1. The Value of Healthcare Setting the Stage: Looking to the Future Ian Morrison

2. Outline n The Economic Value of Health and Healthcare n Values, Perceptions and Attitudes n The Case of Pharmaceuticals n Scenarios for the Next Decade n The Value of Healthcare: Toward an Action Agenda

3. The Emerging Value Context n Rising costs n Rising cost shifting to consumers n The Fat Trapper, Bariatric Surgery and the “Swaning of America” n Infatuation with Technology based care n Evidence that Innovation makes a difference n Expect more Innovation in long term although gaps in the short run n Potential Paradigm Emerging –High cost, High efficacy, High Customization but unaffordable –The Concorde Syndrome n The Quest for Value –IOM: Balancing cost, quality, access and equity –Evidence based medicine and evidence based benefit design –Pay for Performance –Value Purchasing

4. Attitudes toward Value n Strong argument that American healthcare is a poor value –The International Story –The Dartmouth Story n Americans love high technology medicine and think we as a society should spend more on it…..but, OPM (Other People’s Money) n Healthcare is a superior good, as we grow economically we will spend more, but it has to flow from…… –Government –Employers –Households n Value is in the eye of the beholder …..and the payer n Value is being redefined as we move to engage the consumer as payer and decision-maker n What is value to the millions left behind?

5. Value and the Transformation of the National Debate n It’s not just about cost containment n It’s not just about affordability n It’s not just about prices n It’s not just about life expectancy n It’s not just about societal level value n It’s not just about the best, no matter how much it costs n It’s not just about healthcare as the last industry to go offshore to China or India

6. Innovation Imperatives n Consumers love new technology n Innovation is the pharmaceutical industry’s ace in price control debates n But if you don’t truly innovate in a way consumers appreciate and pay for……. n The new environment shifts responsibility for payment increasingly and transparency of pricing to consumers for all aspects of healthcare not just drugs n Delivering innovation to an end user consumer that has value they are willing to pay their own money for n Do not overestimate (even) Americans willingness to trade up n Are we comfortable with overt tiering?

7. How Consumers Rate Industries * In 1997 “computer companies” were rated together (I.e. hardware and software companies were not measured separately ** Because airlines were not included in 1997, the trend for airlines is from 1998 - 2002

8. Health Care Tops List of Industries Public Wants to See More Regulated Should Be More RegulatedGenerally Honest & Trustworthy Hospitals Managed Care Companies Health Insurance Companies Pharmaceutical Companies

9. The Value of Health Care 14% 21% 24% 32% 35% 36% 43% 63% Health insurance companies Brand name prescription drugs Hospitals Pharmacies Doctors OTC (non-prescription) drugs Medical devices Generic prescription drugs Percentage of consumers rating each of the following a very good or fairly good value Source: Harris Interactive/Wall Street Journal. Aug 19, 2003

10. The Argument For Consumer Responsibility for Payment n Consumers have been progressively insulated from the cost of care for the last 40 years n If they only knew how much healthcare cost and had to pay they would use it less n If they were responsible for paying they would also take more responsibility to become healthy and cost the system less n Consumers should have the right to choose and to trade up to better quality with their own money n When they are make rational consumer choices the market will be working and whatever is spent will be appropriate like any other market or sector of the economy

11. The Argument Against Consumer Responsibility for Payment n The 5/50 Problem: Most consumers that are heavy users have significant co-morbidity or serious illness like cancer, they didn’t choose this health status n One day in an American hospital and they are over their maximum deductible, so…… n Catastrophic coverage is a green light for excessive care by hospitals and procedure- oriented specialists n While skin in the game can clearly move people around does it save money overall? n The equity problems: –A de facto reallocation of resources from poor to rich (my access to the collective social capital of health insurance is better because I can come up with the economic down payment for physician visits and tests) –Poor people with chronic illnesses will be disproportionately affected by consumer responsibility for payment

12. Consumer Exposure to Health Care Costs is About to Increase Percentage of total personal health care expenditures paid out-of-pocket Source: Centers for Medicare and Medicaid Services Projected Per capita amount of personal health care expenditures paid out-of-pocket

13. The Case of Pharmaceuticals n Coverage and Value n Tiering and consumer strategies n How do consumers behave? n What are the challenges?

14. Who Pays for Drugs? Source: Kaiser Family Foundation and Sonderegger Research Center analysis of CMS data Percent of Total National Prescription Drug Expenditures by Type of Payer Private insurance Out-of- pocket Government programs

15. The Five-Tier Formulary Old Generic New Generic Rebated Brands Non-Rebated Brands Look Good / Feel Good Lowest Copay Highest Copay and/or Coinsurance

16. James Brown and Fernando Lamas Effect Mortality Morbidity Mobility Feel Good Look Good Quality of Life Affluence of the Individual or Society End-Point

17. “Skin in the Game” Matters n Trading down twice as often as trading up n Rapid increase in generic and therapeutic substitution n Poor, chronically ill most effected n Starting to lead to adverse health outcomes like the uninsured n Simple cost shifting without sophisticated disease management is not the right answer in the long-term

