0 DUS-051807-036-20040428-he Dr. Jrgen Wettke Dresden, April 28, - - PowerPoint PPT Presentation

DUS-051807-036-20040428-he

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• Dr. Jürgen Wettke

Dresden, April 28, 2004

Opportunities and Challenges Within the European and US Healthcare Systems Opportunities and Challenges Within the European and US Healthcare Systems

IAAHS Colloquium 2004 IAAHS Colloquium 2004

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Key issue questions

Source: McKinsey

What can we learn from other countries' successes and failures? What can we learn from other countries' successes and failures? Are there untapped international opportunities with implications for payors and providers? Are there untapped international opportunities with implications for payors and providers? Why is there not more cross country knowledge sharing

• f reform ideas?

Why is there not more cross country knowledge sharing

• f reform ideas?

Will the increase in healthcare costs ever stop? Will the increase in healthcare costs ever stop? Is integrated care the solution to more efficient healthcare? Is integrated care the solution to more efficient healthcare?

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Key messages

• While healthcare systems are all substantially

different, they all face the same challenges

• Major reforms have been implemented with

varying success

• Healthcare systems appear to be converging

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The Western European healthcare market amounts to 65%

• f the US healthcare market

* Austria, Belgium, Denmark, Finland, Greece, Ireland, Luxembourg, Norway, Portugal, Sweden; for Austria, Belgium and Luxembourg data from 2000 Source: OECD Health Data 2003, McKinsey

US 100% = USD 1,392 bn Western Europe 65% = USD 900 bn Ger- many France UK Italy Spain The Nether- lands Switzer- land Others* Percent, 2001, USD PPP US Western Europe 17 9 8 10 2 3 5 65 11 100

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Although healthcare systems are different …

US

• Private systems (employer based
• r individual), voluntary
• Government-sponsored programs

(elderly, poor, disabled)

• Broad range of products,

deductibles, and co-payments dependent upon type of product

Sweden

• National healthcare system
• Several patient co-payments

(e.g., on Rx, inpatient care) UK

• Tax-financed national

healthcare system (NHS)

• Gatekeeper system
• Patient co-payments

(e.g., on Rx, dental services, glasses) Spain

• Tax-financed national

healthcare system

• Gatekeeper system
• Free choice of physicians

Source: McKinsey

Germany

• Almost complete insurance

coverage

• Income-related insurance

premiums

• Solidarity and subsidiarity

principle Switzerland

• Mandatory basic insurance
• Voluntary supplementary

insurance

• Income-related insurance

premiums

• Patient co-payments

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FUNDING SOURCES FOR HEALTHCARE SYSTEMS, 2001 Percent

… three basic models can be identified

Liberal – payor and provider competition

* Including private social insurance and all other private funds ** 2000 Source: OECD 2003

US Switzer- land** Bismarck – coverage is compulsory and directly contributory The Nether- lands Ger- many France Beveridge – coverage is compulsory and contribu- tory through taxation Italy Denmark Norway Total health expenditure per capita USD PPP 2,626 2,808 2,561 2,212 2,503 3,012 4,887 3,248 15 33 41 11 44 56 Out-of-pocket payments Private insurance* Public expenditure

• n healthcare

11 10 28 14 14 63 75 76 20 16 14 4 76 82 85 1 2 9

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European healthcare systems share similar characteristics

• Strong sense of social solidarity

– Dominated by public payors – Comprehensive coverage

• Preponderance of public and non-profit

providers

• Very "local markets" – limited cross-border

exchange

• Very fragmented provider landscape
• Little influence of employers on public payors

Source: McKinsey

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Challenges of healthcare systems (1/9)

• Sustainability of financing

healthcare services

• DRG introduction
• Public sickness fund competition

Germany

Source: McKinsey

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Challenges of healthcare systems (2/9)

• Structural change of the health

insurance scheme

• Introduction of reference price system

and drug de-listing

• Impact of 35-hour work week in

hospitals, hospital reform

France

Source: McKinsey

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Challenges of healthcare systems (3/9)

