US Healthcare Costs & Role of the Middleman...Benchmarking of US healthcare performance vs. other...

© 2019 S. Garg 7/11/2019| ATDC CONFERENCE, KEYSTONE, CO

US Healthcare Costs &Role of the Middleman

Sandip Garg, MBACorporate Strategy & Development

Western Digital

Health Economics Plenary SessionATDC 2019, Keystone, CO

July 11, 2019

7/11/2019 2© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO

•No conflicts of interest to report

Disclosures


Take-home messages

The profile and trajectory of healthcare spending is unsustainable, both economically and socially

1

While healthcare middlemen capture significant value, they’re maximizing risk vs. return for a given set of incentives

2

A digital future could mean empowerment, cost efficiencies and transparency in healthcare, but is not without risk

3


Agenda

Macro view of healthcare economics1

2

3

4

Closer look at diabetes market

Player incentives, risks and returns

Thoughts on the future


Agenda


2

3

4





US healthcare costs over time, a consistent story

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

5.5

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

+65%

Y/Y Change, %

Source: National Health Expenditure Data, CMS; BLS (CPI, US City Average).

$13K (+52%)~19% of GDP(OECD Avg ~10%)

$69K (+42%)Population > 65 y/o growing 3x faster

Forecast

National Health Expenditures Per Capita

US GDP Per Capita

Consumer Price Index

A growing and significant share of economic output, 2011-21

50

60

70

80

90

100

110

120

130

140

150

160

170

2008 2010 2012 2014 2016 2018

Autos

Food & Beverage

College Tuition

Overall CPI

Toys

Hospital Services

Medical Care

IT

100

+61%

Indexed Price (2008 = 100)

More Expensive =Gov’t Involvement

More Affordable =Market Economics

Largest portion of household budget


Story persists in global context … exacerbated by resource allocation decisions

2

4

6

8

10

12

14

16

18

1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020

17%

9%

USA

OECD Average

Health Expenditure as Share of GDP, 1970-20171

Yearly %

1 OECD Health2 BLS, National Center for Health Statistics, US Census Bureau Current Population Survey.

US Healthcare Resource Growth,1975 – Present2

Healthcare Occupation

Total Growth 1975-Present

Administrators (incl. EHR)

> 30x

Physicians ~ 1.9x


Potential explanatory variables based on field research, last 20 years1

What drives overall healthcare expenditure?

1 Garg, S., et. al, Management of Unexpected Healthcare Cost Inflation: Analysis of Strategic & Financial Options from the Health Insurer Perspective, UCLA Anderson (2016).

Medical

• Prescription drug costs

• Prior year CMS costs

• Hospital utilization

• Cost of hospital stay

• Immunizations

• Diabetes incidence %

Demographic / Economic

• Unemployment

• US population

• Birth rate

• GDP

• Adolescent fertility

• Minor / aging pop %

• Medicare enrollees

• Death rate

Inflation

• Overall CPI

• Medical Care

• Medical Commodities

• Hospital Services

• Medical Care Services

• PPI

• PCE


Multilinear regression for the top candidacy variables, last 20 years1

Predictive model for healthcare expenditure

Top Variables & Model Results

VariableCorrelation to

Healthcare Spendingp-value in Multilinear

Regression

Prescription drug costs 0.714 0.0041

Last Year CMS 0.624 0.6492

CPI Medical Care 0.525 0.1407

CPI Medical Care Services 0.501 0.1400

Adolescent Fertility Rate 0.499 --

CPI Medical Commodities 0.487 0.1232

Hospital Utilization 0.476 0.4807

1 Garg, S., et. al, Management of Unexpected Healthcare Cost Inflation: Analysis of Strategic & Financial Options from the Health Insurer Perspective, UCLA Anderson (2016).


