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.

Epoch’s End

I should start by stating that I am a novice in the fields of economics and finance. My career was as a law enforcement officer. I do, however, believe that I have a firm grasp of world history, human nature, and a sense of how much the human spirit can endure until endless mass frustration leads to a chain of events that explodes into actions which can result in regime change and major shifts in worldwide belief systems.

After the First World War, communism and socialism emerged to duke it out with Hitler’s fascism and other conservative regimes for the balance of power in Europe. After the Second World War, unfettered missionary capitalism emerged in the US, bolstered by evangelic Christianity. Liberalism and socialism tended to dominate in old Europe where the relative place of religion diminished, and today is virtually non-existent in many such secular states. Into this mix, multinational corporations emerged, with no allegiance to anyone except their shareholders. Their power enabled them to shape government policies, and their financial weight enabled them to implicitly blackmail governments into giving them sweetheart deals, which were often to no ones benefit except theirs and the richly rewarded politicians who supported them. From this standpoint, I do suspect that the shock waves radiating around the world from the stock market meltdown were not entirely created by a few bad apples running amok in Wall Street, but were rather a symptom of the basic dishonesty that seems ensconced in most stock markets around the world.

Events of the past decade and the past year in particular have convinced me that we are at Epoch’s End and that the current worldwide geopolitical and economic system is so broken that it can never be completely fixed. What will emerge I cannot venture to guess, but it will likely take many years to reach this yet unknown new global equilibrium. In this new equilibrium, the standard of living that many in the western world have taken for granted in recent generations may not be seen again.

Certainly many have been expecting Epoch’s End, through global warming, plagues or famines, but its tipping point appears to have occurred not through those venues, but through economic breakdown. As life has proceeded happily upward for us in the developed world since the Second World War, we have long forgotten that this uninterrupted growth was unprecedented in recent world history. World history suggests that the past fifty or sixty years are more likely to be seen as an outlier rather than as a permanent new paradigm. In the past, plagues have wiped out the working forces, old industries closed down and new ones developed, and populations followed the jobs. Crop failures caused those who wanted to survive to move on to new areas or even to new continents. Growth has been followed by stagnation. Fifty or sixty years may seem like a long time in the scope of a human lifetime. However, it is all but a footnote in world history.

Over the last 50 or 60 years we have come to expect that things will always improve–we will have better cars, holidays, and medical care, and our incomes will continue to provide more of these things. Many companies have based their development on a policy of increasing their revenues as much as 10% a year. Most of these companies have psychologists study shoppers brain waves to use exactly the right words in their sales promotions and to find the best place to put certain items in the store to trigger the buying impulse. We have all happily shopped and shopped for more and more things we don’t need. Products we really need require no advertising. How many television commercials do you see for bread and milk? If the whole world were to enjoy the standard of living that we currently enjoy in North America, we would need three worlds just to keep up. Perhaps most selfish of all, most people now expect to live longer without giving any thought to the potential consequences of this like increasing the world’s population, all the problems of pollution, global warming, polluted water ways, etc. With the world’s population approaching 8 billion plus people, it is close to cardiac arrest. We can’t expect to live forever and have growth forever; death and cyclical stagnation of populations and civilizations are a part of the natural balance of our planet.

As you probably expected, I am nothing of an expert in the ways of the multinational corporation. However, what I do know is that there are many Chinese workers, working at monotonous, dangerous jobs for $5 a day or less, with unpaid overtime expected. They produce cheap quality goods for us that we really don’t need. Who then is the net gainer? At least in the short run, it is a few wealthy shareholders. In order for this situation to flourish, our wage levels must remain 20 times higher, for the same or less effort, than a Chinese worker. The whole approach is broke.

As I write, more and more western governments are announcing huge spending plans to stimulate the economy, using vast amounts of borrowed money. That money is all coming from the sale of our bonds to China. If it works, perhaps we can put off Epoch’s End for a few years, as we attempt to pay the huge debts. Certainly our wages will take a huge hit, and lifestyles will need to readjust. But what if it doesn’t work, what if our spending doesn’t pick up enough to reopen the factories in China? What if China were to ever demand repayment of those bonds to assist their own citizens? We will be bankrupt, there will be no wages for any civil servants, no military wages, no police wages, and no pensions or benefits of any kind will be paid.

Further, as a people, many of us have become lethargic and ignorant. How is it possible to consider people for the highest offices in the land without demanding that they have the knowledge, stability, and honesty to do the job? When you visit your doctor you know that his or her certificate represents years of study, tested time and again by exams and practicum. Yet we are prepared to accept persons for the highest offices because they look good, string a fine line of BS and are just like you and me. Well I have news for you, I don’t want a person like me running a country.

In Canada from where I write, we had a recent Federal Election. The Liberal leader Stephan Dion was put down continually because he didn’t speak perfectly in his second language of English. He didn’t look good in front of the cameras, and he was often filmed from the wrong angles. The saddest thing was that nobody seemed to have the slightest interest in hearing the substance of what he actually was saying. We could save enormous amounts of money and time if we simply gave the job to the best actor and provided a good speech writer. Perhaps getting precisely that for many years has resulted in all our difficulties today. Franklin D. Roosevelt would probably never have been elected today, wheelchair bound as he was. Winston Churchill, similarly, was drunk too often to be electable today. At that time we paid attention to what was said, not the carefully buffed images we see presented today.

In the last U.S. election, most were too polite to state publicly that the election of Sarah Palin as vice president could potentially place every citizen of the US one 72-year old heart beat away from danger. Yes, thankfully Ms. Palin did not become vice president. However, for one of the two major parties of the world’s leading nuclear superpower to even nominate her for vice president should be scary enough. In the case of Mr. Obama and Mr. Dion, being an intellectual was seen as a negative by many. We call this civilization? Thankfully, after eight years of George W. Bush, the America people took a chance on an intellectual. New Canadian Liberal leader and respected Harvard intellectual, Michael Ignatieff, may get a chance in the next few years as well.

If we are indeed at Epoch’s End, we will have all caused this through greed, but most of all because we have failed to keep our eyes on what has really been going on, failed to keep people honest, and preferred to switch on the football game rather than take a glimpse at the foreign-affairs columns or use our computers to access the mass of information which is availably so readily today, yet ignored by most. If we are at an Epoch’s End, it is indeed our own damn fault.