“The unfolding drama of Anil Potti — a Duke researcher who posed as a Rhodes Scholar and appears to have invented key statistical analyses in a study of how breast cancer responds to chemotherapy — has sent ripples of angst through the cancer community. Potti’s antics prompted editors of The Lancet Oncology to issue an “expression of concern” — a Britishism that might be better expressed as “Holy Shit!” — about the validity of a 2007 paper in their journal by Potti and others.

So why write a blog on retractions?

First, science takes justifiable pride in the fact that it is self-correcting — most of the time. Usually, that just means more or better data, not fraud or mistakes that would require a retraction. But when a retraction is necessary, how long does that self-correction take? The Wakefield retraction, for example, was issued 12 years after the original study, and six years after serious questions had been raised publicly by journalist Andrew Deer. Retractions are therefore a window into the scientific process.”

Why is this important? Because of opinions such as this from the friendly folks at Asia Healthcare Blog. This was in reaction to recent US press and media honing in on a new type transferable antibiotic resistance in gram-negative organisms. NDM-1 (New Delhi Metallo-beta-lactamase 1) is named after the city that was visited by the patient in whom the first organism carrying this enzyme was isolated.

“Sorry Indian MPs, claims like this are not made lightly by scientists or one of the most highly respected medical journals in the world. And, if for some strange reason the Lancet decided it was going to publish study findings based on maliciously distorted information just so that the UK could somehow claim political superiority over all of India, then this is something that should be challenged through study and not through parliament.

The most important thing in a world 7 billion strong is too be vigilant against the threat of global pandemic. Instead of worrying about their reputation and the medical tourism industry, Indian physicians, public health experts, and government leaders should focus on double checking the findings of the study.

GIVE ME MY ANTIBIOTICS!

India has a lot to lose from a marred medical tourism reputation, having heavily invested both government and private dollars into the development of its medical tourism industry. The worst thing that could happen is for profit and pride to be put ahead of health. We’ve had this happen once already this decade in China, and that culminated in the frightening summer of SARS. And, if the reporting of Swine Flu numbers is anything to go on, then Indian hospitals and governments aren’t exactly on top of the ball when it comes to keeping other countries abreast of their health problems.”

Damjan Denoble, Editor, Asia Healthcare blog

and from Reuters Health Information (incidentally Ivan Oransky of Retraction Watch is the Executive Editor at Reuters Health – very interesting indeed):

New superbugs could spread around the world after reaching Britain from India – in part because of medical tourism – and scientists say there are almost no drugs to treat them.

With international travel in search of cheaper healthcare increasing, particularly for procedures such as cosmetic surgery, lead author Dr. Timothy Walsh from Britain’s Cardiff University said he feared the new superbug could soon spread across the globe.

“Because of medical tourism and international travel in general, resistance to these types of bacteria has the potential to spread around the world very, very quickly. And there is nothing in the (drug development) pipeline to tackle it.”

In a study published online August 11th in The Lancet Infectious Diseases, Dr. Walsh’s team found that NDM-1 is becoming more common in Bangladesh, India, and Pakistan and is also being imported back to Britain in patients returning after treatment.

“India also provides cosmetic surgery for other Europeans and Americans, and it is likely NDM-1 will spread worldwide,” the scientists wrote in the study.

Part of your view appears to me to be a tad naive Damjan. The Lancet it seems would be well-advised to review their quality control processes. A supposed Rhodes Scholar? A Duke researcher? Isn’t that your Alma Mater Damjan (kidding of course)? 12 years for the Wilkinson retraction? The Wilkinson retraction was regarding the issue of autism being linked to MMR vaccine which turned out to be b-ll sh-t (please read Medicine, media and accountability: What’s the hazard ratio of that?).

Will this episode also blow up in the Lancet face? Why is it necessary to potentially malign a country, a city, a possible growth industry? Why all the hoopla? Lets call HIV, “African monkey/ Gay man disease”, or H1N1, Spanish flu, or salmonella, McChicken bacteria? Now, I know this last sentence is not politically correct so let me preempt any complaints by saying I don’t really suggest that we should seriously demean a McDonald’s McChicken, though I’m a burger-man myself.

What is this new “Superbug”?

From the original study which was high in science and low in hoopla factor:

Yong D et al. Antimicrob Agents Chemother 2009. http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2786356/

The growing increase in the rates of antibiotic resistance is a major cause for concern in both nonfermenting bacilli and isolates of the Enterobacteriaceae family. β-Lactams have been the mainstay of treatment for serious infections, and the most active of these are the carbapenems, which are advocated for use for the treatment of infections caused by extended-spectrum β-lactamase (ESBL)-producing Enterobacteriaceae, particularly Escherichia coli and Klebsiella pneumonia (21). However, carbapenemases are increasingly being reported; and the most prevalent of these would appear to be KPC, which has recently been characterized in the United States, Israel, Turkey, China, India, the United Kingdom, and Nordic countries.-

-Herein, we report on the genetic and biochemical characterization of a new subgroup of MBL, designated NDM-1, originating from New Delhi, India. We also report on its novel genetic context and describe a new erythromycin resistance gene, designated ereC.

And the conclusions (selected sentences) from this study:

The broad resistance carried on these plasmids is a further worrying development for India, which already has high levels of antibiotic resistance.

Strain 05-506 clearly arose in India, but there are few data arising from India to suggest how widespread it is. We are currently undertaking studies in several Indian cities to examine these points. Interestingly, there appears to be the possible transfer of blaNDM-1 in vivo either from K. pneumoniae to E. coli or vice versa, but more interestingly, the plasmids carrying blaNDM-1 in the two species are of different sizes. This evidence would suggest that there is rearrangement in vivo which could result from either duplication and insertion, e.g., transposition or rolling circle replication from the smaller plasmid, or deletion from the larger plasmid (33, 34). The plasmid carrying blaNDM-1 also carries blaCMY-4 and the complex class 1 integron carrying several antibiotic resistance-conferring genes (33), and it has also shown itself to naturally have a broad host range. When the plasmid was transferred to E. coli J53, the E. coli strain containing pNDM-1 was resistant to all antibiotics except colistin and ciprofloxacin and was shown by blotting and PCR to carry blaCMY-4, the ISCR region, and blaNDM-1. Therefore, the rapid dissemination of this plasmid among clinical bacteria would be a nightmare scenario.

In a country where there is little control on antibiotic prescriptions, the rapid dissemination of such a plasmid is alarming.

Ouch. Chalk one up for the Lancet and Damjan. India (and the world) had better wake up quick or there clearly is potential for a nasty bacterial brew to disseminate via our “The World is Flat” achievement. As an expat living in Singapore with ready and frequent access to India, I must say I exploit the ready off-the-street availability of zithromax and other premium antibiotics at a fraction of the cost in Singapore. Relatives bring a few courses of cipro, augmentum, zithromax, every time we go back and forth and I’m certain I’m not the only one. I think it’s time the WHO and India work on policy and procedures to take drugs which are only available by prescription elsewhere and limit access through the traditional channel- prescriptions by certified physicians. Yes, I know there are a billion people in poverty who cannot afford doctors visits and prescriptions, but the alternative is to let Darwin’s evolution work it’s magic on the human race (kill off millions) until WE develop resistance to those bacterial strains.

Tej Deol, M.D.

Monday, July 5, 2010

Big Pharma Research Cost Defense of High Drug Prices Debunked in Study

Readers may know I have perilous little sympathy for Big Pharma. The industry too often wraps itself in the mantle of science, in particular, claiming its needs its high profits and hence high prices to support its research and development efforts. In fact, it spends more on marketing than on R&D (and perilous few industries sell products with fat enough margins to support the cost of frequent sales calls to small businesses, let alone prime time TV ads). And it is a given that it allocates as much overhead as its accountants will tolerate to its reported R&D levels.