• Rising spend despite cost

containment measures

• Fragmented territorial coverage
• Reorganization on a regional level

Italy

Source: McKinsey

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• Rising public sector hospital debt
• Increasing role for private payors
• Cost containment measures in public

sector

Portugal

Challenges of healthcare systems (4/9)

Source: McKinsey

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Challenges of healthcare systems (5/9)

• Financial and managerial

responsibility of autonomous regions

• Rising spend despite cost

containment

Spain

Source: McKinsey

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Challenges of healthcare systems (6/9)

• Budget deficits
• Hospital performance
• Short supply of healthcare personnel

Scandinavia

Source: McKinsey

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DUS-051807-036-20040428-he * Krankenversicherungsgesetz (Health Insurance Act) Source: McKinsey

Challenges of healthcare systems (7/9)

• High per capita premiums
• Payor competition and revision
• f KVG*
• Hospital financing, hospital

benchmarking

Switzerland

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Challenges of healthcare systems (8/9)

• Funding up, very tough targets for

NHS

• Various opportunities for private

players to enter

UK

Source: McKinsey

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Challenges of healthcare systems (9/9)

• Medicare Modernization Act (MMA) – recently passed

reform with 300 provisions and profound impact on many stakeholders, as well as on patient care and access

• Rising healthcare costs and aggressive cost shifting
• Aging population and increasing consumerism

US

Source: McKinsey

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European countries and the US are facing many of the same challenges

Healthcare costs are increasing significantly more quickly than GDP Large quality gaps despite growing amount of money inflow Patients beginning to act as consumers and are deman- ding more and better services

• How can we sustain the healthcare

finance system, given the demo- graphics and increasing costs of medical care?

• How do we attain higher quality

for lower costs?

• Does privatization automatically

mean loss of social solidarity?

Source: McKinsey

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REAL ANNUAL PER CAPITA GROWTH RATES (1990 - 2003) Percent If current healthcare spending growth continues … 4.5** 2.4 1.9 6.0 3.2 1.7

Costs are increasing significantly more quickly than GDP

* Average for 15 European countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, UK), unweighted data, partly calculated by using extrapolated data ** Without Austria and Spain *** Extrapolated by using data from 1990 to 2001 Source: OECD 2003, McKinsey

Pharmaceutical expenditure Healthcare spending GDP Europe* US

• By 2010, the average European*

healthcare spending per capita will be USD PPP 2,966*** compared to the current average of USD PPP 2,199

• And the average US healthcare

spending per capita will be USD PPP 6,322*** compared to the current average of USD PPP 4,887

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Large quality gaps within states …

* Indexed, 100% = German average ** Adjusted value Source: "Benchmarking von Arzneimittelausgaben“, McKinsey analysis

Diabetes mortality rate* Percent Baden- Wurttemberg Thuringia Saxony Berlin North Rhine-Westphalia Hamburg Diabetes pharmaceutical spending** EUR per inhabitant More than 100% difference between Hamburg and Saxony German average More than 300% difference in probability of death from diabetes (Thuringia vs. North Rhine- Westphalia) Also note: no clear correlation between spending and outcome 50 100 150 200 5.0 7.5 10.0 EXAMPLE GERMANY

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… and also across countries

1 2000 2 Average for 15 European countries (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden, UK), unweighted data 3 Number of deaths from breast cancer divided by number of new cases in the same year 4 Extrapolated data for the number of deaths among females by using data from 1990 to 1999 5 Extrapolated data for the number of new cases by using data from 1990 to 1998 Source: OECD 2003; Cancer Facts & Figures 2000, American Cancer Society; Statistisches Jahrbuch 2002, StaBu; McKinsey analysis

Italy 4 Luxembourg Germany 5 France 4 39 36 30 26 23 22 690 550 460 450 430 390 482 US 1 Italy European average 2 UK France +86% Germany Spain Finland US Infant mortality (2001) Deaths per 100,000 live births Mortality rate from breast cancer 3 (2000), percent +44%

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Patients increasingly act as consumers in Europe

* UK, Italy, and Germany Source: 1,500 telephone interviews (500 per country), Factiva, McKinsey analysis

Patients are becoming more proactive … … and healthcare is being debated more often 57 67 1996 2001

