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The short-termism of value-based care models
Or: why my startup idea is DOA
I spent last weekend in Denver at the Out of Pocket retreat and had a great time, it was like healthcare ComicCon (in that I’ve never met so many prople so interested in the same things as me).
Part of the weekend was devoted to a faux startup pitch competition. A few people, including me, pitched ideas of varying levels of seriousness, followed by some targeted questions from some of the smartest healthcare people out there.
My pitch (linking the deck here, please recognize that I made these slides in about 20 minutes in my hotel room and grade me on that curve) centered on a patient-friendly specialty pharmacy. I’ve talked about specialty pharmacy quite a lot in my newsletter, including how you could finance a competitor to one of the big three specialty pharmacies.
In short, my conclusion has been that unless you can hire a founding team with relationships with big pharmacies strong enough to psy-op them into contracting with a competitor, or unless the FTC/DOJ decides to make it more challenging for major insurers to send specialty prescriptions solely to their in-house specialty pharmacies—well, I could not come up with a financing mechanism for my specialty pharmacy.
Self-insured employers and value-based care
Then, on the flight to Denver, I started thinking about self-insured employers. If you’re not familiar, these are (typically large) companies that insure themselves. A simplified explanation is that the employees’ premiums go into a pot of money that the company uses to pay out claims. The company usually contracts with a traditional insurer to handle the paperwork; the traditional insurer, in this case, is called a third-party administrator (TPA).
Because self-insured employers (SIEs) more or less manage their own benefits, I started to wonder if there could be value in convincing SIEs to turn over their employees’ specialty pharmacy to a company other than the one run by their TPA.
But there are a few problems. First, depending on the size of the SIE, they may not have THAT many employees on specialty drugs. Specialty drugs are becoming more common, but they’re not like statins—specialty drugs are not a drug category that many people ever end up using. (On the other hand, of course, specialty drugs are disproportionately expensive.)
Second, depending on the relationship between the SIE and the TPA, the TPA might disallow or disincentivize the SIE to have a relationship with another entity to do specialty pharmacy, particularly if the TPA has a specialty pharmacy of their own (and most do, in our vertically integrated healthcare world). I’ve never worked on the inside of any of these companies, so I don’t know how strong the inducements can be—but given the amount of money at stake and the fact that there aren’t a ton of major SIE clients to go around (we’re talking about some of the biggest employers in the country), I’d guess TPAs can be pretty convincing.
Finally, it would have to be a good deal to convince SIEs to add complexity to their benefits. It would have to be an obvious choice, given how many companies are trying to sell to employers. Which brings us to value-based care.
Is VBC really the path to financing innovation?
I’ve written about VBC a lot in this newsletter, mostly because it’s everywhere. For ten years, give or take, VBC has been the ideal the healthcare system is striving for—and at the same time, that ideal has remained elusive, as pilot programs routinely return mixed results (over the short term, which is what the pilot programs are set up to measure) and CMS refines the programs.
It’s all a little discouraging, to be frank.
What’s even more discouraging is the growing sense (from what I’ve gathered in conversation online and off) that VBC might not be the end point we all hoped for, at least as currently designed.
VBC is premised on the idea that, by incentivizing healthy outcomes over time, healthcare can move from being reactive to being more proactive. Unfortunately, as more people test more VBC models, the conclusion increasingly seems to be that the time horizons to realize those savings are too long, given how fragmented the healthcare system is.
After all, the median tenure for an employee in the U.S. is 4 years, which roughly corresponds to the amount of time an employee is on one health insurance plan in our employer-based insurance model. Therefore, no individual insurer can be guaranteed long-term savings from funding a value-based care model, and so any insurer is less likely to adopt it.
This is feedback I also got on my pitch for a patient-centric specialty pharmacy. Humira costs tens- to hundreds-of-thousands of dollars a year—but a patient-centric specialty pharmacy would cost all of that and then some upfront, with the savings accruing only after a patient didn’t have to receive an expensive knee replacement or bowel resection.
In many cases, too, the upfront spending of a value-based model (for a higher-touch patient experience in the case of my pitch, for example) would mean spending more money on patients who could probably float by without an intervention for a long time. If someone isn’t on Humira but also doesn’t seek care until they need a bowel resection…there’s a chance that the higher cost, higher risk bowel resection is actually cheaper than that person having been on Humira for years (although obviously a worse outcome for the patient).
Essentially, one of the biggest problems is also one of the oldest problems: Healthcare is too fragmented, and because of that, the long-term outcomes of a value-based model are too hard to measure, and the financial benefits too challenging to attribute to any one entity (although the patient gets a good deal, seeing as they just avoided a costly outcome or intervention).
That’s what I’m asking myself! I think the answer probably has to do with playing various entities’ incentives off of each other. My specialty pharmacy idea, for example, could be funded by AbbVie, the makers of Humira, because they’d be incentivized to get the drug to as many patients as possible (ignore the biosimilar component for the sake of this example).
However, because my idea is, at its root, intended to be about improving outcomes for patients on these drugs (which may or may not include taking the drug for a lifetime, depending on the patient) that incentive structure can feel short-termist.
As I described in my last newsletter, I’m interested in testing the thesis that the future of healthcare is in innovative, novel attempts, rather than skeuomorphic rebrands of traditional healthcare in a virtual world. And I’m increasingly of the opinion that we have to figure out VBC—or another funding mechanism altogether—to incentivize truly innovative models. Pragmatically, it probably means bigger swings at VBC, including riskier contracts or even life-long capitated models. In the meantime, I don’t expect anyone to be rushing to fund my idea.
This information shouldn’t be taken as investment advice (obviously), and the opinions expressed are entirely my own, not representative of my employer or anyone else.