Healthcare's Elusive "Economic Customers"

This blog first appeared as Steve Wunker's piece for Forbes

By Steve Wunker

The future for pharmaceutical and medical device companies is said to lie with serving “economic customers,” not physicians. These customers – health insurers and healthcare providers who are financially at-risk for achieving better outcomes – are looking to reduce the cost of healthcare while maintaining or improving its medical quality. Given that it is increasingly hard to create new blockbuster drugs and devices offering great leaps forward in medical outcomes, pharma and device companies believe they can be paid well by these economic customers for helping to lower the total cost of patient care.

In principle, the strategy makes a lot of sense. It is often vastly cheaper to give a patient a new prescription or to implant a device than it is to have patients hospitalized because their condition was under-treated. If pharma and device companies can broaden their lens from providing pills and implants to creating full solutions for disease states, they can vastly expand the value they create and offset intense pricing pressure within their core products. These companies can then make money both through reducing overall healthcare expenses and by making their drug or device products a component of the solution – an option that stand-alone disease management firms don’t have.

But there is a big problem with this story. Exactly who are these customers that want to buy integrated solutions? Conversations keep coming back to a handful of entities like Kaiser Permanente or Geisinger Health System that both insure and provide healthcare for their patients. These organizations have a true financial incentive to reduce the cost of care, and their direct control of physicians allows them to orchestrate more cost-effective interventions. Indeed, they are some of the most forward-thinking institutions when it comes to managing a patient holistically, versus compensating doctors operating in discrete silos on a fee-for-service basis. Yet in the United States you can count these entities on two hands.

To be sure, many institutions are taking steps toward the model. In Massachusetts, private equity-backed Steward Health Care has been buying up hospitals and now offers its own insurance plan, in which patients are strongly encouraged to keep their physicians within Steward’s tight network. But these are early days. When pharma and device companies approach health systems to pitch their ideas for lowering the cost of healthcare, the conversation gets delegated to purchasing managers who just want to negotiate down the price of the drug or implant. Higher-up executives at insurers and health systems are worrying about how they will integrate newly acquired groups of physicians, implement Electronic Health Records, and address umpteen other changes in their environments.  They are not spending much of their time considering radically new ways of managing costly diseases.

There are two lessons here, one for the pharma and device companies and one for the health systems. Drug and device firms need to think not about the ultimate target customer, but rather about “foothold customers” who are easy to reach, demonstrate the effectiveness of new solutions, and place their vendors into early leadership positions. Frequently in these kinds of new markets, the foothold looks quite different from the eventual prize. The customers may be small, poor, disorganized, and unprestigious. But they are fast and inexpensive to reach, partly because they are desperate.

One health insurer has found traction for new propositions in an intriguing place: American Indian reservations. These places – with their geographically dispersed and low-income populations – typically receive poor quality care.  They are a prime target for early take-up of telemedicine solutions, where specialists can consult with patients via video link-ups and monitor their vital signs remotely. Inner city public hospitals may be another effective target. Their budgets are severely pressured, and they may happily offload elements of patient care to external entities eager to prove how they can improve both medical and economic outcomes. Are the pharma and device companies going to make much money with these institutions? Not a chance, but that’s not the point for solutions being validated in their early stages. These health systems have vast room for improvement, urgently need to make those gains, and offer a glimpse of how solutions will fare in real-world circumstances, not in the rarified confines of institutions like Massachusetts General that offer prestige but little insight into how the vast bulk of the country receives its care.

For their part, health systems need to think about how they handle innovations that cut across traditional silos. A handful of leading systems like Kaiser Permanente, Mayo Clinic, and Ascension Health have set up internal incubators to work with outside parties in transforming patient care. These efforts don’t need to cost vast sums, have offices stuffed with beanbag chairs, or function in zany ways. Indeed, for some health systems a single person might serve as the incubator – someone who can convene people across medical departments, commission cost-effectiveness analysis, sort through potential partners, and get change moving in a handful of areas. That won’t revolutionize healthcare, but it’s a beginning. Many health systems talk a big game about changing dysfunctional ways in which medicine is practiced, but far too few are doing much to make it happen.

Whether the institution in question develops drugs, manufactures devices, insures patients, or directly provides healthcare, none of these moves will cost a lot or irrevocably roil internal operations.  They are small steps, but in a much-needed direction toward making economic customers as prevalent in reality as they are in strategic plans.