The DNA of Disruptive Innovation

There’s no denying that American health care companies are facing a transformation imperative. Forces ranging from increases in R&D costs and declining productivity to the prospect of fewer big volume drugs in the pipeline are squeezing margins and forcing layoffs in the pharmaceutical industry. What’s more, the entire health care sector is grappling with the challenge of adapting to the mandates of the controversial Affordable Care Act (aka ObamaCare). Meanwhile, medical care costs continue to spiral, with spending on health care projected to reach 20 percent of GDP by 2020 and the aging of America’s population working against efforts to whittle away at the nation’s health care bill.

“This is the most disruptive time I’ve experienced in 40 years being in medicine,” Ken Davis, CEO of The Mount Sinai Medical Center, told business leaders who gathered for a Chief Executive roundtable discussion held in partnership with A.T. Kearney.

“We talked about disruptive change in the ’80s with HMOs, and in the ’90s with the Clinton’s plan for [reform], but it is different this time,” agreed Chris Paddison, partner at A.T. Kearney, who outlined five drivers of the transformation of health care (See “The Big Five” sidebar at right). “The depth of change needed and the pace of change going on is far more [intense] than what we’ve experienced in the past.”

A Culture of Care

Most in the industry acknowledge the need to wring out inefficiencies in the health care system and to shift incentives toward performance metrics rather than overutilization of medical equipment, pharmaceuticals and physician resources. Yet, one fear is that those changes will ultimately negatively impact the quality of care.

“Sure, there are PSAs we don’t need to do, MRIs we don’t need to do, and, yes, doctors who own those machines use them six times more frequently than those who don’t,” noted Davis. “But when I was in medical school we were taught that the value of a human life is infinite—which means there’s no such thing as too many tests if one might save a life. I don’t think we should lose sight of that.”

What’s more, while inefficiency surely exists, the aging of America—19 percent of the population is expected to be over 65 by 2030—and, ironically, the development of treatments effective at prolonging lives is also fueling the rise in health care costs. “It isn’t just that we’re inefficient, it’s that the population is getting older,” said Michael Gutnick, CFO of Memorial Sloan-Kettering Cancer Center, who pointed out that Americans have come to expect proactive—and costly—health care. “In this country people don’t want to be told, ‘I’m sorry, there’s nothing more we can do for you.’”

Several participants also expressed concern that big pharma’s innovation engine has stalled, largely due to the intrinsic risks of attempting to develop a blockbuster drug. “If you look at pharma versus other areas, the profitability is just not there any more,” agreed Dan Regan, chief commercial officer of the biopharmaceutical company Intercept Pharmaceuticals. “The thing that concerns me is will there continue to be an incentive for venture capital companies to invest in pharma innovation?”

“The blockbuster model is a thing of the past—rather than having a Lipitor ending its patent life doing $14 billion, you have 10 molecules doing a billion each,” agreed Zak Hosny, CEO of Motif Biosciences.

Addressing Chronic Costs

Still, there are opportunities to bend the cost curve, particularly in the area of chronic disease. “There is a lot of process opportunity in treatment of chronic disease,” asserted Ashish Kachru, CEO of the healthcare technology company Altruista Health, who predicted that process innovation will trump product innovation. “Somewhere around 75 percent of the GDP on healthcare is begin spent on managing patients with chronic diseases [such as heart failure, chronic obstructive pulmonary disease, diabetes, hypertension, asthma and depression]. We have about 125 million of them today in the U.S. These people are frequent fliers to hospitalization, which runs about $10,000 on average.”

“It’s easy to forget how much money there is in good chronic care management,” agreed Davis. “From the hundreds of thousands of people we service at Mt. Sinai we identified a small number at high risk of readmission and put case workers on those people to address their problems, which ranged from not taking their insulin or eating too much salt. We were able to diminish readmissions by 50 percent in that group.”

While such successes suggest there is low-hanging fruit ripe for the picking in addressing the health care cost conundrum, many fear that simple demographics will stymie efforts to keep costs in check. “Nobody gets off planet Earth alive, and the problem with that is that the major driver of Medicare expense is the last year or the last six months of life,” summed up Davis. “As much as we can manage someone’s disease to keep them alive longer and for that to cost less, they’re still going to die. So unless we start to manage how people die in America, at the end of the day we will [eventually] be overwhelmed by the demographic problem.”

The Big Five

A.T. Kearney’s Chris Paddison outlined five factors driving disruptive change in health care.

1. The current model of health care in the U.S. is unsustainable. “We simply don’t have enough money to continue the way we’ve been going, and that will drive inevitable system changes,” asserted Paddison.
2. Government’s role is expanding. Long a primary payer and regulator of the industry (thanks to Medicaid and Medicare), the U.S. government is poised under the Affordable Care Act (ACA) to take on an even larger role.
3. The industry is moving toward more patient-centric healthcare. The ACA’s mandates around integrated care and accountability will, in turn, “require greater transparency, IT integration and more cooperation and coordination among players in the system,” explained Paddison.
4. Global growth opportunities are emerging. Pharmaceutical and medical device companies have an opportunity to expand market share overseas.
5. Innovation continues to accelerate. Advances in fundamental science—biology, computer science, computational science—will continue to drive the development of new health care products.

Roundtable Participants

Brett Coleman, Co-Founder, Waypoint Health Innovations • Kenneth L. Davis, M.D., CEO, The Mount Sinai Medical Center • J.P. Donlon, Editor-in-Chief, Chief Executive • Donna Drummond, Chief Administrative Officer, North Shore-LIJ Health System • Michael P. Gutnick, SVP and CFO, Memorial Sloan-Kettering Cancer Center • Zaki Hosny, CEO, Motif Biosciences • Ashish Kachru, CEO, Altruista Health • Rajeev Kapoor, Partner, A.T. Kearney • Chris Paddison, Partner, A.T. Kearney • Daniel Regan, Chief Commercial Officer, Intercept Pharmaceuticals • Michael Wise, Partner, A.T. Kearney