A new and interesting line of attack has been opened against Big Pharma’s defense of its high US prices and its ongoing attacks on Europe and other countries that negotiate discounts. US drugmakers have contended that the rest of the world is effectively free-riding on US research, and that its inability to charge higher prices outside the US limits funding of R&D (ahem, have we forgotten the fact that most really big ailments already have treatments of some sort, making it much less likely that anyone will find a new blockbuster drug?).

But a more granular look at drug pricing within the US shows that drugmakers offer enough discounts here to undermine their attacks on non-US health schemes. And the foreign drug regimes at least assure that everyone in the population is on the same footing, while here, the highest prices fall on those either outside health care plans or in ones without favorable drug pricing, so the burden of higher prices falls disproportionately on lower income people.

Yves Smith

In my eyes, America has become a frighteningly depressing place. The land of the “American Dream” where literally hundreds of millions flocked from all over the world for life, liberty, and the pursuit of happiness (read pursuit of maximal individual utility – financial and otherwise) has transitioned into “Nightmare on Elm and every other American Street” where the government has now poured trillions of future tax payer dollars into “saving” and now owning the auto industry (General Motors); “saving” and owning the insurance industry (AIG); “saving” and owning the banking industry (Citibank); “saving” and owning the housing finance industry (Fannie Mae and Freddie Mac); and finally this year, “saving” and owning the Healthcare system.

All of this is justified in balancing the “needs” of society with the needs of individuals (people or companies). In the past, the individual has usually taken preference but society has definitely hit back and with a vengeance. This attitude pervades Yves’ thinking process in her above comments and appears to be shared by many as the big bad branded pharma firms continue to be bashed up all around the world.

Why does big pharma tolerate this nonsense?

Why do branded pharmaceutical (or other healthcare) companies exist? Is the industry’s mandate to provide society with innovative drugs and treatments? NO. It started the simple way. People sensed an opportunity to build a business. To invest their capital and make it grow. They sensed a potential and sustainable demand for better (quality) treatments. Branded pharmaceutical firms exist to maximize the well-being of their management and their securities holders; they exist so that the employees can make a great living (i.e. chase the American Dream) and so that the residual cash from running the business will allow the equity holders to make a great living (i.e. chase the American Dream). That is it. There is no “society” needs in this mandate. In other words, they seek to profit by innovating to improve the quality of their offerings.

Why do generic pharmaceutical manufacturers exist? Well, it also started the simple way. People sensed an opportunity to build a business. To invest their capital and make it grow. They sensed a potential and sustainable demand for cheaper (price) treatments. Generic pharmaceutical firms exist to maximize the well-being of their management and their securities holders; they exist so that the employees can make a great living (i.e. chase the American Dream) and so that the residual cash from running the business will allow the equity holders to make a great living (i.e. chase the American Dream). That is it. Again, no mandate for “society” needs. In other words, they seek to profit by exploiting cheaper cost structures and adding elements of price competition.

Companies compete on either quality or price but they must have an incentive to do so. For branded pharmaceutical firms, the incentive is patent protection for a period (17 years give or take) and the ability to create a hypothetical monopoly situation. For generics firms the incentive was from the provisions of the Drug Price Competition and Patent Term Restoration Act of 1984. Better known as the Hatch-Waxman Act, this legislation provides independent generic firms with a reward for challenging patents held by brand-name firms. That “bounty” consists of a 180-day generic drug exclusivity period awarded to the first patent challenger. During the 180-day period, the brand-name company and the first generic applicant are the only firms that receive authorization to sell that pharmaceutical. At the close of this period, other independent generic competitors may obtain marketing approval and enter the market, ordinarily resulting in even lower prices for generic medicines.

So why bother? How does a pharma company recoup its investment and make a profit? Well, there are two broad categories of conditions: common and rare. For common conditions, firms will want to maximize market share; for rare conditions, firms will want to maximize price. Of course this is very black and white and there is a broad spectrum of prevalence of disease and thus a broad spectrum of economic incentives but basic economics folks: price x quantity = revenue.

The industry too often wraps itself in the mantle of science, in particular, claiming its needs its high profits and hence high prices to support its research and development efforts. In fact, it spends more on marketing than on R&D (and perilous few industries sell products with fat enough margins to support the cost of frequent sales calls to small businesses, let alone prime time TV ads). And it is a given that it allocates as much overhead as its accountants will tolerate to its reported R&D levels.

In well-functioning competitive markets Industries don’t have to defend their pricing choices to anyone in society (except its shareholders!). If a particular company prices it’s product (i.e a new patent protected antibiotic for urinary tract infections) too high, consumers (patients) will substitute to cheaper alternatives. For the vast majority of common illnesses there are plenty of cheap and effective treatment doctors and their patients can choose from. Patent protection to encourage the investment in new technologies/drugs is helpful in justifying the investment but it does not create a monopoly nor eliminate competition. Thus, pharma companies must expend “more on marketing than on R&D “. In order to achieve an acceptable market penetration to justify investment you must market your products. If the condition is rare, and your product is truly innovative and value enhancing, then high prices are very justified and less can be spent on marketing until someone else can challenge your product with a cheaper but equally effective alternative.

And the foreign drug regimes at least assure that everyone in the population is on the same footing, while here, the highest prices fall on those either outside health care plans or in ones without favorable drug pricing, so the burden of higher prices falls disproportionately on lower income people.

Uhhh. No. The burden of high prices fall exactly where it should. On those with a willingness to pay. Those outside of health plans (lower income people) will not choose the most expensive treatments for their condition. They will choose the cheapest substitute. And if they do choose the expensive alternative then they have made a conscious decision about their utility and proceeded. Who are we to judge? Some of these same people also choose cigarettes and alcohol over healthy expensive food. And if it is a condition that is emergent or severe, then SOCIETY pays. Whether society feels entitled to the most expensive patent protected option or the cheaper alternative is another story.

As evidence for her claims, Yves quotes the following article in the FT. I have inserted my comments in bold.

“Claims by the US drugs industry that the US disproportionately funds research and development of new drugs by paying higher prices than Europe for its medicines have been undermined by a new study to be published soon.

Panos Kanavos and Sotiri Vandoros at the London School of Economics argue in their report that a rigorous like-for-like comparison shows that transatlantic differences in patented medicine prices are modest and declining over time.”

Maybe. But it’s their assumptions and conclusions we should question.

“In a forthcoming article in Health Economics, Policy and Law, the co-authors conclude that “public prices for branded prescription medicines in the US are comparable to those in key European and other OECD countries”.

Their findings are an embarrassment for the industry, and notably PhRMA, its powerful Washington, DC-based trade body. In the past PhRMA has argued that Europe’s ill-conceived public policies, including price controls and sluggish regulatory decision-making, have chilled innovation and raised doubts among private investors who help to underwrite research.”

If anything, the industry should be “embarrassed” for being so defensive about this topic.

“But the study confirms data released recently by several pharmaceutical groups, including AstraZeneca and GlaxoSmithKline. This data – confirmed informally by senior industry executives – suggests profits in the US are only marginally greater than in Europe.

His study concludes that Europe remains a relatively attractive market by volume and price, even though budget deficits have forced through aggressive price cuts in several EU states in recent weeks.”

