Redefining Competition in Health Care

1. Redefining Competition in Health Care Michael E. Porter Harvard Business School Harvard Business Review June 2004

2. Competition in Health Care Zero-Sum Positive-Sum WRONG LEVELRIGHT LEVEL Between Health Plans Between treaters of specific diseases WRONG OBJECTIVERIGHT OBJECTIVE Cost reduction leading Quality of care to cost shifting

3. Competition in Health Care (Continued) Zero-Sum Positive-Sum • WRONG FORMRIGHT FORM • Payer competes for Create quality outcomes care • healthy consumers • Providers discount for • contracts • WRONG STRATEGY/RIGHT STRATEGY • STRUCTURE Specific disease unique quality • Consolidated diverse care • care • Discounted care

4. Competition in Health Care (Continued) Zero-Sum Positive-Sum WRONG INFORMATIONRIGHT INFORMATION Health plans Provider outcomes and cost WRONG INCENTIVESRIGHT INCENTIVES FOR PAYERSFOR PAYERS Restrict access and - Find best value for care innovation - Reduce administrative bureaucracy

5. Competition in Health Care (Continued) Zero-Sum Positive-Sum • WRONG INCENTIVESRIGHT INCENTIVES • FOR PROVIDERSFOR PROVIDERS • Too diverse in care Focus on Quality • Less time with patients

6. Redefining the South African Healthcare Model Reforming the Healthcare Market

7. The Current Healthcare System • Competition between health plans driven by costs and benefits • Cost containment key focus • Component approach to healthcare management • Covert rationing is commonplace (cost shifting) • Providers incentivised based on cost outcomes • Doctor-patient relationship being threatened • We all talk ‘quality’ but don’t measure it • Our rhetoric is not accompanied by action • All parties are guilty of protecting vested interests Reforming the Healthcare Market

8. The Ideal Scenario “ If we could do it all again, how would we design an optimum healthcare system?” Some key characteristics; • Outcomes based incentives • Holistic view of cost, not price • A focus on clinical management • Shared liability • Solid doctor-patient relationship • A determined focus on quality • Competition between health plans including quality of care measures Reforming the Healthcare Market

9. The ‘Quality’ Rhetoric If quality is the common objective – let’s ensure that we have a common understanding or definition of quality A common understanding will allow us to pool our collective efforts What is ‘quality care’ ? Reforming the Healthcare Market

10. What is ‘Quality Care’ ? best available care Pharma = Both definitions conveniently protect the vested interest of the individual players the application of evidence based clinical protocols developed considering factors of cost-effectiveness and affordability Managed Care = A better definition of ‘Quality Care’ Best clinical outcome given budgetary Constraints • Incorporates; • patient focus • actual endpoints – health outcomes • budgetary constraints

11. Are we providing ‘Quality Care’ ? • We don’t measure quality therefore we do not know • We only measure intermediate outcomes Quality Care = best clinical outcome given a specific budget The Missing Link Diagnosis Authorize Rx Education Compliance Reporting Measurement Ensure treatment is Necessary Appropriate Cost-effective ?? Quality Care is measured here DUR

12. Concerns with the current environment • Authorising the use of appropriate, cost-effective treatment is an important step in obtaining quality outcomes • It does NOT however guarantee quality • Quality can only be achieved through rigorous follow-up and measurement • The current market; • creates incentives where non-compliance results in short term savings • non-compliance = poor outcomes and waste • poor outcomes = short term savings Current market creates economic incentives to NOT measure quality

13. A Outcome Based Approach to Healthcare - who benefits? • Patient • Quality clinical outcomes and reduction of risk drive the process • Providers • Strengthen doctor-patient relationship • Quality clinical outcomes met • Pharma • Innovative, effective products that can meet budgetery constraints • Funders • Competition based on quality health outcomes MAKING THE CHANGE

14. What is needed to make the change? • A common understanding of quality • A change in mindset by all players • Leadership • Political will Reforming the Healthcare Market

15. What can Pharma contribute ? • A new mindset • A different approach to business which; • is locally relevant but globally compatible • understands the need to sometimes ration care….. but doesn’t compromise the need for quality • understands the evolving healthcare market in SA • doesn’t accept that access to innovation should be limited to small privileged sectors of the community Reforming the Healthcare Market

16. The Pharma challenge • Take Risk • Put our money where our mouth is ! • Move from sellers of medicines to guarantors of outcomes • Have confidence in our products and share liability “ If our product is sold and does not meet the quality endpoint of actually reducing the clinical risk being incurred by a third party, why should we expect that third party to pay for the product?” Reforming the Healthcare Market

17. The Pharma challenge • Wider access to innovation • Finding mechanisms to; • give access to innovation to emerging market • create multi-level margin markets • Benefit from legislative changes “Is a lower margin business in a growing sector, with strict but consistent clinical policies and a focus on QUALITY, not better than the current higher margin business in a shrinking sector characterised by inconsistent clinical rules and an incentive to ignore quality?” Reforming the Healthcare Market

18. The Pharma challenge • Measuring and reporting on outcomes • Create a quality audit group • Measure adherence to clinical policies AND quality outcomes • Publish this data – inform consumers “Should we not be creating new levels of competition in healthcare – where patients choose health plans based not only on the cost of cover, the adequacy of benefits but also the quality of care they will receive?” Reforming the Healthcare Market

19. Calculating Dispensing Fee utilising Real Market Data • Market Data • Pharmacy Mark-up = 50% (blue book) • Average discount from Pharmacy to Payers = 28% • (Mediscor data) • Average cost per item = R76 (Medscheme) • Wholesale + Manufacturer discount as per SA Pharma Journal • June 2004 p.10) =16% • 5) Average number of items per script = 2,5 (IMS NDTI)

20. Utilising Real Market Data to compare Dispensing Fees at different Scenarios Traditional Mark-Up SystemNew Dispensing Fee MSP = R70 SEP = R70 Plus 50% Mark-up = R105 Dispensing Fee @ 26% = Minus 28% discount = R76 R18 per item (average cost per Medscheme item) Therefore Pharmacy Fee = R6 Cost per script = R18 x 2,5 = R45 Include previous rebates: Wholesaler 1% Manufacturer 15% Rebate value = R11 Rebate + Mark-up = R17