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THCB PLUG: Upcoming Michael Porter event

The good folks at Harvard Business School Publishing are getting into the field of audio conferences. They’ve bribed me with a free pass to their first one so long as I mentioned it to you, and that I’ve accepted gives you a clue about which HBS professor is not presenting. The one who is presenting is Michael Porter, luminary of the business competitive strategy field who has been massively successful and influential in that arena for decades, so much so that all my MBA friends can still recite his 7 Pillars of Wisdom Five Forces of Competition. For reasons that I’m sure will appear puzzling to him in several years and were probably due to excessive consumption of alcohol, Porter has decided to enter the quagmire known as health care.

Porter’s initial thrust is to suggest that healthcare is not competing on the right level. He says:

Competition in the health care system occurs at the wrong level, over the wrong things, in the wrong geographic markets, and at the wrong time. Competition has actually been all but eliminated just where and when it is most important.

To get this from the horse’s mouth, get your corporate credit card out and go sign up here for the webinar which is on Tuesday 28 September.

My biased read will be delivered sometime later. I suspect that given the new emphasis on P4P and DSM in Medicare, Porter’s thinking may become pretty influential in health care.

THCB NOTES: FierceHealthcare Newsletter

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Your host here has picked up another gig which is pretty complementary with TCHB. I’m now editing the new FierceHealthcare newsletter. This is a free newsletter each weekday emailed out around 12 noon EST which captures the gist of the 5 healthcare biggest stories that day, and has a link to another 5-10 stories or press releases of interest. It’s mostly aimed at the health care business crowd, but the kind of topics you see in it will be pretty familiar to THCB readers. I encourage you to sign up here. If you want to see a sample first, go here.

FierceHealthcare is pretty much straight news, although I supply a little context. So I will be attempting over time (and actually have been for some months) to continue to take THCB away from the the “selective” news reporting type of blogging where it started out (and which tends to be how Don Johnson’s BusinessWord and Ross Silverman’s Public Health Press‘s News Links features operate) and into more in-depth analysis, opinions on the future likely course of healthcare (from me and my various contributors), and scurrilous gossip (OK, maybe not that scurrilous!). You shouldn’t notice too much difference, but as ever please let me know your opinions.

QUALITY: More problems at Tenet sub-contractor

A little more scuttle-butt from my source on that Tenet sub-contractor THCB wrote about a while back.

Disarray abounds at the small healthcare IT company that Tenet has chosen to support its Core Measures JCAHO submission requirements. The company recently was denied JCAHO “listed” Core Measures vendor status because JCAHO’s Board didn’t feel that the company should be permitted to sell to hospitals directly. Although the company is still permitted to support Tenet, Tenet (as the JCAHO listed entity) is wholly responsible for data submission screw-ups: something that has occurred every quarter, so far.

Adding to the dysfunction is the removal of this company’s CEO and founder by its board and the departure of the company’s CFO, VP of Engineering, VP of Sales, Director of Marketing, and several senior engineers in the past few months. One wonders why Tenet would entrust something as important as JCAHO accreditation to a company that JCAHO refuses to certify…

I have some really juicy stuff on this waiting in the wings, but I probably need to get the as yet non-existent THCB legal counsel on the case first.

POLITICS/POLICY: Harris Poll Shows Tight Presidential Race

As I’ve saying for a while, this Presidential race remains too close to call, and today my favorite polling organization confirms that. A Harris Poll taken late last weekend showed Bush and Kerry tied. Why believe Harris? Well aside from being bright enough to employ me for a little while in the late 1990s, they have a very good record in very close elections. For example they were the only ones to get the UK 1992 election right (a very narrow Tory win) and the most accurate in the 2000 Presidential election in which they called the popular vote a tie (and it was).

Which all lead me to the conclusion that Bush needs to stop talking about health care. On the other hand some commies might suggest that the other parts of his record that he is running on aren’t too strong either. But the point is that (gullible or not) the public thinks that he’s a better bet than Kerry on that furr-in terra stuff. Of course them furr-iners massively prefer Kerry — lucky for Bush they don’t get to vote.

POLICY/POLITICS: Which Californians care about Prop 72?

