© 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
7/11/2019 3© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 4© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
Agenda
Macro view of healthcare economics1
2
3
4
Closer look at diabetes market
Player incentives, risks and returns
Thoughts on the future
7/11/2019 5© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
Agenda
Macro view of healthcare economics1
2
3
4
Closer look at diabetes market
Player incentives, risks and returns
Thoughts on the future
7/11/2019 6© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 7© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 8© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 9© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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).
7/11/2019 10© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 11© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 12© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 13© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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?
7/11/2019 14© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
The public’s views on health care costs (2/4)
Most people blame hospitals, drug companies and insurers for high healthcare costs (the “supply”), as
opposed to over-utilization (the “demand”)
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)
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?
7/11/2019 15© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
The public’s views on health care costs (3/4)
Most people believe in prevention and the role of government to bend the cost curve…
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)
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…
7/11/2019 16© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
The public’s views on health care costs (4/4)
Most people want greater price transparency and competition to reduce drug prices…
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)
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…
7/11/2019 17© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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)
7/11/2019 18© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
Agenda
Macro view of healthcare economics1
2
3
4
Closer look at diabetes market
Player incentives, risks and returns
Thoughts on the future
7/11/2019 19© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 20© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 21© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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%
7/11/2019 22© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
Agenda
Macro view of healthcare economics1
2
3
4
Closer look at diabetes market
Player incentives, risks and returns
Thoughts on the future
7/11/2019 23© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 24© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 25© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 26© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 27© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
7/11/2019 28© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
Agenda
Macro view of healthcare economics1
2
3
4
Closer look at diabetes market
Player incentives, risks and returns
Thoughts on the future
7/11/2019 29© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
• 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?
Thoughts on the future
7/11/2019 30© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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
With which tech company would you share your health data?
7/11/2019 31© 2019 S. Garg | ATDC CONFERENCE, KEYSTONE, CO
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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