The evolving value chain in life sciences

22nd Annual Health Sciences Tax Conference The evolving value chain in life sciences December 4, 2012

The evolving value chain in life sciences Page 2

Disclaimer

► Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


Disclaimer

Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US. For more information about our organization, please visit www.ey.com. This presentation is © 2012 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of US and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party. Views expressed in this presentation are not necessarily those of Ernst & Young LLP.


Presenters

► Peter Anderson Ernst & Young LLP New York, NY +1 212 773 3720 [email protected]

► Sanjeev Wadhwa Ernst & Young LLP Iselin, NJ +1 732 516 4183 [email protected]

► Jeff Holtz Johnson & Johnson New Brunswick, NJ

► Karen Holden

Ernst & Young LLP New York, NY +1 212 773 5421 [email protected]


Agenda

► Supply/value chain hot topics for today and tomorrow

► Center-led principal and value-added services structures

► Supply chain best practices ► Using strategic business processes to impact performance ► Inventory and working-capital management ► Governance and compliance

► Industry trends and drivers ► Collaborations


Key challenges for the pharmaceutical (pharma) and life sciences industry

Supply side challenges Demand side challenges Challenges to meet

for investments across the supply and

value chain

► Adapting business strategy to the new mix of: ► Generic competition ► Cultures and tastes

► Ensuring business

processes and assets match market needs ► Emerging market focus ► Brands across markets

► Meeting changing patterns

of consumer demand in line with new key markets

► Competition and price pressures (open markets)

► Cost reduction essential to

compete and be profitable

► Supply side rationalization a

critical success factor ► Procurement, e.g., rationalize

suppliers ► Intellectual property (IP)

management strategy across multiple brands

► Regulatory environment

Demand side Supply side

Marketing; research and development

(R&D)

Supply chain manufacturing

operations

Sales activities Sourcing activities

Direct sales

Wholesale Retail Suppliers Logistics


Meeting the challenges — examples of supply and demand side rationalization strategies

Adapting business models to the new outcomes-based, patient-centric world

Opportunities across the supply chain

Reduce spend

Leveraging purchasing skills, rationalizing suppliers

Supply chain rationalization Lean manufacturing processes

Logistics management Inventory/capacity management

Protect and develop brands

Coordinated IP management and brand development strategy

Management of issues re generics

Suppliers

Internal supply chain processes

End users

Active pharmaceutical ingredient (API) Other materials

Inactive ingredients

Finished goods

Procurement

Operations: ► Manufacturing/services provision ► R&D and IP management ► Clinical trial processes and management

Sales

Centralization of services and risk m

anagement

Center-led principal and value-added services for pharma and life sciences


Centralized business models implemented for pharma and life sciences companies

Centralization can be achieved in: Key decision variables:

► Key functions ► Transaction flows (hub) ► Product groups ► Assets such as IP

► What degree of change can be implemented? ► Where do the key opportunities exist? ► What are the potential benefits? ► Are the benefits realistically achievable?

Supply chain management

company

Full principal with IP

Sales and marketing principal

Import and export company

Sourcing company

Service company

Ben

efit

Business impact

High

Medium

Low


Deliver goods

Warehousing services

Ownership of material Invoice

Contract manufacturer

Legal title Physical flow

Services Material rel. invoice

Invoice

Ownership of products

Limited risk distributor

Deliver goods

Product sales and services

Invoice

Ownership of products

Invoice

Profit Profit

Full principal model for global pharma and life science companies

Customers Suppliers

IP principal

Centralized warehouse (inventory of principal)


The center-led principal (CLP) alternative

Business issue Business drivers

No overall estimated realization percentage (ERP) system

► CLP can mitigate ERP issues

Deductibility and withholding tax (WHT)

► Unbundled services and royalties may mitigate these issues

Indirect tax and customs duty

► No change in product flows/pricing

► Limited value-added tax/customs impact

Center-led principal

CLP provides:

► Routine services

► Non-routine services

► IP

Local sales entities

Bundled or unbundled services, IP

► Value-based fees for value-added services

► Management fees for routine services

► Royalties for IP


The value-added services model within CLP

It is essential that the CLP has full control over the risks it assumes, substance behind the functions it performs and the financial capacity to withstand the risks it contractually bears.