So the mudslinging has begun with the No on 72 crowd calling it a government takeover of the health care system in California. Prop 72 is an up or down popular vote on the SB2 “Pay or Play” passed last year just before Gray Davis was booted out by Arnie. Calling Pay or Play a government takeover as have recent ads is pretty disingenuous, as the law only gives the government control over those who choose to “pay” into the pool in order to stop employers gaming the system. But why waste precious ad time saying that, especially as it smacks of the truth.

Of course if you really want to find out what this is about you need to follow the money. The California Health Care Foundation’s HealthVote 2004 site shows who’s spending what. Unions are supporting the campaign with about $1m so far, and that’s mostly an ideological buy to support SB2’s sponsor State Senator John Burton. On the other side is $6 million from the people who’d have to –shock-horror — pay for their employees’ health care! Who are this disinterested crowd? The list of contributors by size

1.California Restaurant Association
2.CKE Restaurants. (Carl’s Jr)
3.California Restaurant Association Issues PAC
4.Target
5.Macy’s West, Inc.
6.Harman Management Corporation (biggest KFC franchisee)
7.Sears
8.Yum! Brands, inc. (parent company of KFC, Taco Bell)
9.McDonald’s corporation
10.Wendy’s international, inc.

I think it’s safe to say that Walmart is on that list in spirit at least too. So basically anyone who employs a lot of low wage-employees is fighting this. But really what difference would it make to them? People will keep living in California and someone will make money selling them fast-food and whatever schlock Target is selling. So it’s not exactly as if these jobs are going to pack up and go to Arizona.

So really this is as naked as it gets. These corporations are trying to preserve the share of their revenue that goes to profit over that which goes to compensation. And for that, they want the rest of us to fund the care of 1 million uninsured people who work for them. Arnie is opposed to 72. Welcome to Kal-ee-forn-iya.

PHARMA: The debate on R & D spending, with UPDATE

Following the revival of the “taxpayer pays for the drugs twice” line by Marcia Angell, there’s an excellent article and series of comments in Derek Lowe’s In the Pipeline blog on the subject of paying for R&D. Derek has somewhat talked down the role of the NIH–and was kind enough to mention my comment on that aspect of the subject in a subsequent post. He was further taken to task for it by the (new to me) Bedside Manners blog. All posts well worth reading.

And there is no doubt that we are on the edge of much more spending and much more great results from all this medical research (do the words genome or nanotechnology ring a bell). But right now, that’s not the point. What is the point is the relationship between who’s spending what on what and the political result out of it.

Broadly, with the NIH (i.e. the taxpayer) doing mostly big basic R and some D and the for-profit sector doing mostly applied R & D, here’s the spending score.

NIH $27 billion on Research in 2004 (corrected to $23 billion in 2003 in update below)
Pharma $33 billion on R&D in 2003 (according to PhRMA’s numbers)

Both these numbers have been going up rapidly, and there are lots of arguments about what’s in it, but the overall issue is that they are pretty much the same. No one cares about the distinction between R &D; people only care about what’s spent to get the drug onto the market, and you need basic R, applied R and D to get that done. But that total is around $60 billion and we spend more than that marketing the drugs. The government’s report on the pharma industry from which I pinch this chart shows the real issue, and that issue is mostly a political and business issue.

And of course the political issue is how to deal with the fallout of these three numbers — the 13% of revenues spent on R&D, the 20% going to profit and the 31% going to sales and marketing. So long as the public gets to see that industry’s R&D spending only just exceeds the taxpayers’, yet they have to pay more in profit (i.e. higher prices) than big Pharma is paying in R&D, and that nearly three times what is spent developing the drug is being used to market it, this problem is not going away for pharma. Of course it might help their cause if they stopped being at war with their best customers.

UPDATE: Contributor Joe Crea informs me that:

The $27 billion dollars on research by the NIH is a very common misconception. That figure + or – a $billion is the OPERATING BUDGET or BUDGET AUTHORITY for the NIH; and, not all research at, by, or for the NIH is pharmaceutical-related.

