Thursday, January 31, 2013

Achieving Wal-Mart efficiencies in healthcare

Everyone agrees that ACA (Obamacare) is going to fundamentally transform the US healthcare system. That was, after all, its intention — the legacy that Hillary and Bill Clinton sought 16 years earlier and failed to achieve. At the same time, the US system — from pharma companies to providers to insurance to clinicians — was facing its own multi-faceted crisis. The crises were used as a justification for ACA, but for some problems, ACA may have no impact or make things worse.

The “US Health Care Outlook” panel today at KGI examined the likely culmination of this coming storm. The panel featured Pete Clagett (CEO of Express Scripts), Jeff Mason of United Healthcare, Don Jones of Qualcomm and consultant Linda Cullen.

Pullen highlighted the nominal impact of ACA is that the government will be buying more healthcare and thus have more control over supply, demand and pricing. Mason reviewed the dying throes of the traditional US fee-for-service, to be replaced by bundled payment plans (such as capitation — commonly used in California).

Pullin recited the depressing statistics of declining R&D productivity. A simple ratio of gross R&D expenditure to new therapeutics ranges from $3.7b per drug (Amgen) to $12b per drug (AstraZeneca). The industry has $200b of revenues disappearing from expiring patents of 2012-2018.

Their provocative openings spawned an interesting discussion: there will be winners over the next few years whether or not the ACA takes hold. Both public and private payers want cost reductions, so innovators who deliver efficiency improvements have lucrative business opportunities.

Kathy Webster, dean of KGI’s new School of Biopharmacy, asked about the costs of the very sickest. The panelists noted the high burden produced by the sickest of the sick (perhaps top 2-3%) — where the severe (and largely incurable illnesses) require a societal resource allocation discussion. However, the next 3-5% are those with chronic disease, who today are very expensive but offer tremendous opportunities for improved efficiency (and thus attractive margins for the right solution).

My question picked up on one of Pullen’s factoids: that 80% of the global pharmacy profits come from the US. I asked the panel: "what would happen to pharma profits if the US reimbursements were cut to Canada’s levels?” (An increasingly single payer system is a textbook increase in buyer power and thus the ability of the government to force industry to cut prices).

The audience groaned at the question and the flip answer that the profits would go down. However, Clagett noted that while the reimbursement levels for branded drugs are lower than the US, generic drugs are higher. (NB: Canadian provinces pressured generic suppliers earlier this month to take a sizable price cut). Even if reduced reimbursements destroyed current business models, there was a suggesting that new business models might emerge (whether through increased generics or by opportunities for lower cost solutions).

Overall, the general tone — consistent with KGI’s mission — was that market forces, private innovation and competition (to the degree it’s allowed) is most likely to provide sizable improvements in efficiency and efficacy. One example was cited by KGI advisory council member Jamie Danenberg (of Takeda), who noted an NPR report comparing a bargain basement MRI machine to a local hospital: the discount clinic was both cheaper and better.
But perhaps the most inspirational example came from Don Jones. Noting the recent rumor that Wal-Mart was getting into health insurance by setting up a health insurance exchange, he took that scenario to its logical conclusions:
  • With their retail locations, they could open in-store clinics (as CVS has MinuteClinic in its locations).
  • Their locations (and other services) would offer convenience and efficiency to shoppers that would attract business (cf. MinuteClinic).
  • Unlike traditional healthcare companies, they would be consumer-focused rather than patient focused. (Most consumers would rather not be patients — they just want the healthy outcomes)
  • They would bring their now operational efficiencies and buying power to the operational of any such business. Their buying power alone could cut capital equipment costs by 50%. (Would you like an MRI scan when you’re done shopping?)
Jones predicted that other pressures to do things better would come from Fortune 500 companies that are bringing healthcare onsite to improve worker productivity. Tech companies are well situated to effect such changes, because they understand the potential of the technology to improve the efficiency of service delivery, such as through mobile apps (on Qualcomm-enabled phones) that do for pharmacy what Amazon (or Pandora) have done to simplify purchasing of other goods.

Overall, it was an encouraging — in fact exciting — prognosis for the US healthcare system. Instead of going down the path of increasing bureaucratization and rationing, we could get improved outcomes at a lower cost. Perhaps if we’re lucky it will even turn out to be true.

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