“For example, with a container of yogurt, I know its price, calories, calcium content, and vitamin content. But if I need a hip replacement, I have no data to judge the quality of the physician, hospital, or other sites where the surgery might be performed.”
On February 2nd, Merion West’s Henri Mattila interviewed Harvard Business School (HBS)’s Regina E. Herzlinger, who serves as the Nancy R. McPherson Professor of Business Administration. Notably, she was the first woman to serve as chair or earn tenure at the school.
Active in formulating national policy, Professor Herzlinger drafted Senator John McCain’s presidential healthcare platform and has also consulted for both the United States Congress and the President’s office on healthcare policy. She established the HBS Health Care Initiative and received the inaugural HBS Student Association Faculty Award for her excellence in accounting education.
Among numerous private sector engagements, Professor Herzlinger co-founded two firms in medical technology and served on several corporate boards, including Cardinal Health and John Deere.
Her new book Innovating in Healthcare: Creating Breakthrough Services, Products, and Business Models will be available later this year.
Editor’s note: this interview has been lightly edited for clarity.
Regina, thank you for joining me here today.
My pleasure.
The West is experiencing something it has not in a long time: grappling with the reality of violent conflict, from the Russia-Ukraine war to the ongoing crisis in Israel. But you’re not unfamiliar with the reality of war, having grown up in Israel during the War of Independence. How did that experience shape you?
Well, it was Palestine at the time, and it was a very violent war. I would see dead bodies in the streets almost every day, and I was just a little child. I felt immortal because I was so young. I would go to my home, which, like many homes in the Mediterranean area, is covered with stucco. And I would see bullets creating furrows down the stucco. I was really fascinated by the path of the bullet because I was a child and thought I was immortal. I didn’t think that furrow could be inside me.
So, the war made me, I think, very strong, resilient to horrific events. And I believe I’m not alone in that response. War is terrible. But children who survive it, if they can remain psychologically intact, may become stronger than those who haven’t gone through such experiences.
Indeed, there is no shortage of examples of children who grew up in wartime, such as World War II, which produced some of the greatest minds and leaders of the 20th century.
Yes.
Now, speaking of influence and leadership, you’ve been dubbed the “godmother of consumer-driven healthcare.” Can you describe what consumer-driven healthcare means to you?
Most healthcare is purchased by governments or by our employers in the United States and many developed countries, offering us very limited choice. However, it’s our money that funds it, either through taxes for government healthcare or through less apparent deductions from our salary for employer-provided healthcare. Our employers are not gifting us healthcare; they’re using our money to provide us with healthcare options.
In any consumer-driven market, there are numerous choices, whether it’s cars, vacuum cleaners, or even yogurt at the supermarket, where there are nearly a hundred varieties. This choice creates competition, which typically improves quality and lowers prices. Unfortunately, we don’t see this in healthcare. Costs keep climbing, and the quality is uncertain. We’re told it’s good, but there are no data to prove it. For example, with a container of yogurt, I know its price, calories, calcium content, and vitamin content. But if I need a hip replacement, I have no data to judge the quality of the physician, hospital, or other sites where the surgery might be performed.
The idea of consumer-driven healthcare is to give us back our money. If we had the money, instead of our employers or government, we would create incentives for more choices, as it’s a significant amount of money. The average family insurance policy costs $22,000 this year. If I had $22,000 to spend on healthcare, I would have a broad range of choices. For example, if I had diabetes, I wouldn’t just be looking for diabetes care; I’d be looking for care covering the 34 common comorbidities with diabetes. With my $22,000, I’d shop for an insurance plan that has credible data showing they’re excellent in treating diabetics like me. Currently, I don’t have that choice or that money, even though it is technically my money. And if I find something costing less than $22,000, I should keep the difference.
Consumer-driven healthcare essentially gives people back their money, creating more choices, competition, and transparency about the quality of services.
For decades, you’ve been a staunch advocate for this type of approach, whether in the private sector, academia, or instituting policy in Washington, D.C. However, there still seems to be a march toward more government influence in healthcare, as seen recently with the Inflation Reduction Act. Now, for the first time, there will be government-mandated price negotiations for certain prescription drugs. Having advocated for a more consumer-centric approach for so long, what do you see as the biggest obstacles to realizing your vision?
The biggest obstacle is the status quo. Big hospital systems have revenues of $20 billion, and insurance companies have revenues over $200 billion. It’s very hard for consumers to fight against these giants. Employers, who could be a force, don’t want to get involved. They think they have businesses or non-profits to run, which is certainly true. Healthcare is complicated, and shifting to a consumer-driven system is a complex process. They would rather maintain the status quo.
