finally began to really regulate its insurance industry.
Requiring everyone to buy insurance is the other element that many people in this country would resist. But if we want universal coverage, we have to have a universal mandate. Otherwise, as I explain in the post, people will just wait until they are sick before signing up for insurance.
And because everyone in the insurance pool will be sick or old, insurance will be very, very expensive.
But I agree with you: the lack of solidarity in this country is an enormous obstacle to reform. In its own away, it's as big an obstacle as the lobbyists.
Though as more and more Americans find that they can't afford healthcare--and are either uninsured or underinsured--more and more of the middle-class and even upper-middle-class will find themselves in the same position as the lower-middle class and working poor.
The Great Depression did bring disparate people together, and maybe that's what it will take for healthcare.
What we really need, I think, is leadership that could bring conservative and liberal working class and middle-class people together, be they black, white or brown, religous or not, Northerners or Southerners, to recognize that we all have the same economic and social needs.

[Tim]

Switzerland is a much smaller country with a much greater sense of shared values. It's also a much more homogeneous culture with less socioeconomic disparity.

That makes it a lot easier to implement effective universal coverage than a place like the U.S., which has such huge cultural and socioeconomic disparities as well as a large contingent which distrusts the government even more than Big Business, particularly at the federal level. The socioeconomic and cultural differences are so large, in my opinion, as to render comparisons all but useless because what they are doing is not even remotely feasible politically here.