Health Care Reform: A Lesson From the Big 3

US health care reform is the biggest domestic issue facing America today, and action is needed to fix it. But as I was reading about Chrysler’s bankruptcy the other day, it got me thinking about the similarities and differences between the auto industry and the health care industry. As the rhetoric and furor over health care reform gets more and more heated, it might help the debate if we step back and take a look at the failed auto industry and try to learn some lessons about what to do and what not do when reform is needed.

To use an oxymoron, American health care is sick. As many reports have stated, Americans spend twice as much on health care as similar western countries. Half of this cost is paid thanks to the American taxpayer (or the American taxpayer’s children and grandchildren, thanks to budget deficits). But even with all that spending, objective impartial statistics rank America’s health care near the bottom when compared with those same western countries. (See Demockracy article from February 16, 2009, “Health Care in America – A Time for Change” for a full discussion of this issue.) However, even with the groundswell of support from many different corners, this is not a problem which will be fixed at the flip of political switch. This is a problem which has been forty years in the making and will probably be forty years in the fixing.

So, as we watch the plight of the Big 3 automakers, I can’t help but compare their plight to the current situation of the health care industry and compare the position of the auto companies of 1960s to the health care providers of today. For many, many years, the Big 3 automakers were the most celebrated and profitable companies in the world. CEOs, executives, shareholders, unions, and car salesmen all got rich and fat on the profits from the US auto industry. They were the “Masters of the Universe” in the mid 20th century. A national infrastructure was built to support the industry. “What’s good for General Motors is good for America” was the oft-quoted refrain.

GM, Ford, and Chrysler made cars that were the shiniest, biggest, boldest, and the envy of the world. Even if you didn’t need or want rear fins or white side wall tires or big V-8 engines,  you got them because it was the American way to do things. Cars got bigger, more expensive, and more inefficient, and the industry run by the three big oligarchs with almost no other meaningful competition slowly lost touch with the consumer.

Bigger isn't always better

And then in the 1970s the car industry had a hiccup. The Japanese (and others) devised a cheaper, more sensible way to make cars which fit the needs of the consumer. These cars were cheaper and on objective criteria, better (sound familiar to an industry we know?). Detroit of course tried to react in the 1970s and 1980s. The industry went through thirty years of pain – a government bailout here, a merger there, a few concessions from the unions. They pared down their product lines to sell mostly SUVs and big cars (cars which people really didn’t need, but old habits die hard). Salesman and marketing programs claimed that the quality statistics comparing the Japanese cars were flawed, and anyway, who wants to drive a small little Japanese car (“I don’t care what the statistics say, the American made car is better”).  And now thirty years later, the Big 3 are on the critical list. Their infrastructures were just too cumbersome to change in the radical ways that were necessary to survive. Chrysler has now died, and GM and Ford are gasping their last breath. It is sort of ironic that one of the biggest problems of the auto industry is the escalating health care costs of the labor force that simply cannot be reduced under the current system.

Saying all that, and even with the Big 3 in their current sad state, I don’t think I know one American who is not a lot happier with the car they drive now compared to what they drove thirty years ago (OK, maybe we need to exclude owners of ’57 Chevys or ’64 Mustangs). All of the trauma and gut-wrenching decisions and layoffs and closures, although obviously difficult for those directly involved, were part of the process required to allow the American consumer to buy the product that was best for him.

So the similarities to the health care industries today and the auto industry of thirty years ago are obvious. The health care infrastructure is bloated and inefficient – it is providing products and services which are too big, expensive, and inefficient to many US citizens. It is more expensive and has less quality than other countries’ health care systems. A huge and complex national infrastructure has been built to support the entire industry. CEOs, executives, and shareholders, along with many powerful physician specialties, are all getting rich on the profits of the health care industry. These constituents do not want to stop the gravy train – but stop it will and stop it must – someday. In the long run, the American consumer will force the change – and it will most likely lead to trauma in the industry. It might take thirty years or longer – but the health care industry will change. In fact, I will make a bold and a rather pessimistic prediction: We will know that health care is “fixed” when one or more of the health care giants of today go bankrupt. The trauma that is necessary to change the system will almost certainly lead to the bankruptcy of a major player in the industry. Just like the Big 3, one or several major health care players will not be able to adapt to changes in the industry, and the result will be predictable. The somewhat tricky issue here is that the bankruptcy that occurs could well be the US Government, which foots nearly 50% of the health care bill in the U.S. – the bankruptcy in the health care industry which occurs might be US.

