Preparing the 21st century healthcare industry

Bob Curry, Ph.D.

As KGI prepares the strategic plan that will take it to its 25th anniversary, the members of the KGI community are being challenged to imagine where we need to be 2022 to continue to prepare cutting-edge graduates who will work across the healthcare value chain.

During a post-dinner exercise Wednesday night, we were encouraged to consider a map of imminent changes in healthcare suggested by Bob Curry, who is chairman of our Board of Trustees, a veteran VC, and now CEO of Perceptimed.

Based on this experience, Bob suggested four megatrends that KGI should consider:

1. Growth in the science of diagnostic, prognostic, and monitoring tools will be explosive and be increasing paired with drug and procedure usage.
2. Drugs will become every more customized to treat highly defined cohorts as characterized in the discussion point above. This will change both the nature of drug discovery and of clinical trail design.
3. Healthcare will be delivered by a broader, integrated team of professionals than has been the traditional norm. Pharmacists and clinical diagnosticians will be teamed with physicians and nurses in staffing the healthcare system.
4. Hospital systems and health insurance companies, as we currently recognize them, will disappear and will be replaced by 50-100 integrated care organizations to cover the entire U.S. (e.g. 50-100 Kaiser-like organizations).

The first two points appealed to our scientists in the room, who (since our 1997 founding) have been thinking about genomic and personalized medicine. The third point relates to those interested in clinical care delivery, particularly our pharmacy school which trains its PharmD students to work in teams with MDs and RNs. The final point ties to the business side — our group within KGI — and the changes brought by ACA (Obamacare), both pushed by the strong patient incentives for adverse selection and pulled by incentives for Affordable Care Organizations.

Based on this, the 70+ trustees, faculty, staff and students at nine tables generated a series of ideas. From their ideas — and my own observations — I see four important trends:

• The importance of big data and data analytics. This is not just for analyzing genomic data for personalized medicine, but for patterns of clinical and other bioinformatic data for efficacy, drug-drug interactions, and other healthcare outcomes.
• New types of healthcare providers and business models for funding them. 
• Increasing importance of healthcare economics. Whether it’s HMOs, ACOs, capitation models, bundled pricing, or other approaches, we are moving away from a fee-for-service and dollars-per-pill model toward outcomes-based compensation.
• New regulatory approaches to deal with these changes.

Some of these trends were building and accelerating over the past two decades. (I've been with one HMO for 30 years). Others were accelerated by the ACA. Still others (the destruction of insurance companies) were not among the announced goals of the ACA, but may be its inevitable outcome.

Administration: 93 million will lose existing health insurance

From Forbes, October 31:

Obama Officials In 2010: 93 Million Americans Will Be Unable To Keep Their Health Plans Under Obamacare
[by] Avik Roy
…
It turns out that in an obscure report buried in a June 2010 edition of the Federal Register, administration officials predicted massive disruption of the private insurance market.
…
Section 1251 of the Affordable Care Act contains what’s called a “grandfather” provision that, in theory, allows people to keep their existing plans if they like them. But subsequent regulations from the Obama administration interpreted that provision so narrowly as to prevent most plans from gaining this protection.

“The Departments’ mid-range estimate is that 66 percent of small employer plans and 45 percent of large employer plans will relinquish their grandfather status by the end of 2013,” wrote the administration on page 34,552 of the Register.
…
The Departments’ mid-range estimate is that 66 percent of small employer plans and 45 percent of large employer plans will relinquish their grandfather status by the end of 2013,” wrote the administration on page 34,552 of the Register. …

Another 25 million people, according to the CBO, have “non group and other” forms of insurance; that is to say, they participate in the market for individually-purchased insurance. In this market, the administration projected that “40 to 67 percent” of individually-purchased plans would lose their Obamacare-sanctioned “grandfather status” and become illegal, solely due to the fact that there is a high turnover of participants and insurance arrangements in this market. (Plans purchased after March 23, 2010 do not benefit from the “grandfather” clause.) The real turnover rate would be higher, because plans can lose their grandfather status for a number of other reasons.
…
As to the number of people facing cancellations, 51 percent of the employer-based market plus 53.5 percent of the non-group market (the middle of the administration’s range) amounts to 93 million Americans.

Spurring innovation for a system that doesn't want it

This morning I watched the #bigdatamed conference at Stanford via webcast. (I was out of town earlier in the week, presenting my own talk, and couldn’t attend the conference in person.)