Well, if Europe is an attractive market based on volume and price, and yet margins are similar, that suggests that less is being spent in Europe to promote the drugs. You can only maintain margins by cutting costs if your prices are controlled at less than the optimal (for the business). This would make sense. Why promote any drugs if the governments dictate which drugs can be prescribed and at what prices (formularies). Thus this is not evidence of anything relevant. All it means is that in a comparison of the drugs that ARE available in both markets the margins are similar. What about drugs that pharmaceutical firms won’t bother to introduce to these markets or that AREN’T available because they don’t make the formulary? For a similar discussion of European manufacturers struggling in China due to government policy see ‘Patients In China Denied Innovative New Medicines, Says E.U. Pharmaceutical Group’ in PharmAsia News (Elsevier Business Intelligence).

“But Mr Kanavos demonstrates that manufacturers of branded drugs do not significantly cut prices to compete with lower cost generic rivals once patents expire. Governments typically have to ensure that prescribers switch to generic alternatives to save money.”

This sentence makes no sense to me at all. If branded drugs do not significantly cut prices to compete then everyone, given appropriate pricing transparency, will switch to generic. Why do governments have to “compel” prescribers to switch? If the products are identical except for price, won’t consumers switch anyway? Clearly something is wrong with this logic.

So what happens when you tilt the field away from innovation by removing some of the financial rewards? Branded pharmaceutical firms choose to spend even less on R&D (i.e. less on innovation), and redistribute their efforts to competing on price thus justifying the “controversial” strategic approach of offering branded or authorized generics or even purchasing generic manufacturers outright. In Reuters Feb 2010:

AstraZeneca, GlaxoSmithKline and Pfizer, have all taken a knife to research and development in the past week, ditching drug discovery work that does not pay its way.

Branded or authorized generics are simply pharmaceuticals that are marketed by or on behalf of a brand-name drug company, but sold under a generic name. The branded pharmaceutical firm/ or a firm it licenses the drug to, takes it’s own high quality version and sells it at discounted prices to compete with the generics close to patent expiration. If I know I have a factory already producing the drug and I know a competitor will come into the market at deep discount, won’t I lower my price to compete?

According to:

Congressional Research Service Report RL33605
Authorized Generic Pharmaceuticals: Effects on Innovation
John R. Thomas, Resources, Science, and Industry Division


Current interest in authorized generics is largely due to a shift in corporate strategies that has been traced to the early 1990’s. Until that time, many entrants in the pharmaceutical industry engaged exclusively either in selling brand-name, innovative drugs, or in selling generic drugs. Several other brand-name firms began to market authorized generics shortly before patents on their products were due to expire. Among such products were Nolvadex® (tamoxifen), authorized by the Stewart Pharmaceutical Division of ICI Americas (now AstraZeneca) and sold by Barr Laboratories; Dyazide® (triamterene/hydrochlorothiazide), marketed by SmithKline Beecham Pharmaceuticals (now GlaxoSmithKline); and Ventolin® (albuterol), authorized by GlaxoSmithKline and sold by Dey LP.

Many brand-name firms did not continue to sell authorized generics at that time, however, reportedly due to a lack of profitability. One reason for the “resurgence” of authorized generics in the early 2000’s is that physicians, pharmacists and patients more rapidly switch to generic drugs upon their introduction to the marketplace than a decade ago. Because the rate of generic adoption is much greater now, brand-name firms reportedly are more willing to “genericize” their own brands in order to capture a share of that market. The expanding generic adoption rate has also reportedly led to an industry trend where brand-name houses acquire generic firms. This development too may encourage authorized generics practice in the future.

So where’s the controversy? From the same report:

Some commentators view the 180-day exclusivity period as a crucial incentive for generic firms to challenge patents held by brand-name firms. Under this view, the launch of an authorized generic during the 180-day exclusivity period makes the recovery of litigation expenses more difficult. In turn, the possibility that a brand-name firm will sell an authorized generic during the 180-day exclusivity period may decrease the incentives of generic firms to challenge patents in the first instance.

Other observers believe that authorized generics benefit consumers by increasing competition in the generic market. Because the authorized generic is manufactured by the brand-name firm and identical to its own product, consumers may be encouraged to switch to the lower-cost authorized generic alternative. Authorized generics may also facilitate the settlement of patent litigation between brand-name and independent generic firms. As an historical matter, certain of these settlement agreements have allowed authorized generics to enter the market, and therefore promoted competition, prior to the expiration of the relevant patent term.

Recent judicial opinions have upheld FDA practices allowing authorized generics. As a result of congressional interest, however, the Federal Trade Commission has agreed to release a report directed towards this issue. Although Congress may wish to take no action if the current allowance of authorized generics is deemed appropriate, other possibilities include subjecting them to the 180-day generic exclusivity period enjoyed by an independent generic firm, or simply disallowing them altogether.

Anyway, in my humble opinion both Little red riding hood and the big bad wolf are getting screwed. “Society” loses out on an critical source of healthcare innovation and forces large deep-pocketed branded pharma firms into consolidating with generics manufacturers with everyone competing on price and nobody competing on quality. Worse yet, once the consolidation matures, the prices will rise anyway. So in the end, no specialty pharma companies; no pure generics manufacturers; only consolidated hybrids and a commoditized industry with limited incentive to compete on quality or price.

Tej Deol, M.D.

Also read:

PATENTS CAUSE DRUG HEADACHES

Despite the relatively low level of spending on healthcare in Singapore, the island state’s health indicators are good

Spending on healthcare in Singapore is relatively low as a percentage of GDP: at an estimated 4.1% in 2009, it is below the average of around 5.3% of GDP in the Asia and Australasia region. Spending will edge upwards in the next few years, rising to 4.3% of GDP in 2014. This represents a projected 50% rise on 2009 spending in local-currency terms. Healthcare spending by the public sector currently stands at around 0.9% of GDP, with most spending by the private sector coming through savings and insurance funds run by the government.

Average life expectancy at birth was 81.9 years in 2008; for males, it was an estimated 79.3 years, and for females 84.7 years. This compares favourably with average life expectancy of around 73 years in Malaysia and Thailand, 78.1 years in the US and 79.1 years in Germany. The rate of infant mortality stood at 2.3 per 1,000 live births in 2008, down from 3 per 1,000 in 2000. Singapore in general has a developed country profile for disease.

Spending

The majority of Singaporeans are covered by the three major government-operated healthcare financing schemes, known as the 3Ms: Medisave, Medishield and Medifund

Medisave is a simple national savings scheme designed to enable patients to save income for future healthcare expenses. At end-2008 there were 2.9m Medisave accounts, the average balance of which stood at S$14,900 (around US$10,600). Medishield is a low-cost insurance scheme, premiums for which can be paid out of Medisave accounts, and is aimed at providing patients with cover in the event that balances in Medisave accounts are insufficient to meet healthcare expenses. At the end of 2008, 84% of the population were Medishield members, with the ratio for the working-age population standing at 93%. Medifund is an endowment fund that is financed by the government to provide a safety net for those who cannot afford their part of subsidised healthcare expenses. The Private Medical Insurance Scheme, which allows private insurers to offer medical insurance to members of the Central Provident Fund (a compulsory savings scheme to finance pension payments) and is similar to that offered under Medishield, has around 500,000 members.

Demand for care for the elderly is expected to increase steadily, and the government is making progress in terms of managing this. In 2002 it introduced Eldershield, an insurance scheme aimed at providing payments to cover private nursing-home expenses, and by end-2008 there were 835,000 policyholders.

Direct government spending on healthcare has risen in recent years. In 2008/09 its recurrent healthcare spending amounted to S$2.4bn (around US$1.7bn) and its development healthcare spending to S$339m. This was equivalent to around 1.1% of GDP and 7.1% of the total public expenditure budget.At the onset of the 2009 economic recession the government sharply increased the 2009/10 budget allocation for the health ministry, raising it to S$3.7bn, nearly S$1bn more than the allocation for 2008/09.

