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

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

Competition in Health Care (Continued) Zero-Sum Positive-Sum WRONG FORM RIGHT 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

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

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

Redefining the South African Healthcare Model Reforming the Healthcare Market

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

Reforming the Healthcare Market 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

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

A better definition of ‘Quality Care’ 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

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

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

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

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

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

Reforming the Healthcare Market 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

Reforming the Healthcare Market 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

Reforming the Healthcare Market 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

Calculating Dispensing Fee utilising Real 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)

Rebate + Mark-up = R17 Utilising Real Market Data to compare Dispensing Fees at different Scenarios Traditional Mark-Up System New 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