Regina Herzlinger is not afraid to call them as she sees them. And what she sees looking at the American health care industry is a bunch of killers. Not only are hospitals, insurers, employers, Congress, and academics killing health care, they are also killing real patients, she asserts in a new book, Who Killed Health Care?

We asked Herzlinger, the Nancy R. McPherson Professor of Business Administration Chair at the Harvard Business School, to discuss her latest work and her more than 30 years of research in the health care industry.

Sean Silverthorne: Why write this book now?

Regina Herzlinger: I've had it. [Laughs.] Just had it! You know, I did my doctoral thesis really by accident in a hospital. That was in 1971, 36 years ago. And at the time, I was astonished at how mismanaged that hospital was and how the most rudimentary kinds of business processes—good accounting systems, good scheduling systems, ways of responding to the customer—were totally absent. And on the other hand, the science and the doctors were so awesome. I went to MIT—I'm not a great scientist, but I know it when I see it. You knew that they were on the verge of a real breakthrough in the science, but it was coupled with this delivery system that was, wittingly or not, heartless.

And I've been at it since then. I wrote Market-Driven Health Care, which was a very popular book. But the part of it that I thought was the most important, which is the restructuring of the health care delivery system around the needs of human beings, not around the needs of the status quo, didn't happen. Consumer-Driven Health Care was another book that I wrote to help change the demand for health care, to get innovation in the insurance industry. That was more effective in launching new high-deductible products. I don't think in any of these cases I launched a revolution, but I think I was helpful.

But the pace was so slow, and people were saying that these high deductibles represented consumer-driven health care. It's ridiculous. Consumer markets have lots of choice. I thought I've got to lay out just how self-serving this system is.

Q: What strikes me about this book, and I think anyone who's going to read it, is the tone. You're actually calling players in the health care system "killers"? It's more like a manifesto, a call to action. Is that deliberate?

A: Yes. When I was a young girl, my mother gave me a copy of The Jungle by Upton Sinclair. I was very struck by that book. I find the writing, in retrospect, really wretched, but the kind of passion that said, "Here is an awful system," was pivotal in getting food and drug laws on the books.

Q: What about the timing? Could you have written this book when you were writing Market-Driven Health Care (1996) or Consumer-Driven Health Care (2004)?

A: I think at the time of Market-Driven Health Care , people were still delirious about the prospects of managed care. Some believed that the cure, the silver bullet, was this technocratic, top-down oversight of the health care system, as opposed to something organic, entrepreneurial. What I did in Market-Driven Health Care was to say, this emperor has no clothes. Managed care is just not working. But to say that the whole system is dysfunctional would have been laughable at that time.

There's always a tipping point, and we've hit the tipping point here. I've read reviews of Michael Moore's Sicko. I haven't seen it as yet. But what strikes me is that his diagnosis and my diagnosis are very similar. He diagnoses the same problems—heartless, insensitive, greedy, self-serving status quo—but his cure is a government-run system, I gather from hearsay. I agree with the diagnosis, but my cure is, yes, everybody should have health insurance, but they should control it for themselves. It should be run by the people, not by the government.

I'm an economist; I take economics very personally. My own view is that the economic consequences of our present health care system are disastrous and grievously injure the economy. It's not getting any better, and none of the cures work.

Q: What your book points out is that all the players and other parts of the system are interdependent. And although you may have a great doctor with the best intentions, the system may not allow him or her to give the quality of care they would like to.

A: Absolutely. My heart really goes out to physicians nowadays. They're like little hamsters running on a track, and they're measured for their productivity, how many people they see. They have lousy information systems to back them up. And then they have a public policy establishment that more or less continuously deprecates their ideas and squeezes down their income. Not a great occupation to be in.

Q: I wonder if your personal experiences with the health care system went in the book.

A: Oh, I remember the birth of my daughter, who's now a doctor. I had a very long labor with her. My obstetrician, a lovely man, was giving me a hormone called pitocin to accelerate the contractions. And I said to him, "I don't want this." "I'm very strong, I can handle this." And he said, "Well, you can't make an omelet without breaking eggs." And I thought, "Oh, could you have a more disgusting analogy for a woman who's giving birth?" I was appalled. I was in the middle of labor. It's very painful—labor is the right word—and I had to negotiate about this. That experience gave me a sense that you can't be a passive person, even with the best of physicians. You have to understand what's going to happen and to negotiate about all the possible twists and turns ahead of time rather than when you're lying there in the labor room.

