Friday, December 31, 2010

We Shall Meet In A Place Where There Is No Darkness

Big Brother. Facebook. One and the same? Or completely different?

Facebook, as Time Magazine recently put it, is now the third largest country on earth, and, like Orwell's Oceania, transcontinental, omnipresent and amorphous. Some might argue that the more family and friends use it, the more involuntary it becomes.

Still, it's a commercial entity. To survive, it needs to generate profits that provide a sufficient return to its owners.

Read our latest Perspectives article on privacy and Internet regulation here.

Government as the gatekeeper
Broadband Internet did not become ubiquitous until after 2000. The mobile, social networking Internet we use today has only existed for about the time it takes a person to complete high school. (Okay, an eternity for a young person, but a blink of the eye for the rest of us.)

And yet, because the urge to regulate is endemic, many believe it cannot exist without oversight.

Whether Facebook's walled-garden or Google's open platform, different business models are competing for the consumer's wallet. Not unlike the bricks and mortar world, these and other models will succeed and fail based on how well they incorporate customer knowledge.

Most consumers, as we know, are more than happy to share extremely private information in both the real and virtual worlds, which begs the question what exactly is private information?

One regulatory strategy is to view the Internet as a communication—not an information—service. Recently, the FCC, in the name of neutrality, issued an order that makes it the traffic cop of Internet access providers: a move that the new Congress, if not the courts, will surely test soon enough.

Our article points out that the Internet is still a massive information service. Think of all those YouTube videos and digital photos we so willingly share.

At least with Facebook we have some sense of what we're dealing with. Its users have revolted on privacy issues before, and the company has responded.

Government as the Internet gatekeeper is an altogether different proposition. Accountability—the Fannie Mae and Freddie Mac fiascoes demonstrated—does not occur in the same way it does in the private sector. Transparency might as well be a brick wall.

Big Brother would indeed be watching.

Monday, December 20, 2010

What Our Readers Are Reading

Throughout 2010, Lyceum has featured more than 200 articles and postings in the newsletter Perspectives, the Talking Transitions blog, and ChatterSmart, our short format news forum. We list below the ten most viewed commentaries in each publication.

In aggregate, our three lists boast more than 6,000 views. They span three broad categories—health care, financial systems and entrepreneurship—and encompass multiple topics, including:
  • Health Policy and Reform, ICD-10, Drug Discovery and Development, Clinical Pathways, Standardized Care, Integrated Care Delivery, Information Technology, Employer-Based Health Care, and Pharmacy Benefit Management in Health Care;
  • Too-Big-To-Fail, Investment Time Horizons and Alternative Investing in Financial Systems;
  • Venture Capital, Customer Experience and Business Model Analysis in Entrepreneurship.
Transparency, accountability and innovation appear frequently as common themes—perhaps not surprising given Lyceum's emphasis on dynamic transition. Lyceum participants and their businesses not only respond to market shifts, they will often instigate them.

As always, we encourage our readers to join our discussions and debates, and submit detailed thoughts to Perspectives and quick observations to ChatterSmart. We believe that group problem-solving offers the best route to valuable information gain and needs to involve a variety of stakeholders, large and small.

Most viewed Perspectives (Newsletter) articles

10. "Fixing Health Care's Value Deficit: The Problem of Unexplained Geographic Variation"
9. "Short-Term Trading is a Growing Threat to Capital Markets" *
8. "Simple Strategies to Defeat Incumbent Inertia in Health Care"
7. "Fixing Health Care's Value Deficit: The Solution in Clinical Pathways"
6. "Reform Legislation Aside, ICD-10 Could be Health Care's Biggest Challenge"
5. "The Long Fight is Over for Follow On Biologics" *
4. "Anticipating New Strategies to Gain FDA Approval of Biologics" *
3. "ICD-10 Impact on Provider Reimbursement"
2. "We Can No Longer Afford To Retire"
1. "What Payers and Physicians Need to Look for in Clinical Pathways"
 * Membership or subscription required to view