Healthcare proactivity of consumers in Europe* Percent of respondents (1,500 telephone interviews) "I am proactive about my health and make choices about my lifestyle"

+10% 21 26 1996 2001

"I have been to the doctor and requested a specific treatment or prescription even though it was not initially offered to me" Example: number of health-related articles per year in major news and business publications in Europe Index, 1996 = 100

100 154 1996 2001 +5% +54%

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459 318 1990 2001 1,401 1,825 Total Private

Patients bear greater financial responsibility due to reduction

• f reimbursement

CAGR Percent 3.4 2.4 AVERAGE HEALTHCARE EXPENDITURE PER CAPITA IN GERMANY, FRANCE, ITALY, AND SPAIN EUR*

Total out-of-pocket expenditure rising notably due to shift towards discretionary spending, e.g.,

• Reimbursement level recently reduced on several

hundred treatments

• Reference pricing scheme introduced in October 2003

implies that patient co-payment is a must if they require brands that are more expensive than the reference price.

• Since January 2004, patient co-payment per drug

pack is 10% of the drug price, fixed at min. EUR 5,

• max. EUR 10 (but never more than the drug price).

Sickness funds no longer reimburse OTC and lifestyle drugs.

• Massive shift to co-payment over the last 5 years

(> 60% of drug expenditure privately funded)

• Entire category of drugs (C) not reimbursed
• Reference pricing introduced in 2003 sets a "cut-off"

reimbursement point by TA (based upon daily dose cost). Products priced above that level will not be reimbursed.

* At 1995 GDP price level Source: OECD 2003, Espicom, McKinsey analysis

Total

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DUS-051807-036-20040428-he Source: Mercer/Foster Higgins, Hewitt Associates, Kaiser/HRET, CMS

336 360 468 Average employee annual contribution to health insurance premium USD 2000 2001 2002 Prevalence of multi-tiered co-payments Percent of covered workers Two tiers One tier 2000 2001 2002 33 41 59 48 37 28 19 22 13 Three

• r more

tiers 113 126 138 155 173 189 1998 1999 2000 2001 2002 2003 Per capita out-of-pocket prescription drug spend USD CAGR = 11% CAGR = 18%

In the US, healthcare costs are also increasingly being put

• nto the patients

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Key messages

• While healthcare systems are all substantially

different, they all face the same challenges

• Major reforms have been implemented with

varying success

• Healthcare systems appear to be converging

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Smart navigation of patients

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Seven solutions for transforming healthcare systems

Source: McKinsey

Selected country examples EUR 11.6 billion investment in IT infrastructure in UK Improve quality of care Medical quality management in the Netherlands Take control of drug spending Reference pricing scheme for branded drugs in Portugal Improve the operation

• f hospitals

Efficiency improvements in hospitals in Sweden Increase competition Competition among public payors in Germany and Medicare reform in the US Increase patients' free choice and responsibility Freedom to choose hospitals in Norway Limit covered benefits Limiting of illnesses covered in Sweden

2 3 4 5 6 7

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Smart navigation of patients

Building blocks Hypotheses based upon experiences to date

• Widespread usage across Europe (especially tax-based systems such as

in the UK, but also The Netherlands and Switzerland) – with mixed outcome

• Inherent ambivalence: patients don't like it (it reduces their choices),

politicians believe in the cost savings potential but cannot prove it

• Areas for improvement: lack of professional management, bureaucratic
• verload, blurred roles and responsibilities, inadequate payment schemes,

individualism rather than collaborative effort to achieve common goal

• Though conceptually brilliant, the idea only delivered convincing results

in special situations (Knappschaft, Germany) – most other models failed

• Strong need for adequate financing models: risk-adjusted capitation rates,

internal pricing and transparent profit sharing between participants

• Being developed in many countries/regions (UK, Scandinavia, Germany),

no proven success stories to date

• Enabling backbone for any efficient navigation
• Think big – start small: focus on e-prescriptions/e-doctoral letters first

and test feasibility in small pilots Integrated delivery networks (IDN) Healthcare IT infrastructure Gatekeeping models