18. Big Increase in Trading Down on Drugs Base: Total cost of prescription drugs increased last year (53%)

19. Rx co-pay increase: More bargain-hunting since 2002. Low- and middle-income equally likely to “ trade-down ” Percentage of consumers who did the following in response to an increase in prescription drugs cost sharing Base: Copays for prescription drugs increased a lot or a little in past year

20. The Transformation of Pharmaceuticals n Discover a unique white powder n Search for a therapeutic action n Establish safety and efficacy n Make sure it’s better than available alternatives n Promote to the profession n Get a passive payer to pay for it n Design a white powder with a predictable therapeutic action n Establish safety, efficacy and cost- effectiveness n Make sure it meets a previously unmet medical need or has an effect that is detectable to human beings n Promote to all the Ps (patient, physician, PBM, payer, pharmacist, politician, press) n Get an active payer to pay for it Past Future

21. % of Patients Do nothing Chronic pill popping (Rolaids for Yuppies) Me-too Fast Followers & Generics Higher Price Higher Efficacy Innovative Technology Big Pharma Success Heavy-duty traditional therapy Evidence-based medicine Consumer payment Marketing Demonstration of clinical efficacy Traditional Pharmaceuticals vs. Advanced Therapeutics Cost

22. Happy Biotechnologist Scenario n We have the best stuff n Sure it’s expensive, but it works n Because it works there are savings elsewhere n This is complex – do not try this stuff at home n As generic competition makes costs go down for some technologies, there will be more gross margin left for us n Catastrophic drug coverage insulates consumers from caring about price

23. Biotechnologist’s Nightmare Scenario n Public, physicians, policymakers could care less about large molecules; we don’t buy drugs by the atom n It’s complex brewing not chemistry, but how hard could it be? n Big ugly buyers and providers incensed about price of technology n High efficacy focused on small sliver of needy, desperate patients n Payers/purchasers –Medicare inpatients – the stent effect –Medicare hospital outpatient – the value case –Administering Physicians e.g. oncologists n zero-sum game on incomes n “Plop, plop” vs clinical efficacy –Consumers n Co-insurance on top tier n All drugs in CDHP n Can you pass the NICE/Kaiser Test?

24. Demonstrating “Value” n What is value? n Benefit / Cost? Quality/Cost? Access/Cost? n Benefit to whom? –Patient, physician, payer, insurer, employer, government, public(?), politician? n Cost to whom? –Patient, physician, payer, insurer, government, public (taxpayer)? n Is “value” (for money) the same as cost-effectiveness? n Remember if you cut the price in half, you double the value

25. Market Nirvana Market Driven Government Driven Minor Delivery System Reform Major Delivery System Reform Four Scenarios for Health Care 2004-2010 Tiers R’Us National Rational Healthcare Bigger Government

26. Scenario 1: Tiers R’ Us n The SUVing of American Healthcare n We pay more for choice and control n WIPDBS brings the market to Medicare n Chronically ill, low income beware n Catastrophic coverage for the very sick n The benefits of benefit design: save employers money n Trading down more often than trading up n A world of opportunity and risk n Private sector celebrated

27. Scenario 2: Bigger Government n Major backlash against cost shifting to consumers n 2008 election run on the retirement and health security issues of the middle class n Protect the baby-boom at all costs –Medicare Advantage for All or –Pay or Play or –Expanded Medicare and FICA tax or –Fill the donut holes, stick it to pharma, shore up the entitlement n Live with the consequences –Politicization of healthcare spending –Rationing and restriction –Lower Innovation –Lower profits –Equity over efficiency –Rising costs and taxes

28. Scenario 3: Market Nirvana n Break the Culture of Entitlement n Consumers learn to discriminate and pay n We buy care not cars n Incentives for health and personal responsibility n Catastrophic coverage and retail medicine for all n Utilization based on ability to pay n The rise of cheapo plans and delivery systems n Reaching high end retail customers is key n Delivery reform is market-based not evidence-based n Opportunities abound for the entrepreneurial n America’s economic base as private sector healthcare n High quality, high service, low equity

29. Scenario 4: National Rational Healthcare n Universality and Delivery System Redesign n Evidence-based floors and ceilings n Pay for Performance n Reference-pricing and cost-effectiveness criteria for new technology n Financial rewards for clinical redesign n Universal Mandated Coverage –Employer and individual mandates or –Expanded Medicare Advantage or –Expanded Safety Net Delivery Floor n Expanded Access and Rational Design n Delivery System Innovation rewarded n All enabled by a 21st century IT and bioscience infrastructure

30. Implications for Value n No matter what, we will need better value measures and more transparency of measures n Value based purchasing will become more prevalent and have a powerful influence on providers and vendors n Consumers will become more engaged in value decisions but we cannot rely on them absolutely n The systems of healthcare need to be continuously improved to deliver greater value

31. Towards an Action Agenda n The Need for Leadership n Stakeholder Dialogue –Not just IOM or NHI –Conversation for Action –Not about figure pointing –Constructive Engagement about Value Improvement in Healthcare –Redesign of the systems of healthcare n Generate Enthusiasm n Cultivate Broad Community Dialogue n Identify Quick Victories