CHANGING HEALTH CARE IS DIFFERENT – IT’S HARDER

Although there are similarities in the predicaments of the auto and health care industries, there are three major differences worth noting, none of which are going to make reform any easier.

First, there is limited foreign competition to replace and offer alternatives to an inefficient industry. Health care, especially in- patient and primary health care is almost inherently a domestic industry. Japan, India, or China cannot easily begin a strategy of exporting health care to America and provide a competitive hammer to the industry. But this trend can be hard to predict.  If a consultant would have advised the CEOs of the Big 3 in 1960 that they would be brought to their knees by Japanese companies exporting two ton cars from Japan across the Pacific Ocean, he would have been laughed out of the board room. In the high technology world of internet, ipods, blackberrys, and instant data transmission, it is not inconceivable that a cheaper, more efficient health care model could be imported into the US and provide consumers with an alternative. If this does happen, you can be sure the first persons to cry foul will be the doctors, US health care companies, and their lobbyists who, predictably, will complain about low quality, “non-approved” health care, cheaper replacements, job losses, un-American competition, etc. – the mantra that car companies have moaned about for years.

Second, the US government does not just regulate or support the health care industry – it is the health care industry – as mentioned before, approximately 50% of health care spending is through Medicare, Medicaid, and other government programs. Moreover, the rules, regulations, and reimbursement programs developed and administered by the government are incredibly complicated when compared to other private industries. So when we speak of infrastructures that need to change, we are not speaking of a board room in Detroit; we are speaking of the mother of all infrastructures – the US Government. Needless to say, changing the direction of this US battleship will not be an easy task.

Third, the health care industry by its very nature involves life and death situations. The auto industry had to deal with issues like increasing miles per gallon, faster times for 0-60 mph, and how many grocery bags could fit in the trunk. Health care involves more serious issues – which cancer drug is likely to cure a sick child, kidney transplants, strokes, and heart attacks. Health care is emotional and stressful. To affect change within this emotional environment will be much more difficult given the potential side effects if a particular policy is in error.

If anything, then, these three major differences of the health care industry, as compared to the auto industry, will make change harder not easier. The lack of  foreign competition to drive changes and to lower costs, the gargantuan bureaucracy of the US government, and the emotional issues involved all are roadblocks to change. Change will not be easy.

LESSONS TO BE LEARNED

It has been said that he who fails to learn from history will be destined to repeat it. So what can the health care industry learn from the plight of the auto industry?  In my opinion,  there are several important things.

First, what is required to fix the health care system is major surgery. The cost structure and system is fatally flawed. The auto companies cost structure was fatally flawed thirty years ago. Tweaks here and there allowed thirty years of survival for the Big 3, but they did not fix the problem. The health care companies, the insurance companies, and the US government cannot keep forcing their “SUV” solutions when what the consumer needs is a reliable, efficient, quality health care system. If rich people want to pay for big SUVs, then let them, but the average person needs good and efficient, not excessive and gaudy.

We will need to accept that this major surgery to the health care system will be painful and it will take a long time. There will be winners and losers. Jobs will be lost, salaries may be lowered, and mistakes will be made. And given the emotion and seriousness of health care, the mistakes may lead to serious consequences. Let us be prepared for these mistakes and issues. These issues that change brings about cannot reduce our desire and drive to change the system for the better. And as we are going through these painful changes, let’s not let lawyers and tort laws allow even more money to be sucked out of the system by legal confrontation. Tort reform is needed to limit damages and to let providers make the decisions necessary to cut the waste out of the system without worrying about multimillion dollar lawsuits that ultimately just add more costs to an already inefficient system.