When I got home, I got a bill. I had never made it to the delivery room—pitocin acts suddenly. But I had a charge for the delivery room on my bill. And I called the clerk at the hospital who said, "Why are you even bothering? You're not paying for this." I had another epiphany. Of course I'm paying for this. We're all paying for this.

Q: You devote 5 chapters to 5 health care players that you actually call "killers." They are the hospitals, health insurers, employers, U.S. Congress, and academics. How do they all interact to make this such a bad or unresponsive or inefficient system?

A: I think there is a big 3 here, an iron triangle, and those are the hospitals, the insurers, and the government. They want power. It's very understandable. Everybody wants to be powerful, and the way they will be powerful is to institutionalize their role in the system.

The insurers would love for a private health insurance system to remain. I, too, think that's very important, but the easy way for it to remain is to offer just one product. If you offer a lot of products, suddenly you're in actuary land. You're in a real risky business. So they've done a lot to maintain just one product.

Hospitals want to control the health care delivery system, and they've become oligopolists or monopolists in many markets, thus obviating price and quality competition, and they've become vertically integrated by hiring physicians and using them. Initially the hospital was a place almost like a hotel or an office, a kind of ancillary place for the doctor. The doctor was the star. But increasingly, the hospitals have won the power struggle, and the physicians are more or less the blue-collar workers.

And then the government. Whether Democrat or Republican, power is seductive, and they are actually practicing medicine … by micromanaging the payment system. I tell the story in the book about how Congress motivated clinics and doctors with its payment formulas to use more of the antianemia substance epo. How can the U.S. Congress—and I admire the people in all of these institutions—but how can 100 senators possibly know what a doctor in Dubuque, Iowa should receive for removing a mole?

So these 3 are the iron triangle, and they've got all the power in their hands. They're abetted by the academics who, in a market-oriented system, are not going to be very powerful, but in a centralized, technocratic system, will be very powerful, because somebody has to do the research that informs all of this. The final group is the human resource people in corporations. They turn to limiting the choice of health care programs for employees as a solution, the belief that big is beautiful and will result in lower costs. Very poor idea, but in a way I'm the most sympathetic to this group. Suddenly human resource managers are asked to look into the bowels of this $2 trillion system and figure out how to make it simultaneously more effective and efficient. Is that insane, or what?

Q: But to say these groups are killing their patients is pretty strong language.

A: Well, 300,000 people die every 3 years in hospitals, not with the problems that brought them in. What killed these 300,000 people? It's almost comic, and just a hairline removed from a tragedy. For example, you come in with a hammer toe, next thing you know you're dead. What happened?

Well, "failure to rescue" is a big one. Something happened to you, your respiration got compromised, you couldn't breathe, and they didn't get to you in time. Infection is another reason. In a hospital, the scope of work is so broad that the possibility of cross-infection is monumental. If you go into a general hospital, there's no way they can keep those walls and floors clean and free from all bacteria.

Plus, the people who work in these settings are stressed and confused. You and I, we have very focused jobs. But if you're a nurse in a hospital, you're dealing with hundreds of different cases constantly. It's tremendously stressful. Every single care event is de novo. So of course, hospitals kill people.

Q: One of the hospitals and health care providers mentioned often in your book is Kaiser Permanente in California, which started out as a very innovative, customer-focused institution that at some point "lost its soul," as you write. What does the Kaiser story tell us?

A: It tells us that it would be great if we had a health care system that would permit Kaisers and other innovations and entrepreneurs in health services to spring up. But we don't. I have an acquaintance, Garrison Bliss, who is a Harvard Medical School doctor, and his brother-in-law is Norman Wu, a software guy who went to the MBA program. They created a system to bring concierge medicine to the uninsured and the middle class. For $70 dollars a month, you get 24/7 access to a doctor. And the reason I told you about who they are is this is not naïve or idealistic—this is a team that can execute. They're bankable.

But the insurance industry charged that they were insurers and that they should be regulated the way insurers are regulated. Those words, insurance regulation, that's like striking a knife into the heart of an entrepreneur. It means you need a huge finance department to fill out forms, and so they hired a lobbyist just to deflect it.

