Market Driven Health Care: Who Wins, Who Loses in the Transformation of America’s Largest Service Industry

Apr 7, 1999Book Review

Book Review
Title Market Driven Health Care. Who Wins, Who Loses in the Transformation of America’s Largest Service Industry.
Author R E Herzlinger
Publisher Reading, Massachusetts: Addison-Wesley, 1997.
ISBN 0-201-48994-5
Pages 379
Price AUS  $39.95
Reviewer Dr George Halasz
Honorary Senior Lecturer
Department of Psychological Medicine
Monash Medical Centre, Victoria, Australia
Consultant child and adolescent Psychiatrist.


Australian observers of the American health system reform have learnt a simple lesson: politicians will go along with any health reform that promises to save money. Whether this preserves the freedom of choice of one’s doctor, or affects the quality of health care is not relevant. In the last decade, the US experience of cost downsizing was achieved, first, by a reduction in standards of care, and second, by increased productivity, which meant that doctors were pressured to see more patients for shorter time.

As time passed, increasing evidence has accumulated that the corporate standards of ‘health management’ are not synonymous with ‘health care’, and people are asking why the managed care reforms have not worked? The simple reason is that health is not a commodity like other “purchased goods”. Choice, access, and quality standards in health care may not be an inalienable right, but the American public has learnt to associate health care with traditional ethical standards. And those standards were blatantly being eroded, as dramatically highlighted in Dr Linda Peeno’s testimony to the U.S. House of Representatives Committee on Commerce (Peeno, 1996).

Against this background, Professor R. Herzlinger, a professor of Business Administration at the Harvard Business School, offers a vision of the future that on first reading seems compelling: a market driven health care to replace the current costly and flawed managed health care system. Her book is organized in four parts: Part 1, What Consumers Want: Convenience and Master; Part 2, What Payers Want: Quality and Lower Costs; Part 3, What Works: Health Care Focused Factories and Medical Technology; and Part 4, How to Make it Happen.

Professor Herzlinger based her thesis for a market driven health care on the fact that American consumers have steadily rated hospitals, doctors, and insurance as the lowest value for money among the many goods and services they commonly purchase. The case is self-evident: a health system with its excess ‘fat’ of inconvenience, lack of information, and high cost needing transformation to ‘muscle’.

She argues for the replacement of the current employer provided health benefits, which applies to most Americans with health coverage. In the new system, employers are to return the health dollar to their contributors, thus creating a new culture of consumerism. This new consumer environment will allow the consumer to purchase health like any other commodity. But is health like any other commodity?

The book asks, but fails to answer, some serious questions on the path to the new utopian reform: do shorter stays in hospital result from throwing patients out of the hospital prematurely or from intelligently replacing expensive in patient services? Does replacing specialists with primary care physicians’ and other health personnel hamper the quality of care? These are serious questions, which in a rationally driven health reform would demand answers. Sadly, driven by economic rationalism, the ultimate priority of profit replaces reasoned reform.

The US figures clearly indicate that profit could be made in the American health system that spent substantially more of its G D P on health care (13.6%), than did Canada (10.3%), Germany (8.7%), Japan (6.95%), the (UK 7.1%) or Australia (8.5%).

According to Herzlinger, American health policy first tried ‘downsizing’ (managed care), then ‘upsizing’ (big is beautiful), and now the time was ripe, after the cherry picking, for the new vision of ‘resizing’ – the focused factory. Admittedly, this is “the hardest diet to follow, because it relies not on a simplistic change in size but on a fundamental, dramatic change in the bodies composition; trading fat for muscle.” (page 157)

Wickham Skinner, a professor of production and operations management, introduced the concept of focused factory in 1974 in the Harvard Business Review. The focused factory concept has revitalized many American companies. The argument simply stated goes: if it’s good for McDonalds it must be good for the McDonaldization of society, an extension of the turn-of-the-century German sociologist Max Weber’s theory of rationalization ( Ritzer, 1993).

Ritzer offered a compelling case to explain why the McDonald model has proved so irresistible: efficiency, quantified and calculated service, predictability, with maximum control over people. Where does this all lead? Ritzer concluded that as various bureaucracies exert ever growing influence over physicians, the end result is the emergence of the ‘”McDoctors,” modeled after fast-food restaurants, (are) based on rules, regulations, and controls so that what physicians do in them will be highly predictable.’ (page 11).