Source: McKinsey

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Improve quality of care

Building blocks Hypotheses based upon experiences to date

• Tested in some countries/regions (The Netherlands, Scandinavia, Germany)
• Example The Netherlands: regular re-certification, peer reviews, practice visits
• Critical success factor: need to manage consequences by removing/sanctioning

poor performers (e.g., mammography certification in Germany)

• Promising solutions already in place: regular peer-based monitoring

(e.g., The Netherlands), direct linking of guideline adherence and compensation (e.g., UK)

• Goes hand in hand with the introduction of treatment guidelines and systematic

patient education Promote adher- ence to best practice treat- ments (process quality) Ensure quality

• f providers

(structural quality)

Source: McKinsey

• Initial testing in some countries/regions (e.g., Scandinavia) and first attempts

to link outcome and compensation (e.g., UK – part of "NHS 2008" vision)

• However, achieving systematic transparency of outcome quality is very difficult
• Need for independent, fact-based outcome research as a basis for sustainable

improvements Make outcome transparent (outcome quality)

• Work well in The Netherlands/UK and are the core of any quality effort
• Approval procedures and efficient implementation are critical

Treatment guidelines

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Example: Medical quality management in The Netherlands

• Approximately 80% of primary care

physicians take part in 6 to 12 peer reviews per year

• 60 to 70% of peer reviews are based

upon guidelines

• Approximately 70 guidelines have

been developed by the Dutch College

• f General Practitioners
• Statistical analysis of treatment

processes and outcomes

• Testing of physicians
• Video recordings of physician/patient

interaction

• Approximately 40% of all general

practitioners take part

• Goal is mainly to evaluate

management processes

• Re-certification every 5 years based

upon participation in trainings, congresses, etc. Key facts Measures to ensure quality History of quality initiatives Initiatives to introduce peer reviews and treatment guidelines Dekker reforms introduce competition and focus on quality Law passed to enforce annual quality reviews 1970s 1980s/90s 1996

Source: McKinsey

Peer reviews Peer reviews Treatment guidelines Treatment guidelines Quality monitoring Quality monitoring Practice visits Practice visits Re-certification Re-certification

1 2 3 4 5

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Take control of drug spending

Building blocks Hypotheses based upon experiences to date

• Substantial differences in penetration of generics between highly developed

generics markets (e.g., Germany, UK, The Netherlands) and less-developed generics markets (e.g., Italy, France, Spain)

• Emerging successful best practices: generics substitution by pharmacists,

INN-only prescriptions, patient incentivization (e.g., UK, Germany)

• Late-to-market drugs with little therapeutic improvement cause high costs
• Promising countermeasures: rigorous cost/benefit evaluation ("4th hurdle" –

e.g., NICE in UK, IQWiG in Germany), positive lists, or reference pricing Reduced acceptance of "me too" drugs Widespread use

• f generics

Source: McKinsey

• To date, pharma's EUR multi-billion sales machinery controls physicians'

prescriptions (> 60,000 reps in the EU)

• Some promising counteractions, e.g., in Germany: individual target agreements

for physicians (including generics usage, overall budget, consultation services) plus transparent bonus-malus system Increase physi- cians' responsi- bility for induced drug spending

• Still significant potential for increasing efficiency within distribution (on average

28% of drug spending for distribution)

• Solutions: pharmacy chains (e.g., UK, The Netherlands), fee for pharmacists'

service (e.g., Switzerland), promotion of mail order pharmacies (outcome still not clear) Realize efficiency gains from drug distribution

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Example: Government action to promote use of generics in Portugal

* Denmark, Finland, France, Germany, Greece, Ireland, Italy, Spain, Sweden, UK Source: OECD Health Data, press clippings, IMS

Healthcare spending in Portugal increases more than the Euro- pean average Reference pricing system introduced in March 2003 to reduce drug spending Strong growth in sales of generics

• Reimbursement of drug

costs only to maximum generic drug price

• Patient must pay the

difference between that and the branded drug price

• Initially, rule applied to

45 registered generics; number expected to grow

• Patients overwhelm-

ingly in favor of reform Portugal Index, 1990 = 100 1990 2001 100 228 Europe* Index, 1990 = 100 1990 2001 100 133 Actions to prove long-term effect on drug spending