I have attached OMB breakdowns of the budget for the NIH as well (Ed note: shows total Gov spending on Health R&D at $23bn in 2003) as a report that breaks down how that research budget is spent. Remember, the NIH has multiple institutes, centers, as well as the Library of Medicine. As can be seen from the report, about 10% of R&D is done by the NIH (intramural) — the rest is “farmed out” in the way of grants and Cooperative Research and Development Agreements (CRADAs).

Here is an explanation of this system by PhRMA. Take it for what it is worth (it was a readily available summary), but likewise, is the report by The American Association for the Advancement of Science (not exactly a bunch o’ FReepers). Just keepin’ things in perspective!

Joe may well be right, much of the money allegedly spent on research by NIH may not get to the lab bench, but on the other hand my colleague Bob Leitman tells a story of his visit to an R&D facility owned by very big pharma company. When he commented on the acres of marble in the halls and the restrooms, his host told him “Well we’ve got to hide the money somewhere!” So I think it’s fair to say that the big numbers on both private and public side have a fair bit of bureaucracy tucked away in there. It’s also fair to say that the NIH farms out much of its research, but that’s irrelevant. The point is how much gets spent by whom on what and not who gets it.

My point is that there is a lot of money spent, and both types of spending on research is necessary to create drugs, but the political issue is simple. The pharma industry makes more on profit than it spends on R&D, and spends nearly 3 times on marketing than it spends on R&D and gets some large level of help for its R&D from the taxpayer. And it prices drugs at a level that makes its consumers very angry. So big pharma can either continue its present course of trying to tough this out (which I believe has a significant long term risk of vicious price controls or regulation) or try to figure out a middle way. I’ve put my proposals for that middle way here, but I believe that they have to take a small hit now or a huge hit later.

POLICY/POLITICS: My quick view on the politics of Medicare in the campaign, with brief UPDATE

There was a lot of fuss about Medicare and health care in the last few days, particularly brought up by Bush. I think this is a serious blunder on his part. Given Swift Boat and Kerry’s non-position (or actually he should just use Bill Maher as spokesman because he explains it well) on Iraq, why is Bush trying to change the subject?

Here’s why I think Bush is being politically dumb here. If you look at these polls, things are still very close, and the Bush convention bounce seems to be over. Now if you play with the electoral college (try here) basically if Kerry wins Florida and Pennsylvania, then Ohio, Missouri, etc, don’t matter. What is special about Florida and Pennsylvania? They are the two oldest populations in America. Why did Clinton win Florida in 1996? Because he scared seniors into believing that the Republicans would kill Medicare as seniors knew it. Now, premiums are going up, and HHS’ own data is showing that the cost of the drug benefits to seniors will consume most of their social security checks, and seniors hate the Medicare bill, especially the ban on drug importation.

So let’s play it out. Seniors vote at roughly one and a half times the rate of those under 65s. Four in ten seniors say that they’ll vote based on health care. While 12.1% of the US population is over 65, the number is 18.1% for Florida, and 15.8% for Pennsylvania’s. So essentially the more voters focus on health care, the more likely it is that they’ll vote for Kerry, and each one of those votes in magnified by 1.5 X 1.5 for seniors in those two states. (or to be really pedantic only 1.5 x 1.25 for Pennsylvania).

So why is Bush bringing this up? I don’t know. If I were him I’d go back to terra, terra, terra. Otherwise Kerry can keep bringing up this kind of stuff.

UPDATE: A correspondent tells me why Bush is bringing this up. Karl Rove apparently believes that you should attack the other guy’s strength, and so that’s why Bush is attacking Kerry on health care. With that strategy, I don’t think Rove would last long as a coach in the NFL, and he hasn’t won a national campaign yet (after all tying is like kissing your sister), but Arianna Huffington thinks that Kerry should take Rove’s advice and come after Bush on terrorism and Iraq.