Second, good old fashioned competition will ultimately serve the needs of the health care consumer best. Whatever the system looks like in twenty years, it must be a competitive system where individual consumers choose what is best for them. This does not mean that government cannot be involved, but government needs to develop and nurture a system which promotes competition. However, it must be noted that just introducing competition into a system which is broken is not just a cure all. The private and public health care system does have competition now, but it takes place at the wrong levels and on the wrong things. This dysfunctional competition does not focus on delivering value for money to customers, but instead motivates providers to capture more revenue, shift costs to the deep pocket, and restrict services to those who cannot pay. The competition is more about profit and revenues and less about providing value to the patient. Flawed model – flawed competition. The industry needs to develop new business models that reward quality and efficiency, not simply a fee-for-service mentality. Reform should focus on creating a system whereby providers compete directly on the six overarching “Aims for Improvement” (as identified by the Institute of Medicine) for health care. These aims are:

• Safe: Avoid injuries to patients from the care that is intended to help them.
• Effective: Match care to science; avoid overuse of ineffective care and under-use of effective care.
• Patient-Centered: Honor the individual and respect choice.
• Timely: Reduce waiting for both patients and those who give care.
• Efficient: Reduce waste.
• Equitable: Close racial and ethnic gaps in health status.

If competition is refocused along these parameters rather than just on profit and revenue, then the competition will bring value to the customer. The book Redefining Health Care: Creating Value Based Competition on Results by Michael Porter and Elizabeth Teisburg is an excellent treatise on how competition can be implemented into health care systems to drive the most efficient solutions to the consumer.

Regarding competition, it would be interesting, indeed, if a foreign competitor could begin importing health care services into the US.  I have traveled and lived extensively overseas and experienced health care in many foreign countries.  I can testify that many, many overseas providers would be more than willing to provide health care to US citizens at a fraction of the cost that is paid in the US (and this is from persons living in Western Europe – the opportunities from a low cost country like India or China must be staggering). And remember, before you get protectionist, these other countries’ health care statistics are better than ours – don’t be fooled like the automakers who claimed that your 1972 Ford Galaxy is really better than the Toyota Corolla.

Finally, the leaders of the health care industry, public and private, must focus on what Detroit did not – the needs of the consumer – what does the average citizen want and how much will he pay for it.  In too many cases, the health care industry has lost touch with its customer – the patient.  Instead, the dysfunctional system we have now has redefined the customer as the payer, which usually is Medicare, Medicaid, or a large insurance company. As a simple illustration of this, let’s assume there are two viable, equally effective procedures available to cure a patient: Medicare pays $100 for Procedure A and $1000 for Procedure B. Guess which procedure will be recommended by the Provider – the Provider will choose the one giving him more revenue (assuming more revenue generally leads to more profit). The patient won’t argue, he just wants the best treatment, and there will be an implied view that the more expensive treatment is the “better” treatment. No one is worse off except the government, and they have lots of money – right? This is a simple example, but this is how it works. There are scores of accountants, lawyers, and clinicians who are employed not to provide better care to patients, but to maximize revenue from the “customer” (Medicare, Medicaid, et al.).

The current system and structures are designed to maximize revenue and profit from the intermediaries – they are not focusing on the needs of the customer. The average person does not need the “Cadillac” of health care; the average person does not need the Mayo Clinic. The average person does not need a multimillion dollar tort settlement. The average person needs and wants good, reliable, quality health care at a reasonable cost. The average consumer knows in his heart that health care bills are too large, but that there are currently no viable alternatives for the average citizen. (There are no inexpensive imports he can turn to!) The industry leaders cannot let their existing infrastructures, inefficient practices of the past, or bloated costs and salaries be the drivers of the decision-making process. The industry cannot survive with a “if we build it, they will come” attitude. The health care industry must give the consumers what they want.

Other countries have health care systems (public and/or private) that give the same or better health care results to its citizens for about half the cost of the US. The Big 3 automakers did not survive such inefficiencies, and neither will the health care industry. Change must come or the health care industry will ultimately face the same crisis as the Big 3. Change is imperative; failure is not an option.

