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

2. Confidential 2 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

3. Confidential 3 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 STRUCTURESpecific disease unique quality - Consolidated diversecare care - Discounted care

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

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

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

7. Confidential 7 Overview 1. The current marketplace 2. An ideal scenario 3. Quality Care – defining the objective 4. Quality in today’s marketplace 5. Being serious about quality ≠ increased cost 6. What is needed to reform the market 7. What can Pharma contribute 8. A challenge to all serious Pharma companies Reforming the Healthcare Market

8. Confidential 8 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

9. Confidential 9 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

10. Confidential 10 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

11. Confidential 11 What is ‘Quality Care’ ? Quality Care = best available care Historically, the definition proposed by Pharma Industry Questionable in an environment of limited resources Reforming the Healthcare Market

12. Confidential 12 What is ‘Quality Care’ ? Quality Care = the application of evidence based clinical protocols developed considering factors of cost-effectiveness and affordability The definition often proposed by Managed Care Basis of all DUR More realistic as it takes into account the reality of limited resources Reforming the Healthcare Market

13. Confidential 13 What is ‘Quality Care’ ? best available care A better definition of ‘Quality Care’ the application of evidence based clinical protocols developed considering factors of cost- effectiveness and affordability Both definitions conveniently protect the vested interest of the individual players Pharma = Managed Care = Best clinical outcome given budgetary Constraints Incorporates; patient focus actual endpoints – health outcomes budgetary constraints

14. Confidential 14 Are we providing ‘Quality Care’ ? Quality Care = best clinical outcome given a specific budget We don’t measure quality therefore we do not know We only measure intermediate outcomes Diagnosis Ensure treatment is Necessary Appropriate Cost-effective ?? DUR Authorize Rx Quality Care is measured here Education Compliance Measurement Reporting The Missing Link

15. Confidential 15 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; o creates incentives where non-compliance results in short term savings o non-compliance = poor outcomes and waste o poor outcomes = short term savings Current market creates economic incentives to NOT measure quality

16. Confidential 16 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

17. Confidential 17 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 But, can we afford to implement an outcomes based model?

18. Confidential 18 Can we afford an outcomes based quality approach? In any healthcare model we have to consider affordability But equally we have to be serious about quality If the economics do not allow a quality outcomes based model to be implemented then consider this; “ Should we not be paying for certain treatments in smaller sub-populations of patients who will benefit the most – and then take quality seriously by measuring and reporting on it ---- rather than treat a wider spectrum of patients and show a disregard for clinical outcome measures?” It is a choice

19. Confidential 19 Illustrating the choices – showing that it is possible ! A More Efficient Model Current Scenario Population Receiving Treatment n = 100 Non-compliant Intolerant n = 40 Population that could possibly benefit n = 60 New Scenario Eligible Population n = 80 Non-compliant Intolerant n = 10 Population that definitely benefits n = 70 Intensive Management Measured Guaranteed Quality Outcomes

20. Confidential 20 Let’s take quality seriously Can we afford not to adopt this approach? Current Scenario Population Receiving Treatment n = 100 Non-compliant Intolerant n = 40 Population that could possibly benefit n = 60 New Scenario Eligible Population n = 80 Non-compliant Intolerant n = 10 Population that definitely benefits n = 70 Intensive Management Healthcare cost incurred – no clinical benefit gained = WASTE Fewer patients treated Less waste Better outcomes enjoyed by more patients Measured Guaranteed Quality Outcomes

21. Confidential 21 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

22. Confidential 22 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

23. Confidential 23 The Pharma challenge 1. 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 Reforming the Healthcare Market “ 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?”

24. Confidential 24 The Pharma challenge 2. Wider access to innovation  Finding mechanisms to; –give access to innovation to emerging market –create multi-level margin markets –Benefit from legislative changes Reforming the Healthcare Market “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?”

25. Confidential 25 The Pharma challenge 3. Measuring and reporting on outcomes  Create a quality audit group  Measure adherence to clinical policies AND quality outcomes  Publish this data – inform consumers Reforming the Healthcare Market “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?”

26. Confidential 26 Calculating Dispensing Fee utilising Real Market Data Market Data 1)Pharmacy Mark-up = 50% (blue book) 2)Average discount from Pharmacy to Payers = 28% (Mediscor data) 3)Average cost per item = R76 (Medscheme) 4)Wholesale + Manufacturer discount as per SA Pharma Journal June 2004 p.10) =16% 5)Average number of items per script = 2,5 (IMS NDTI)

27. Confidential 27 Utilising Real Market Data to compare Dispensing Fees at different Scenarios Traditional Mark-Up SystemNew Dispensing Fee MSP = R70SEP = 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