Value-Based Health Care: US Lags In The Global Shift To Outcomes
Executive Summary
The adoption of value-based health care concepts among US providers is happening, albeit slowly. In what is an unusual reversal of pioneering health care concepts, the pace is being set elsewhere – in Europe – rather than in the US, even if the direction of travel has been firmly established. Boston Consulting Group experts give In Vivo an interim update on the progress and outlook for VBHC.
- Medtech companies in the US need to be prepared to live in a world of multiple payment structures, bundled payments and other risk-sharing mechanisms that are taking hold, but there will be a part of the market that remains fee-for-service, for the foreseeable future at least.
- For manufacturers, it's a case of timing: they have started to engage payers with some success, and progressive providers are working to adapt, but many providers lack the measurement systems and tracking capabilities to make VBHC a commercial reality.
- So what? Delays and slow adoption should not deter medtechs from planning a VBHC strategy: the time is ripe to figure out what their role will be in this shift in care delivery, and what capabilities they will need to deploy.
In matters of the delivery of value-based health care (VBHC), it helps to lay out a few basic tenets. One key fact to consider is that not every medical technology solution or technology provider fits into the value discussion that is currently preoccupying providers, manufacturers of medtech innovations and payers.
Jens Deerberg-Wittram, MD, a director at Boston Consulting Group based in Munich, Germany, tells In Vivo that there are certain areas of medtech that are robust within themselves, and given their nature, are not immediately affected by the broader discussion on value. These are companies, for instance, in the imaging and radiology fields: they provide value per se and they are not under enormous pressure to prove the value of their technologies by having it reflected in reimbursement models.
Jens Deerberg-Wittram, MD
But medtech companies generally should not turn away from the debate. Deerberg-Wittram spoke to In Vivo after the release of BCG's discussion paper, "Why Every Medtech Company Needs A Value Based Strategy," which he lead-authored in late 2017. "The more your product is tied to a medical condition and/or intervention, the more likely it is that questions will be raised about its contribution to outcomes in a measurable way," he believes. But conversely, the more it is a commodity supply or a big capital equipment system, the less the manufacturer is affected. But that may change too, he adds.
Another pivotal consideration is the geography. There are three areas to consider:
- What is happening today in the US, which is the most important market globally and one where prices, revenues and profits remain high. If the US health care system changes, there are major consequences for the larger medtechs. The US market is a driver for the global players.
- In Europe, a plethora of VBHC systems exist with a variety of degrees of maturity. Some economies are already moving into value-based models, such as the Netherlands, some Scandinavian systems and the UK, while others can be rather conservative.
- The emerging markets – BCG believes that the major growth in the future will come from the emerging markets, as well as countries like China, India, Russia and Brazil. But these will not replicate the US model in terms of pricing and reimbursement. The question is rather, will they follow Europe's cue, or leapfrog into new models of care that will have huge consequence on their pricing and reimbursement policies?
How Far Have We Come With VBHC Models?
With VBHC such a compelling focus of conversation among the top players, the question must be asked as to just how much of the medtech market is currently bound up in the value-based model? BCG's Bob Lavoie, who co-authored the report, says that outcomes, shared savings and value-based pricing are common currency among CEOs. Lavoie, who is a partner and managing director focusing on medtech and diagnostics, based at BCG's New York office, certainly gives the impression that there is still more talk than action.
"Although 75% to 80% of the market is talking about VBHC, less than 15% of payments are value-based or risk-shared payments in the US; 85% are still traditional fee-for-service for procedure-based reimbursement." – Bob Lavoie
He says, "A lot of the market is not engaged in risk-based payment arrangements or rewarding on value-based outcomes, and although 75% to 80% of the market is talking about VBHC, in truth, less than 15% of payments are value-based or risk-shared payments in the US – 85% are still traditional fee-for-service [FFS] for procedure-based reimbursement." In the next three to five years, that could accelerate slightly, and the 15% might stretch to 20% to 25% on average across the US. At some time in the future, there will be a tipping point.
The most impacted procedure-based medtech implant sectors are orthopedics and cardiovascular. They are a large and visible element of the market, and therefore tend to create a lot of noise. However, Lavoie observes that the 15% referred to above is still largely a “bundled payment,” as opposed to true insurance-risk or population-based payments.
Bob Lavoie
The result is that at present, there is a mix of FFS, FFS plus an incentive, bundled payments, and the VBHC extreme – full risk-share. Most of the payments are being made in the FFS plus incentive/bundled options, but it is still "a really small proportion of the market" that is being addressed by VBHC. Trauma implants and trauma services will probably always be FFS, whereas large-joint systems, stents, CRM and cardiovascular devices used in chronic disease areas will probably shift to VBHC a little faster.