► Allocation of risks to the CLP must be substantive in nature.

► The substance follows control and financial capacity to bear the risks.

Control — capacity to make decisions to take on the risk (decision to put the capital at risk) and decisions on whether and how to manage the risk, internally or using an external provider

► Requires company to have employees with authority to perform control functions

► Not required to perform day-to-day activities but must be able to assess outcomes

Financial capacity — capital and liquidity position should be held as per that which an independent entity would require to be able to bear and withstand the risks allocated to it

► Requires company to hold sufficient of capital and liquid assets to bear risks

► Can be arranged via financial guarantees and other means as long as arm’s-length principle is applied to transactions

Consequence: party controlling risk should be compensated by an increase in expected return.


Foreign base company services income (Sec. 954(e))

► The foreign base company services income rules apply to treat services income as Subpart F income when a Controlled Foreign Corporation (CFC) performs services for, or on behalf of, a related person and performs those services outside its country of incorporation.

► When the CFC receives substantial assistance from related US persons, service income will be Subpart F, regardless of where earned. ► Under Notice 2007-13, this rule applies only when the cost to the

CFC of the assistance provided equals or exceeds 80% of the total cost to the CFC of performing the services.

► The rule does not apply to assistance from other CFCs.


Foreign base company services income (Sec. 954(e)) ► Place of performance is a factual issue. ► Watch for foreign base company sales vs services

income. ► Service income related to the purchase and sale of property from

or to related parties may be characterized as foreign base company sales income (see Treas. Reg. Sec. 1.954-1(e)(1)). ► Substantial contribution rules come into play.

► Certain transactions may be treated separately. ► For example, a CFC manufactures and sells property to a related party

and also provides installation and warranty services. ► In general, the CFC will be viewed as earning separate sales and services

income. ► Compare the predominate character rule (Rev. Rul. 86-155).


Foreign base company services income (Sec. 954(e)) ► There is no branch rule of foreign base company services

income. ► Thus, services provided between and among disregarded entities

will not be Subpart F.


Overall risks and benefits — incremental value-added services vs CLP

CLP with value-added service

CLP with profit split CLP with full residual

Bundled or split return Split (per service) Bundled Bundled

Expected risk of challenge Medium risk Medium risk High risk

Implementation difficulty Low difficulty Medium difficulty Medium difficulty

Expected benefits Medium benefits Medium benefits High benefits

Substance shift to center Low to medium shift Medium shift High shift

The overall risks and benefits vary based on several factors.

► Various types of return structure are applicable for a CLP providing value-added services.

► Payments may be bundled or split.

Initial conclusions


Bundled or separate payments? WHT considerations in Asia ► Services fees do not always attract WHT in Asia-Pacific.

► For technical services fees, WHT generally applies if the services are sourced or performed in the local country. ► Payments may avoid WHT if:

► The payments are characterized as technical services fees and rules are based on the rule detailed above. ► The services are not deemed to be sourced in the local country.

► Note that this general rule does not always apply — full WHT applies on technical services regardless of source in some cases.

► Under a single payment, many Asia-Pacific authorities deem such payments to be royalties: ► Technical service fee characterization may be challenged in favour of a royalty if former does not attract WHT. ► If the payment is a single payment and IP or know-how is deemed included, then such challenges are frequent. ► Examples include India, Korea, Hong Kong, Indonesia, China, Japan, Thailand and others. ► Note: technical services fees are shown at non-treaty rates.

SG Treaty WHT rates CN IN JP KR AU NZ ID TH MY SA

Royalties 10% 10% 10% 15% 10% 5% 15% 15% 8% 5%

Dividends 10% 0% 15% 15% 15% 15% 10% 10% 0% 10%

Interest 10% 15% 10% 10% 10% 10% 10% 15% 10% 0%

Technical services 25% 10% 20% 20% 0% 15% 20% 15% 10% 0%

Source: Ernst & Young Worldwide corporate tax guide and the relevant tax treaties


Bundled or separate payments? WHT considerations in Latin America ► Services fees do not always attract WHT in Latin America (Latam):

► WHT in Latam countries depends on the nature of the service. Each country has a definition for each type of service (i.e., royalties, technical assistance, management fees).

