Bright Light, Long Tunnel

Kim Slocum, Founder of KDS Consulting gives his view on the future of the pharmaceutical industry.

Bright light, long tunnel, sums up the where the pharma industry is. There is a bright light in the fact that demand for healthcare and pharmaceuticals is clearly going to be on the upswing for the next 30 or 40 years just on the back of the aging population that we see throughout the developed world.

The problem is how that demand is going to be fulfilled in the face of some of the macroeconomic forces in the pharmaceutical industry?. I can imagine at least two ways that this can occur. One of them is that the policy makers decide that generic products are good enough and they become the standard of care, so there’s a lot of product use, but it’s not benefiting the research-oriented companies. That would not be good for society as a whole, and it certainly wouldn’t be good for the innovator firms.

On the other hand, if the industry takes some steps to protect itself, such as not isolating itself from the health policy debate, reaching out to these powerful payers and beginning the discussion about what’s important to them there is a reasonable opportunity that truly innovative drugs, ones that do have a good value proposition, can be reimbursed at premium prices and industry can participate what should be a golden age for it.

The biggest two words that the industry is going to have to grapple with over the course of the next ten years are cost effectiveness. Now, the challenge that the pharma industry has generally speaking, is that national health policy makers can cut services, which tends to be unpopular with the beneficiaries politically, they can raise taxes which is also politically unpopular, or they can cut the payments that are made to the people who make money out of the system: doctors, hospitals, biopharma companies, laboratories, pharmacies and the like. That’s the path of least resistance, and it tends to be the first one used.

Almost half of US healthcare is directly paid for by government agencies of one form or another today. Our CMS, centers for Medicare and Medicaid services, is the single largest payer for healthcare in the United States. If you add in the tax breaks that US employers receive for subsidizing health insurance for their employees, then more than half of US healthcare is already government financed in one form or another.

Over the course of the next several years as our population in the US ages I suspect the direct financing of healthcare by government agencies will pass 50 percent. Now, the other thing that’s happening at the same time is the desire to try to gently shift more cost onto patients so they bear a bit more of the burden as well. We’re seeing that as a phenomenon, not only in the United States, but also in Europe.

What we have to do is watch these two trends at the same time and to understand who has the deep pocket in healthcare in terms of how things are going to be financed. Here in the US, I have a deep worry that people have a somewhat optimistic view that people who are members of my generation, the Baby Boom generation, are going to be able to finance their own healthcare and the cost-shifting is going to happen pretty seamlessly.

Unfortunately it’s not true. There’s a good deal of data out there suggesting that perhaps as many as half the people who are 55 or older in the United States, in other words, approaching retirement age, have a net worth of less than $100,000, some speculate less than $50,000. There are experts out there suggesting that a couple retiring today is going to need somewhere between a quarter and a half a million dollars just to pay for out-of-pocket healthcare expenses under the system we currently have.

My fear is that industry will continue to look inward. There’s an old saying in the US that relates to the Wild West. If you recall the old movies when the pioneers are going across the prairie and they’re attacked, they circle the wagons, but one of my good friends likes to say when you circle the wagons you have to remember to shoot out. And that’s the challenge for industry now. Is it going to shoot in and die of some self-inflicted wounds, or is it going to indeed learn to shoot out and partner with people through the distribution end of the payment channel to improve business conditions for everyone.