But unusually perhaps in the realm of global medtech, "the US is lagging many parts of the world in its adoption of VBHC," Lavoie says.
Catalyst In The US
The major catalyst for VBHC in the US has been the action of the Centers for Medicare and Medicaid Services (CMS) in setting up the major bundled payments systems, for instance, the Comprehensive Care for Joint Replacement Model (CJR) in early 2017. The Trump administration has since stepped back slightly from the bundled payment system concept, making it more of a voluntary-basis scheme.
Nevertheless, BCG believes that the shift to VBHC will continue, although in the US it will not be driven by CMS, but by two other groups: the large commercial payers, such as [United Healthcare Services Inc.] and Aetna Inc., which have an incentive to shift to a value-based world (and because of their size and influence); and the progressive providers systems – those higher performing physician practices and health systems that have better outcomes data and higher quality than some other systems.
A critical enabler in driving more patient traffic to a practice is transparency in outcomes. This is duly happening. "Relative to 15 to 20 years ago, we're starting to see in the US more availability of data and transparency of outcomes. As a result, the payers are doing more with this data, and we are also seeing more consumer-facing data coming to the market, where, for example, scores are being granted to hospitals and different provider types," says Lavoie. These elements – transparency and digestibility of the data for patients, referring physicians and payers – are what will drive this, BCG believes, stressing, however, that it's going to take some time in the US.
What Does This Mean For Medtechs?
The implications of the VBHC trend for medtech companies in the US is that they need to be prepared to live in a world of multiple payment structures. BCG's view is that part of the market will remain FFS, about for the next eight to 10 years, but there will be pockets locally (California and Florida, say) where VBHC penetration will accelerate due to the provider/payer dynamics. It is therefore vital that medtechs have the right building blocks in place to be able to live in a world that is partially FFS and partially value-based. The manufacturer needs to be increasingly agnostic, and to be able operate in both fields.
There is a range of perspectives open to manufacturers. The forward-looking companies that develop innovative products that have a definite impact on patient outcomes are in a position to drive to a VBHC outcome/risk-sharing model.
The problem is that right now, fewer than 50% of provider systems/hospitals can accommodate risk-sharing or bundled payments, given the state of their IT, admin and payment systems. They've had success in engaging payers, but not so much with providers, whose measurement and tracking systems are not advanced enough. The progressive players, such as Johnson & Johnsonand Medtronic PLC, are working to make it happen, in the knowledge that manufacturers must recognize the need to put a set of services around their products to ensure they can deliver outcomes. (Also see "The Tailor Will See You Now – J&J's EMEA VP Explains Total Care Partnership For Hospital Systems" - In Vivo, 19 Feb, 2018.)
Providers have been coping with the challenges of consolidation, but are now catching up, and over the coming years, the ability of the hospitals to take on these concepts will improve, says BCG.
Medtechs with revenues of around $200 million will find it very difficult to play beyond the product to drive an outcome. For them, the priority must be driving clinically proven, differentiated product innovation.
While larger OEMs can make and amortize the necessary investment as they work on the building blocks to shift the market to VBHC, the smaller companies are often left wondering how, beyond product innovation, they can invest and scale the capabilities required to engage with other players. Medtechs with revenues of around $200 million will find it very difficult to play beyond the product to drive an outcome. For them, the priority must be driving clinically proven, differentiated product innovation. They must also use metrics to articulate value in terms of length of stay, outcomes and readmission reductions, to align themselves more closely to the needs of the economic buyers in the system. "That's how the smaller companies can win," says Lavoie.
Adapting To Something New May Take Time
How straightforward is it to set up a value-based business? Deerberg-Wittram points out that even market leaders – commercially successful companies – can often find it very difficult to set up a VBHC business, which follows very different economic rules than they are accustomed to for their established products businesses. It can be a challenge to embark on a new business model that has much lower margins, particularly at the beginning. It may not sit easily with the business models that the company has established over the years.
Conversely, this might suit certain smaller companies that may, say, set up a business with a 20% to 40% margin and later sell it to one of the majors that has the ability to scale it up, and combine its products with an existing range and bring them into multiple markets.