As you mentioned, things aren’t getting any better; in fact, they’re getting worse. I hope that in my lifetime, things will become so bad that the consensus will be that we’ve tried everything else – single-payer systems like in the UK, government interventions in various market aspects, but costs continue to rise, and quality remains unknown and unimproved. Maybe then, we’ll give consumer-driven healthcare a try.
In terms of improving the system, if you were giving advice to the next generation of like-minded advocates, would you recommend a more incremental approach consisting of small legislative victories in the right direction—or, considering the current system is far from optimal in your view—is it better to start from scratch and try to completely overhaul the system?
I think consumer-driven healthcare is not as monumental a task as it may seem. It’s certainly not as significant as the wars and the plight of children experiencing them. It’s simply a matter of giving the money back to those who pay for healthcare.
The government’s intrusion into pharmaceutical pricing through the Inflation Reduction Act is a grave mistake. The 21st century is poised to be a period when medicine becomes truly powerful. Right now, medicine is mostly idiopathic, meaning doctors often don’t know what’s causing a condition. The unraveling of the genome and the technology to detect and correct mutant genes will profoundly transform medicine. This technology is expensive. If the government begins setting prices, the capital markets funding this technology will become apprehensive. For instance, a genetic drug costing $2 million can potentially stop blindness in children with specific gene mutations. If venture capitalists or private equity firms fear government price control, their willingness to invest in this risky technology might wane.
Another concern in the U.S. is the increasing consolidation of hospitals, leading to reduced choice and competition, resulting in higher prices. Insurers have also consolidated to bargain against these powerful hospital systems. Again, this results in less choice, less competition, and neither is conducive to controlling costs or improving quality.
Switching gears, your mere presence in academia, particularly at an elite institution like Harvard, is remarkable and unexpected in many circles. There’s a growing perception—especially among more conservative Americans—that professors at universities are notoriously leftist, both fiscally and socially. You would be clearly and exception to them with regards to the former. Furthermore, today, there is increasing focus on the lack of accommodation for more right-of-center viewpoints at elite university campuses like Harvard. How has your experience been as a more heterodox thinker?
It’s been great. I’ve never aspired to be part of the crowd. I’ve always aimed to be an independent thinker.
By the way, I’m not sure what “conservative” means. To me, I’m certainly on the side of the consumer regarding money, ensuring they have choice and control. But socially, I’m very liberal. I support anything consenting adults wish to do. Regarding Harvard, I’m known as a right-winger on the other side of the river (Harvard Business School is on the opposite side of the Charles River from the main Harvard campus). I don’t consider myself a right-winger. I see myself as a consumer advocate. But being different is okay with me. From the start, I’ve been different, often the first woman to achieve many of my accomplishments. That’s my mentality, being different.
There was a recent Fraser Institute poll that found 43% of young people in the U.S. have a preference for socialism over capitalism as their preferred economic system. Considering your extensive interactions with the younger generation—and while acknowledging Harvard Business School might not be representative—have you noticed any shifts in their attitudes towards economic and healthcare matters after they’ve been exposed to your viewpoints, especially those who might have started off as skeptics?
I’m not just an academic; I’m an entrepreneur. I’ve launched several businesses, thankfully mostly successful, and have been on the boards of various organizations. So, my exposure isn’t limited to just Harvard Business School students. My observation is that young people tend to lean towards socialism. This has been a consistent trend for many years, at least until they start earning their living. That’s when the allure of capitalism often becomes evident to them. This tendency varies, especially in economies with minimal private sector opportunities, where government jobs are seen as the pinnacle of success.
For example, during my travels in Thailand, I asked a local guide about his aspirations for his child. His immediate response was a government job, a reflection of the limited private industry options available there at the time. So, coming back to the Fraser Institute’s findings, my substantial experience has shown me that young people’s socialist leanings often evolve into a different perspective once they’re responsible for their own or their family’s livelihood.
It has been great speaking and learning from you. Thank you for joining.
My pleasure, and thank you for having me.
Henri Mattila
Henri Mattila is the publisher at Merion West. He was born in Helsinki, Finland and is an army reservist there. His professional experience is in pharmaceuticals and finance. After growing up in the Philadelphia suburbs, Henri attended Cornell University where he studied applied economics. Contact Henri at henri@merionwest.com.