Most viewed Talking Transitions (Blog) posts

10. "In Health Care, It's David Versus Goliath"
9. "Reform Legislation Aside, ICD-10 Could Be Health Care's Biggest Challenge"
8. "Paper: Cost Shifting No Longer an Option"
7. "Book Review: More Money than God"
6. "'Not My Problem!'"
5. "Clinical Pathways Lessen Geographic Variation, Reduce Costs"
4. "Biggest Wave of IPOs since 2007—Or Not"
3. "Promising Business Model Targets Traditional PBMs"
2. "Not Just Access. Understanding."
1. "Finding a New Way in Accountable Care Organizations"

Most viewed ChatterSmart (News Forum) posts

10. "Something New in Drug Discovery"
9. "Dartmouth Atlas Under Fire"
8. "What Happens if Employer-Based Health Insurance Goes Away"
7. "Report Finds Employers at Risk of Not Making Health Plans Affordable"
6. "Government Opts for the Cloud"
5. "Washington Politics Ruin Reform"
4. "States: No Choice But to Reform Health Care"
3. "Venture-Backed Health Care Companies Selling for Less Than Total Raised"
2. "Same Problems for HIEs as for RHIOs"
1. "ICD-10: The Biggest Health Care Event Not Discussed"

Tuesday, December 14, 2010

Promising Business Model Targets Traditional PBMs

Four years ago, Walmart launched its four dollar generic drug program. Target, Costco, K-Mart, and others implemented similar plans soon after.

Many experts expected a direct challenge to mail-order pharmacies, and head-to-head price competition. Some believed the pricing initiative doomed the traditional pharmacy benefit management ("PBM") business model.

Not only have the major PBMs survived, they've thrived—and once again deflected a substantial market challenge. Shares in Medco Health Solutions and Express Scripts have more than doubled. Both now trade at or near all-time highs. (The CVS Caremark price is flat, but the company has navigated an unfulfilling merger that has so far diluted the value of the legacy Caremark operation.)

Traditional PBMs, however, should not rest too comfortably, according to a recent white paper by Milliman, the actuarial consultancy. The paper, entitled "The Value of Alternative Pharmacy Networks and Pass-Through Pricing", explores the emergence of transparent retail pharmacy networks that build on Walmart's and other large retailers' aggressive cost-cutting capabilities.

Milliman calls these new business models Alternative Pharmacy Networks, or "APNs". The paper presents analysis that estimates cost savings of between four and 13 percent beyond a traditional PBM service for an average employer with 10,000 lives.

The Milliman white paper thoroughly considers the traditional PBM business model, how APNs function, and what the implications are in terms of contract pricing, transparency and the distribution chain. Read it here.

Restat, a privately-held pharmacy benefit management company, commissioned the paper. Restat deploys an APN model called Align.

Even though pharmacy costs are small as a percentage of total employer health care costs (medical benefit costs can be at least four times as great), the savings are real, especially against a tough economic environment. For large corporations employing tens of thousands, scale advantages could produce even bigger percentage savings.

Because the APN creates a transparent marketplace, it bestows employers, or plan sponsors, an intangible benefit of eliminating the traditional PBM's information advantage. The APN takes away what the PBM knows about drug pricing and how it leverages this.

Most important, the APN is an emerging model. Only a few large employers such as Caterpillar utilize it. One catalyst—beyond sponsors seeking additional savings—could be small PBMs reinventing themselves. The three big PBMs—Medco, Caremark and Express Scripts—are powerful players. Their aggressive strategies and market consolidation leave little room for others to compete.

APNs, Miliman states, feature two characteristics: one, substantially lower drug prices and dispensing fees than traditional pharmacies; two, 'pass-through' attributes including rebates that flow from manufacturer to employer and a PBM that collects no spread or drug cost differentials. (Instead of rebates and spreads, the PBM makes money on a flat administrative fee.)

Whereas, in the traditional model, PBMs negotiate price with plan sponsors, the APN model allows in-network pharmacies to compete for consumers on price and service. Control, in effect, shifts to the employer (the payer), and, depending on how the employer arranges the APN, the consumer.

So why haven't APNs gained greater momentum? There are several reasons. Perhaps the most important is the resilience of mail order, the traditional PBM's core franchise. Mail order is a distinct class of trade, the Milliman paper notes, which means PBMs can purchase drugs from manufacturers at prices lower than wholesalers or retail pharmacies. It also allows for price arbitrage strategies not available to retailers.