Policy

The government’s healthcare policy aims to encourage self-reliance, keep healthcare affordable and involve community-based facilities.

Singapore had 29 hospitals in 2008, with 14 in the public sector and 15 in the private sector, according to the health ministry. The total capacity of these hospitals in 2008 was 11,457 beds. The public sector is more important than the data suggest: although there are slightly fewer public hospitals, their average size, at 590 beds, is greater than that of hospitals in the private sector (which have an average of 210 beds). There were 1.6 doctors and 4.8 nurses and midwives per 1,000 people in 2008. The ratios of doctors and hospital beds per 1,000 people are above the global averages.

Government figures for 2008 show that there were around 330,000 admissions to public hospitals in that year, compared with around 106,000 admissions to private hospitals. In addition, public-sector specialist outpatient clinics served 3.8m patients in 2008, while public-sector outpatient polyclinics (multipurpose clinics) had nearly 4m patients. The private sector accounts for over 75% of all primary healthcare services, with government primary-health clinics accounting for the remaining share. The government subsidises 50% of the treatment cost at public-sector clinics.

Expensive medical treatments, including non-essential cosmetic treatments, are not available in public hospitals. The health ministry determines the charges for any kind of medical treatment. The government introduced the Casemix system of funding in public hospitals in 2000, under which funds are distributed according to the type of medical condition and the difficulty of treating it, as well as the frequency of its occurrence.

Building on the world-class reputation of Singapore’s health services, bolstered by its growing clinical research and biomedical industries, the government is promoting the local healthcare industry as a regional centre of medical excellence. It is also keen to promote not only general surgery and medicine but also specialist services, including organ transplants and cardiology.

Diseases

Singapore in general has a developed-country profile for disease, with cancer, cardiovascular diseases
and strokes accounting for over 60% of deaths

Singapore struggled alongside many other countries worldwide in coping with outbreaks of influenza A(H1N1), often known as swine flu, in 2009, but by early 2010 concerns over the potential threat from the virus had diminished, with the health ministry stating that there were no signs of a significant rise in influenza prevalence in Singapore. The government has also established Pandemic Preparedness Clinics— in essence, primary-healthcare clinics—as a central part of the health ministry’s pandemic response framework. It also commenced a swine-flu vaccination campaign in late 2009. Singapore will remain vulnerable to highly contagious viruses owing to its position as a regional business and tourism hub.

Aside from the influenza threat, Singapore in general has a developed-country profile for disease, with cancer, cardiovascular diseases and strokes accounting for over 60% of deaths, according to the health ministry. Despite government health campaigns, there is no reason to believe that Singapore’s disease profile will change significantly in the coming years, although problems associated with obesity are expected to increase.

A seemingly ubiquitous item on the reform agenda of most developed and now developing nations is “healthcare reform”. Whether we talk about the U.S. private/hybrid health care system or universal healthcare systems such as Canada’s, U.K.’s, Australia’s, and France’s, it appears the grass is much greener on the other side though as far as I can tell the debate has been an exercise in watching the blind lead the blind thus the actual colour of the grass is irrelevant. However there does appear to be an intelligent analysis of the critical issues emanating from an article posted in Harvard Business Review. This brilliant article written by Michael Porter, of Porter’s 5 forces fame -a competition analysis framework and Elizabeth Teisbera, precisely identifies the critical issues creating a malfunctioning market in healthcare. For all stakeholders from patients to providers and payers but especially governments responsible for ensuring a viable robust healthcare system that provides for its citizens yet does not stifle innovation, this ought to be mandatory reading. The article is so relevant that I include it in it’s entirety. Again, though the U.S. Congress has finally passed “reform”, the real debate let alone execution of reform has yet to begin.

Redefining Competition in Healthcare
by Michael E. Porter and Elizabeth Olmsted Teisberg

The U.S. health care system has registered unsatisfactory performance in both costs and quality over many years. While this might be expected in a state-controlled sector, it is nearly unimaginable in a competitive market—and in the United States, health care is largely private and subject to more competition than virtually anyplace else in the world.

In healthy competition, relentless improvements in processes and methods drive down costs. Product and service quality rise steadily. Innovation leads to new and better approaches, which diffuse widely and rapidly. Uncompetitive providers are restructured or go out of business. Value-adjusted prices fall, and the market expands. This is the trajectory common to all well-functioning industries—computers, mobile communications, banking, and many others.

Health care could not be more different. Costs are high and rising, despite efforts to reduce them, and these rising costs cannot be explained by improvements in quality. Quite the opposite: Medical services are restricted or rationed, many patients receive care that lags currently accepted procedures or standards, and high rates of preventable medical error persist. There are wide and inexplicable differences in costs and quality among providers and across geographic areas. Moreover, the differences in quality of care last for long periods because the diffusion of best practices is extraordinarily slow. It takes, on average, 17 years for the results of clinical trials to become standard clinical practice. Important constituencies in health care view innovation as a problem rather than a crucial driver of success. Taken together, these outcomes are inconceivable in a well-functioning market. They are intolerable in health care, with life and quality of life at stake.

We believe that competition is the root of the problem with U.S. health care performance. But this does not mean we advocate a state-controlled system or a single-payer system; those approaches would only make matters worse. On the contrary, competition is also the solution, but the nature of competition in health care must change. Our research shows that 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.

There is no villain here. Poor public-policy choices have contributed to the problem, but so have the bad choices made by health plans, hospitals, and the employers who buy their services. Decades of “reform” have failed, and attempts to reform will continue to fail until we finally get the right kind of competition working.

How Reform Went Wrong

The health care system can achieve stunning gains in quality and efficiency. And employers, the major purchasers of health care services, could lead the transformation.

Zero-Sum Competition

In any industry, competition should drive up value for customers over time as quality improves and costs fall. It is often argued that health care is different because it is complex; because consumers have limited information; and because services are highly customized. Health care undoubtedly has these characteristics, but so do other industries where competition works well. For example, the business of providing customized software and technical services to corporations is highly complex, yet, when adjusted for quality, the cost of enterprise computing has fallen dramatically over the last decade.

Health care competition, by contrast, has become zero sum: The system participants divide value instead of increasing it. In some cases, they may even erode value by creating unnecessary costs. Zero-sum competition in health care is manifested in several ways: First, it takes the form of cost shifting rather than fundamental cost reduction. Costs are shifted from the payer to the patient, from the health plan to the hospital, from the hospital to the physician, from the insured to the uninsured, and so on. Passing costs from one player to another, like a hot potato, creates no net value. Instead, gains for one participant come at the expense of others—and frequently with added administrative costs.

Second, zero-sum competition involves the pursuit of greater bargaining power rather than efforts to provide better care. Health plans, hospital groups, and physician groups have consolidated primarily to gain more clout and to cut better deals with suppliers or customers. But the quality and efficiency gains from consolidation are quite modest.

Third, zero-sum competition restricts choice and access to services instead of making care better and more efficient. As the system is currently structured, health plans make money by refusing to pay for services and by limiting subscribers’ and physicians’ choices. Health plans and care providers restrict patients’ access to medical innovations or limit the services that are covered. Many health plans pay hospitals a set amount per admission for a given ailment rather than for a full treatment cycle. This creates an incentive for hospitals to use cheaper treatments rather than more effective, innovative ones—and if patients consequently must be readmitted, the hospitals are paid again.

