Looking for Solutions in a Rapidly Changing Health Care EnvironmentPublished: March 28, 2012 in Knowledge@Wharton
While the U.S. health care system is not yet on life support, it remains a fragmented and unwieldy structure whose rising costs bear little relation to improvements in access or quality. This is despite the introduction of patient management programs, some restructuring of insurance models and efforts to adjust incentives for decision making all across the care continuum.
But during the keynote presentations and panel discussions at Wharton's 18th Annual Health Care Business Conference titled, "Innovation in a Changing Health Care Environment," the emphasis was on solutions. Participants analyzed some of the ways that individual companies are digging deep into the system to come up with approaches that rely on new technology, new business models and new marketing strategies.
Two keynote speeches served as thematic bookends to the day's discussions. The morning kickoff keynote by Glenn D. Steele Jr., president and CEO of Geisinger Health System, defined the scope of the problem in dollars and disease. Steele focused on the inverse relationship between cost and quality, citing several studies that found that more than 50% of health care spending in the U.S. is wasted or actually harmful. The conference ended with a keynote by Robert Pearl, president and CEO of The Permanente Medical Group, who stated that the survival of the U.S. depends on reining in health care costs. He challenged the audience to save the country from economic collapse by redesigning how health care is delivered and paid for.
Overall, conference presenters provided a ground-level view of what some of the problems, and solutions, look like in this transformative time.
Strategizing for Survival
The cost of health care is directly related to our larger national economic health, as noted by Pearl. "Our problems go back 40 years.... Costs have been rising 7% to 8% a year; health care is 18% of GDP this year, and it is set to double again, to 36% of GDP, by 2030.... That leaves no money for education, infrastructure, police and fire." The current players, he added, are strategizing for survival today because the trajectory is unsustainable, and change will come. "Currently, we are fragmented, piecemeal, paper-based and leaderless."
According to David Jones, Jr., chairman and managing director of Chrysalis Ventures, a private equity and venture capital firm, the days for tinkering around the edges are gone. "The provider side re-engineering is doomed to failure because of a fundamental governance problem. You heard in the keynote this morning that 40% to 50% of the money spent is useless or actually harmful to outcomes. All of the change initiatives are focused on solving it in an incremental way."
Jones described that as a "pants-on-fire problem.... I don't think there is a possibility in the world that a bunch of ungovernable non-profits with no motivation to change quickly will go after that problem. I think the solution ultimately -- like the Greek [economic bail-out] solution or the GM solution -- is that you must have restructuring in the traditional financial sense. Everyone talks about hospitals going bankrupt because of politics. That is nonsense. Bankruptcy is a restructuring, and the system is going to change dramatically."
This urgency, and a new economy driven by information technology, have created an environment in which change is happening no matter what laws are passed or what the courts uphold or overturn, conference participants stated.
"Good regulations, bad regulations: Change has thrown the pickup sticks into the air, and they will come down in other ways," Jones said. "The iPhones have taken over the world. More than 80% of doctors use an iPhone or a smartphone. You can't wall off change. The health plans are changing fast. As a venture capitalist, that is exciting stuff."
Aetna CEO Mark Bertolini told the conference that his firm is evolving into a health technology company with a big insurance vehicle attached. Bertolini discussed Aetna's competitors' similar investments in electronic health record software that is transforming the nature of the health insurance industry. "UnitedHealth recently announced its Optum healthcare cloud which is meant to be a collaboration platform. It's not Epic, it's not Cerner, it's not McKesson [referring to some of the dominant electronic health record software companies]. It's got a lot of resources behind it; it's got a lot of cash flow, and I think it's worth watching."
Jones of Chrysalis also referred to insurance company investments in software that are changing the way patients are cared for. As an example, he cited Humana's platform called Vitality, an incentive system to encourage individuals to make good choices about eating, exercising and other health issues. While the problems remain, solutions are starting to emerge either through creative new business models, technological advances or creative patient engagement initiatives, he said.
According to Jones, Congress did not offer true health reform with the passage of the Patient Protection and Affordable Care Act, but instead offered health insurance reform that will address how consumers pay for health care. "Health insurance is a dysfunctional, shrinking market on the private side. Plans aren't changing voluntarily; they are changing because their old business model was crushed and destroyed. We are getting rid of the chokehold that insurance brokers have on health care. An 8% to 12% commission goes to Joe Box-of-Donuts," he said, referring to the fact that health insurance brokers get a commission that is built into the cost of the price of health insurance. The regional health insurance exchanges (HIEs) that have been established under the Affordable Care Act eliminate health insurance brokers -- and their commissions - and allow patients to buy insurance directly from a pool of health plans, Jones added. "The health exchanges will drive out that cost and will focus on brand value."
By eliminating the insurance brokers -- the middle men in the system -- patients will focus on the value of the insurance product and choose a tool that works for their situation out of a menu of options offered through a health insurance exchange, Jones said. As direct consumers of health insurance, he added, patients will be required to ascend a learning curve about their options.
According to John Keith, a principal at Deloitte, "No matter how exchanges evolve, when consumers start looking at their local networks and what they are getting for their dollar, there will be chaos for a few years. There will be a period of adjustment as people realize they are responsible for those costs, and that will drive change down the road."
Providers and suppliers will compete for business in this new paradigm, where cost and quality are expected to be in alignment, said Keith. "This is truly an opportunity for real change. ACOs (Accountable Care Organizations) aren't anything new," Keith added, referring to the outcomes-based payment system being piloted by Medicare as mandated in the Patient Protection and Affordable Care Act. "Bundled payment systems have been around since DRGs (Diagnosis Related Groups), and there have been lots of revolutions, like HMOs (Health Maintenance Organizations). They all resulted in very minimal change. Fee for service abhorred information, but economic duress is causing price pressure, and it opens the door to an industry focused on value, and demands collaborative tools. We're going from a feudal system to a Renaissance."