The traditional model also wins on market inertia. While the APN does offer real savings, traditional PBMs can argue that they too create savings, and have been doing so for years. Sponsors focus more on trend than details anyway, and new contracting means hassle. Moreover, sponsors care much more about the medical side of the ledger, since it's the principle contributor to price inflation.

No doubt, if the number of employers weighing the APN option accelerates, then the PBM universe could rebalance. The odds of the traditional model collapsing appear slim, however.

For small PBMs and new entrants, the APN model does finally establish a vehicle that can compete against the big three PBMs.

More than existing share, revenue that the APN does claim will likely constitute new share in a growing marketplace of aging baby boomers and new-to-market oral specialty pharmaceuticals.

The big three PBMs have consistently shaped and dominated the pharmacy distribution chain. As time passes, their biggest risk may not be the APN, but their own success in building behemoth businesses that ultimately limit maneuverability.

Thursday, December 9, 2010

'Value' and the End of Health Care as a Right

A surprising new word is making its way into the health care lexicon: value. Its emergence ends the health-care-is-a-fundamental-right argument, and advances the debate over what needs to change.

Value, an economic term, defines health care as an economic good. It emphasizes the rules of supply and demand, and basic strategies targeting efficiency, outcomes and cost.

Michael Porter, the Harvard Business School professor, states in the New England Journal of Medicine:



Value—neither an abstract ideal nor a code word for cost reduction—should define the framework for performance improvement in health care. Rigorous, disciplined measurement and improvement of value is the best way to drive system progress. Yet value in health care remains largely unmeasured and misunderstood.

He goes on to argue that value should be defined around the customer, and that the creation of value should determine the rewards for all other actors in the system.  For several years now, right-leaning strategists and economists have addressed value as the essential mechanism for true reform. Folks on the left have argued that because health care is a fundamental right, traditional economics don't apply in the same way they do in other industries. And because they don't apply (private industry will always fail, for example), only a single payer system can deliver that right.

Thanks to the health reform bill and its complexity, the budget deficit and economic malaise, the health care debate has continued. The arguments, though, have shifted.

Like any other service, quality and price vary in health care. Unlike other services, however, no one's quite sure exactly how these factors vary, or, for that matter, what each is. Instead of government's role in providing a right, the left side of the aisle now seems more focused on elevating government's role in defining quality and price, and therefore value.

An altogether different conversation is taking place.

Ultimately, agreeing that health care is an economic good is a huge step forward—and in just one year. From 'value', opposing views can finally address core issues such as the care delivery system in a more constructive fashion. For once, the debate features a common language.

Take Professor Porter and his NEJM article. He calls for an integrated delivery system that combines efforts by providers over the full cycle of care. It's what the health reform bill defines in terms of an accountable care organization, though Porter doesn't use this expression. His HBS colleague, Regina Herzlinger, meanwhile, has long argued for focus factories, a concept that Porter pointedly dismisses.

Like Porter, Herzlinger's factories also center on value and customer experience, and, to an extent, integrated care. While Porter calls for broad-scale change, Herzlinger aims at incremental change.

Her force of change is entrepreneurial drive, where lawmakers empower the private sector to discover best practices for itself. Porter, on the other hand, finely details what the end goal should be. He does not explain the process to make this happen, at least not in this article.

Progress can't happen without debate. And meaningful debate can't occur until there's a common language.

The emergence of 'value' marks a crucial step forward.

Monday, December 6, 2010

Another Holiday Season, Another Prediction

It's that time of year again, and everyone seems to be in the business of forecasting, especially on Wall Street. According to a recent article in Perspectives, we're just witness to human nature at its most basic: "We all face forward. Ergo, we make predictions."

No different than a Mennonite studying anomalies in an animal's entrails, a modern-day Wall Street analyst slices and dices spreadsheets to predict future events. In some cases he's even deferred his predictive judgment to an algorithm or computer model. (A scary thought, indeed.)

Are we any better off? Yes. No.

It doesn't really matter, because it's who we are.

The best we can do in making and receiving these outlooks is to know our own context. Think of predictions not as absolutes in and of themselves, but as composites of a bigger picture.

Socrates was right. "Know thyself."

Read "Trust Me, I Predict the Future" in Perspectives here.