Fourth, zero-sum competition relies on the court system to settle disputes. Yet lawsuits compound the problem. They actually raise costs directly (through legal fees and administrative expenses) and indirectly (through the practice of unnecessary, defensive medicine)—none of which creates value for patients. Moreover, of the billions of dollars that doctors and hospitals pay annually for malpractice insurance, less than 30% goes to injured patients or their families.

What Happened?

Zero-sum competition in health care is the consequence of a series of unfortunate strategic choices made by nearly all the actors in the system—encouraged, and in some cases reinforced, by bad incentives introduced through government regulation. These include:

The Wrong Level of Competition.

The most fundamental and unrecognized problem in U.S. health care today is that competition operates at the wrong level. It takes places at the level of health plans, networks, and hospital groups. It should occur in the prevention, diagnosis, and treatment of individual health conditions or co-occurring conditions. It is at this level that true value is created—or destroyed—disease by disease and patient by patient. It is here where huge differences in cost and quality persist. And it is here where competition would drive improvements in efficiency and effectiveness, reduce errors, and spark innovation. Yet competition at the level of individual health conditions is all but absent.

The fundamental economics of health care are driven at the level of diseases or conditions. Numerous studies show that when physicians or teams treat a high volume of patients who have a particular disease or condition, they create better outcomes and lower costs. (For more on this concept, see the exhibit “Experience Matters.”) The renowned Texas Heart Institute (THI), for example, prides itself on having surgical costs that are one-third to one-half lower than those of other academic medical centers despite taking on the most difficult cases and using the newest technologies. Because of its specialization, THI attracts the most complex and demanding patients, whose needs produce even more rapid learning. In health care, as in most industries, cost and quality can improve simultaneously as providers prevent errors, boost efficiency, and develop expertise. As we have learned in many businesses, “doing it right the first time” not only improves outcomes but can dramatically cut costs. The trade-off between cost and quality in health care, then, is significantly reduced by competition at the right level.

Competition at the level of individual diseases and conditions is getting even more important as medical research reveals that diagnoses and treatments should be increasingly specialized. Prostate cancer, for example, is now understood to be six different diseases that respond to different treatments. Providers should compete to be the best at addressing a particular set of problems, and patients should be free to seek out the providers with the best track records given their unique circumstances. In the current environment, where patients’ treatments are determined by the networks they are in, network providers are all but guaranteed the business.

The Wrong Objective.

Competition at the wrong level has been exacerbated by pursuit of the wrong objective: reducing cost. Even worse, the objective has often not been to reduce the total cost of health care but to reduce the cost that is borne by the system’s intermediaries—health plans or employers. The right goal is to improve value (quality of health outcomes per dollar expended), and value can only be measured at the disease and treatment level. Competing on cost alone makes sense only in commodity businesses, where all sellers are more or less the same. Clearly, that is not true in health care. Yet that perverse assumption—which neither buyers nor sellers really believe—underlies the behavior of the system participants. Payers, employers, and even providers pay insufficient attention to achieving better outcomes and improving value over time, which are what really matter.

The Wrong Forms of Competition.

Instead of competing to increase value at the level of individual diseases or conditions, the players in health care have entered into four unhealthy kinds of competition, all of which have unhappy consequences. One is the annual competition among health plans to sign up subscribers. Because of strong network restrictions, however, signing up for a health plan blocks most of the competition at the level of diseases and treatments. And because the commitment between the subscriber and the health plan is for just one year, both payers and employers are motivated to engage in short-term thinking rather than invest in practices and therapies that will improve value over time.

Another form of unproductive competition occurs when providers compete to be included in health plan networks by giving deep discounts to payers and employers that have large patient populations. There is little or no economic rationale for such discounts. It does not cost less to treat a patient employed by a large company than a patient who is self-employed. Health care delivery does not become more efficient from treating twice as many patients with a random distribution of diseases; patients are still treated one at a time and according to their particular circumstances. Large discounts in return for increased overall patient flow simply shift revenue from providers to health plans or to large employers. This creates artificial benefits for large groups and shifts costs to small groups, unaffiliated individuals, patients seeking out-of-network care, and the uninsured—with little, if any, compensating value. Such cost shifting ultimately drives up overall costs—even to large groups—by increasing the number of uninsured patients who must be treated in expensive settings (emergency rooms, for instance) and hence the amount of free care that must be subsidized.

Providers also compete to see who can form the largest, most powerful group, able to offer a complete array of services. Here, too, there are few efficiencies to be gained, apart from modest opportunities to share overhead. Hospital mergers often result in two departments in the same specialty rather than one department, even when the facilities are close to one another. Provider groups are formed not to create value but to boost bargaining power vis-à-vis health plans and other system participants. Throughout Florida, for example, large hospital networks have won price increases far above the rate of inflation and unconnected to any improvements made in quality of care after threatening to cut off one of the region’s largest health plans. And because their referrals are heavily skewed toward affiliated physician groups and institutions, large provider groups further limit competition at the level of diseases and treatments.

Finally, there is always a squabble over who pays. This struggle takes many forms. Providers and payers try to shift costs to each other. Payers raise rates on subscribers who become ill. Providers boost their list prices so Medicare discounts will not cut so deep. Patients seek coverage for optional or cosmetic care. And employers allow health plans to deny payment to their employees. All of this is costly. None of it creates value for patients.

The Wrong Geographic Market.

Competition should force providers to equal or exceed the value created by the best in their region or even nationally. For the most part, however, health care competition is local. Such competition insulates mediocre providers from market pressures and inhibits the spread of best practices and innovations. Throughout the United States, there is an almost threefold variation in annual costs per Medicare enrollee—from less than $3,000 per patient in some areas to more than $8,500 in others. According to studies by Dartmouth Medical School’s John Wennberg and the school’s Center for the Evaluative Clinical Sciences, the higher costs are not associated with better medical outcomes and cannot be explained by differences in age, sex, race, rates of illness (which affect the need for care) or cost of living (which affects the cost of delivering care). These studies did find, as have several others, major differences across regions in outcomes and in delivery of care at the disease or treatment level. Such differences are sustained by the absence of competition.

Localized competition is institutionalized by health plan policies that require subscribers to pay most of the costs of out-of-network care—discouraging them from seeking providers outside their immediate area—or that penalize physicians for making out-of-network referrals. Medicare, for its part, computes HMO capitation payments at the county level, creating little incentive for hospitals in different counties to compete, even if they are only a few miles apart. Localized competition is also the result of habit, inertia, and information; as a matter of course, physicians refer their patients to nearby doctors—even their Medicare patients, who have no geographic restrictions.

Though many health care services should be provided locally, health care competition should take place regionally, or even nationally, especially for more complex or uncommon conditions. In this way, all providers would be subject to competitive pressures to improve. And providers treating less common conditions, drawing from a wider area, could serve enough patients to develop the expertise and efficiency that come with repeated experience and learning.

An ideal health care system would encourage close working relationships between local providers (for most routine and emergency services and follow-up care) and a wide array of leading providers (for definitive diagnoses, treatment strategies, and complex procedures in certain areas). These relationships would speed up the diffusion of state-of-the-art clinical care and would help to increase quality and efficiency throughout the system—but they are often resisted today.

The Wrong Strategies and Structure.

Although value is created by developing deep expertise and tailored facilities in a set of areas where providers can truly excel, most hospitals and networks have instead pursued wide service lines to negotiate better with health plans. Hospitals and physician groups have broadened their services by merging with or acquiring other institutions, resulting in roughly 700 hospital mergers between 1996 and 2000 and very high levels of local industry concentration. In North Carolina, for instance, only 18 of 100 counties had multiple hospital systems in 2000. Rivalry is severely limited as a result.

