Rotman Management Magazine
Fighting Fragmentation in Healthcare: A Modest Proposal
There is widespread agreement that greater incentive alignment will be valuable to the healthcare system. The question is, who will lead the way?
If commercial vendors would engage more actively as value chain partners, we would see important disruptive benefits for both health and healthcare.
on economic development and human GIVEN ITS COMBINED IMPACT health, few would argue that the healthcare sector is the most important industry in the world. Together, the annual economic impact of the hospital, healthcare professional, assisted living and commercial sectors totals multiple trillions of dollars, accounting for more than 10 per cent of global gross domestic product. In the U.S., Canada and other countries, the sector is the number one or number two employer, and it is marked by ongoing innovation: Seven of Fast Company’s top 25 innovators in 2018 — Apple, Amazon, CVS, Alivecor, Novartis, Oneome and Peloton — have active health or healthcare programs that, among many others, are helping to grow economies around the world.
Looking beyond economic impact, healthcare in almost all countries has made amazing progress in the past 50 years in terms of helping people stay healthy, solving major health problems, reducing infant mortality and contributing to longer lives. World Bank data, for instance, reports that from 1960 to 2016, average life expectancy at birth in the world increased from 52.6 to 72.0 years, while average infant mortality fell from 121.9 to 30.5 deaths per 1,000 live births.
Although there is huge variance within and across countries, the trends in almost all countries show at least moderate gains. Innovations and diffusion of drugs, devices, clinical procedures, fitness programs, and many other facets of health and healthcare products and services — introduced by traditional healthcare firms and by a vast range of new ventures and diversifying entrants — underlie these improvements.
Despite all of this, we are far from realizing the potential benefits of even our existing healthcare knowledge — let alone the impact that viable healthcare innovations might have on human life. Studies by the Commonwealth Fund and others highlight major shortcomings in equity, efficiency and health outcomes throughout the world. Individuals and organizations in the sector often struggle to achieve the ‘triple goal’ that thoughtful
stakeholders in all healthcare systems aim to achieve: To provide services with a strong combination of quality and innovation, to as many people as possible, at an appropriate cost. If we are to achieve this triple aim, we need disruptive changes.
The Challenge: Value Chain Fragmentation
The core challenge to reaching our potential in healthcare impact is not a lack of funding, commitment or individual skill. All developed countries invest substantial resources in healthcare, attract people in both the public and private sectors who are deeply committed to providing and supporting effective care, and have high levels of training. Lack of money and skill are bigger problems in many lower and middle-income countries (LMICS), yet even there, resources are often used poorly. Instead, the key issue demanding disruption — both in traditional developed markets and LMICS — is that healthcare systems are highly fragmented. Collectively, they face ‘silo’ problems within and across the value chain of institutions that create, supply and deliver healthcare products and services.
Figure One provides a simplified summary of key actors in the healthcare sector that together comprise major elements of the chain of activities that ultimately deliver value for patients: Science, in both academic settings and clinical practice, creates new products and procedures; commercial suppliers bring the products and procedures to market; public agencies provide regulatory oversight on safety and efficacy; healthcare providers, including clinicians and administrative staff, manage and recommend products and procedures; and payers, whether public and private third-party payers or individuals providing out-of-pocket payments, underwrite the costs.
Two major issues are depicted in Figure One. First, patient needs are often an afterthought. Although patients are present in the diagram — and all actors on the supply side universally refer to patients as the primary driver for their decisions — the reality is that the supply-side challenges of developing, supplying, administering and paying for goods and services commonly overwhelm what should be a demand-side focus on what is actually be valuable for patients.
Second, the actors are typically connected only at arm’slength, emphasizing formal contracts and suspicious relationships, with only limited knowledge sharing. And the money and knowledge that do flow through the system suffer from major discontinuities. Too often, we develop and pay for products and services that do not address the most important patient needs and miss opportunities to contribute to systemic value. Individual actors commonly make decisions that are best for their own goals and budgets, but are far from optimal for the health system as a whole or for the needs of individual patients. Put simply, the multiple actors in the healthcare system lack the incentives to make decisions that are best for patient needs — and for the strength of the healthcare system itself.
Make no mistake, individual actors — whether they be scientists, commercial vendors, physicians and other healthcare professionals, regulators or others — truly do care deeply about the needs of patients and the healthcare system. But at the same time, they also care deeply about their own needs for profits, career advancement and the viability of their own organization. The result: Local needs too commonly trump systemic benefits and the needs of individual patients.