Friday, December 3, 2010

Focus on Focus Questions

Lyceum's GatherSmart® website features a news blog called ChatterSmart. We've designed it as an open forum for folks to highlight news stories relevant to Lyceum discussions.

Postings are formatted to include a short description of the issue at-hand: normally a sentence or two. They also include a focus question to encourage the reader to consider a broader context.

Often, we take these questions and explore them in roundtables and events. Listed below are ChatterSmart's ten most recent postings and their associated focus questions.

"Emboldened Opponents Ready to Open New Fronts Against Health Reform" December 3, 2010
  • Focus Question: To what extent will state and local governments block the health reform bill from taking effect?
"Employee Health Premiums Soar" December 2, 2010
  • Focus Question: What's the breaking point in employee health premiums? Are consumers now demanding taking control away from government and employers?
"Why Rolling Back the Health Reform Bill Will Be Difficult" November 30, 2010
  • Focus Question: If the federal government cannot revise even the least favored provisions, how much will it slow its implementation? How much control will state and local governments possess?
"Drug Marketing & Social Media" November 26, 2010
  • Focus Question: As much as social media marketing could put docs and consumers at informational risk, how does its feedback loop alter the risk profile of drugmakers?
"Summary of Medial Loss Regulations" November 22, 2010
  • Focus Question: How does the MLR provision affect investment capital in commercial health plans? How does this impact innovation?
"How to Define Quality in End of Life Cancer Care" November 17, 2010
  • Focus Question: How effective would integrated care delivery systems—or accountable care organizations—be at addressing palliative care?
"Who's Better at Leading ACOs: Physicians or Hospitals?" November 12, 2010
  • Focus Question: Why couldn't a shareholding structure apply where shareholders control the ACO?
"What's the Role of Patients in ACOs" November 12, 2010
  • Focus Question: To what extent could ACOs emerge from concierge medicine, where patients and payers are one and the same?
"CFOs Stressing More Than Ever About Health Care" November 2, 2010
  • Focus Question: As insurance exchanges emerge as alternative markets to purchase coverage, how quickly will employers shift to a defined contribution model?
"McKesson Purchases US Oncology" November 1, 2010
  • Focus Questions: How does this transaction impact oncology business practices including standardization of care and clinical pathways? What's the impact on strategic positioning in specialty pharmacy—specifically the large PBMs (Caremark, Medco, ESI)? What effect does this have on drug development and demand for lower cost treatments? Should we expect further consolidation among providers?

Thursday, December 2, 2010

The Big Bank Coin Flip

The 2008 crisis paralyzed the global capital markets. It produced shock waves that we will navigate for sometime.

And yet, despite colossal mismanagement, the nation's biggest banks not only survived, but in fact have expanded their share of market activity.

The Federal Reserve's December 1 release of 21,000 credit transactions conducted to stabilize markets reveals just how badly the big guys' business models failed.

We quote the Thought of the Day blog:



Documents from the Federal Reserve indicate that Goldman Sachs (despite claims from CEO Lloyd Blankfein that they were doing “God’s work” and that the firm could have survived without help from the Fed) tapped the Fed’s Primary Dealer Credit Facility (PDCF) 84 times and Morgan Stanley 212 times between March 2008 and March 2009. Citigroup used the facility almost daily, tapering off in April 2009. Bank of America, between September 18, 2008 and May 12, 2009 used the facility more than 1000 times. Other lending facilities made available include the Term Asset-Backed Securities Loan Facility (TALF); Commercial Paper Funding Facility (CPFF) – used by industrial companies in need of over-night financing, with GE borrowing $15 billion a dozen times; Term Securities Lending Facility (TSLF) – providing loans up to 28 days, and the Term Auction Facility (TAF) which allowed banks to bid for loans without the stigma associated with the Fed’s discount window.

As the Thought of the Day concludes, government action avoided a total meltdown.

But where's the fix? If highly concentrated capital and distortions in risk and return (in particular, management accountability) contributed to the original problem, then why do the same business models persist?

Entrepreneurs know that individual success and failure are two sides of the same coin. The same odds, however, don't seem to apply to banks too-big-to-fail.

Maybe that's because when senior management flips the coin, it only half realizes the consequences.