In a recent WSJ article, Joerg Reinhardt, chairman of pharmaceutical giant Novartis AG, shared a fundamental business model innovation insight: “We need to add value – life prolonging or quality-of-life benefits – that are meaningful enough for payers around the world to say, ‘Yes, I’m willing to pay a premium over generic opportunities.’” To create such benefits, Reinhardt is devoting a higher percent of revenue to R&D than most competitors and consolidating researchers into four centers to increase synergies across teams.
Reinhardt has business model strategy partially right. Healthcare payers should not pay a premium if that premium does not translate into real benefits. In the past, fear of generic drugs’ quality encouraged many people to favor branded versions. But after decades of safe generic drug production, “assurance” is no longer a differentiator for branded drugs. Unless the branded drug produces significantly better results and far fewer side effects, why pay the premium?
What’s Reinhardt missing? A third way – earning a higher premium by lowering payers’ overall cost of care. I believe that lowering the overall cost of care will become the #1 differentiating benefit in the years ahead. We are nearing a breakpoint in which growing demand for health care pushes in opposition against our nation’s growing inability to pay for it. Like an earthquake, a sudden break will appear in the market terrain.
In the mid 1980s, we faced a similar breakpoint. Medicare unexpectedly shifted from covering provider costs to a prospective DRG payment system. After recovering from the shock waves, providers figured out how to maximize profits from prospective payments per procedure. Surely, case payment – for a collection of procedures involved in a specific case – will emerge. Already, Medicare is experimenting and some self-insured employers are contracting with providers this way. Their aim? To lower the financial incentive to do needless procedures and to encourage providers to remove cross-medical silo inefficiencies. If drugs are part of the case cost, tomorrow’s pharmaceutical markets will be as distinct from today’s markets as Oz was to Dorothy’s Kansas.
The shift towards the overall cost of care has many implications for pharmaceutical companies. First and foremost it suggests drug companies need to look at the overall value chain of care. They should consider moving beyond drugs if they can bring knowledge, relationships, channels or integrated solutions that improve the customer experience and lower the overall cost of care.
The disease-centric website of another pharmaceutical company, Novo Nordisk, could be a good example for Novartis teams: Novo Nordisk’s website clearly demonstrates a broader and more strategic view of the diseases it aims to address than does the Novartis site.
A second implication of the shift is potential changes in industry boundaries. Payers are consolidating and exercising more buying power; and whenever one part of a value chain consolidates, others usually follow. Post-DRGs we experienced consolidation within equipment, device, supply, hospital, physician practice, medical distribution and pharmaceutical companies. The next wave of consolidation will be across categories, as we are already seeing on the provider side. A company offering all elements needed for managing a chronic disease may offer a better solution from the payer and patient perspective.
A third implication is that the premium for extending life cannot be too expensive. While that may sound crass, the emerging reality is a limit to the price premiums that insurers will pay. Furthermore, consumers are taking action already to lower their overall cost, as the increase in centers-of-excellence, healthcare tourism and out-of-country drug purchases attest.
The best drugs in this new world will be those that replace more costly alternative treatments. And here Novartis has some leading candidates. It has partnered with the University of Pennsylvania, for example, on an exciting cell-therapy solution for curing acute lymphoblastic leukemia. A patient’s T-cells are enlarged in number and potency to allow the body’s immune system to fight the cancer, avoiding traditional cancer treatments with terrible side effects. If clinical trials continue to produce the stellar results they have to date, Novartis will have a winner on its hands. (Disclosure: My husband’s company, ThermoFisher, Inc., is part of the solution’s value chain.)
I can’t imagine a more attractive pricing situation: save lives, improve quality of life during and after the treatment, and lower payers’ overall cost of cancer care. The benefit combination is terrific for Novartis’ shareholders, patients and our economy. Let’s hope all our drug companies double down on such bold innovations.
Products that are “a little better at a much higher cost” just won’t cut it anymore in healthcare or for that matter any market. Go after solutions that are dramatically better. Novartis gets it. Do you?