► Management fees and general services ► WHT generally applies if the services are sourced or performed in the local country. ► Payments may avoid WHT if the services are not deemed to be sourced in the local country.

► Technical services are typically subject to withholding taxes regardless of where they are performed.

► Under a single payment, many Latam authorities deem such payments to be subject to the higher withholding taxes: ► Service fee characterization may be challenged in favor of a royalty or other category if the former does not

attract WHT. ► If IP or know-how is deemed included, then royalty classification is likely.

Brazil Mexico Argentina Colombia Venezuela Chile Peru Panama

Royalties 15% 30% 28% 33% 30.6% 30% 30% 12.5%

Dividends None None None or 35% None or 33% None or 34% 35% 4.10% 5%

Interest 15% 30% 35% 33% 32.30% 35% 30% 12.50%

Technical services 15% 25% 31.5% 33% 10.2% 20% 15% 12.50%

Source: EY Worldwide corporate tax guide. General rates under domestic law.


The value added services solution

► Potential solution: ► Divide the payment into several

component parts, including: ► Routine management

services fee ► Value-added services fee ► Royalties on IP in the event

that any rights on valuable IP are granted to the sales companies

► Deductibility and transfer pricing challenges easier to manage: ► Multiple payments linked to

specific services and IP ► Easier to defend using

benchmarks

Routine services

Value-added services

Intellectual property

Full residual prof its

Commercial risks and dif f iculty in implementation

Expected incremental

prof its

► Value added services are a newer concept but are frequently applied.


Types of value-added services for life sciences/pharma companies 1. Services to API manufacturer Product testing services ► Comparable uncontrolled price (CUP) or controlled

price method (CPM) search for similar service providers

Plant/production plan layout/design ► CUP or CPM search for design service providers

Centralized procurement services ► CUP or CPM search for procurement companies

Quality processes ► CUP or CPM search for quality service providers

2. Services to API local market life sciences/pharma sales Request for proposal support services ► CUP or CPM search for marketing services

Warranty support services ► CUP or CPM search for warranty insurers

Database creation ► CUP or CPM search for IT service providers

Demand planning and inventory management ► CUP or CPM search for Supply Chain Management (SCM) service providers

3. Services to drug R&D entities Clinical trials project management/technical support ► CUP or CPM search for similar at-risk service prov.

Drug R&D strategy and development services ► CUP or CPM search for similar at-risk service prov.

Strategic business processes


Using strategic business processes to impact operating performance

► Sales and operations planning (S&OP) ► Principal governance


Using strategic business processes to impact operating performance

► Sales and operations planning (S&OP): ► As part of supply chain redesign, many companies are looking at

this key business process to drive significant improvements in planning and forecast accuracy and to sustain governance and compliance structure. ► S&OP processes support substantial contribution.

► The governance and compliance process can be designed within the S&OP framework. ► Process should monitor that the principal is “living the structure.” ► Process should create documentation for future tax authority review.


What is sales and operations planning (S&OP)?

► S&OP has a vast array of definitions: ► “an integrated business management process developed in the 1980s by Oliver

Wight through which the executive/leadership team continually achieves focus, alignment and synchronization among all functions of the organization”

Wikipedia, the free encyclopedia

► “a set of decision-making processes to balance demand and supply, to integrate financial planning and operational planning, and to link high level strategic plans with day-to-day operations”

Tom Wallace, S&OP 101 ► the “function of setting the overall level of manufacturing output and other activities

to best satisfy the current planned levels of sales, while meeting general business objectives of profitability, productivity, competitive customer lead times, etc., as expressed in the overall business plan”

APICS The Association for Operations Management


Substantial contribution and S&OP

► Oversight of manufacturing processes ► S&OP process ► Formulate policy internal and external manufacturers

