Speeches & Presentations

The Critical Condition: The Ills of America's Health Care System, and How We Can Heal Them

Sidney Taurel

Chairman - Eli Lilly and Company December 12, 2008

February 1, 2005

Remarks to The World Health Care Congress — Washington, D.C.

Thank you, Alan (Murray). I’m delighted to be here.

When he was secretary of education, William Bennett often began his speeches by assuring his listeners, “This speech is not as long as it seems.” I’d like to give you the same assurance. But the fact is, I’ve bitten off a big topic here -- reforming the U.S. health care system … and it’s going to take a bit of time to chew through it. I promise that I will leave some time for questions and answers. And in fact, just to be absolutely sure we fit that in, I’m going to begin and end my remarks by raising and answering two questions on your behalf -- two questions I’m pretty sure you’ll want to ask me.

The second question probably won’t occur to you until you’ve processed most of what I have to say. But the first question may have formed in your mind before you even entered this room. Some of you must be wondering, “Sidney, why are you talking about reforming the U.S. health care system? Doesn’t the pharmaceutical industry have enough problems for you to worry about?”

A bit pointed, but reasonable.

And my answer is that I have gradually come to believe that the most serious problems of the pharmaceutical industry cannot be addressed by solutions specific to the pharmaceutical industry. Our problems are rooted in and perpetuated by a deeply flawed health care system.

If that’s true -- and I will try today to show you how very true it is -- then it follows that the only way to really, finally address the problems of the pharmaceutical industry is to repair the system that so completely defines our environment.

For many people, I know, the statement that our health care system is broken may sound improbable. Most Americans believe we have the best care in the world.

We need to make a key distinction here. I would say that American medicine … that is, our expertise, our training and technologies for healing … is indeed the best in the world. But the health care system that we use to organize, deliver, and pay for that care … is itself unhealthy to the core. Experts may disagree sharply on how to fix the system, but there’s generally broad agreement about the major symptoms.

First is a gross inequity in access to care. We provide large public subsidies to the elderly, to the very poor, and even to workers with good jobs -- through the tax exclusion for employer-based health plans. But a great many Americans, 45 million by the conventional way of counting, don’t fit into any of these boxes and so lack insurance coverage for their health care.

Second, our system suffers from ever-rising costs. For a few years in the mid-nineties, the spread of managed care sharply cut the rate of increase. But the draconian cost controls alienated doctors and patients and led to legislation that overran the controls in many areas. And so we’ve seen six straight years of health costs rising at double-digit rates -- twice or three times the general rate of inflation.

The third major symptom is persistent problems of poor quality. What do I mean by poor quality? The Institute of Medicine at the National Academy of Sciences has estimated that at least 44,000, and possibly as many as 98,000 people, die each year due to medical errors. All of these problems have been with us for years, like a chronic illness. But a powerful force is about to push them from chronic to critical condition. That force is the unprecedented demographic event some have dubbed “the Age Wave.”

In 2011 -- when 76 million baby boomers begin to reach retirement age -- the public funding mechanisms for Medicare and Social Security will be stretched and stressed as never before. Very soon, the pressure to finance these retiree needs will flow back to those still in the workforce. But here, the pay-as-you-go scheme that has funded these entitlement programs for so long will finally unravel.

The ratio of active workers to retirees will steadily shrink. And these younger workers will be squeezed in a double-bind, from the federal government on one side and their employers on the other. They will be taxed at ever-rising rates to pay for the entitlements promised to their parents and grandparents, meanwhile struggling to pay an ever-increasing share of their own rising premiums, and trying to find some way to provide for their own retirement needs. Clearly, if no measures are taken to avert this crisis, young workers and their retired elders will face an intergenerational battle royal -- a battle with no likely winners.

What is to be done?

There is no shortage of proposals floating around in the policy arena. But, in order to choose the right solutions, we first need to understand the underlying pathology -- the root causes -- of the problems we’re trying to solve. I suppose there are many contributing factors, but I see three powerful drivers. To stretch the disease analogy a bit further, I would say American health care suffers from a metabolic disorder, an autoimmune disorder, and a cognitive disorder.

The metabolic disorder is really an economic problem. As the intake and utilization of food drives the performance of the human body, so does the intake and utilization of funding drive the performance of a health care system. People with certain metabolic disorders may overeat, because the chemical signals that usually tell the brain when to eat and when to stop are out of balance.

