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David Dranove, the Walter J. McNerney Professor of Health Industry Management

David Dranove

Sick situation

Kellogg Professor David Dranove considers how the Obama administration may dramatically reform the U.S. healthcare system. Or not

By Matt Golosinski

12/19/2008 - Though the United States outspends most other countries in terms of healthcare, allocating more than 15 percent of GDP, according to World Health Statistics, 2008 figures from the U.S. Census Bureau estimate that 45.7 million Americans still are medically uninsured. That number is likely to rise as the current recession leads to further job losses.

Programs to cover younger citizens through government-funded initiatives such as the State Children’s Health Insurance Program (SCHIP), begun in 1997 and extended by legislation in 2007, appear to be having a positive impact, although the exact nature of that impact continues to stir debate.

As ongoing challenges in the U.S. financial system create uncertainty, many Americans are watching to see what healthcare policy reforms will emerge from the new leadership in Washington, D.C. With President-elect Barack Obama assembling his chief advisers and cabinet members, media attention has focused on key personnel, such as former Senate Majority Leader Tom Daschle, tapped as the new Health and Human Services secretary. Early indications from incoming Obama chief-of-staff Rahm Emanuel suggest that, as one of his first priorities, the new president will seek to expand SCHIP coverage. But given the magnitude of the U.S. healthcare crisis, can the new administration make good on Obama’s campaign promises to overhaul the nation’s health system, expanding coverage to provide “quality affordable healthcare for all Americans,” as the president-elect’s transition team stated in a recent press release?

We put the question to Kellogg School expert David Dranove, the Walter J. McNerney Professor of Health Industry Management. As director of the Kellogg School’s Center for Health Industry Market Economics (CHIME), Dranove oversees an effort whose mission is to promote business and public policy discussion on healthcare and related industries. Dranove has written extensively about healthcare: With Kellogg colleague Mark Satterthwaite, for example, he has examined the relative merits of “report cards” — public disclosure of patient health outcomes under the care of individual physicians or hospitals — to effect market-driven change in that industry. Dranove’s books include The Economic Evolution of American Healthcare, What’s Your Life Worth? and Code Red: An Economist Explains How to Revive the Healthcare System Without Destroying It, a text that has been hailed by Harvard’s Regina Herzlinger as “The best explanation for how we got into this mess that I’ve ever read.”

Matt Golosinski: There is a lot of attention and optimism surrounding President-elect Barack Obama’s pledge to dramatically reform the U.S. healthcare system. Should we be optimistic, or are these perennial challenges unlikely to be solved despite the serious consequences faced by millions of Americans who are going without adequate health insurance?

Prof. David Dranove: When you say “optimistic,” I guess that depends on what your objectives are. I won’t use that term. I will say that it’s ironic that the need for some kind of comprehensive health insurance reform is always greatest at the time when the resources to accomplish it are at their least. This certainly isn’t the first time people have talked about the need for comprehensive healthcare. People have talked about how this time is going to be different from the past, and the longer I’ve lived the more I’ve learned that the more things change, the more they stay the same. So, no, I’m not expecting any comprehensive health insurance reform.

MG: Why is that?

Prof. Dranove: The reasons are partly fiscal, and those are obvious, and partly political. One thing that people should bear in mind is that we just saw a major change in leadership in Congress, with the Democrats over the last two elections sweeping the Republicans out of power. The previous time we saw this kind of leadership change was in 1994 when the Republicans swept the Democrats out, and the No. 1 issue in that election was the Democrats’ failed efforts to enact national health reform.

MG: That was a big agenda item and didn’t gain real traction. With majorities in Congress, are the Democrats better positioned now to advance this reform?

Prof. Dranove: I think those conservative “blue dog” Democrats would be very, very nervous about any program that required a massive tax increase.

MG: Thinking back on that 1993-94 effort for universal health coverage, one of the key differences between the Clinton administration and the Obama team seems to be organizational. Tom Daschle is being appointed to oversee a more integrated position as both director of White House office of health reform and as secretary of health and human services. In the Clinton administration those roles were split between Donna Shalala and Ira Magaziner. Do you expect the Obama approach to be more effective because of this organizational design?

