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 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. 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

4. 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

5. 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

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. 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

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. 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

11. 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

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. 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

17. 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

18. 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

19. 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)

20. 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 26% =
Minus 28% discount = R76 R18 per item
(average cost per Medscheme item)
Therefore Pharmacy Fee = R Cost per script = R18 x 2,5
= R45
Include previous rebates:
Wholesaler 1%
Manufacturer 15%
Rebate value = R11
Rebate + Mark-up = R17