A similar malfunction is at the heart of the endless cost spiral in U.S. health care. There is a breakdown in the economic signals between buyers and sellers where, normally, price is the balancing mechanism. In health care that exchange never happens, because one party -- the patient -- needs and consumes the medical service, while another party -- the government, or one’s employer, or the insurance company -- appears to pay for it.

I say “appears,” because economists would argue that, in one way or another, consumers do bear the cost. But, because we think of it as “somebody else’s money,” we feel little inhibition about spending it. “Feed me,” the consumer says.

Conversely, the payers are driven to focus on costs above all else and cannot fairly or fully balance their concerns with consideration of the long-term benefit to the patient. “Stop eating!” is their message.

The sellers -- doctors, hospitals, drug companies, and all the other suppliers -- are caught between these conflicting signals. But still, they are the sellers, and so, in general, they will try to provide what the patient requests. Consequently, like the compulsive overeater, we as a society cannot seem to check our consumption.

The side effects of this fundamental economic dislocation are pervasive. Harvard’s Michael Porter -- probably the world’s leading authority on competition -- has recently focused his analysis on our health care system and found that the very principles of competition have become deformed.

He argues that competition in health care has become a zero sum game. As he puts it, “the system participants divide value instead of increasing it.” He shows how, instead of competing to increase value to consumers, health care payers and providers compete to avoid costs to themselves. So what we see is an endless cycle of cost shifting. Again, quoting Porter, “costs are shifted from the payer to the patient, from the health plan to the hospital, from the hospital to the physician, from the insured to the uninsured.” Thus “gains for one participant come at the expense of others -- and frequently with added administrative costs."

It’s obvious how such behavior powers the upward spiral of costs. It’s also obvious that the root of it lies in the fracture that separates patient from payer.

When I say that another key pathology in our system is like an autoimmune disorder, I’m thinking of the impact of various kinds of government involvement. The immune system’s function is to protect the body, mainly by detecting and neutralizing harmful intruders like viruses and bacteria. But sometimes, the immune system runs out of control and begins attacking the body itself -- that’s the essence of an “autoimmune” disorder.

Most government regulations in our economic system are designed to protect citizens from potentially harmful practices. But in the case of health care, massive over-regulation -- while surely intended to protect us -- has instead created a great deal of “friction” -- the waste and inefficiency -- that is crippling the system as a whole.

Virtually every component of health care -- and every transaction at every level -- is affected by some sort of legal requirement. But the heavyweight champion has to be the Medicare program. Its rules and regulations have grown larger than the tax code -- more than 130,000 pages. It’s so extensive and so complex that virtually none of the parties supposedly governed by it can really claim to be in compliance with it.

Recently, one group of scholars has attempted to compute the total economic impact of all the regulatory complexity in our system. Subtracting total benefits from total costs, they concluded that regulation in our current system imposes excess costs of at least $169 billion per year. If we could somehow recover that much every year, it would be enough to cover the entire Medicare shortfall for the next 75 years.

In health care, sometimes even the best-intentioned acts of government intervention can have unintended, and undesirable, consequences.

The split between patients and payers can be traced to a quirk of policy expediency during World War II -- when the Roosevelt administration allowed employers to skirt temporary wage and price controls by offering health benefits to workers in lieu of higher wages.

What really locked this system in place -- and greatly amplified the economic dislocation it causes -- was the subsequent decision by the government to exempt these benefits from taxation. All of us who receive our health care through our employers are dependent on this break -- but it has pernicious consequences. In effect, it inflates our currency for buying health care insurance, and thus compounds the third-party payer problem in weakening the price signal in health care transactions. Consumers who enjoy this invisible subsidy are less sensitive to the true consequences of price, and therefore, so are suppliers. This is one of the keys to the perpetual rise in health costs.

And of course, it’s a key to the problem of the uninsured. If you don’t get health coverage through your employer, you don’t get this significant discount. You have to pay full fare -- and many simply can’t afford that. This is not to say that all of the wasteful “friction” in the system can be laid at the door of government. A significant part of it arises from the third systemic disorder -- which I compare to a cognitive disorder. Our health care system seems to be plagued by a strange pattern of willful ignorance.

Many of the medical errors and other quality problems that plague U.S. health care can be traced to a gap in the flow of necessary information. Too often, the information is not available, not because it doesn’t exist, but because we do not allow ourselves to see it, share it, and act upon it.