The thrust of Herzlinger’s philosophy for focused factories is an explication of this persuasive, deeply flawed premise. Herzlinger notes that the absence of focused factories in the health care system needlessly diminishes the quality of care and increases its cost (page 173). The conclusion is clear, not only is withholding focused factories uneconomical, but also unethical on two counts: first, quality of care is diminished, and second, the notion of distributive justice seemed to be compromised.

So what are Herzlinger’s focused factories? They would provide convenient, specialized health care enabling greater comparison-shopping; e.g. diabetics would readily be able to compare different focused factories for their care, with clear data on price, quality, and customer satisfaction. How do focused factories achieve their goals? According to Herzlinger, first, by keeping people healthier, there is a reduced need for costly medical intervention. Second, as ‘practice makes perfect’, a natural outcome of focused factory medicine is increased quality with lower cost as more volume in specialized areas becomes feasible. Third, given that the current health system is loaded with redundant technology and capacity, she argues that focused factories are intrinsically more efficient. Finally, as true competition generally lowers costs, and as each focused factory will provide clear output measures, health purchasers (patients) will drive the competitive market by choosing factories with the best output measures.

From the perspective of traditional medical ethics, this book struck me as most disturbing, both in its use of language, as well as the radically altered concept it offers for the factory based doctor-patient relationship. Whilst the position of advocacy to improve health services for patients is laudable, the concept of focused factories undercuts the very essence of the medical tradition of care: encompassing the application of scientific principles with the subjective experiences of patients.

As Bill Pring (1997) reminded us, the word ‘patient’ is derived from patiere, to suffer, client from cliens, one who is dependent on a patron, while consumer from consumere, to use up, to surrender, to destroy! (page 26). Clearly driven by the economic imperative for secure profitability, focused factories replace the subjective judgements of physicians with objective protocols that are most cost-effective. And in such settings, it is falsely assumed that empathy with a patient is not cost-effective.

But there is more. Naivete or ignorance seems to color Professor Herzlinger’s vision for the market driven health care reform. She declares that “(P)hysicians’ groups that capitate or that fulfill an insurance function can provide an important benefit to the customer. They can eliminate the “gatekeeper”, the person from whom many HMO enrollees must request permission for referrals to other sources of care.”(page 191). Whilst this is true, her next observation is outright dangerous and practically unworkable in an ethical health care system.

She elaborates: ” (T)he physicians’ in such groups must balance pressures coming from two directions. Their professional standards push them to provide as many services as are needed, while their economic incentives force them to contemplate the cost- effectiveness of additional expenditures. Yet because they are the insurers, these physicians’ can no longer blame managed care organizations for imposing economic constraints. These groups thus have both the responsibility and the ability to deliver cost effective health care.” (page 191).

I see this position as the fatal flaw driving Professor Herzlinger’s misguided vision of health reform; she seems not to be aware of the ethical conflicts of interest created in the system she envisions. Those conflicts led Dr Linda Peeno, working as an HMO executive, to conclude that such an environment promoted a sense that “we were part of some psychology experiment whose design was to see how quickly those of us in the health profession abandoned our humanity (Peeno, 1998).

The lessons for the Australian health reforms are starkly obvious: will we learn in time, or are we destined to repeat the mistakes so evident in the American, and UK (Bruggen, 1997) systems of health reform?


  • Bruggen P. Who Cares? True Stories of the NHS Reform. Charlbury: The Spendlove Centre, 1997.
  • Peeno L. Managed Care Ethics: The Close View. Prepared for the U.S. House of Representatives Committee on Commerce, Subcommittee on Health and Environment. Michael
  • Bilirakis, Chair. May 30, 1996.
  • Peeno L. What is the value of a voice? US News and World Report, March 1998, p.40-46.
  • Pring B. Slips…of language and memory. In She Won’t be Right, Mate! The impact of managed care on Australian psychiatry and the Australian community. Ed. Halasz G.,
  • Borenstein R., Buchanan J., Davis J.M., Grant D., Prager S., Pring B., Prytula R. Melbourne: Psychiatrists Working Group, 1997. Pp.22-29.
  • Ritzer G. The McDonaldization of Society: An Investigation into the Changing Character of Contemporary Social Life. Thousand Oaks, California: Pine Forge Press, 1993.