CHARITY: Grenada hurricane victims appeal

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In a first for THCB I’m asking readers to help the victims of Hurricane Ivan. My college friend Paula Robinson is having a great year off sailing the Caribbean with her boyfriend John. Great that is until last week when they chose to ride out the hurricane season in the supposedly safe climes of Grenada. Paula and John are now safe in Trinidad. Here’s Paula’s email:

We’re safe and well in Trinidad now despite Hurricane Ivan hitting Grenada while we were there. Thankyou all so much for your kind messages of concern and sorry to give you all so much stress waiting for news from us but as you can imagine all the phone lines and power was (and still is largely) cut off in Grenada. I used one of the other boat’s satellite phones to get a message through to my dad on Wednesday but only managed to leave half a garbled message. He then found the website listing all the boats that were in the area including the brief but satisfying comment “Yellow Bird in Secret Harbour – floating”.

Grenada however is seriously trashed from one end to the other and really suffering with 60,000 people estimated to have lost their homes and that means literally blown away. We were advised that since we were afloat we should push off somewhere else rather than stay and try to help as we’d only add to the shortages of food and water.

We arrived in Trinidad yesterday and are counting our blessings to have come through Hurricane Ivan in one piece. Rather too close for comfort. We had decided to stay in Grenada as the weather reports suggested Ivan was going to track north and we’d only get storm conditions. However when Ivan changed his mind and headed directly for Grenada it was too late to run. We anchored the boat and went ashore to spend 3 nights in a hotel, hoping for the best. Then Ivan whipped himself into a frenzy and became a category 5 hurricane; on a scale of 1-5 that’s the strongest category so it could not have been worse. Also the hurricane scored a direct hit on Grenada which has not been hit at all by any hurricane for 50 years. We still can’t quite believe we’re both fine and the boat has only suffered minor damage where another boat bashed into it.

When we get our breath back we’ll bore the pants off all of you with our wild hurricane stories, but for now “we be chilling, man”. Love to all at home and will give you the full story when we’ve got our heads round it all and thanks again for all the messages.

Meanwhile those poor people need all the help they can get. We’ve been helping load boxes of stores onto boats here in Trinidad that are heading off for Grenada tomorrow but it’s just a drop in the ocean and they need serious amounts of aid — including just the basics like water and food.

While Paula and John were lucky, 60,000 of Grenada’s 90,000 people were not and are homeless. The Red Cross has launched an appeal for $1.4m and is delivering aid already. Please consider donating. If everyone who reads TCHB gives up the price of a cup of coffee, we’d cover over 1% of the amount needed. To donate click here, or you can paypal the money to me at ma*****@*********lt.com and I’ll deliver it. Thanks.

QUALITY/POLICY/PHARMA: More on the costs of chemo

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So the fight over cancer drug reimbursement is getting quite nasty. The doctors, who as we’ve explained in TCHB many times, have done very well over the last decade or so by dispensing drugs and charging Medicare and private payers a whopping margin, are crying foul as the details of the current price cutting by CMS emerge. Apparently they believe that the overall cut will be 15% as opposed to CMS’s stated 8%. There’s much more in this AP Article.

There’s actually some real money at stake here. About $600m is being cut from the chemo drug budget. ASCO claims 20,000 members but my mole in the business tells me that there are somewhere around 10,000 oncologists (or docs dispensing enough chemo to be counted as oncologists) in the US with an average income in the high-$300,000s of which roughly half comes from the drug mark-up. So you could argue that actually 30% of the doctors’ drug income (i.e. their margins rather than total drug spending) or around $60,000 per physician, is on the table. So expect the fight to continue, and of course have ramifications downstream on the pharma companies, and upstream on the patients.

Meanwhile, back on the subject of chemo, Harvey Fry writes concerning the post last week by Greg Pawelski on chemosensitivity testing.

I fought for chemo-sensitivity testing of cancers over 20 years ago, and finally lost because of the problems with the tests. First, it’s often hard to get a representative sample of tumor cells by biopsy. Then it’s hard to get them to grow. Then you’re not sure whether the cells that grew out are the tumor cells, or normal matrix, like fibroblasts. Then there’s the delay in starting treatment while waiting for the cells to grow out. Then there’s the question of whether cells in metastases have the same response as those in the primary. But the killer was that the clinical response was not that well predicted by the cell survival tests in the lab. And of course, there was the expense.

Unless there has been some major advance in the intervening years, I can understand the reluctance of some oncologists to go back to it. Alternatives to growing the cells and seeing what kills them may now exist, but they are only surrogates for the real end-point of interest.