My point is, if Garfield and Kaiser were alive today, I don't know how the hell they would get this idea started. The other point is that the health care system policy thinking is dominated by the idea of economies of scale. But there are diseconomies of scale. You get too big and you lose touch with the core of what made you great. I think that's what happened to Kaiser.

Q: Your HBS colleague, Richard Bohmer, talks favorably about clinics now sprouting up in malls and big chains that offer very basic services at affordable prices. Is that a sample of innovation now starting to take root?

A: It's also about why innovation in health care is so hard. About 20 years ago, I did a series of cases on a retail health clinic called Health Stop. It was at the mall, and I thought it was great. The idea was, just like these guys now, you're sick, we're quick. Rather than going to an emergency room for your child's earache, you could go there. And because they were a chain, they were a business; they had very advanced processes like very good information systems. Health Stop grew to be a $100 million company. But these guys were run out of business by the hospitals and by the community physicians who attacked them relentlessly.

So what makes the current mode of innovation, the MinuteClinic, the Ready Care Clinic, feasible today? They've got very powerful protectors. They're housed in Wal-Mart. They're housed in Target. These guys have got very powerful allies who have very good business reasons for making it happen. But it took 20 years for this to happen.

Q: There's an interesting phenomenon going on, and that's basically outsourcing fairly complex surgeries to India for much cheaper prices. Does this actually pose a threat to the institutionalized health care system at some point?

A: Not yet. I have 3 student teams who focused on this, and their analysis was that employers are very worried about sending their employees to India, so they're unlikely to ask their insurers to offer India or Thailand as an option. It's the human resource person, not the CEO, making this decision. So this poor human resource person says, "Oh my God, if I have an insurance policy that says you can go to Thailand or India for surgery, and something goes wrong, I'm going to be on the front page of The New York Times for outsourcing surgery." If you can't get the employers to buy in, the insurers are not going to do it independently.

On the other hand, I'm sure it's going to happen.

There are four big hospital companies in India, and I've talked with their CEOs, with these teams of students. They're very focused on this market. And one of the things they're all doing is getting accredited, so that the fear that they don't meet the standards of U.S. hospitals will be minimized. Of course, the accreditation agency is a creature of the hospital system, so how much protection do you really get from that? But they will have the same kind of accreditation as the American hospitals.

Some of them have a fabulous strategy, and that is they're very specialized. Rather than build a 1,000-bed hospital, they have hub-and-spoke systems. Hub is for trauma, and spoke are specialized hospitals that deal with specialized needs. They have a fundamentally different delivery system, and the reason they can have it is they're not dealing with the status quo that mashes down every kind of innovation.

Q: Well, that's the next subject I want to get to, which is innovation and entrepreneurship, which you say are sadly lacking in the health care system. There are no Bill Gates- or Michael Dell-type innovators in health care. Why don't we see more entrepreneurship, more innovation, outside of technological innovation in the system? What's stamping down on that?

A: This iron triangle, it kills you. So first of all, if we want to start a health delivery innovation, we need to get paid. The consumer's not paying us. It's these third parties operating either through the government or an insurance company that's paying. We would need a code. A code comes from the AMA [American Medical Association]. Will the AMA give us a code? Well, not easily, because the doctors are all competitive with each other. So that's a barrier to begin with.

Then we need a coverage decision. The insurer or the government will say, I'm going to cover him, but I'm not going to cover Martha. That takes 1 year, 2 years, 3 years. And then they tell us what the price is going to be. We have no negotiating power in this unless we are a lifesaving technological innovation, which is how the biotechs and some of the medical devices can get through these hurdles. But for a health service innovation, the payment hurdles are so massive it's masochistic.

Then if you go into competition with a hospital, may the force be with you, because they're going to run to Congress and they're going to say, "We're so charitable and wonderful, and this venal competitor's taking away our best business." And we've seen how sympathetic Congress is in mashing down entrepreneurs by saying, "Oh, you're such a wonderful charity, how can we permit anybody to compete with you?"

Q: Aren't improved techniques for minimally invasive surgery an innovation? It gets you out of your bed quicker, gets you back to work quicker, fewer costs, more productivity.