This reduction in competition produces few offsetting benefits. As we have discussed, consolidation has led to few efficiencies. Nor is it at all clear that quality is better when the breadth of services is wider. Though some patients have multiple diseases, focused institutions can easily cope with this. The M.D. Anderson Cancer Center in Houston, for example, has staff cardiologists but does not maintain a full-line cardiology practice. When difficult cases arise or heart surgery is required, the physicians at M.D. Anderson consult with outside colleagues or refer their cancer patients to leading cardiac centers.

The Wrong Information.

Information is integral to competition in any well-functioning market. It allows buyers to shop for the best value and forces sellers to compare themselves to rivals. In health care, though, the information really needed to support value-creating competition has been largely absent or suppressed. There is plenty of information about things that have a modest impact on value—health plan coverage and subscriber satisfaction surveys, for instance. But much more relevant is information about providers’ experiences and outcomes in treating particular conditions. Even this basic information is unavailable. For example, most hospitals and physicians do not even provide data on how many patients with a particular diagnosis or condition they have treated. Instead, available information about medical experiences and outcomes is largely word-of-mouth, even among physicians, and may be unsupported by evidence.

There have been efforts to collect the right kind of information—among them, Cleveland Health Quality Choice, the Pennsylvania Health Care Cost Containment Council, and New York State’s Cardiac Surgery Reporting System. But these have been small-scale experiments. Providers argue that data on the outcomes of treatments—appropriately risk-adjusted to reflect the complexity or severity of the patients’ initial conditions—are complex and difficult to measure in meaningful ways. Indeed, the collection of outcome information has been actively opposed by some system participants—sometimes for good reasons (the difficulty of performing risk adjustments, for instance) and sometimes for not so good reasons (fear of comparison and accountability, for instance).

Some observers have tried to discredit the attempts that have been made so far to collect relevant information. But these experiments demonstrate both the critical value of having the right information and the feasibility of developing it. In Cleveland, the information collected was not disseminated to patients or referring doctors. Employers, faced with short-term cost pressures, did not use the data to select high-quality providers. Patients and doctors were left in the dark. Meanwhile, in New York, information was collected on risk-adjusted mortality rates following cardiac bypass surgeries performed statewide, and the data were made more widely available. In response to the data, cardiac surgery groups pursued process improvements, and some hospitals revoked the privileges of cardiac surgeons with low volume and high mortality rates. After four years of published data, New York had the lowest risk-adjusted mortality following bypass surgery of any state in the country.

Encouraging competition at the level of specific diseases or conditions will speed the development of the right kind of information. For instance, insurer Preferred Global Health (PGH) helps its subscribers choose among the world-class providers and treatments it offers for the 15 critical diseases it covers. To find the highest-quality providers, PGH identifies those with the most experience in the most advanced treatments, documents their effectiveness and outcomes, and asks them to participate in quality-improvement processes. PGH’s experience belies the argument that there is too little information available for meaningful consumer choice in health care. America cannot afford to wait for perfect information to be developed before it can be disseminated. Nothing will drive improvements in information faster than making the existing data widely available.

The Wrong Incentives for Payers.

Health insurers should be rewarded for helping their customers learn about and obtain care with the best value; for simplifying administrative processes; and for making participants’ lives easier. Instead, payers benefit financially from enrolling healthy people and from raising premiums for or denying coverage to sick people. Payers have incentives to complicate billing; they can shift costs by issuing incomprehensible or inaccurate invoices and by delaying or disputing payment. They also have incentives to shift costs or reduce services by putting roadblocks between patients and care providers, restricting patients’ access to expensive treatments and most out-of-network treatments. (Although out-of-network care is not inherently more expensive, hospitals charge out-of-network patients list prices that may be twice as high as negotiated in-network prices. The difference between the amount the payer will reimburse and the artificially high list prices essentially makes out-of-network care prohibitively expensive for many patients.) Finally, payers benefit from slowing down innovations that do not show immediate, short-term cost savings. All these incentives reinforce zero-sum competition and work against value creation in health care.

A single-payer system, which has been proposed, would end the practice of excluding high-risk subscribers. But it would only exacerbate all the other skewed incentives by eliminating competition at the level of health plans and giving the payer more bargaining power with which to shift costs to providers, patients, and employers. A single payer would have greater incentive to reduce its costs by restricting or rationing services and by slowing the diffusion of innovation. The only real solution is to change these incentives and open up competition, not to make health insurance a government monopoly.

The Wrong Incentives for Providers.

Providers should be rewarded for competing regionally and nationally to deliver the best-value care for particular conditions or diseases. Instead, providers’ incentives, just like the payers’ incentives, reinforce zero-sum competition in health care. Hospitals and physicians have incentives to not refer patients to other providers who may be more experienced or to make referrals only within their network. Reimbursement practices encourage physicians to spend less time with patients, discharge them quickly, and readmit them if there is a problem. While many physicians resist the pressure to undertreat their patients, this conflict between good medicine and economic self-interest demoralizes physicians and slows the diffusion of best practices.

The threat of malpractice suits creates opposing incentives for physicians to overtest, overtreat, and overrefer their patients. Unfortunately, these incentives to overtreat do not cancel out the reimbursement incentives to undertreat. Instead, the result is less effective clinical practice and mountains of paperwork that drain doctors’ time. Worse still, the threat of malpractice suits creates risks for providers who try to learn from bad outcomes by measuring and analyzing them. Ironically, while technology has made knowledge diffusion faster and easier than ever before, the social and economic structures of the health care sector work against the rapid dissemination of learning.
Positive-Sum Competition

In a healthy system, competition at the level of diseases or treatments becomes the engine of progress and reform. Improvement feeds on itself. For that process to begin, however, the locus of competition has to shift from “Who pays?” to “Who provides the best value?” Getting there will require changes in the strategies of providers and payers and in the behaviors of employers purchasing health plans. In addition, some important system infrastructure needs to be put in place—rules and regulations that shift the incentives and create the right types of information. Let’s look at each needed reform in turn.

Provider Strategies: Distinctiveness.

Under positive-sum competition, providers would not attempt to match competitors’ every move. Instead, they would develop clear strategies around unique expertise and tailored facilities in those areas where they can become distinctive. Most hospitals would retain a wide array of service areas, but they would not try to be all things to everyone. In most businesses, it is common sense to develop products and services that create unique value. For many hospitals, developing uniqueness is a significant change in mind-set and deciding what not to do is an even more radical idea.

No Restrictions to Choice.

Under positive-sum competition, all restrictions to choice at the disease or treatment level would disappear, including network restrictions and approvals of referrals. Reasonable co-pays and large deductibles combined with medical savings accounts would let patients take some financial responsibility for their choices. But co-pays would be the same inside and outside of the network. Antitrust authorities would scrutinize system participants so that one hospital system or health plan did not unfairly dominate an important market.

Transparent Pricing.

Prices would be posted and readily available. Providers would charge the same price to any patient for addressing a given medical condition, regardless of the patient’s group affiliation. Providers could and would set different prices from their competitors, but that pricing would not vary simply because one patient was insured by Aetna, another covered by Blue Cross, and another self-insured. Payers could negotiate, but price changes would have to benefit all patients, not just their own. The cost of treating a medical condition has nothing to do with who the patient’s employer or insurance company is.

Price discrimination not related to costs imposes huge burdens on the system today. Having multiple prices drives up administrative costs. Patients covered by the public sector are subsidized by private-sector patients. And within the private sector, patients in large groups are subsidized by the uninsured, members of small groups, and out-of-network patients, who pay list prices. Artificially high list prices make more patients unable to pay, driving up uncompensated care expenses, which leads to ever higher list prices and bigger discounts for large groups. The price disincentives for care outside of the network stifle competition, which in turn slows quality and efficiency improvements that would otherwise benefit all patients. Without service-by-service competition, costs spiral ever higher while quality lags. The cost of dysfunctional competition far outweighs any short-term advantages system participants get from price discrimination—even for those firms that currently get the biggest discounts.