Indicia of manufacturing Potential activities carried out by principal

Activities that are considered in, but are insufficient to satisfy, the substantial transformation

Material selection, vendor selection or control of raw materials, work-in-process or finished goods

Management manufacturing costs or capacities

Control of manufacturing-related logistics

Quality control

Developing, or directing the use or development of, product design and design specifications, as well as trade secrets, technology or other intellectual property for the purpose of manufacturing or producing the product

Oversight and direction of the activities or process under which the product is manufactured

► Ownership of inventory

► Manage supplier risk (capacity, obsolescence) ► Determine supplier capacity and continuity

► Identify and manage cost-improvement initiatives ► Cost reduction (e.g., inventory reduction, price reduction)

► Direct the planning and production schedules for internal and external manufacturing

► Monitor production orders, schedules and output to ensure products are manufactured and scheduled delivery dates are met

1

2

3

4

5

6

7

► Evaluate quality systems and share best practices ► Negotiate quality agreements ► Ultimate quality responsibility

► IP ownership ► Develop technology transfer process for new product introductions ► Transition design or process changes to external partners ► Partner with partners on supply chain development initiatives

► Finish and fill ► Sterilization


Effective S&OP aligns objectives

S&OP supports the organization by balancing goals across markets, plant operations, supply chain and finance.

Finance

Product availability

Promotional plans

Customer opportunities

Competitor actions

Portfolio management

Annual plan/budget Revenue plan

Operating income/profit plan Capital investment plan

Wall Street guidance

Make-vs- buy decisions Short- and long- term capacity management Product lifecycle management Inventory management Network optimization


Why does S&OP fail?

► Companies are organized and typically work in silos, but planning needs to be executed horizontally.

► S&OP is viewed as a supply chain process instead of a fully integrated, enterprise-wide planning process.

► Financial, sales, marketing and operations plans rarely match. ► Organization structure does not support effective S&OP. ► Processes are not focused on the right elements; people are not

doing the right things the right way. ► Executive sponsorship is inadequate.

A lack of management support and leadership is the most common reason for implementation failures.


Activity Month 1 Month 2 Month 3 Demand

review and exception process Supply review

process Integrated

reconciliation meeting

MBR meeting

EBR meeting

Month 1 Month 2 Month 3

Weekly view

Process

Meeting

S&OP process cadence


Principal governance and compliance

► Use of a performance management framework to review operational performance

► Establishes principal oversight of manufacturing and markets

► Monitors that the principal is “living the structure” ► Creates documentation for future tax authority review


Operational metrics are used by principal companies to monitor the performance of manufacturing sites and markets. Metrics should be reliable and action oriented.

Operational metrics

Centrally reported metrics

Critical operational metric was identified that measures key business process performance.

Operational focused metrics

identified

Metrics reviewed with stakeholders Operational focused metrics were reviewed

with stakeholders to determine validity.

Metrics were reviewed and operational focused metrics identified.

Centrally reported metrics were collected through various scorecards and dashboards.

Supply chain governance


These 15 metrics provide visibility into manufacturing and markets’ operational performance.

Process area

Item no. Operational metrics Existing

Planning

1 Percent in stock 2 Forecast error 3 Forecast bias 4 Inventory value 5 Inventory turnover

Procurement 6 Percent principal approved/endorsed

spend 1

7 Percent of spend in principal lead SRM 1

Global logistics and supply

8 Distribution cost as percent of sales 9 Distribution cost per unit shipped 10 Shipments not delivered on time (%) 11 Shipments not delivered full (%)

Manufacturing

12 Right first time 13 BOH commitments 14 Budget variance 15 Critical findings

Strategic metrics

Operational metrics

(in scope)

