There are signs that healthcare products, services and providers may become subject to a new kind of “survival of the fittest” as the system copes with new market dynamics.  In the early days of my healthcare career, the organization I worked for promoted its own demise by training large numbers of professionals how to compete with it, as well as not generating enough revenue to cover its costs.  But the organizations I worked for after that had only modest competition and miserly payers to cope with, and have survived, as have most.

Value-Based Purchasing

There are at least three developments that are altering market dynamics toward selective survival in the future.  First is the creation of a national effort to identify which products, services and providers are the best choices – a model of “value-based purchasing” that mirrors the 1970s idea of “Buy Right” selection by payers and consumers, but never caught on widely.  There have been many private efforts to rate the quality of providers and treatments before, but there is a move afoot to create a national comparative effectiveness studies entity that would analyze and publish data indicating the relative performance of providers, treatments and drugs for all purchasers to use in selecting options. [“MedPAC Recommends Independent Entity to Conduct Comparative Effectiveness Studied of Health Care Services” KaiserNetwork.org June 18, 2007]

While consumers have been slow to adopt a “Consumer Report” approach to selecting which drugs, treatments and providers to buy, they are beginning to add published comparisons to their search process, along with asking friends and physicians for recommendations.  More important, employers, commercial and government insurers are using such a process in their selection of which products, services and providers to include in coverage, or which to cover in ways that make them more affordable to consumers.

Pay-for-Performance

The idea of P4P is to determine how well competing products and providers perform, then pay more to those that perform better.  In many cases, P4P systems are “budget neutral”, meaning that in order to ensure that payers do not spend more in such arrangements, the better performers get more, but the poorer performers get less, so that the effects are doubled in terms of survival.

P4P systems include guarantees and warranties that providers and product manufacturers offer to promote confidence in their offerings.  Insurers have offered guarantees of limited annual premium increases to their employer clients, for example. [U. Karkaria “Humana Promises Savings to Employers” Florida Times Union June 1, 2007 (cgi.jacksonville.com)] Geisinger Health System has been offering a  “ProvenCare” warranty for heart surgery for over a year, promising that any unexpected re-admissions during the 90 days post surgery will not add to patients’ bills. [R. Abelson “In Bid for Better Hospital Care, Heart Surgery with a Warranty”, New York Times May 12, 2007]

Johnson & Johnson has guaranteed that its cancer drug Velcade will prolong the life of patients, or it will reimburse the National Health Service in the U.K. the cost of that drug. [C. Elser “J&J to Repay I.K. if Cancer Drug Isn’t Effective” Bloomberg.com June 4, 2007].  Such guarantees will tend to either promote the survival of products that offer them or force rivals to match the offer, which will then threaten their survival if they do not work as guaranteed.

Whenever payments made to providers or pharmaceutical firms are selectively higher for those that perform better, they will tend to promote selective survival. This complements “value-based purchasing” by third-party payers and consumers, since poorer performers will have to charge less in order to compete on cost-effectiveness, while better performers will be paid better.

Proactive Health vs. Reactive Sickness Care

Current proposals for healthcare reform are beginning to recognize that whatever ways are chosen for creating a more affordable healthcare system, one thing is clear.  The levels of and rates of increase in the need and demand for expensive sickness care, i.e. the incidence and prevalence of disease and injury, must be controlled in order to make paying for it tolerable for whoever gets stuck with the bill. [“A Welcoa Interview with Steve S. Martin, President and CEO of Nebraska” Wellness Councils of America 2006 (welcoa.org)]

If proactive investments by employers, insurers and consumers reach the estimated $1 trillion market within the next ten years or so, as predicted, they will pay off in at minimum a reduction in the rate of increase in sickness care demand.  With thousands of providers already investing in new or larger facilities and equipment to handle a dramatic increase in demand, any reduction in the rate of increase will mean threats to the survival of sickness care providers.  Drug manufacturers will also see less of an increase in demand for their sickness care products, but that will be balanced by an increase in demand for drugs that help in prevention, such as weight loss and smoking cessation pharmaceutical “solutions”.

Considering that roughly 50% of all sickness care demand can be traced to lifestyle choices by consumers, and the pressures that will be put on them by employers, insurers, and even their peers, there is likely to be some effect in the direction of reduced demand.  Whether it is an absolute decrease, or merely a lowering in the rate of increase, both will add to the selective survival effect for providers.  And already, there are hundreds of physicians and hospitals joining in the proactive health movement, themselves, in order to balance their service lines and hedge their bets against the threat of proactive health.

The combination of these three developments, already well under way, and supported by virtually all sources of payment for healthcare products and providers, will create severe threats to the survival of all, and a synergistic effect on their selective survival.  Current and future rivals will have to achieve and demonstrate superior performance, and ability to adapt to a shift toward more prevention, in order to promote their chances of survival.

Second is a move toward value-based pricing, either voluntarily among providers or forced upon them by purchasers, what amounts to “value-based pricing”.