Paradoxically, the most practical way to eliminate price differentials for favored groups might be to temporarily institutionalize them. The federal government could limit the spread between the most discounted price and the highest price charged by a provider for any service and then reduce this spread each year over a five-year period. Ending the price anomalies would put a short-run burden on the biggest beneficiaries of the current system—master cost shifters like Medicare and the largest health plans. But over time, all participants would benefit from the enormous improvements in value and efficiency.

Simplified Billing.

A fundamental function of pricing is to convey information to consumers and competitors. Current billing practices obscure that information. Unnecessarily complex billing contributes to cost shifting, drives up administrative costs, and makes price and value comparisons virtually impossible. Under positive-sum competition, providers would have to issue a single bill for each service bundle, or for each time period in treating chronic conditions, rather than a myriad of bills for each discrete service. Many other industries have solved the problem of how to issue a single bill for customized services; among them aerospace, construction, auto repair, and consulting. A competitive health care industry could figure it out, too. Competing providers would also figure out how to give price estimates in advance of service. Such estimates would not only improve consumer choice but would also spur providers to learn about their real costs.

The other major source of billing problems is that currently, the patient bears the legal responsibility for bills, even with fully paid-up insurance. In positive-sum competition, payers would bear full legal responsibility for the medical bills of paid-up subscribers. If providers bill once and payers cannot shift costs to patients or providers, much of the confusion in billing will end.

Accessible Information.

Under positive-sum competition, both the providers and the consumers of health care would get the information they need to make decisions about care. The government or a broad consortium of employers could jump-start the collection and dissemination process by agreeing on a standard set of information that would be collected nationally on a regular basis. Indeed, medical information is not unlike the corporate disclosures overseen by the SEC. The benefits of national comparisons are compelling and will unleash a tidal wave of improvements in quality and efficiency.

An obvious—and relatively uncontroversial—starting point would be to collect information on specific providers’ experience with given diseases, treatments, and procedures. The data would be made publicly available after a waiting period during which providers could correct any errors. Over time, information about providers’ risk-adjusted medical outcomes also would need to be collected and disseminated, allowing consumers to evaluate the providers’ areas of expertise. This information would be specific to particular diseases or medical conditions, not aggregated across different areas of medical practice. A productive system would also collect or disseminate pricing information, enabling comparisons for specific treatments or procedures.

Nondiscriminatory Insurance Underwriting.

Two anomalies mar the pricing of health plans. First, people who are included in large risk pools (such as those who work for big companies) can get a reasonably priced health plan even if someone in the family has medical risks. But those without access to such a pool (such as people who work for small firms or are self-employed) will pay very high prices if a family member has medical risks. Realistic reform efforts need to assume that health care coverage will continue to come mostly from employers. However, risk-pooling solutions need to be developed for those who are self-employed, employed by small firms, employed part-time, or unemployed. For example, smaller companies are joining consortia for health plan purchases. For high-risk people unable to buy health plans, assigned risk pools, like those used in automobile insurance, will need to be developed.

In addition, people in small groups or with individual insurance policies face the likelihood that their premiums will rise sharply if someone in the family actually develops an expensive medical condition, even if the family has paid premiums for years without making large claims. This practice, known as “re-underwriting,” negates the purpose of health insurance and must be eliminated.

Fewer Lawsuits.

Malpractice litigation and the associated defensive medical practices inflict huge costs on everyone, and they have done little to raise the quality of health care. Indeed, the threat of malpractice creates incentives for physicians and hospitals to hide their mistakes rather than own up to and eliminate them. Standards for malpractice litigation need to change. Lawsuits are appropriate only in cases of truly bad medical practice, such as negligence, the use of obsolete treatments, or carelessness, not when a patient had a bad outcome despite receiving appropriate, up-to-date treatment. With better information and no restrictions on choice, many lawsuits will be averted. The money spent on enabling information and choice is an investment in removing billions of dollars of administrative and legal costs from the system.

National List of Minimum Coverage.

The current system of individual negotiation and litigation over coverage is expensive. A better system would mandate a minimum level of coverage with a national list (such as the one used in the Federal Employees Health Benefits Program). Health plans could choose to cover more services and treatments for competitive reasons, but they could not be forced to do so by lawsuits. This change would refocus health care expenditures from malpractice premiums to delivery of care for more people.

Payer Strategies: Choice and Efficiency.

Positive-sum competition would induce payers to compete to create value, not just to minimize cost. They would simplify billing and administrative processes. They would serve subscribers by identifying treatment alternatives and providers with excellent outcomes. They would help subscribers to know when and where it is appropriate to travel outside of their immediate areas for quality care. (Some payers have begun to post information about treatments and providers on their Web sites, but the information is often only about those treatments and providers within a small radius around the subscriber’s ZIP code.) The best payers would be able to recommend effective disease-management options for subscribers with chronic conditions. Competition would shift to providing information and excellent service. Attempts to limit patients’ choices or to control physicians’ behavior would end.

Accelerating the Transformation.

Two other steps would accelerate the transformation in health care—one a transitional change and the other a larger, more controversial one. The transitional step, with major symbolic importance, would be the creation of a short-term mechanism to encourage the diffusion of promising new approaches to care that are initially expensive. One model would be for Medicare, traditionally slow to adopt new treatments, to create an Adoption of Innovation Fund to support the spread of promising FDA-approved therapies to patients. Providers, working with technology suppliers, pharmaceutical companies, and payers, would compete to win the funding under well-defined standards for institutional review and informed patient consent. In time, such a fund may not be needed as positive-sum competition takes hold. As a transitional device, however, it would speed treatments toward lower cost and wider adoption.

The larger, more controversial step would be for the government to require health coverage for all, with subsidies for low-income people. With required health care coverage, everyone would be a paying customer concerned with the value of health care. While subsidies to low-income people would drive up health care expenditures, there would be offsetting cost savings and revenues. The huge cost of free care would be eliminated, and providers would no longer have to raise their prices to cover it. Cost savings would result from more care delivered at the right time rather than after complications have developed, and in cost-effective settings rather than in emergency rooms. Additional revenues would come from people who can afford coverage but who choose not to buy it and become part of the uncompensated care pool if they become ill or injured.

Employers Should Lead the Way

Companies have a lot at stake in how the U.S. health care system performs. Businesses’ health care costs have outpaced inflation in 13 of the last 17 years, reaching more than $6,200 per employee in 2003. Double-digit increases the last three years, projected to continue in 2004, have caught senior management’s attention. A Hewitt Associates study of 622 major U.S. companies found that 96% of CEOs and CFOs are significantly or critically concerned about health care costs for 2004, and 91% voiced the same concern for the impact health care costs will have on their employees.

As major purchasers of health care services, employers have the clout to insist on change. Unfortunately, they have also been part of the problem. In buying health care services, companies have forgotten some basic lessons about how competition works and how to buy intelligently. Ignoring differences in quality, companies have bought health plans based on price rather than value. They have delegated the management of their health plans to parties whose incentives were not well aligned with the companies’ attempts to maximize value or with the well-being of employees. Hence, employers have become unwitting conspirators in a troubled system.

They should have known better. Few products or services are really commodities—especially not complex services like providing quality health care. The relevant standard should be value, not cost. Companies know that experience and expertise simultaneously improve quality and reduce cost. They know that innovation is crucial to progress, not an expense to be suppressed. And they know that relevant information is essential to good decision making.