The Goal: Incentive Alignment
So, what would a more robust value chain structure look like? Figure Two provides a simple depiction, addressing the two major problems identified in Figure One. First and most importantly, patients are now central, in practice as well as in our language; and second, there is stronger alignment in the interests of healthcare actors, resulting in better use of financial resources and more sharing of information.
To be clear: the incentives among the different actors in Figure Two do not fully align, as there will always be some conflict in individual priorities. Yet, with at least moderate overlap of incentives for innovation, cost sharing, lifecycle benefits, and other patient and system needs, we would unquestionably have stronger healthcare. Quite simply, we would gain far greater leverage from the skills, commitments and passion of people throughout the healthcare system.
What I have said thus far will not be particularly controversial to anyone with knowledge of healthcare systems in any country in the world. Fragmentation, silos and lost opportunities are topics in almost every conversation or analysis of health system needs. The benefits of greater integration and incentive alignment are central to current healthcare policies and strategies, whether it be value-based pricing, community-based care, beyond-the-pill initiatives, digital health, command centre platforms or the many other programs that flourish through the public and private healthcare sectors. The key question is not whether greater incentive alignment will be valuable. Instead, the core issue is, who will lead the alignment?
Each of the nodes in the figures has the potential to be an active partner in achieving greater value chain integration. Government agencies such as regulatory bodies can push for greater evaluation of systemic value when they assess efficacy; third-party public and private payers can pay more for products and services that offer patient and systemic benefits — and less for those that do not; healthcare providers can work harder to tear down the walls that separate professional specialties from each other and from administrative practice; people who develop products and services can pay greater attention to systemic impact, such as focusing more of their attention on products, services and procedures that have stronger lifecycle benefits; and commercial vendors can put greater emphasis on products and services that improve patient outcomes, both at a particular point in time and over a patient’s life. There are also multiple complementary options that would increase the value delivered through their synergy.
These are not novel insights. We have long recognized these potential improvements and have made some real efforts towards them, but are still waiting for many of the major benefits to occur. The reason? It is not clear which actors have both the systemic knowledge and incentives to push forward successfully with integration.
Commercial Vendors Can Lead the Way
My argument is about to become more controversial: I believe that commercial vendors such as medical device and pharmaceutical firms — including both manufacturers and distributors — are positioned to play lead roles in helping to achieve greater integration and incentive alignment in our healthcare systems.
This suggestion may strike some readers as absurd, in a world where pharmaceutical firms are commonly viewed as price gougers and biased innovators. Indeed, in 2018, the U.S. Gallup survey on industry reputation placed the pharmaceutical industry ahead of only the federal government in terms of public reputation, with a net negative rating of 23 per cent (30 per cent positive, 16 per cent neutral, 53 per cent negative). Medical device companies tend to fly somewhat less visibly under the radar of general public perceptions, but are often viewed with deep suspicion by those who purchase their products. Why would such untrusted companies be credible as active partners in value chain integration?
The core reason that we should see vendors as value chain partners is that they tend to have unusually broad-based knowledge of healthcare systems and opportunities to create patient and systemic value. By their nature, they typically deal with multiple hospitals, clinics, pharmacies, assisted-living facilities and other healthcare actors, often in multiple countries and commonly across multiple medical specialties. Other reasons to focus on vendors include:
• They are often at the forefront of digital initiatives that cut across institutions.
• They have extensive databases of product usage and, in many cases, health outcomes.
• They often have experience in supply chain management and skills in other industries that offer insights for healthcare.
• They observe clinical and administrative practices in a wide range of settings and have the potential to draw together insights to help their customers make substantial advances that can reduce costs and improve outcomes.
Consider a few examples. Drug companies sell their products in multiple countries for patients with a wide range of indications. Increasingly, moreover, they are bundling drugs with other health services such as nutrition, exercise, early stage diagnosis and outcomes evaluation. The insights from these activities are relevant for most or all of their customers, whose practices are inevitably more local and focused. Likewise, medical device companies commonly deal with a wide range of clinical practices.
In the same vein, healthcare distributors have a broad base of experience and knowledge about which products and services offer benefits in particular settings, which can help reduce costs across a healthcare system, and which are most likely to be beneficial over a patient’s life. While no single vendor has universal knowledge, any one vendor has sufficient knowledge to help clinicians and administrators make more robust decisions about healthcare costs, quality innovation and access.
Currently, vendors do play a relevant role in helping to shape such decisions by many of their customers and other actors throughout the healthcare value chain. Device producers, pharma companies, information technology vendors and others often work closely with their customers in specific therapeutic areas and, increasingly, are helping to bring different specialties together to seek shared value. But we are far from the frontier in taking advantage of their knowledge. The challenge lies, in part, in recognizing that vendors possess valuable knowledge, but even more in trusting them to have the incentive to use that knowledge for systemic benefit rather than private gain. What, then, would create the incentive for vendors to use their knowledge for systemic benefit and, in parallel, for other decisionmakers to trust vendors’ recommendations? Following are four suggestions for aligning vendors’ incentives with those of other actors in the healthcare system.