Tactical metrics

Operational metrics scope Recommended operational metrics

Supply chain governance — example of operational metrics


# Supply chain governance activity Compliance guidelines Operational metrics

1 Finished goods planning/manufacturing

► Demand plan submitted to principal monthly ► Master Production Schedule (MPS) submission

guidelines ► MPS adherence guidelines

► % in stock ► Forecast error ► Forecast bias

2 Intermediate goods planning/manufacturing

► MPS/Material Requirements Planning (MRP) submission guidelines

► MPS/MRP adherence guidelines

► Forecast error ► Forecast bias

3 Direct materials sourcing

► Substantial direct material/drug product contracts endorsed by principal

► Purchase price variance report submitted to principal monthly

► % principal approved/endorsed spend ► % of spend in principal lead SRM

4 Manufacturing cost management

► Excess and obsolete inventory management costing performed at principal

► Supply chain agreements adjustments approved by principal

► Budget variance ► Inventory value ► Inventory turnover

5 Logistics

► All inter-transfer approved by principal ► Transportation plan submitted to principal

monthly ► Transportation plan adherence

► Distribution cost as % of sales ► Distribution cost per unit shipped ► Shipments not delivered on time (%) ► Shipments not delivered full (%)

6 Quality ► Quality parameters met ► Quality reports submitted

► Right first time ► Board of Health (BOH) commitments ► Critical findings

Supply chain governance activities

Compliance guidelines and operating metrics are aligned to key activities that are critical for governance and oversight.


Supply chain governance — metrics, agreements and S&OP Key activities that help achieve business objectives and support the principal structure

Supply chain agreements and MSA planning parameters

1 ► The principal to review the

currently used planning parameters for select products

Compliance guidelines and operational metrics

2 ► The implementation of

compliance guidelines to support the principal structure and operational metrics to support the business processes

Escalation thresholds 3

► Identification of thresholds and setting of business scenarios that will need to be escalated to the principal for review or approval

S&OP process 4

► A key process for decision making and control of supply chain activities and business results

Operating manual 5

► The operating manual to be the guiding document for all processes, responsibilities and controls

Industry trends and drivers


Industry trends and drivers

► The life sciences business environment

► Patents: wave of patent expiries on key products and threat of follow-on biologics

► Productivity: low R&D productivity slide vs historical performance and biotech sector

► Pricing: cost containment placing pressure on prices and market access — first Europe, now the US

► Commercial structure: inefficiencies in traditional sales and marketing model

► Compliance commitments: increased requirements, complexity and enforcement actions

► Customer relationships: increasingly informed and active stakeholders demanding value and transparency over business practices

Reduced growth (top-line)

Margins squeezed

Reputation in decline

Consolidation (mid-market)


US

Germany Spain UK

Japan France

Healthcare costs (HC) continue to outpace economic growth

€2.650

€3.150

x

€2.250 €1.850

1992 1997 2002 2007

€5.351

Inde

x

Index: 1992 = 100 HC cost per capita 2006 (€)

1992 1997 2002 2007 1992 1997 2002 2007

1992 1997 2002 2007 1992 1997 2002 2007 1992 1997 2002 2007 100

200

300

100

200

300

100

250

400

100

200

300

100

200

300

100

250

400

Wages HC costs GDP

€2.381

Source: OECD Health Data 2008; EIU.

Inde

x

Inde

x

Inde

x

Inde

x

Inde

x


Higher spend doesn't necessarily lead to better outcomes

Expe

nditu

res

($) p

er c

apita

6,000

5,000

4,000

3,000

2,000

1,000

0

Healthy life years 76 75 74 73 72 71 70 69 68

Japan

Singapore

United States

Internationally, higher spend not correlated with increased health

Costs outpacing improved quality for past decade in US

(%)

250

200

150

100

Year 2006 2004 2002 2000 1998 1996 1994

Costs Quality Source: OECD Health Data 2008; EIU.


Value-based interventions — how do we define the value?

Patient health experience for a given medical condition

► Health status achieved and retained ► Survival ► Extent of recovery or disability ► Disease progression

► Recovery/disease management ► Right diagnosis ► Treatment errors ► Complications ► Recovery time

► Sustainability of health ► Recurrences ► ER visits

► Self-management cost of patient care

► Personnel ► Facilities ► Supplies ► Technology ► Administration

► Net cost across cycle of care (to minimize cost shifting)

Risk-adjusted outcomes

Cost of providing value-based services ÷ Health care

value

► Health outcomes per dollar spent providing services

► Value measured across full cycle of care

= Source: Redefining Health Care: Creating Value-Based Competition on Results; Michael E. Porter.