Some employers have started to purchase health care services differently. And consortia like the Leapfrog Group (a coalition of 150 public and private organizations that provide health care benefits) are working to improve the quality of health care; Leapfrog’s focus is on reducing the high incidence of errors in U.S. medical care. These efforts are important, but they will be even more effective when they focus on the power of competition. Rather than approve hospitals or tell them how to run their operations, employers need to insist that choice and information be made truly available at the level of specific diseases and treatments so that patients and referring physicians can choose providers that use efficient, state-of-the-art methods of care. Leapfrog is moving in this direction with its efforts to promote regional referrals for high-risk surgeries to highly experienced providers. Honeywell is also moving in this direction by hiring Consumer’s Medical Resource, a decision-support service that provides independent information on diagnoses and treatments to employees.

The newest employer initiatives, known as “pay for performance,” set higher reimbursement rates for providers that comply with specified standards of medical care. These measures aim to prevent subpar care by encouraging widespread use of well-established standards that are too often ignored. Pay for performance could be an important transitional measure until experience and outcome data are widely available. However, it is an inadequate long-term solution because it rewards providers for following mandated practices, not for achieving excellent (risk-adjusted) outcomes. The system will improve much faster if providers face competitive pressure to produce truly good results, patient by patient and condition by condition.

By setting new expectations for health plans and providers and by purchasing health care services differently, employers can realize the power of positive-sum competition in health care. (The exhibit “What Employers Can Do Immediately” outlines what employers should demand from their health plans.) Most employers resist the idea of an end to volume discounts, but these discounts contribute to the vicious cycle of cost increases and cost shifting in health care. If employers take the lead in creating productive health care competition, insisting that competition take place at the right level, firms and their employees will benefit from the increased value of services and the broader information available. Pursued seriously, such changes would radically alter the health care system, instigating a transformation of historic proportions. The system can be fixed.

Copyright © 2004 Harvard Business School Publishing Corporation. All rights reserved.

Written By

Michael E. Porter (mporter@hbs.edu) is the Bishop William Lawrence University Professor at Harvard University. He is based at Harvard Business School in Boston and is a frequent contributor to HBR. His most recent HBR article, “The Competitive Advantage of Corporate Philanthropy” (December 2002), with Mark R. Kramer, won a McKinsey Award.

Elizabeth Olmsted Teisberg (teisberge@virginia.edu) is an associate professor of business at the University of Virginia’s Darden Graduate School of Business Administration in Charlottesville, where she focuses on innovation and strategy.

Despite relatively low healthcare spending, Hong Kong rates well in comparisons of basic health indicators, such as life expectancy.

Spending on healthcare (which tends to be resistant to economic downturns) ticked up to an estimated 6.2% of GDP in 2009, based on WHO definitions. This is still low compared with healthcare spending of 16.3% of GDP in the US, 10.6% in Germany and 7% in Japan.

The structure of healthcare expenditure has been changing. In the early 1990s the bulk of expenditure was accounted for by the private sector. However, in recent years public-sector expenditure has become more significant, and it now accounts for well over one-half of all health spending—a proportion that will continue to rise.

Spending

Healthcare spending in Hong Kong is being pushed up by the same factors that are affecting most developed economies: an ageing population, the emergence of innovative and expensive medical technologies, new sources of demand and rising consumer expectations.

In fiscal year 2008/09 (April-March) total public spending on healthcare stood at an estimated HK$36.8bn (US$4.7bn). The ratio of public health spending to total government spending is usually fairly high, but recent government efforts to cushion households against inflation and other economic problems have pushed up other kinds of public spending, with the result that health expenditure as a proportion of total spending fell to 11% in 2008/09.

The Economist Intelligence Unit expects total healthcare spending to increase from an estimated US$13.2bn in 2009 to US$16.6bn in 2014. This will be driven in part by expanding public health investment. But consumer health spending will also grow, from around US$5.6bn in 2009 to US$7.8bn in 2014, driven by rising disposable incomes.

At present, healthcare in government hospitals is not free but is heavily subsidised, and costs can be waived for those receiving comprehensive social security assistance. The disadvantage of this is that waiting lists can be long. Public subsidies cover around 95% of care costs: virtually all in-patient care costs are covered, but there is a slightly lower proportion of coverage for outpatient care. Hong Kong’s private hospitals handled only 20.4% of in-patient admissions in 2007, but the vast majority of outpatient consultations are provided by private doctors. The level of private medical insurance cover is extremely low in Hong Kong. Given the above figures, it seems probable that public healthcare provision is priced low enough (and is of a good enough standard) to curb the expansion of private-sector provision.

Several options to supplement existing funding have been proposed, including social health insurance (probably funded by a tax on the working population or employers); increasing out-of-pocket payments at the point of delivery; mandatory individual health savings accounts; voluntary private insurance;mandatory healthcare insurance; and so-called “private healthcare reserves” that seek to incorporate elements of private healthcare accounts and regulated medical insurance plans.

Policy

The Hospital Authority (HA) is now moving to outsource more of its services to the private sector, amid a general drive to reduce waiting times, shorten the average duration of hospital stays after surgery, place greater emphasis on patient empowerment and reduce demand for HA services.

Hong Kong’s ratio of an estimated 1.5 doctors per 1,000 people in 2009 is below that in Germany (3.8 per 1,000), the US (3.3) and Japan (2.2). Hong Kong had an estimated five hospital beds per 1,000 people in 2009, a level that has been broadly stable in recent years. The HA runs 48 specialist outpatient clinics and 74 general outpatient clinics. Around 4,760 doctors—roughly 40% of the 11,961 doctors registered in Hong Kong—are employed by the HA. Most other doctors are general practitioners in the private sector.

Growth in demand for healthcare services is estimated at 3-4% a year. This has resulted in the need to promote home and community care by building up the family-medicine services offered by the HA, and also by managing demand through the provision of primary care that can reduce avoidable hospitalisation for the elderly and the socially disadvantaged.

The government is keen to see further development of the medical services sector. By attracting paying mainland-Chinese clients to Hong Kong for medical treatment, this would in effect provide a subsidy to the local healthcare sector. Hong Kong has recently proved more politically stable than rival healthcare tourism destinations such as Thailand and Sri Lanka, but in the long term its advantage may lie in niche sectors, such as traditional Chinese medicine.

Diseases

In the past few decades Hong Kong’s population has aged and grown wealthier, and chronic diseases, cancers, and their associated disabilities have emerged as the leading causes of morbidity and mortality

Cancer was the leading cause of death in 2008, claiming 12,390 lives, followed by heart disease (6,737), pneumonia (5,399) and cerebrovascular diseases (3,751), according to government figures. Infectious diseases are also a significant threat: in 2008 there were 5,730 cases of tuberculosis, of which 237 were fatal.

In 2003 Hong Kong’s healthcare system was tested by an outbreak of the highly contagious severe acute respiratory syndrome (SARS) virus. The outbreak was eventually brought under control, but not before it had infected 1,755 people and killed 298. In the wake of SARS, official enquiries identified shortcomings in the organisation of the healthcare system for the control of communicable diseases. A Centre for Health Protection with responsibility for the prevention and control of communicable diseases was subsequently set up.

The territory’s experience with swine flu in 2009 paints a mixed picture of progress on preventing the spread of dangerous diseases. There have been few fatalities from swine flu, but the disease spread rapidly in Hong Kong, despite initial tough measures to attempt to halt its progress, including quarantine (the measures were criticised in some quarters as an over-reaction). The territory’s experience so far suggests that it is too early to assume that a future serious epidemic could be controlled effectively.