Sidebar: I was struck by an amusing wrinkle in the end of the chemo article which showed how close the two sides are politically, even if they are fighting over money:

Ketchum Communications, the public relations company working with the cancer doctors to call for a change in the Medicare law, also is the principal contractor employed by the administration to promote that same law. The administration has spent $87 million on television ads, mailings and other means to promote the new law, most of it to tout prescription drug coverage that will be available through Medicare in 2006, the Health and Human Services Department said.

HEALTH PLANS: In Defense of HSAs, by Langdon Alger

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THCB is pleased to welcome a new contributor, writing under the nom de plume Langdon Alger. Langdon works for the Feds, and THCB duly notes that Langdon has expressed the usual disclaimer of government employees who speak their own minds, namely that “the views in this [post] do not necessarily represent those of my organization.” So just to really stick in certain of THCB’s contributors’ craws, today we turn over the mike to someone who thinks HSAs will be modest in their impact (as does THCB) but that what impact they will have will be good (not something you hear much on this station, where the prevailing tune is far more like this!) Here’s Langdon’s piece:

Much has been said on the issue of Health Savings Accounts (HSAs) and despite all the criticism–much of which I agree with–I still find HSAs an attractive option. As a young, healthy, and well-informed healthcare consumer, a High Deductible Health Plan (HDHP) with an HSA is obviously a good deal for me, but I still believe it will provide a net benefit to our healthcare system.

First, I fundamentally believe that healthcare and health insurance should be two separate entities. Doctors and hospitals provide healthcare; employers, the government, and the market provide health insurance. If people prefer managed care, they’ll make that choice, but I should have the option to choose insurance coverage that matches my needs. No other insurance industry provides such ridiculously low deductibles for such expensive coverage without exorbitant cost to the individual. Avoiding the “adverse selection death spiral” is entirely up to the health insurance industry providing value to its customers.

Two of the major criticisms of the HSA model are that it simply splits the risk pool and it shifts costs from employers to employees. I concede that both points are obviously true, but I think that both the magnitude and the significance of each effect are not as dire as critics would have us believe. Concerns over splitting the risk pool really lie in the fundamental issue of who should pay for what in healthcare. How much should we subsidize the heavy users of healthcare? A couple of thousand dollars per year less than we do now. That’s all HDHPs change in the world of health insurance. Insurance ends up being less expensive and a few more people get coverage. Are overall healthcare costs reduced? Absolutely, but maybe not by any significant margin. HDHPs and HSAs aren’t designed to address top dollar spending in healthcare, but that certainly doesn’t mean they don’t add value to the system. As far as shifting more healthcare costs from the employer to employee goes, this is an inevitable trend as long as healthcare costs rise faster than salaries and the health insurance industry continues to be dominated by the employer-sponsored model. HSAs don’t change a thing here.

One concern raised in this Blog is whether employers would want to adopt this system since they have to contribute to the HSA account in addition to the insurance premium; individuals with low healthcare costs might actually increase their spending on healthcare, given that they have a cash account to pay the costs. This should hardly be an issue since, from the employer’s perspective, the cost of HDHP including an HSA contribution is usually lower than traditional insurance or a managed care product (i.e. the employer cost shifting.) And it can still be a good option for employees since having an account actually makes preventive care even more likely (lowering long term costs), while the roll-over provision of the HSA eliminates the incentive to overspend each year.

One critical area of rising healthcare costs that HSAs do have the potential to reduce is prescription drugs. My employer spends upwards of 30% of total premiums on prescription drugs so there is obviously room for significant savings. Consumer choice and market price pressure are a great threat to the prescription drug industry if people begin to realize they can get drugs to cover their needs at a fraction of the price (often hidden in premiums) they pay now. How many people take name-brand heartburn, blood pressure, pain, allergy, cholesterol, or antidepressant medications and countless others that have inexpensive alternatives? Consumers have no concept of price transparency and value in the prescription drug market.

And finally, are HSAs just another tax break for the affluent? Hardly. Given that the maximum annual deposits are currently $2600 a person, the accounts are really aimed more at the middle class.

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