Focus on results — measured by quality and efficiency


The collaboration imperative

► Working together for mutual gain ► US health care is transforming from a provider- and payer-

dominated system to one in which patients are at the center of care. ► Forces at work require new levels of collaboration.

► Collaboration, the new competition ► Collaboration crossroads:

► When does collaboration make the most sense for your organization?

► What strategic issues do you need to address to thrive in a collaborative environment?

► How are your leaders serving as role models for a collaborative culture?

► What are the tax impacts of collaboration?


In fact, several partnerships and pilots are positioned to build collaborative care partnerships

I3G Johnson & Johnson (J&J) — AOK and Care4s

Nationwide network for integrated outpatient care for schizophrenia patients in Lower Saxony region of Germany: ► Case managers and nurses

build the team on site. ► Structured treatment path with

psycho-educational or drug adherence and shared decision-making initiatives are in place.

► Patients and relatives are active in the decision process.

Merck — M2Gen

Merck’s for-profit collaboration with H. Lee Moffitt Cancer Center aims to improve cancer care with personalized treatments.

Moffit’s M2Gen database of genetic data derived from tumor tissue samples and clinical information from 85,000 patients allows researchers to match molecular signatures of patients’ cancers with treatments.

AstraZeneca — Healthcore

AstraZeneca and HealthCore (WellPoint’s health outcomes based subsidiary) are conducting retrospective and prospective studies to determine effective and economical treatments for chronic diseases.

Lilly — Anthem BCBS and five other Indiana-based Health Care Provider (HCPs)

Merck — Camden Coalition of Healthcare Providers

Merck Foundation committed $15 million in 2009–2013 to fund the Alliance to Reduce Disparities in Diabetes, a public/private partnership encouraging evidence-based collaborative approaches to improve care and reduce care disparities in low-income, underserved populations..

Abbott — Anthem BCBS**, UHC*, Humana, Cincinnati doctors

Cincinnati Patient-Centered Medical Home (PCMH) Pilot and Co-Pilot Project is organized under the Aligning Forces for Quality (AF4Q) initiative.

The project is sponsored by Health Improvement Collaborative of Greater Cincinnati and funded by Anthem BCBS, Humana, Abbott, UHC* and various physician practices.

Sanofi-Aventis — Baltimore County Dept. of Aging, John A. Hartford Fdn and NCOA Sanofi-Aventis, the Baltimore County Department of Aging, the John A. Hartford Foundation and the National Council on Aging (NCOA) launched a pilot program to help physicians connect older patients with diabetes to evidence-based education and wellness support.

Fresenius — Aetna

A patient-centric care coordination program is improving clinical outcomes and reducing costs by slowing the progression of chronic kidney disease in members and facilitating gentler, less costly transitions to dialysis or pre-transplant care. The program is enhancing coordination of care among specialists, primary care providers and nurses.

The alliance aims to achieve better outcomes for diabetes patients. Policyholders of Anthem BCBS who have diabetes, but have performed their testing, will receive reminder phone calls.

*UHC=United Healthcare; **BCBS=BlueCross BlueShield Association


PatientN

Patient

Rather than research-focused initiatives, improving patient health outcomes is the ultimate goal.

Clinical transformation ► Real-world data informing discovery and

development ► Increased focus on “pills+” that help prevention,

adherence and self-management

Health care delivery transformation ► Patient–physician

connectivity and multi-channel information pipelines

► Improved multi-sourced and predictive data

► Behavioral economics levers

Inspiration Merck/M2Gen

Inspiration Sanofi and NCQA

Inspiration Wellpoint/Watson

Inspiration Coalition Against

Major Diseases (CAMD) Inspiration

Merck/Camden Coalition

Inspiration Merck/CIGNA

Aspiration Permanently funded, national

*CER Infrastructure

Aspiration Collective care

model

Aspiration Patient-focused, healthier

outcomes

Aspiration: Personalized Healthcare

(Nutrigenomics and Nutrigenetics)

Aspiration New therapies for druggable

compounds

► Organizing around patient populations ► Customer segmentation ► Behavioral economic levers

Commercial transformation ► Providing product and services in non-traditional settings ► New business models creating lifelong relationships with

customers and improving outcomes

Model will enable pharmaceutical companies to access larger markets (from a $200 billion to $2.5 trillion market).