The session I watched was entitled “Big Data Opportunities for Healthcare Startups,” part of a larger conference on “Big Data in Biomedicine: Driving Innovation for a Healthier World.” The panel consisted of Ori Geva (Medial Research), Vicki Seyfert-Margolis (MyOwnMed), Risa Stack (GE Healthmagination), Warren Hogarth (Sequoia Capital) and moderator Chris Longhurst (Lucile Packard Children’s Hospital).

It’s no revelation to say that healthcare startups face huge regulatory barriers that drive up both costs and capital requirements. It’s hard to imagine — other than perhaps a defense company — a more regulated industry the USA. (And, as I showed in a 2008 study, aerospace communications allowed market entry by some underfunded entrepreneurs who later gave us Qualcomm).

It’s also no revelation that most stakeholders — patients, doctors, taxpayers, the government, insurance companies — would like better outcomes at a lower cost, but have different perspectives on how to do so.

Notably, former Kleiner Perkins exec Risa Stack cited last week’s published lament by healthcare IT entrepreneur Jonathan Roth about the difficult of bringing innovation into the healthcare system. She cited his three barriers:

1. Healthcare consumers don’t shop. … With hardly an exception, patients can’t shop for healthcare. Why compare prices if you have no choice? Caregivers can’t shop for healthcare either. Few doctors know the true cost of tests and treatments they refer patients to. The setup leaves caregivers with little incentive to differentiate themselves by embracing innovative care delivery practices.

2. The biggest buyer stifles innovation. The government is the biggest buyer in the healthcare market. In fact, it represents more than half of all healthcare buying in the U.S. Unfortunately, the big spender has not prioritized supporting innovation, but rather minimizing the scenario of maximum regret: the audit, the lawsuit, the death. This compliance burden breeds risk-averse behaviors among healthcare providers, not creativity. Furthermore, the government rewards caregivers for a narrowly defined set of activities, limiting their appetite for innovation and thus for entrepreneurial services and technology.

3. Service, quality, and competitive pricing aren’t rewarded. By and large, doctors continue to be paid based on how many services and tests they provide. Here and there, they are also paid for reporting some data. They are not commonly incentivized to compete on price and quality, and there’s no obvious way to display that information for shoppers.

While Stack thought high-deductible plans might make patient more cost-sensitive, she offered no hope on the other two.

In her talk, former FDA official (turned healthcare social media entrepreneur), Vicky Seyfert-Margolis, noted the pressures coming to the system for greater real world effectiveness. For example, right now oncology drugs are tested for late stage cancers that have failed chemo (with benefits measured in terms of 3 month survival) rather than earlier in the process. Since her husband helped get Obama re-elected, I was not surprised at her optimism about the effect of the Affordable Care Act and Accountable Care Organizations. However, Stack noted that ACOs would tend to increase patient switching costs and decrease choice (which by the way would exacerbate Roth’s concerns).

Still, there was one glimmer of hope. Given HIPAA, the one party that could actually do something to enable patient data availability for better outcomes is the patient him/herself. There are important technical and economic barriers to overcome, but also potential payoffs.

As VC Warren Hogarth noted, this would be an improvement over the current system, where patients (for example) give their tissue to a hospital for (say) a cancer test and then the hospital controls who and how that sample is used. The technical problem, noted Ori Geva, is how will the data be made available in a portable way so that the patient can share it on other platforms.

Several panelists noted the opportunity (and challenge) was what’s in it for the patient. On the one hand, patients [likely an unusually motivated subpopulation] opt in to sharing their data on Patients Like Me. Many patients also want to be treated as co-managers of their own data or (as Seyfert-Margolis noted), the household “chief medical officer” (i.e. mom) does so on behalf of the family.

One challenge is that (as noted) patients don't shop. Another is the (realistic) fear that medical groups, insurance companies or HMOs will use the data to reduce choices for patients in the name of cost containment. (I have no problem with Kaiser choosing cancer treatment A over cancer treatment B based on my genotype, but I start to get pissed when they tell me I can’t have a diagnostic because I’m “low risk”).

On the one hand, the normal way of getting something through the system is to appeal to payers. If entrepreneurs can find a way to directly appeal to patients — as have 23 & Me, Patients Like Me and the various quantified self efforts — perhaps this will create other opportunities for innovation that don’t require winning the end-to-end cooperation of the entire system.

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.