• Year-on-year growth of

generics sales is 316% in the first half of 2003

• Total generics sales in

2003 expected to reach EUR 100 million (total market in 2002 approx. EUR 2 billion)

• Market share of

generics expected to grow between 8 and 10%

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Improve the operation of hospitals

Building blocks Hypotheses based upon experiences to date

• Operations within hospitals are often anachronistic: long waiting times, low utili-

zation of capacities, permanent bottlenecks in ICUs, paper-based documentation

• Classic toolbox to optimize operations requires top management skills: capacity

planning, clinical pathways, specialization, outsourcing of non-core activities, purchasing, etc.

• Private ownership appears to propel development (e.g., Sweden, Germany)
• Cooperations are the key to competitive advantage in the long term,

e.g., purchasing organizations, shared services, and mergers and acquisitions

• However, there must be a good partner fit – otherwise substantial risk of failure

exists

• Private and public hospital chains will push consolidation
• Strong enabler of efficiency gains with a proven track record

(e.g., US, Australia)

• Transparency across the hospital landscape but also within hospital departments

(e.g., Norway, Germany)

• Means of fair allocation of resources – "money follows performance"

Pursuing structural change options Introduction of DRG-based pay- ment schemes Principles of lean production and professional management

Source: McKinsey

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Austria Austria Germany Germany

Example: Introduction of new financing mechanisms has begun to put pressure on hospitals

2 4 6 8 10 12 1980 1985 1990 1995

DRG-type financing is leading to increased cost pressure and reduced length of stay All hospitals need to consider

Average length of stay acute care (2000) Year of implementing DRG-type financing

• Actions for improving
• perational performance
• Specialization
• Mergers and acquisitions
• New partners (alliances)
• Exiting the market

(where regulation allows) if not competitive

2005

US US UK UK Sweden Sweden France France Australia Australia Spain* Spain* Italy Italy

* Length of stay in 1998 Source: OECD Health Data 2003, McKinsey

Norway Norway

2000

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Increase competition among payors and providers

Building blocks Hypotheses based upon experiences to date

• Competition among payors leads to new ideas and new dynamics

(e.g., better services, more efficient cost management)

• Similar: competition of systems within one country on a comparable basis

(e.g., public and private payors in Germany, tax-based and private insurers in the UK)

• Good ideas: public tenders for certain contracts (e.g., medical aids in

Germany), some degrees of freedom to negotiate prices and discounts (e.g., by large specialized orthopedic hospitals in the future), regional budgets, and contracting (e.g., Norway, Italy, Germany)

• Group contracting seems to make more sense because of low gains from

improved competitiveness through individual contracting, compared to high administration costs (e.g., Germany vs. US)

• Some competition among hospitals exists, but many restrictions remain

(e.g., monopolies, restricted market access, state ownership of facilities)

• Instead of budgeting, enforce transparency of prices and quality (same for identical

treatment whether outpatient or inpatient), private ownership (hospitals and

• utpatient facilities), and attractive economics (flexible budgets)

Contracting among payors and providers (contract market) Competition among providers (treatment market) Competition among payors (policy market)

Source: McKinsey

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Example Medicare: The key reforms include the introduction

• f drug benefit guidelines and competition among private payors

* Estimated to produce savings of 10.15% Source: Deutsche Bank Research, March 17, 2004, No. 292

ELEMENTS OF MEDICARE REFORM IN THE US Opening up for competition

• From 2010: pilot models including private

insurers are to be initiated in 6 major regions

• If private insurers offer services at more

favorable prices, retirees are free to switch to these payors

• By 2013, Medicare costs

are expected to rise from 2.5 to 3.9% of GDP

• Positive evaluation of the

reforms has been muted by – Complexity of the legislation – Limits and gaps with respect to covering costs Extending subsidies to include drugs From 2006:

• Pay the first USD 250 in drug costs p.a.
• Pay 25% of total drug costs between

USD 250 and 2,250 p.a.

• Pay 100% of drug costs between

USD 2,250 and 5,100 p.a.