A: Do you know how that came to be? It came through the community hospitals. The big academic medical centers didn't want minimally invasive surgery because it threatened the surgeons and it threatened the hospitals; their real profit centers are the surgical suites. It came through community hospitals and community doctors who communed with their patients, and the patient said, "I have to get back to work, I make $50,000 a year, I can't spend 6 months in recovery." That's how it came about and then it moved up the food chain to the big academic medical centers.

Q: You have generated and advocated for many years this concept of consumer-driven or market-driven health care. What is the idea?

A: It basically is giving us back the money we now hand over to our employers for health insurance, so we can buy our own. And if we're poor, the government will transfer money to us so that we can go and buy it for ourselves.

But there is no individual insurance market right now. How do you solve this problem?

Well, one idea is the one (former Massachusetts Governor Mitt) Romney put together, which is called the Connector. It offers individuals a tax-sheltered market for different insurance products. I'm not crazy about that solution, because one market means no competition, and the products on that market are designed by the government, which is not exactly my idea of how products ought to be designed.

I think what's going to happen is once we have an individual mandate to have health insurance, and you and I get back the money that somebody used to spend on our behalf, there'll be a lot of entrepreneurs who'll create these markets.

The analogy is in the mutual fund market. Vanguard came along with the 401(k), and John Bogle, the amazing man who created Vanguard, knew that consumers were going to have to shop for retirement income choices, and what the hell would they buy? There were a lot of stinky products around. He created Vanguard and he created terrific products, these indexed mutual funds. Lots of employers picked up Vanguard, or Fidelity, or T. Rowe Price, and they said, "We're not doing the investing for you anymore. We're giving you the money, and we're giving it in tax-sheltered ways so you can use your own money, and we're also giving you a great supermarket that has very good products in it." So I think that will happen.

There's always a tipping point, and we've hit the tipping point here.

The other part that the government must do is to require transparency, to require the quality metrics that we need in order to be good shoppers. If I had stage four breast cancer and were going in a hospital, I need to know how good that hospital is for women like me who are having a lumpectomy. The only way, in my view, that we're going to get there—this is a classic public good—is for the government to require this kind of disclosure, and to have something like generally accepted accounting principles and audits so it goes beyond "trust us."

I think that's what we need, and I honestly believe that we will have it by the end of the term of the next President. We'll have the mechanism that will bring transparency and have this tax support that will make it possible for people to buy health insurance with pre-tax money.

Q: And why are the 5 forces that are killing health care going to roll over in the next 6 or more years?

A: No, they're not going to roll over. They're going to kick and scream. But I think the tipping point, the fact that Michael Moore and I—who could be stranger bedmates?—have reached the same point is an indication of how pervasive the recognition of this problem is, the economic problem and, more importantly, the human problem, the lack of quality and the lack of assets.

Q: It seems a hard case to make. As you described, in the current system the consumer has no power, no leverage, basically.

A: The reason I'm sanguine about it is managed care went from zero penetration to 100 percent penetration in 4 years, and we weren't as badly off at that time. So, elephantine though this economy is, we can transform ourselves with astonishing rapidity if we permit the transformative forces to work, if we unleash consumers, unleash entrepreneurs, don't keep binding them up. It will happen very fast.

Also the insurers stand to win in this in some ways, because with universal coverage the market gets much bigger. The hospitals are going to be huge losers, because once consumers buy health insurance, they will want cheaper health insurance policies. The only way to get them cheaper is to cheapen down the health care delivery system, and the most bloated part of it is the hospital, and these health care delivery entrepreneurs will start popping up.

And I expect tremendous resistance to transparency. Nobody wants to be measured. The argument will be, "It's not feasible." So, we can unravel the genetic code, we can measure tau neutrinos, but nope, the quality of this doctor or hospital is unmeasurable? I think these are very self-serving arguments.

Q: Well, you almost automatically get transparency if you have the money in the hands of the consumers, because they're going to demand to know what they're buying.

A: Absolutely. The critical lever is getting the money to the consumers. That transforms the whole, causes transparency, also changes the delivery system. It lets consumers ask, "Why does it cost $100,000 to have surgery in the U.S. but it costs $7,000 with American-trained doctors in India?" Help me understand this.