“Exhibit A” is the general failure to fully adopt and implement the advantages of modern information technology. Though it’s starting to change, too many people in health care are still living in a world of paper charts and hand-scrawled prescriptions. We need a world in which our doctors have instant electronic access to our complete medical records.

And we need a world in which consumers can go online and get reliable information about price and performance for health care products and services -- just as they can for other sorts of products. That information is not available today.

Many practitioners suffer from a version of willful ignorance. Even though doctors are required to update their skills through Continuing Medical Education, too few have a taste for the kind of continual scanning of clinical trials and outcomes studies that support “evidenced-based medicine.”

The rest of us act out our own form of willful ignorance, too. We damage our livers by drinking -- our lungs by smoking -- our hearts by eating way beyond our heart’s content, as if no one had ever told us what the consequences would be. And then, when the consequences come, we look to our doctors to save us -- our insurers to pay for us -- and even then we often can’t take the trouble to cooperate in our own care. You have to ask, how much could be saved -- in dollars and, indeed, in lives, if we only acted on all the information available to us?

Some people look at the depth and the complexity of these problems and conclude, “it seems the free market has failed here. The only solution is to build a nationalized health system along the lines of Canada or England.” I believe this is not the correct conclusion ... and certainly not the correct solution.

The free market hasn’t failed in the U.S. It’s never been given a chance to work.

I’m confident that if we can apply market principles in a sustained reform effort, we can create a health care system to match our progress in medicine. Indeed, I believe continued progress in medicine depends on achieving free-market reforms.

Let me just quickly sketch a few key principles for building a better system and suggest what type of policy measures might start us on the right path.

First and foremost, we need to build a consumer-driven system. In order to instill a sense of personal ownership, and to break the endless cycle of expanding costs and cost shifting, we need to heal the economic fracture at the heart of our present system and put the individual consumer back in charge of how money is spent.

That doesn’t mean people have to pay for everything out of pocket. There should still be a central role for insurance and indeed for government assistance. But no one should be allowed to think of health care as “free,” or paid by others.

As it happens, Congress has already taken some crucial steps in this direction. One of the less-publicized provisions of the new Medicare Modernization Act is clear authorization for Health Savings Accounts. In these HSAs, employers or individuals set up special accounts where contributions can accumulate tax-free, as long as they are used to pay for medical expenses. They are supposed to be combined with high-deductible catastrophic insurance coverage, so that people meet first expenses from the HSA, additional expenses out of pocket, up to the deductible limit, after which the coverage kicks in to pay all costs. This not only puts the purchasing power in the consumers’ hands, it dramatically reduces the cost of the insurance coverage. Most important, these accounts belong to the individual -- not the employer or the government. They will be portable, from job to job, and, eventually, from employment to retirement.

Second, we need to restructure the system so that it is patient-centered. We need to end the continual tug-of-war between the many interests in our system and refocus decision-making on a single question: “What’s best for the patient?” This does not mean that we create a system that indulges the patient’s every whim. On the contrary, a patient-centered system would begin with the idea that we as individuals bear primary responsibility and accountability for our own health.

The role of all the providers -- and the first objective of the system -- should be not merely to help us when we fall ill, but to work with us and teach us how to prevent illness in the first place. Doctors should play a key role in helping patients see the incentives for healthier living -- in terms of reducing both illness and costs.

A patient-centered system should be one in which providers compete on value, and are measured on quality. But that can’t happen unless physicians and other providers are also unshackled to act fully as agents on behalf of their patients. They too need to be cured of the cost-shifting disease and allowed to truly compete in an open market, where patients pay for results and use reliable quality measures to predict those results and choose their providers. Making that transition will require some ways for patients to act in concert, to get the purchasing leverage of large groups. Perhaps new structures -- like new types of association health plans -- will emerge to fill this need. But I would also expect today’s insurers to become the buying agents and the bundlers and marketers of consumer-oriented health plans.

Ultimately, to really deliver value to patients, all provider services need to be restructured into a system of integrated care. Prevention, treatment, and health maintenance should all be provided and funded as a unified package, not a disjointed string of treatment “episodes” as it is today. As for how we get there, I believe the power of the patient will rise as the role of the third-party payer is reduced. But we can speed things up by removing legal roadblocks that prevent closer integration of services -- like the 1927 law that prohibits doctors from becoming hospital employees.