All recommendations and promotions TRANSPARENCY: should be recorded and publicly visible. This will allow decision-makers and external analysts to compare and contrast recommendations, provide oversight and evaluation.
Rather than being the primary SHARED DECISION MAKING: drivers of value chain integration, vendors need to view themselves — and to be viewed — as value chain partners, sharing the responsibility for identifying system and patient benefits with other actors. Each actor in the system needs to bring its knowledge to the discussion.
One of the major issues that currently inSHARED BUDGETS: hibits systemic decisions is the fragmentation of budgets within and across organizations. The central problem is that those who must pay for products and services that will provide systemic gains in costs and quality often do not reap the benefits, and as a result, they often do not make systemic choices. The solution is easy to identify, even if difficult to implement: Actors with oversight over multiple budgets in their hierarchy and in their network of more informal relationships need to push those responsible for the budgets to make joint decisions, reward them for doing so, and penalize them if they do not. The role for vendors here is to help identify budgets that need to be aligned, both within departments of individual clients and across the multiple organizations that they deal with.
Senior executives and A SENSE OF PERSONAL RESPONSIBILITY: operating staff members of commercial vendors need to view themselves as ‘system stewards’ who will be rewarded for decision making that advances both the interests of their companies and the strength of the healthcare system. Career advancement needs to be tied to system outcomes as well as to corporate success.
A key question here is whether, in addition to contributing to system strength, these suggestions are consistent with corporate strategic interests? The short answer is Yes. Companies that successfully become trusted partners will gain sales compared to competitors that are not able or willing to do so. A proactive strategy of value chain partnership is a pathway to commercial success.
To some, these suggestions will seem naive. What will it take to encourage people who, even as they care about patients and healthcare systems, also need to care about their own goals and needs? The answer to this question has two parts: low-hanging fruit and effective leadership.
First, we are not going to completely transform healthcare systems overnight. However, all healthcare systems contain opportunities to bring together focused sets of two or three currently uncoordinated activities that have real potential for systemic and patient improvements. The opportunities will vary by context and could include linking decisions about surgical activities, post-op procedures and out-patient follow-up more effectively; shifting activities that traditionally take secondary/tertiary care settings to primary care facilities; taking advantage of the growing sophistication of pharmacies as first-line providers; pulling together drug treatments with lifestyle and nutrition programs; tying emerging digital initiatives with traditional care platforms; and an infinite variety of other prospects. There is no shortage of opportunities with potential for major impact.
Second, though, we will need effective leadership by people who will be affected by the changes. Bringing two programs together to make a joint decision requires that leaders from both programs believe in the benefits and are willing to commit the time and energy to negotiate solutions that are viable for both programs — to share the initial costs and, in turn, to share the subsequent benefits. To get to this point, leaders who do not traditionally work with each other must begin to do so. As a first step, this might mean identifying a small project that offers a win for each of the parties involved, bringing together a few staff people to deliver the project, and developing a shared language and respect during the course of the project.
Historically, we have been most likely to undertake such cross-functional projects within institutions — hospitals, agencies, companies, and other silos in the system. What we need to do now is look for opportunities for inter-institutional projects. For instance, to bring a couple of people from a vendor together with a couple of people from a clinical practice and a couple of people from an administrative team to devote a few hours to achieving a targeted goal. Then, evaluate what has been learned about the goal and each other to help set up another, ideally bigger, goal.
Bringing vendors into the mix as key partners in creating patient and system value may appear controversial. But if we do not do so, we are leaving important knowledge on the floor and missing opportunities for improvement. By contrast, if vendors do engage more actively as value chain partners, we can gain important disruptive benefits.
Even if many stakeholders do not yet trust vendors’ incentives, it is not as if the rest of the healthcare system has much stronger credibility. The same 2018 Gallup poll that ranked the pharmaceutical industry as second from the bottom in reputation ranked healthcare only one step higher, at 14 per cent net negative (34 per cent positive, 18 per cent neutral, 48 per cent negative). Actors throughout the healthcare value chain need to improve their public perception, and a central way to do that is to work together in stronger partnerships. As indicated herein, commercial vendors offer key knowledge and, potentially, appropriate incentives as central actors in these partnerships.
A proactive strategy of value chain partnership is a pathway to commercial success.