• Pay 5% above USD 5,100 p.a.
• From June 2004, Medicare beneficiaries have

access to Medicare-endorsed drug discount cards*

• Insured with an annual income of more than

USD 80,000 pay higher contributions

SIMPLIFIED

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Increase patients' free choice and responsibility

Building blocks Hypotheses based upon experiences to date

• Broad range of choice across European healthcare system: from 100% free choice

(e.g., Germany) to fully controlled systems (e.g., UK, Portugal)

• Change is underway: introduction of hospital list in the UK, central reservation

management in Sweden and Norway

• Challenge: more choice for patients as a powerful driver of competition

("vote by feet")

• Systems suffer from "full-coverage mentality" of patients (e.g., low compliance

in drug usage, visits to multiple doctors, unhealthy lifestyle)

• Measures to change mindset from "treat when diseased" to "contribute to

staying healthy": large-scale preventative programs (breast/prostatic/colon cancer screening), premium discounts for healthy lifestyle or participation in disease management programs More patient responsibility for healthcare utilization More freedom for patients to choose payor/ provider

Source: McKinsey

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Example: Introduction of free choice of hospital leads to emerging competition in Norway

How it works

• Free choice of hospital

(since January 2001)

• Patients free to call toll-free

number or visit website to find shortest waiting times and book treatment (since May 2003)

• Hospital outcome ratings

and rankings of service level by hospital on Internet (since September 2003)

• Patient is guaranteed

treatment within a certain time period by law Positive effects still to be proven: system has been in place just less than one year

Source: www.sykehusvalg.net; McKinsey

Choose body part Body area Find shortest waiting time

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Limit covered benefits

Building blocks Hypotheses based upon experiences to date

• Rationing of coverage is effective in terms of promoting "system-compliant" behavior

– Exclusion of OTC medicines (e.g., UK, Germany) – Co-payment schemes for drugs, physician, or hospital services (e.g., France, Germany) – Reimbursement reference pricing: generics coverage (e.g., Portugal) and medical aids (e.g., Germany)

• Instead of "one-size-fits-all packages": modularization of coverage into basic,

voluntary (e.g., acupuncture, contact lenses, glasses, etc.), and luxury coverage (e.g., single bedroom, gold in-lays, etc.) Differentiation and more co- payment by patient

Source: McKinsey

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Example: Sweden is limiting coverage

"The Diseases for Which You Will Not Receive Treatment" (Expressen, Oct 30, 2003) Examples of diseases not covered in the future Heart disease

• Infarct observation with low likelihood
• f cardiac infarct

Stomach diseases

• Chronic abdomen pain

Womens' diseases

• Water gym for pregnant women

Childrens' diseases

• Slightly overweight, eating disorder
• Infection of the respiratory passages
• Growing pains
• Headache, stomach pain
• Primary bed wetting

Source: Expressen; McKinsey

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Key messages

• While healthcare systems are all substantially

different, they all face the same challenges

• Major reforms have been implemented with

varying success

• Healthcare systems appear to be converging

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Healthcare systems appear to be converging

Primarily insurance- based systems (Benelux, France, Germany, Austria, Switzerland)

• Higher premiums

for healthcare

• Better accessibility

to services Primarily tax- based systems (UK, Spain, Italy, Scandinavia, Finland)

• Lower absolute

level and growth rate of health-care costs

• Waiting lists,

rationing of services

Convergence

Source: McKinsey

More freedom to choose providers Increase in capacity Wider choice of treatment quality Reduction of services covered Reduction of overca- pacity/consolidation Introduction of gatekeeping/steering principal

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DUS-051807-036-20040428-he Source: McKinsey

Key observations and takeaways

• Although healthcare systems vary, all systems

appear to have similar problems

• In order to cope with rising healthcare costs

and quality issues, nearly all countries have introduced reforms with varying outcomes

• The European and US systems have major oppor-

tunities to become more efficient and effective

• Many governments are testing various solutions -
• ften with limited upfront analysis and without

learning from other countries' successes and failures

• The impact of any reform depends upon execution -

"fine tuning" is critical

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