“A Giant Hairball of Perverse Incentives…”

The best thing about going back to school is to think big thoughts, immerse oneself in what the great academic minds are ruminating over. This past weekend Harvard Business School hosted its annual healthcare conference for students and alums, and fortunately for us, some of the great faculty were on hand to share their views on the state of the healthcare industry. The quote above was the opening comment from the breakfast keynote by Prof Bill Sahlman, one of the best of the best!

While we all lament the fundamental conundrum that competition has not led to an improvement in quality at lower costs, which is the phenomenon experienced in every other industry vertical, the business of healthcare is now facing arguably the most profound transformation in modern history. But most troublesome were Prof Sahlman’s observations around the true costs, not yet acknowledged, to society due to this tragic paradox. Today the outstanding federal debt is over $17 trillion; the unfunded Medicare and Medicaid liabilities are estimated to be $30 trillion each, so a total of another $60 trillion of additional obligations – not recorded on the country’s balance sheet – sit out there due to the societal pact to fund healthcare costs for all citizens over 65 years old.

A couple of other fun facts and observations from the morning session:

• An employer-based healthcare insurance system obviously has left a lot of people uninsured
• At 18% of GDP, this implies $4,000 – $5,000 higher health costs per citizen than other developed societies; higher costs with more modest outcomes. This dynamic clearly hurts the global competitive position of the US
• The third leading cause of death is due to faulty medical care – ouch!
• Fundamental misunderstanding of the current reform debate is that we have modestly reformed access to insurance, NOT healthcare services – big difference
• And what are considered the greatest needs in healthcare today according Prof Sahlman? Greater transparency of costs and outcomes which need to be readily accessible, and a re-engineering of where healthcare services are delivered

This event also attracts CEO’s from leading healthcare franchises, and as such, we were privileged to have Mark Bertolini (Aetna) and John Brooks (Joslin Diabetes Center) address the audience later in the day. The juxtaposition of having a provider and then payer share their visions of the future underscored the “jump ball” around who will own the consumer/patient. Both view a very “patient centric” delivery model, enabled by many of the highly disruptive, highly innovative platforms which will enable these new and deep patient relationship to be fostered (frankly the types of companies my new fund at Foundation is investing in).

Some more fun facts from Mark Bertolini, who by the way if you have not heard him speak, make a point of doing so – he is great.

• According to the Institute of Medicine in 2009, 27% of the $880 billion of medical spend was unnecessary; 17% of that was on inefficient care delivery; and, 10% was considered fraud – staggering waste and inefficiencies
• In 2020 Bertolini expects there will be 75 million people on retail commercial insurance exchanges
• When asked about his strategic priorities, quite surprisingly he pointed to the need to enable providers to underwrite risk (be insurance companies?), foster greater sense of community by facilitating public/private exchanges and then drive hard on an integrated “digital experience” – very provocative and forward-thinking
• Worst 5% of the US population consumes 43% of healthcare spend – the two greatest costs are attributed to heart failure to people over 85 years old and end-stage renal disease for those under 65 years old
• Arguably better social safety nets (i.e., better education and healthcare systems) will lead to greater peace of mind, which leads to greater consumption rates and lower savings rates
• Medical device companies will soon be confronted with greater burdens to prove that their devices actually lead to better outcomes which is ostensibly measured by keeping people out of the hospital, thus Aetna’s work with Medtronic on taking data feeds from pacemakers to better monitor for cardiac incidents – before they occur
• The iTriage initiative with CVS – mobile apps to manage one’s entire healthcare needs – is borne from the realization that better quality is mostly correlated to convenience
• Bertolini’s best quote: “Give up control to get power…”

John Brooks, CEO of Joslin, had an equally expansive vision which is very focused on providing an extended care model driven by highly innovative technology platforms. The epidemic of diabetes demands close and regular patient engagement – better longitudinal care earlier can have enormous benefits – which is the real power of the “connected health” models.

All of this opportunity/confusion in the marketplace is reflected in recent financing data. In addition to the dramatic spike in overall healthcare tech investing, valuations have moved meaningfully over the course of 2013…

• First round pre-money valuations from 2012 through 3Q13 decreased from $7.1 million to $4.8 million – perhaps a reflection of the increased start-up activity in this sector and the risk of too many undifferentiated companies – just a guess
• Second round pre-money valuations from 2012 through 3Q13 remained essentially flat – $23 million to $22.5 million
• While Later Stage valuations from 2012 through 3Q13 jumped from $54 million to $64.7 million, which undoubtedly reflects some of the “break-out” winners and increased IPO and M&A activity.

10 Comments

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10 responses to ““A Giant Hairball of Perverse Incentives…”

  1. Mark Payton

    What about the politics? How do you quantify the risk that our nations’ politics imposes on our healthcare systems? Would it be your opinion that that risk stifling innovation?

    • payton, you know i am apolitical! what i can share is that i have never this level of disruptive innovation in the early stage healthcare market like we are seeing today. and, btw, when are you coming to Boston?

  2. Katlyn

    I so enjoyed this.

    I can only hope there was someone at the conference brave enough to discuss the impact of the big business food supply and how it is devastating the American population by making a dinner for 4 at McDonalds cheaper than a chicken dinner with fresh veggies and whole grains.

    Obesity is the leading cause of most health issues in the US and is probably the single largest driving force of the increases in medical care needs.

    The conversation is not limited to the healthcare industry trying to manage how to care for the implications of the food supply.

    There is also no “reward” system in place for the people that choose to take care of themselves; sacrifice the craving for m&ms and choose the piece of fruit. The small percentage of healthy Amwricans are paying the same premiums as the Ameicans that make unhealthy choices. Where is the “safe driver” credit for this industry. Humans are driven by incentives and rewards.

  3. When asked about his strategic priorities, Bertolini states the need to help providers take on more risk. This makes sense as it is exactly what the providers need and don’t have.

    As we move away from a fee-for-service reimbursement environment and move toward a system that rewards quality care at a lower costs, providers are being asked to take on more financial risk for their patient populations. Today, providers have no useful data or tools to properly manage this risk. They are “flying blind”. At the same time, Aetna and all the other payers are desperately looking for ways to provide an olive branch to providers. For years, payers (not Aetna, specifically) have screwed over the provider. They have constantly positioned themselves on the opposite side of the table on almost every negotiation. Payers are now looking for ways to partner with providers and give them added value tools. Giving providers tools to manage risk is a great starting point. The big question is: can the payer-provider relationship and trust be restored?

    Let’s all hope so. It’s our only hope to reverse the “giant hairball of perverse incentives”.

  4. Dan Gebremedhin

    Excellent Summary of this conference that I missed. Thanks! In a parallel point to the many valid points raised above, much of the service payments made to providers (docs, device, lab, pharma, etc) is made through back-room negotiated deals, and not tied to true value. True, there is a general lack of transparency, but even when there is transparency, this has yet not become a valid negotiating post. At this point, market share tends to take the day in pricing negotiations. PCORI was created in 2010 to address this point, but as of yet, not sure that this ACA institution is delivering ROI. Their charter argues against the use of a QALY-type calculation, when that is the closest thing to outcomes-based valuation of treatment that I have seen. A venture that could develop a paradigm to produce value based assessments of treatments that could be used in negotiating based on value would truly move the needle.

    • thanks Dan. very much appreciate the comments. I heard today that 23% of healthcare cost is spent on the process of settling claims – in all other industries the cost of settlement runs between 2-3% of revenues. if this is true, we have an enormous problem on our hands…

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