Country 1990 Ranking 2016 Ranking Change in Ranking

United States 6 27 -21

Mexico 87 104 -17

Nigeria 155 171 -16

Germany 21 24 -3

Indonesia 130 131 -1

Russia 51 49 +2

India 162 158 +4

Iran 97 78 +19

Brazil 91 71 +20

China 69 44 +25

Measurement of human capital* for selected large countries

Meanwhile, a mixed record on outcomes

*Human capital index = expected years lived adjusted for health status + years of education completed adjusted for learning

Source: Lim et al. Measuring human capital: a systematic analysis of 195 countries and territories, 1990–2016. The Lancet. 24 September 2018


Benchmarking of US healthcare performance vs. other developed countries

Healthcare Performance Measure USA Developed World

Infant mortality (per 1K births) 6.0 3.6

Adults with at least two chronic conditions 21% 11%

Mortality amenable to healthcare (deaths per 100K) 112 72

Avoidable hospital admissions (asthma, per 100K) 103 36

Avoidable hospital admissions (diabetes, per 100K) 198 118

Avoidable hospital admissions (heart failure, per 100K) 367 222

Older adults with influenza vaccine 68% 57%

Women with mammography screening (age 50-59) 81% 69%

Healthcare professional did not review medications 17% 33%

Medical, medication, lab mistake (past two years) 19% 13%

Doctor answers same day when contacted 72% 81%

Somewhat / very difficult to obtain care after hours 51% 52%

Waited two hours or more in the ER 25% 28%Source: Economic & Investment Studies, Principles (Ray Dalio, 2019).

Health

Preventative Care

Safety / Quality

Access


US Voter % Trust by Institution1

Elevated spending + mixed outcomes = waning public support & higher lobbying

39

65

60

58

42

26

23

38

30

29

11

25Big Business

36%Medical System

News

Public Schools

Church

Banks

Congress

80%

-44 % pts

1973 2018

1 Gallup2 Center for Responsive Politics

$216

$74

$69

$58

$6 Misc / Other

Pharma / Health Products

Health Services / HMOs

Hospitals / Nursing Homes

Health Professionals

Lobbying Spend by Top Healthcare Industries2

2018 ($M)

$207M


The public’s views on health care costs (1/4)

Reducing the country’s healthcare costs is a top national priority

Source: Blendon, Benson, McMurtry. The Upcoming U.S. Health Care Cost Debate – The Public’s Views. NEJM (May 29, 2019).

Analysis of various nationwide public polls (2018-19) (NEJM)

91

88

88

85

92%

Making sure Medicare benefits are not curtailed

Lowering prescription drug prices

Making sure insurance companies still cover preexisting conditions

Lowering the overall cost of healthcare

Increasing spending on research to find cures for diseases

Health priorities for lawmakers?



Most people blame hospitals, drug companies and insurers for high healthcare costs (the “supply”), as

opposed to over-utilization (the “demand”)



23

11

Prices too high for healthcare services and drugs

Americans are getting more healthcare and drugs than they need

60%

Both (volunteered response)

Cause of high healthcare costs?



Most people believe in prevention and the role of government to bend the cost curve…



67

65

61

52

37

37

84%Greater effort to prevent future disease and live healthier

Gov’t establishing limits on what healthcare providers can charge

Giving individuals tax incentives to purchase high-deductible health plans

Having the gov’t make it easier for hospitals to compete on price/quality

Allowing people 50-64 y/o to buy into Medicare

Disallowing insurance plans to pay for high-cost drugs whose benefits don’t justify the price

Changing our healthcare system so most people have Medicare and little/no private insurance

As a way to reduce the nation’s healthcare costs, favor…



Most people want greater price transparency and competition to reduce drug prices…



66

63

Allow pharmacies to disclose price comparisons (direct vs. insurance co-pay)

Having the FDA approve more generic, OTC and biosimilars

Requiring drug advertisements on TV to include price information

81%

As a way to lower the price of prescription drugs, favor…


Aging population

Eroding health status

Changing role of consumers

Technological / scientific innovation

Systems / management innovation

Regulatory and legislative climate

Affordability and accessibility challenges

All happening amidst a rapidly changing healthcare marketplace

Adapted from Cigna / Express Scripts M&A presentation (March 2018); Anthem Strategy & Governance Update (November 2018)