For instance, the Dutch diabetes specialist center Diabeter, which provides individualized care for type 1 children and young adults, was originated by a couple of entrepreneurs. Deerberg-Wittram asks, would this network, which currently manages over 1,900 patients, have been developed by now-owner Medtronic from scratch? It required a deep expertise, a very extensive academic background, and strong ties to referring doctors. Once it reached a certain level of maturity, Medtronic stepped in, scaled it up and expanded it. Deerberg-Wittram says, "Size is very important to make value-based health care real, but at the start, there is probably a more pressing need for an entrepreneurial start-up-like environment." (See sidebar, "Dutch Lead The Way On VBHC.")
From a product-based device company point of view, services-native business start-ups that are not tied to a device portfolio can build the services required to drive value-based care, but the power for them comes from combining those services with a product portfolio. The advantage that medtech companies have is their deep understanding of the sector – which is better than that of a GPO or an IT company, for instance.
The smaller, $150 million to $200 million revenue companies do not always have the means to acquire a company with a 20% margin – they will likely not succeed with it. But larger companies can realize an 80% margin product off the back of a service offering. This is a trend that BCG is beginning to observe among the ecosystem's various actors.
Putting The Pieces Of The Puzzle Together
Although people are still trying to figure out how the pieces of the puzzle go together, there are some definite consistencies that are starting to emerge, says Deerberg-Wittram. Eventually, there will be a different shape to the industry, different roles and separate areas of focus.
One of the really big challenges to overcome for some larger medtechs is the expectation that they are somehow being forced to develop capabilities to talk to other stakeholders in a different way than they did in the past. Most medtech companies have certain abilities to reach out to the end-user physician, and while, under VBHC concepts, the sales forces are of different power and size, they are still hunting for the same stakeholder group. In the VBHC world, the true relevant stakeholders are now the payers, in particular, if a company like Medtronic opts to sign a contract in the US with the likes of Aetna. But such a move – effectively contracting a diabetes model to national health care insurances – means the manufacturer is dominating the market. (Also see "Medtronic’s Deal With Aetna Heralds New Value-Based Era" - In Vivo, 18 Sep, 2017.)
"One of the really big challenges to overcome for some larger medtechs is the expectation that they are being forced to develop capabilities to talk to other stakeholders in a different way than they did in the past." – Jens Deerberg-Wittram, MD
The ability to talk not just to payers but also to governments and to hospital managers will be crucial in the future, and this is what will separate the big companies from the small ones that will never be able to talk to the big payers. The greater the move toward broader care cycles (and delivering care as Fresenius SE & Co. KGAA has done for decades in renal – and as Medtronic is now starting to) and away from product-based businesses, the more serious the conversation between such companies and health insurers and governments. And that is where the big money is to be made.
The Time Is Now For A VBHC Decision
For medtechs, the time is ripe to figure out their role, decide where they want to see an accelerated shift and work out what capabilities they will need to deploy. "As an OEM, you don't want to wait for this – you want to help shape it," says Lavoie. The larger players already have a seat at the table, but it's the middle-tier companies that need to think about how and where they will fit into this landscape, and when to transition to a service provider for end-to-end patient journeys.
In the past, there were tensions between suppliers and payers, but the sector is now witnessing a "coming together" of stakeholders, consumers being better stewards of their own health, and OEMs providing solutions in what is potentially now a shared goal. BCG fully expects ongoing tension in the transition, but its view is that VBHC is inevitable – even if, for some markets (e.g., the US), it may take a little longer, and some pockets of health care will remain in the FFS world.
Drive For Efficiencies And Cost Savings
Behind the whole concept is the drive for efficiencies and savings. Multinationals know that budgets are being slimmed down all over the world, and that they are helping systems to save money. Are they to be concerned that prices will go down in Europe and the US under VBHC?
The answer is that it is happening anyway, and major provider groups like Helios – the largest hospital group in Europe – are expanding aggressively across borders and in so doing are serving to increase pricing transparency. For instance:
- Fresenius Helios recently expanded from its German base into Spain via the acquisition of IDC Salud Holding SLU (Quirónsalud), Spain’s largest private hospital operator;
- global hospital group Ramsay Health Care (Australia) bought a majority shares in French private hospital operator Groupe Proclif SAS and Générale de Santé, making it the largest private hospital operator in France; and
- international private hospital group Mediclinic International (South Africa), already with operating platforms in southern Africa, Switzerland and the United Arab Emirates, bought a 29.9% stake in Spire Healthcare (UK).
To some extent, value losses that might be incurred by medtechs under VBHC could be replaced by simple volume growth. And in other areas, revenues could be supported by innovation. The challenge for medtechs is that innovation in the VBHC world is defined as only those products that constantly provide better real-world outcomes at reasonable or even lower prices, says Deerberg-Wittram. He adds, "Innovation is different now, it's not simply what the doctor believes is innovative."
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