Inspiration Novo Nordisk in China*

Inspiration GSK and GAVI

in 48 Least Developed Countries (LDCs)**

*Comparative effective research (CER)


Cap

abili

ties

Market engagement Payment models

Automated reporting

Initiatives that focus on collaborative care and quality- and outcome-based payment are the most highly evolved.

Clinical navigation

Disruptive Evolutionary Revolutionary

Aspiration: Coordinated integrated care

Patient focused Holistic payment model

Population context Standardized

Expand collaborative care pilots to employer contracts and 2–3 payers: Abbott and Cincinnati PCMH collaboration, Camden Coalition of Healthcare Providers and Alliance to Reduce Disparities in Diabetes, Maryland multi-payer PCMH funded by Merck, Pfizer and Sanofi-Aventis

Payment neutral constructs to support experimentation and infrastructure development

Multiple payment bundling arrangements; material “at risk” revenue — UHC and 5 oncology practices

Newly established clinical councils of selected medical staff focus on quick wins

Stabilized process for data collection and reporting; roadmaps for mature enterprise tools and data management

Form and operate ACO and PCMH pilots

Competitive advantage established; drives expanding base of covered lives served

Multiple desktop applications aggregating and analyzing data

Maturing teams of primary care physicians (PCPs), case navigators and analysts; recurring comparison of outcomes to standardized evidence-based practices; e-health information and education resources created and sponsored by multi-disciplinary teams, including HCPs, payers, pharma and technology firms

Installation of enterprise tools complete; data governance and management produce “single source of truth”

Clinical councils expand to broader membership of PCPs and selected specialists; reduction in disparity of treatment practices among staff; J&J and VUMC collaborating in “systemic medical care” expanding EHR and decision support

Confidence in capitation and risk pool arrangements

Narrow network products based on Accountable Care Organization (ACO) panel; ACO products offered on exchanges

Advanced risk-sharing arrangements produce recurring, predictable cost and revenue streams

Transformation rooted in critical mass; clinical practices viewed as leading practice

Population and outcomes reporting matures; roadmap implementation underway

Today: Fee for service

Episode-based care Clinician focused in silos

Individual context High variability


Supply chain and operations management is the sourcing and delivery arm of collaborations

Key consideration supply chain management: ► What manufacturing, operational and packaging assets are part of the collaborative operation? ► How will service-level, quality, compliance, risk and liability sharing agreements be handled? ► Who contributes the methods and tools that power the collaboration’s success?

Drivers of change: ► Health care reform ► Health IT ► Super consumer ► Value mining

Delivering healthy outcomes: ► Managing patient outcomes ► Expanding access to health care ► Meeting unmet medical needs

Pharma

Drugs

Diversified drug portfolios

3.0

2.0

1.0

Food cos.

Health insurance cos.

Social media cos.

Information cos.

Health care providers

Health record cos.

Telecom cos.

Retail cos.

Payers Physicians

Academia

Biotech

CROs

Medtech

Health outcomes

Patients


Collective disease networks enhance physician decision making and improve patient outcomes.

Future state example

Pharmaceutical — patients for life ► Funding Patient Centric Medical Home (PCMHs) National Committee for Quality

Assurance (NCQA certification) + procuring patient visit time ► Outcome dev./measurement (VBID) ► Longitudinal observational data — epidemiological patient stratification ► Metrics for Rx (medication possession ratio), patient and provider adherence ► New relationships with patients for life (patient care experience) Leveraging community networks ► KOLs and community physicians (branding and Continuing Medical Education (CME) ► Identifying patients with diabetes ► Patient literacy — paid pharmacist time ► Behaviors (CSAT) — predictive patient profiling ► Predictive Key Opinion Leader (KOL) profiling — EY solution model