Prof. Dranove: Suffice it to say, we haven’t seen a better politician than Bill Clinton in the last 30 years, and he didn’t pull it off. What’s interesting, though, is that the Clinton plan got bogged down in 1,700 pages worth of details. The Obama plan is a very close relative to the Clinton plan, in terms of philosophy. If you look at the components, it’s very similar. It’s not surprising that they are both the prototypical free-market-Democrat-economist version of how to reform the healthcare system, which is: “We’re going to have competition, but we know from theory and research that competition amongst health insurers breaks down in all sorts of ways, so we’re going to write a long, complex set of rules to kind of manage competition.”

MG: So the plan becomes neither fish nor fowl, neither market-driven nor administrated by central fiat, giving you the worst of both?

Prof. Dranove: Or it might be the best of both. But it requires 1,700 pages of rules and regulations, and that becomes political fodder for those who want to be opposed. One example from the Clinton plan that I don’t think will be repeated in the Obama proposal, if it ever gets this far: Both proposals allow individuals to have a choice of private health insurance plans. Under Clinton, the plans that would be available would be local. There would have to be a local government agency to oversee which plans are available. The agency members would be appointed by local politicians. Now, I think Illinois is not necessarily representative of the country overall, but would you want [Governor] Rod Blagojevich, and [Cook County Board President] Todd Stroger and [Chicago Mayor] Richard Daley to be the triumvirate determining which health insurers get to do business? Is that exactly how it’s going to be implemented? Probably not. But if you want to come down against the proposal, there’s a lot of fodder.

MG: What other political considerations might derail any ambitious legislation?

Prof. Dranove: If there is a comprehensive plan — and I don’t think there will be one — it’s going to be held up for ridicule. And the Democrats have a lot of things on their agenda, not just health reform. They’ve got 58 seats in the Senate right now, with one still to be filled. They’ve got a huge majority in the House, and they know they could lose this in the next election. So I don’t think you’re going to see anything [major] succeed. People may not remember this, but the Clinton plan in 1994 never even came up for a vote in the full House of Representatives.

MG: It sounds like you are saying there are two challenges in play: the usual partisan legislative disagreements, but also a sense of caution on the part of Democrats concerned about losing office if they are perceived as being “too radical.” So are we likely to see incremental changes that go after quick wins, even if those victories are not necessarily dramatic?

Prof. Dranove: I see a lot of that. Combine that with the fact that there are a lot of low-hanging fruit here. There’s a lot that can be done in pharmaceuticals that I think will grab headlines, look good to the American public, and possible actually make a difference for a lot of people. Importation, direct purchase of prescription drugs for Medicare, changes to laws governing generics and patent extensions. I think you’re going to see all of those.

MG: In part because these are not so politically charged and a little tougher to demonize by the opposition?

Prof. Dranove: You know, the pharma industry doesn’t rank very high right now on most people’s lists of popular industries.

MG: Right there with Big Oil.

Prof. Dranove: Yes, but it’s funny: Both make products that we can’t live without — one literally. Yet the pharma industry’s profits are always held up as an example of what’s wrong with the healthcare system, and that’s an easy target.

MG: Any other low-hanging fruit that you see?

Prof. Dranove: I think you will continue to see expansions in SCHIP or other children’s health insurance programs, if only because they are very inexpensive — children tend to be healthy. It’s a way of providing peace of mind for millions of American families at very low additional budgetary expenditures.

MG: In terms of reducing overall costs, how beneficial is the continued move toward electronic medical records?

Prof. Dranove: I think a lot of the strategies for cost containment that have been tried, and have failed, over the last couple decades — integrated delivery systems, physician hospital organizations, even disease management to a certain extent — would have a much better chance of success if we had integrated electronic medical records, not just within the organization, but across the healthcare system. Then we could really track the “production function” of healthcare for each individual. One of the unsung accomplishments of the Bush administration has been to really push the creation of standards for electronic medical records. There are currently several ongoing experiments in communities where they are trying to create electronic medical records across all the providers in the community to determine whether these savings are achievable.