(e.g. value based care, AI, EMR)


Agenda


2

3

4





Diabetes prevalence = growth in demand for products and services

1 NCD Risk Factor Collaboration.2 Centers for Disease Control and Prevention. National Diabetes Statistics Report, 2017.

4.4

9.5

4.0

6.0

8.0

10.0

1995 20052000 2010 2015

US Adult Diabetes Prevalence2Global Diabetes Prevalence1

3.6

8.8

4.7

2.0

4.0

6.0

8.0

10.0

1980 1985 1990 1995 2000 2005 2010 2015

8.2

Men Women


Decomposing the $52B in global diabetes drug / device spending, 3.5% CAGR 2017-25

Source: Close Concerns, P&T Community.

Drug / Device ClassTotal Sales in

2018 ($B)Y/Y Growth

Share of Industry Growth

Share of Industry revenue

1 Insulin $20.1 -4% 0% 38%

2 DPP-4 Inhibitors $9.8 +1% 2% 19%

3 GLP-1 Agonists $8.1 +25% 38% 15%

4 SGLT-2 Inhibitors $4.3 +21% 17% 8%

5 BGM $3.6 -16% 0% 7%

6 CGM $3.0 +74% 30% 6%

7 Insulin Pumps $2.6 +13% 7% 5%

8Basal Insulin / GLP-1 Combos

$0.3 +140% 5% 1%

TOTAL MARKET $52.8 +5%

While insulin remains the mainstay treatment and the industry’s largest revenue contributor, the primary drivers of industry growth are being generated from GLP-1 Agonists, SGLT-2 Inhibitors and CGM technology


Costs to take care of the diabetic patient

Insulin costs in the US2

• Insulin prices increased 320% from 2001 to 2014• Introduction of biosimilars has increased

competition and generated cost savings

• 1 in 4 patients reported skimping on prescribed insulin dose due to cost (n = 199, single center survey)• More than one third with cost-related underuse

did not discuss the matter with their physician

• Increasing actions by pharma:• March 2019: Lilly introduces generic version of

Humalog for 50% of list price

• April 2019: Cigna announces cap on out-of-pocket 30-day insulin supply at $25

• April 2019: Sanofi announces cap of $99/month

1 American Diabetes Association.2 Trends in Medicaid Prices, Market Share, and Spending on Long-Acting Insulins, 2006-2018. JAMA (3/1/2019); Patients Report Skimping on Insulin Because of Cost. JAMA Internal Medicine (12/3/2018).3 Insulin Use & Spending Trends Brief, Health Care Cost Institute, January 2019.

Est. total global expenditure (public and private) to treat diabetes: ~$700-800 billionIn the US est. ~$300 billion, or ~8-10% of total healthcare expenditure1

Cost of key modalities to treat T1D in US3

Annual spend per person, USD actual

Includes labor costs, hospital visits, social work to treat disease over an extended time period; reflects utilization

$2,864

$3,022

$2,537

$2,467

$1,578

$5,705

$4,119

$3,073

$3,481

$2,116

Insulin

Outpatient

Non-Insulin Rx

Professional

Inpatient

2012 2016 CAGR %

19%

8%

5%

9%

8%


Agenda


2

3

4





Prescription drug supply chainThe key players, their economics and incentives

Manufacturer (Pharma Company)

Distributor / Wholesaler

Pharmacy

Patients

PBM Insurance

$

$$

$

Rebate $

Formulary placement

Drug coverage

$

Rebate $

Claim

$

Source: Wall Street Journal (June 2, 2019). MIDDLEMEN

Rx

Rx


A middleman story told through Humalog

$135

$407

Pharma Net Price

$25

Brokers Pharmacy Retailers

PBM + Insurers

$20 $7

Wholesalers

Walk-through of pharmacy list price, as reported by Eli Lilly (Mar 2019)1

1 TruthRX.org

$594

Pharmacy Counter Price for Patients


Recent strategies of market participants

Scientific & Technological Innovation

Government

Employers

Patients

Middlemen (Ins / PBM)