Car Trouble? Let’s Bail

With the struggling auto industry predicting its own demise, there has been resistance by some Republicans on Capitol Hill to bail them out. And for those of us who haven’t been comatose the past eight years, we may have a knee-jerk reaction to disagree with anything Republican. So we may think bailing them out is a good idea. But let us not be so quick to judge a policy by its opposition.

“It’s insanity,” said Libertarian Party spokesperson Andrew Davis in a newsletter released Wednesday. “It’s insane that we keep going back to the taxpayers to bailout struggling corporations who, for lack of good management and sound business practices, have become unprofitable. Who in Congress is standing up for the taxpayers?”

When talks began a month ago about bailing out the struggling auto industry, I initially felt a little better about bailing them out than, say, bailing out the financial industry. In my mind, both the financial industry and the auto industry were greedy and stupid. All they wanted was more money, and they didn’t care about any negative repercussions of getting a lot of it.  However, also in my mind was the feeling that while the financial industry was mostly greedy with a good helping of stupid, the auto industry was mostly stupid with a good helping of greedy–and for some reason, I was more sympathetic to the mostly stupid.

Should we really bail out the people who are responsible for this?

Like many individuals, the auto industry had the mindset–sometimes referred to as path dependency–that if it has worked in the past, why wouldn’t it keep working? So, they kept building bigger cars that got fewer miles per gallon. Then, when gas prices skyrocketed, people started buying smaller, more fuel-efficient cars. This left American automakers–who had been building half-ton trucks and wide-load Hummers–with lots full of beasts they couldn’t sell.

Production went down, sales went down, and now they’re nigh unto hopeless. Some may want to blame the American people–who wanted these gas-guzzling mammoths, especially when gas was so cheap–and say that auto makers were going where the market was. Perhaps if things had stayed where they were–with gas prices and demand and such–they would have kept doing well. But when it comes down to it, automakers were being ignorant to the reality of the situation–that people would eventually want cars that ran on alternative fuels. A lack of long-term strategic thinking left the industry too vulnerable to sudden shocks in demand.

So what Detroit needs more than billions of dollars in bailout cash is some good leadership. As has been mentioned by others, the big three automakers need a complete restructuring–not an influx of money. All of the CEOs with their private jets and their fancy suits need to be standing in the unemployment line while new, fresh, smart leaders take the reigns to save the industry.

A government bailout–the very kind these aforementioned Republicans are resisting–doesn’t allow for that to happen and undermines the principles of the American free market economy. You see, the idea of capitalism and free market-ism is that the general population should run the economy. They decide what they want to buy and whom they want to buy it from. Those organizations that make mistakes, sell bad products, or poison their customer will soon be out of business; while those individuals who make bad choices with their money–or lack of money–will soon be begging on the streets.  Every so often, in order to grow in the long run, the market must flush out its waste water. People need to suffer the consequences of their bad decisions or they’ll never learn to do it differently the next time.

Should we add bankruptcy to this list?

But bailouts turn the government into some sort of indulgent parent: “Oh you don’t have money for that? Here let Mom and Dad pay for it. Just promise to pay us back.” And as we all know, when someone has tons of bills to pay, the last people on the list to pay back are always the parents. Just like the $700 billion bailout of the financial industry, an auto industry bailout is not letting capitalism happen. When the government steps in instead of letting the greedy go bankrupt and the stupid go further into debt, that’s not capitalism.

There’s a natural ebb and flow of the economy (this time it’s, admittedly, a large ebb and/or flow). But let people learn from others’ mistakes. Let us be able to look back on this 20 years from now and realize what went wrong and the negative consequences of those actions. Without letting these companies fail, we will create moral hazard. In other words, there will be no incentive in the future to perform better , because, no worries, the government will just bail you out!

But even if the auto bailout does pass, let’s hope that’s the first step and not the last. Money doesn’t solve everything. The only way the money will do any good is if real, radical change takes place from top to bottom. There needs to be an industry-wide shakeup, and new leadership needs to step in, step up, or step out. There needs to be accountability.