MG: How expensive would this migration to digital information be given the current state of records across our healthcare system?

Prof. Dranove: It’s going to be very expensive. Most physicians don’t have electronic medical records and, outside of hospitals, most providers simply don’t have electronic medical records, and it’s very costly for them to implement. There is nothing in the current payment system to make it worth their while. In fact, if anything, electronic records are a way for some providers to lose money. After all, the way these records are supposed to save money is by eliminating unnecessary testing and procedures. But one patient’s unnecessary test or procedure is another surgeon’s down payment on a new car.

MG: With the recession, people have been losing their jobs and health benefits. This is on top of the tens of millions of uninsured and underinsured Americans who already are struggling with health costs. Are we nearing a time of a shift in mass consciousness that simply will no longer accept that the world’s richest nation cannot provide some baseline level of health security for its people?

Prof. Dranove: There are a few things that are different about this time. There have been very few truly major pieces of social legislation in this country: the Social Security Act of 1935 was in the teeth of the Great Depression. Medicare and Medicaid would rank second on my list, and that was 1965. You had a Republican party back then that was in total disarray; Goldwater had been thoroughly thrashed in the 1964 election. You had all the good will that John Kennedy had developed inherited by Lyndon Johnson. You also had a southern Democrat leading the way, so all the stars were aligned [for big social change]. So the question is, “Will the stars be aligned for a third time now?” We have, arguably, the second- or third-worst economic crisis of the past 100 years. So that may suggest momentum for massive change. And you have a remarkable charismatic leader in Barack Obama who will have to use up some of his chips to get this done, but you do have the sense of the stars aligning better than anytime that I can recall since I’ve been working in this field. Still, I’ve heard this so many times before, and sooner or later it’s going to happen, but if you were betting each time that these changes were going to happen, you’d be broke.

MG: What about stakeholders on the corporate side? Aren’t some companies also looking for some policy clarity around the issue of healthcare? I thought that GM was paying more into employee health benefits than it does for steel.

Prof. Dranove: Actually that’s not the case. Their employees have chosen to take their wages in the form of incredibly generous healthcare benefits and their retirees, when they were working and negotiating their contracts years ago, chose to take their retirement in terms of healthcare benefits instead of pensions. Now, after the fact, if GM can offload its healthcare benefits, especially its retiree benefits, to the federal government, it could potentially get away with spending less money. But when the union is negotiating with a company, they are looking at an overall package of compensation and benefits, and if the company offloads the benefits onto the government, the union is just going to demand that compensation in wages.

MG: If you were advising the Obama administration on designing a better healthcare system, what cautions would you urge?

Prof. Dranove: There are a few things. The first is you have a unique opportunity to combine cost savings with coverage expansion. We know how to expand coverage; there’s lot of ways to do that. If we’re serious about cost savings, we need to articulate exactly how you’re planning to save money and let the American public know that, in fact, you can’t save money in the healthcare system without buying less stuff or paying less for it. If you’re going to invest your chips in a complicated program, go the whole nine yards; don’t just go for coverage. Go for whatever it’s going to take to reduce spending.

MG: What’s that going to be?

Prof. Dranove: The investment in electronic medical records is basically indispensible. With electronic records there will be fewer tests, fewer procedures, we’ll be able to turn this into a consumerist’s market because there will be more information out there about what works and what doesn’t work, and about which providers are good and which are bad. You have to ask the public for a total sea change. I would not say that the healthcare system is the greatest in the world and just needs a little tinkering around the margins. No plan that will provide comprehensive health insurance will succeed by merely tinkering around the edges. If you’re going to cover everybody, you’re going to have to do something major. If you do something major, you might as well go and reform everything. I think this is part of what he has in mind. If you don’t think you can do that, then just grab the low-hanging fruit and put yourself in the long line of presidents who tried to fix the system and who had a few small accomplishments to show for it.