Response to Consumers
Consumers as patients are still at the nexus of change, either as they gravitate toward providers who are convenient and effective, or as they learn to manage the health dollars that are spent, if not directly out of pocket, then on their behalf either by an employer or a government program, conference participants suggested. "People will behave like they do in normal consumer markets," said Ashish Kaura, a partner at Booz & Company. "What are the cornerstones of the consumer markets? Three things: One is value in product design, which is standardization and driven by what most people need. Two is simplicity: It must be easy to navigate to get the information you need. You don't want to spend five hours on the phone. Three is trust: The biggest value for payers today is trust."
Permanente's Pearl also noted the influence of consumers on the direction of health care. Consumer demands will need to drive innovation, since the current uncertainty in the regulatory and financial environment has many investors waiting on the sidelines for a clear signal, he said. "Find a single business able to achieve success if R&D and finance are fighting each other."
According to David Kirchoff, president and CEO of Weight Watchers, products like Weight Watchers' online tracking system -- which engages patients in their ongoing care -- have succeeded because they work: Patients use them, they get results and tackling obesity bends the cost curve down in a host of related diseases, especially diabetes.
"The challenges of obesity are complicated to solve," he added. "People have difficult choices surrounded by a sea of temptations. What's at stake? The future of the health care system. There is a strong link between obesity and diabetes. If you have a BMI (Body Mass Index) over 30, you are 500% more likely to have diabetes." Today, 10% of Americans have diabetes, he says. "By 2050, it is expected to be one-third. This is not a vanity [issue]. This is a health condition that is a function of the choices we make in our daily lives."
Ultimately, providers and suppliers -- the pharmaceutical and medical device companies -- will be required to prove their value in the marketplace or face extinction, according to conference panelists. Payment systems continue to move at accelerated speed toward a value-based model with payment for quality and outcomes, and move away from a fee-based system that simply pays for individual services or products for which there is no proof of efficacy. Due to this proof-of-concept stringency, the pharmaceutical sector is financially riskier than it used to be, but there is still opportunity. That means bio-pharmaceutical investors are keeping their wallets buttoned until later in the clinical trial process, panelists said during a discussion about the risks of biopharma investment.
Luke Duster, a principal at Capital Royalty, a private equity firm providing royalty-based financing to health care companies, reported that "last year, there were $90 billion in royalties [paid to biopharma investors]. There are late stage investment opportunities, but smaller companies are starved for cash flow because there is less investment in early stage. We are still raising capital, but only raising one-third as much as [we did] at the peak. Only the strongest are surviving."
Duster said he sees more cooperation between the FDA and industry to move products through the pipeline. He identified drugs with companion diagnostics as a growth area. Companion diagnostics represent an opportunity in that market segment because the diagnostic test identifies genetic markers and so takes the guesswork out of whether the drug will be effective in a particular patient with an identifiable genetic mutation. This assures outcomes and, by extension, guarantees the value of the product to the payer. In companion diagnostics, a genetic test is developed to identify whether a patient has a particular marker that indicates a specific drug will work in that patient -- thus the name "companion diagnostic" -- because the diagnostic is tied directly to the efficacy of one particular pharmaceutical product.
As to the role the FDA is playing in creating a risk-averse pharmaceutical sector, Ronald W. Lennox, a partner with CHL Medical Partners, a venture capital firm that focuses on seed and early-stage companies in the medical sector, said it is the FDA's own aversion to clinical risk that is trickling down to investors. "FDA approvals ought to be a balance of risk and benefit. If one million people benefit from a drug, how many shouldn't? Are we willing to risk one adverse event? We are tilting toward no adverse events at all, with little regard to patients who will benefit. Partly it is because of the litigious U.S. population and partly because we have trials on a small population and we try to extrapolate from 2,000 clinical trial patients to millions of patients. That is hard to do."
Finding that Magic Mix of Providers
Panelists discussed the way that transformed payment models based on outcomes are half of a solution; it is incumbent on providers to transform what the payers are paying for. Moving from a fee for service system where a product or service is paid because it was delivered to an individual patient, to an outcomes-based value model -- where the payment is determined by overall performance delivered at a population level -- requires systems to generate the metrics to support reimbursement, panelists noted.
Emad Rizk, president of McKesson Health Solutions, talked about what that looks like from a provider's perspective. "Down here at the execution level, it is ugly. So let's just look at where delivery systems can go. Supposedly, you have managed populations, which means you have to have the data. You have to stratify; you have to put processes together to intervene, measure outcomes and then demonstrate those outcomes. Then you have to go show the payer that you did it.
"Obviously, there is a financial risk," he adds. "Do they have the actuarial tools to be able to figure out if they have adverse selection or not? It's a lot for a provider to do." Delivery systems must transform themselves to meet the challenge, and upheaval is inevitable since those delivery systems have many different components that serve patients in different ways, at different costs and with different outcomes. Finding the magic mix of providers to deliver appropriate services will be key to survival in certain markets, Rizk said.
"You can have an Accountable Care Organization that is based on patient-centered medical homes, or one that is a hospital or a multi-specialty physicians group that wants to become an ACO. They behave differently, and they get paid differently," Rizk added. "How are you going to govern this? If you are going to take risk at the very highest levels, the devil is in the details. I think this is the right place to go. I think most of the activity in the next three years is going to be around delivery system reform. These are going to be extraordinarily complex models with a lot of hospitals purchasing physician groups, and physician groups purchasing other physician groups, and payers purchasing systems. And then you are going to see a lot of payers begin to acquire physicians. Eventually, you are probably going to have good models, but I don't think this is going to be a panacea."