Consumer control will align supply and demand


Regina Herzlinger's prescription for reform calls for payment based on episodes of care.

A key point she emphasized is that health reform has reached a major crossroads. We must change healthcare delivery, she says, not by moving toward a single-payer system where the government controls the money, nor by maintaining a system where the employers control the money, but by putting patients in control. By that she means patients should have more than just "skin in the game;" they should actually control the disbursement of the cash.

Herzlinger doesn't suggest that patients should pay for everything out of their pockets, but they should make the spending decisions because that will change the dynamics of supply and demand for healthcare services.

The first computers on the market were mammoth, million-dollar machines that ate a steady diet of punch cards and produced data in roughly the same amount of time she could with a pencil and paper. Today, a little smartphone that fits in her purse can perform a countless number of computations and tasks far superior to that clunky old punch-card muncher. How? Consumers drove that change through demand, and entrepreneurs figured out a way to deliver it for just $99.

Current consumer-driven health plans, which often have high deductibles, account for only 2% of the market. Herzlinger is not proposing we just enroll more people in those plans. She is proposing that real control, choice and information-not just the illusion of it-characterize the reformed healthcare system. If an employer gives an employee a choice between two plans that are 90% identical, that's not really a choice in her book.

We're a long way from being able to adopt Herzlinger's model, however. Some underlying issues need to be addressed first.

"Payment reform is essential," Herzlinger said. "As long as pay is based on the providers, you have turf warfare. You need payment the way the patient wants it."

Her prescription for payment reform calls for payment based on episodes-of-care, capitation with risk adjustment, and multi-year enrollment. She also encourages the establishment of "focused factories," which would coordinate care among an integrated team of doctors organized to meet the needs of specific patients or disease states.

"It's a long journey," she says. "And we're at the tipping point."


I asked one of the other attendees which part of the presentation caught her interest. Ferole Parmelee, corporate director, decision support, Lake Hospital System in Painesville, Ohio, told me Herzlinger's examination of the role of employers was a poignant piece of information she planned on mulling over some more.

"The average employer spends $15,000 annually for an employee's health benefits," Parmelee says. "That money is part of an employee's compensation, yet the employee has virtually no say over how it is spent."

What I took away was the idea that a high-quality, affordable system will emerge not through some kind of natural magic within a free market, but through a transformation of demand.

Julie Miller is editor-in-chief of MANAGED HEALTHCARE EXECUTIVE. She can be reached at

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