Third, we need to bring health care into the Information Age. We need to step up now and build a nationwide medical IT system necessary to reduce errors, promote consumer choice, and integrate care. And the good news is, this is under way.

The Bush administration has announced an ambitious plan to actually make this dream a reality. The federal government will establish standards and protocols for recording, sharing, and -- very important -- protecting patient information. It will serve as a catalyst for existing providers to build and connect networks, and will also order the huge federal programs – Medicare, Medicaid, and the Veterans Administration -- to implement and link the necessary technology. The designers of this program estimate such a system will save thousands of lives and $140 billion annually. That’s a huge savings -- about 10 percent of our nation’s total health care spending. It’s enough to fund the new Medicare drug benefit, and provide substantial help for the uninsured.

Number four -- we need to work toward a system that is friction-free.

Government at all levels should work to weed and prune the regulatory framework now choking health care -- preserving only those parts that truly protect the interests of patients, and eliminating those that create costs in excess of their value.

We should start with tort reform, which is long, long overdue. Reformers have come close but failed several times over the last decade … during which time tort costs have risen far faster than even health care inflation. Medical torts now impose a net cost of about $80 billion per year on the U.S. system. In the tough funding environment that lies ahead, I don’t think the American people will continue to carry this excess baggage. Another big policy target should be to get the states out of the role of regulating health insurance. The large insurance companies have long argued that larger, more cost-effective insurance pools could be formed under federal guidelines.

Fifth, and finally, we should build a system that promotes universal access. We must do everything we can to extend some form of affordable health insurance to all Americans.

Free market reformers argue that the best way to deliver this is to replace the tax exclusion for employer-based benefits with a refundable tax credit, available to all -- provided it is used to purchase some form of health coverage. The credit can easily be supplemented with additional financial aid to those in need.

Bringing the case full circle, we can see that changing the tax code is vital to creating a consumer-driven system accessible to all. To make sure all consumers buy with the same currency, we need to create tax parity -- between those who buy coverage through their employers -- and those who want to buy it on their own. To make sure all consumers spend those dollars carefully, we need to give them direct control.

Any of these measures, if enacted, would improve our system. All of them together can truly transform it.

But forward progress on something as emotional as health care is bound to be very tough in this “blue-state, red-state” political environment. Indeed, I wouldn't have much hope of any reform, if it weren’t for the growing and irresistible pressure of the age wave. So I can only hope that we keep working, keep pushing, and take it one step at a time, if necessary.

But we must be especially careful not to take further steps in the wrong direction -- and enact measures that may temporarily ease one of the symptoms, but make the underlying pathologies worse. It will take time for market-driven reforms to work their magic, and realign buyer and seller in a conversation about value. But when it is done, when we have made that journey, we will have done not merely a hard but a necessary thing -- and created a health care system worthy of the best medicine the world has to offer.

In my opening, I said I would answer two questions on your behalf. I hope my answer to the first one is clear now.

As for the second, well, some of you, certainly my colleagues in the pharmaceutical industry, must be dying to ask me, “Sidney, how can this system you envision be good for drug companies?”

It’s a fair question -- and my honest answer is, in the short term, it isn’t good for us.

As purchasing decisions and financial accountabilities are restored to consumers, I believe all on the provider side of health care -- drug companies, doctors, hospitals, insurers, and everyone else -- will feel greater pricing pressure than ever before. And there will no longer be the escape valve of “float,” created by cost-shifting, to relieve that pressure. Instead, all of us on the supply side will have to behave like any other industry -- competing on the basis of demonstrable value and measurable quality.

It will be a tough environment, but I believe my company and my industry may be better prepared for it than other parts of the system. The fact is, drug companies have been feeling consumer-driven pressure for quite a while. Consumers have long had to carry a larger share of their drug costs than other medical charges. Medicare has been the prime example. We hear, and we understand the consumer’s unhappiness, and are already trying to find ways to shrink our own cost structure so as to offer our customers a better deal. We know that’s our future.

At the same time, I know, beyond a doubt, that when all the costs of all the goods and services in medicine are compared head to head, pharmaceuticals represent the best value in the system.

So, the long answer is, I’d much rather take my chances in a true, transparent, free market system ruled by consumer choice than in a command and control system, driven by the winds of politics.

I have to believe that most of you, who have seen the incredible benefits that a market economy has built in this nation -- the miracle that is America -- will make the same choice.

Thank you very much.

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