Providers

New research funding when / where available for major diseases with public support (e.g. diabetes, cancers)

Momentum to change pharma practices; political debate over single-payer reform heading into 2020 general elections

Affordability & Accessibility

Adopting new in-house models for integrating health and wellness for employee populations; incentivizing good habits

“Taking matters into their own hands” (Gawandeconsortium with Amazon, Berkshire, JP Morgan)

New technology start-ups promising greater insight into habits and providing consumers with more options and pricing transparency

“Outsourcing of care” outside traditional channels (e.g. hospitals) through on-call platforms and digital (e-consults)

Inorganic moves (M&A) to drive growth and innovation (e.g. Pfizer pursuing gene therapy deals, Centene / WellCare)

Consolidation to streamline operations and cut costs; mandated public disclosure of drug prices; Amazon entry into outsourced logistics; Apple entry

Continuing improvements in the quality of life for patients across the disease continuum

Consolidation (“the big get bigger”) of hospital systems; vertical integration with payers and suppliers / manufacturers


Equity market outperformance, driven by superior returns on capital and growth

1989 1992 1995 1998 2001 2004 2007 2010 2013 2016 2019

Total Shareholder Return, 1989-Present(dividend-adjusted)1

S&P 500 Healthcare

Index+25x

S&P 500+15x

1 Capital IQ, gross total returns dividend-adjusted, through June 2019.2 Measured as standard deviation of total returns over the time horizon.

Healthcare companies have cumulatively generated 70% greater return vs. S&P 500,

and with one-third the volatility2

Dot-com bust and

9/11

Spread widens post ACA


Trends in biopharma economics – tougher environment, shifting priorities?

10.1

7.3

5.5

4.2 4.23.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2010 2012 2014 2016 2018

7.6

4.8

1.9

Companies are getting squeezed on all sides of the ROI equation

R&D Return on Investment1

1 Deloitte Center for Health Solutions, 2018. Average metrics for large-cap biopharma companies.2 Wall Street Journal, 1/30/19.

ROI % (nominal)

$1,188

$2,168

20182010

+82%

Product Development Cost1 Peak Sales / Drug1

$ millions

$816

$407

20182010

-50%$ millions

Net pricing has fallen as rebates / discounts have increased; net price growth

slowed from 6% (2016) to 2%

(2018)2


Agenda


2

3

4





• Consumers will continue to increase their role and influence in healthcare decisions – a shift from B2B to B2C

– Consumers starting to bear more of the costs

– Strong digital usage and adoption

• Healthcare reform in the 2020 election will be a contentious topic of debate– Will there be momentum towards single-payer reform?

– Will pharma companies and drug pricing practices undergo continued scrutiny and reform?

• Healthcare market participants, especially those serving chronic disease like diabetes, should still be bullish on future returns, albeit the economics have become more challenging

• Scientific and technological innovation will continue to drive improvements in outcomes and will shape the industry

What choices do we have? What’s most likely?



Internet leaders = increasingly trusted with healthcare data

A digital future could mean empowerment, cost efficiencies and transparency in healthcare

Source: BOND Internet Trends 2019 (Rock Health Digital Health Consumer Adoption Survey, 2018, n = 4,000; sub-analysis of 11% of total respondents actually willing to share health data with a technology company).

53

51

49

46

40

34

Samsung

Microsoft

IBM

Google 60%

Amazon

Apple

Facebook

With which tech company would you share your health data?


Take-home messages

The profile and trajectory of healthcare spending is unsustainable, both economically and socially

1

While healthcare middlemen capture significant value, they’re maximizing risk vs. return for a given set of incentives

2

A digital future could mean empowerment, cost efficiencies and transparency in healthcare, but is not without risk

3

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