Pharmacy Benefit Manager (PBM )— manage risk/cost ► Claim analysis retrospective, predictive,

avoidable ► Outcome development + measurement

► Improving recruitment and removing barriers to care

► Patient stratification based on personalized medicine

Honest broker — manage incentives/savings ► Business model: sustainable prevention programs

in community — self mgmt., support and counseling ► TPA (third-party adjudication)/bank ► Bundled payment model/capitation on risk/savings ► Incentive management (benefit and quality credits) ► Calculation of cost/savings and understanding of losses ► Risk management (monitoring)/validate risks transferred ► Observing customers, conducting surveys — adjusting for Hawthorne effect ► Design of similar protocol/care across all settings (community by community) ► Ernst & Young LLP IP and solutions

Payer — enroll and deliver intervention ► Enroll patient (20,000 pilot members identified through claims analysis) ► Initial outreach conducted by both pharmacist and Primary Care Physician (PCP) ► Initial baseline screenings (using biometrics) ► Create incentives to align P4O with 10 NCQA measures to ensure better health

outcomes (4 PCP visits) ► Developing clinically nuanced VBID ► Risk metrics (Harm per 100 patient days, readmissions

within 30 days, adverse events per patient days, % of patients with lab values outside therapeutic ranges, cost per inpatient case, delivery of evidence-based care 100% of the time)

Pharmacy — patient stratification of risk ► Health Effectiveness Data and Information Set (HEDIS)

measures ► Condition specific (hyperlipidermia, Chronic Obstructive

Pulmonary Disorder (COPD), ►hypertension, asthma)

► Quantitative: ► Consumer satisfaction, ► Consumption profile (i.e., high utilizers, patients with

multiple co-morbidities) Manage risk/cost ► Claim analysis (retrospective, predictive, avoidable)

► Outcome development + measurement, diagnostics

PCPs — Deliver interventions ► Physician interventions — based on severity ► Rx adherence + metrics (e.g., pharmacist monitoring) ► Lifelong consent + baseline health risk profiling ► Incorporating community health workers into primary care

homes to liaison between physicians and communities ► VBID layers on incentives to steer individuals to high-value practices and adopt

treatment and behavior change recommendations offered by physicians — continuous FMEA (Failure Mode Effect Analysis) of high-risk areas

Pharmacy and providers sharing EM

Rs

VBID

Pharmacy

Payer (BCBS Highmark)

PBM (Medco)

Big Pharma (J&J/Merck/ NYS Health Foundation)

Provider (Northwestern

Memorial Physicians Group)

Honest broker, PMO, network, coordinator (Ernst & Young LLP)

Patients and families

self-manage after discharge


Diabetes-related hospital admissions and interventional outcomes — Chicago heat map

Chicago diabetes — related hospital admissions pre-intervention heat map Low High

Pre-intervention model of hospital admission rates

► Combine zip code boundary files from Census Bureau with graphing capabilities of statistical software to create heat maps of the Chicago area.

► Colors are based on hospital admission rates. Red zip codes indicate high admission rates compared to yellow zip codes.

► Lower right section illustrates possible effects of diabetes intervention approaches on admission rates. This step can be fine tuned with patient level information related to interventions.

► Although the model does not show high incidence of diabetes for the white population, EY’s deeper analysis revealed that the areas dominated by high-earning professionals and white-dominating communities have a higher number of people at risk of developing diabetes.

Effect of lifestyle modification Effect of medication

Chicago Chicago

Based on national

averages

► In initial testing we found the following

potential predictors to be significant: ► Age, gender, income/poverty, race,

number of hospitals

► There appears to be a negative correlation between education level distribution and hospital admission (top row last column). This means the more educated the population in a zip code, the lower the hospital admission rate.

Chicago diabetes — related hospital admissions post-intervention heat map — lifestyle and medication adherence

Potential predictors

Chicago

Hospital admission rates

White

Male

Education level — graduate


Questions?

Date post:	29-Nov-2014
Category:	Economy & Finance
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The evolving value chain in life sciences

Economy & Finance