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Out of balance

Europe's outdated funding model cannot cope with healthcare demand

A stack of boxes getting smaller in size towards the topThe pharmaceutical industry is at a crossroads. Emerging markets are rapidly coming of age and over the next decade will represent over 50 per cent of incremental growth in the industry. In contrast, the economies of the developed world face unprecedented funding pressures. US reforms will have a profound impact on an industry that has relied on it for the last 30 years for its profits, R&D funding and priority setting. The old economies of Europe, meanwhile, have long been seen as problem children, with at least one counted on to spring an unpleasant surprise every year. Our view is that the challenges faced in Europe will intensify, and will drive a new global model for the industry.

Healthcare on budget
European systems spend on average about 10 per cent of their country's GDP on healthcare, and costs are rising at an average of 5 per cent each year. Left unconstrained, healthcare costs would double in the next 18 years. It is clear that policymakers consider their current spending growth unsustainable.

All European governments are trying to balance rising demand with a funding model designed when life expectancy was 15–20 years less than it is now and where the ratio of employees to retirees was two or three times greater. There is a limit to how much money from taxes governments can raise for healthcare, and in countries such as Germany, employers are increasingly protesting at the high social cost of employment.

Increased longevity
Healthcare costs are being driven upwards by a toxic combination of demographic changes and the increasing cost of medical technology, plus a shift in the types of diseases suffered by people in rich countries. Studies have found that the ageing population, per se, has not been a significant driver of health spending, but increased longevity means that people survive to suffer from much more complex and expensive end-of-life complications. To date, ageing issues have been modest compared with what is projected to occur over the next 40 years.

In most industries, new technology improves productivity — or at least dramatically increases performance at the same cost. In the past, new technologies and techniques helped to extend life expectancy while reducing the total cost of healthcare. However, incremental improvements in life expectancy are coming at an increasing cost, as diseases that are simpler to treat give way to complex diseases such as dementia and cancer.

The use of new technology to treat such complicated diseases is actually increasing costs. It is inevitable that, with the shift in pharmaceutical innovation to end-of-life or incurable genetic diseases and other interventions that are not cost-substitutive, there will be tension between industry's expectation for access and reimbursement and payers willing to pay.

Common healthcare model
To understand what governments and other stakeholders can do, we reviewed the available literature on healthcare reform and analysed 25 healthcare systems. We examined the approaches currently used by countries to improve efficiency and the reforms they are implementing. Our study identified 15 available approaches for reform, which were a mixture of stopping some things and doing the rest better. We also found that health systems adopt certain approaches depending on how well they fit with prevailing social norms.

Social contracts
As governments become less able to finance universal access to all treatments, they will break social contracts that have made such access a human right in many nations. This is already happening, quietly, in all markets – from dentistry and ophthalmology in the UK to wellbeing and rehabilitation in Germany. With limited budgets, states will try to achieve the greatest health return by investing in areas with the most impact. These decisions can be made through supposedly objective metrics such as cost per quality-adjusted life year (QALY), emphasising early intervention (such as vaccination programmes, smoking cessation and screening) or prevention (such as initiatives to reduce cholesterol, counter heart disease and deter suicide). However, social preferences and politics also drive such choices. Few countries would deny children access to cancer care, no matter the prognosis or cost-effectiveness of treatment.

Hard choices
All the other approaches examined aim primarily at improving the efficiency of the health system. It seems irrelevant in most cases whether these instruments are effective or not. Health systems follow the same pattern, starting with making the more culturally acceptable changes first and then moving down the list towards more politically-charged options. Most are now facing some hard choices, like co-payment in the UK or gatekeeping in France.

Eventually, countries will implement some combination of all of these approaches. As they do, healthcare systems around the world will converge. Governments will set the boundaries for core service provision. Markets will be differentiated more by what is, and is not, included. Use of generics, for example, will become part of core funding in ways that new, innovative technologies may not. Commissioning of care will become more sophisticated, taking a patient pathway rather than a provider-based approach. Inevitably, patients will be asked to contribute to what is no longer considered core and alternative private providers will emerge to address this growing area of demand.

Implications for pharma
Taken together, global trends must lead to a reinvention of how the industry discovers, makes and sells. However, the common model is most clearly evolved in Europe. The responses that will be made here could direct how the commercial 'front end' of the business needs to evolve.

Pharma in Europe will need to get used to modest rates of growth in state funding for health, and increasing rigour and professionalism of commissioning with a focus on cost outcomes. In return, the industry will need to be smarter, slimmer and more responsive.

The challenge for management will be to ensure that their organisations are fit for this new environment. There are three key priorities.

Value propositions
Putting forward the right value propositions is essential. Drug companies will no longer be able to assume that governments will fund new drugs, even those that prove clinically innovative and effective. Instead, they must align their drug portfolios and prices to match the core services and priorities of the system in which they compete.

Companies must ensure their offerings fit under the core services umbrella. They must make the therapy area a political priority, encourage regulators to make decisions based not just on price but on the total benefits of a therapy, and reduce non-drug-related costs to keep overall therapy expenses down.

The value dossier will need to be developed in parallel with the clinical dossier. To ensure that localised priorities are addressed, managers will need to have much closer involvement in shaping the later stages of development. More flexible pricing approaches will be required where local perceptions of value differ from global benchmarks. The latest agreement between the industry and the UK government – which creates a provision for such alternatives – is a pragmatic move towards ensuring patient access to innovation.

Customer marketing
The balance of power in healthcare will shift, if it has not already, from the clinician to the commissioner of healthcare. This requires a change from product marketing to customer marketing excellence.

There is evidence that many companies are rising to the challenge. In the UK, we have judged the PMEAs since their inception in 2001.  During that time, we have seen a shift from simplistic 'mega branding' and 'broadcast marketing', to a much more customer- and payer-focused approach aimed at shaping innovation to healthcare priorities and helping commissioners achieve value. This is the new marketing. It is also the new selling, with a re-shaped and smaller sales force targeting commissioning influencers and more focused activities on clinical influencers to drive preference.

Consolidate and connect
From a corporate perspective, Europe has always been accused of being top-heavy in terms of the value it delivers. With the worsening economic climate, companies must become smarter and lower costs. Support functions will consolidate, brand management will move above country level, and integrated, therapy-based business units will become more common.

However, the challenge for European management has always been that healthcare systems and customer behaviours are local. Central management must develop processes and systems to stay connected to the specifics of the local market.

As the US transforms, and the developing world becomes more important, it is likely that companies will need to look to Europe for models to manage the balance between operational excellence and local needs.

The stark reality of life-saving technologies
With nearly 650 drugs in development in the US, the single greatest area of drug research is cancer. This name covers many hundreds of different genetic diseases, and great progress has been made in treating many types within this group. For example, the life expectancy for women with breast cancer who have been diagnosed early now equals that for those who have never had the disease. However, there are still many difficulties in treating cancers for which the prognosis is poor. Many cancer treatments involve surgery, radiotherapy and drug treatments. The current generation of new cancer treatments is dominated by additional therapies, not substitutes, which add more costs for each incremental improvement in life expectancy. As a result, sales of cancer drugs are increasing at roughly 12–15 per cent a year. Similar trends can be seen in areas such as rheumatoid arthritis, where drug sales are skyrocketing.

New technologies that extend patient life will continue to become more readily available, but at ever-increasing costs. The demographic shift will burden the system even further as the number of older people demanding these technologies increases, while the number of people working to pay the bills shrinks. At some point, health systems that have so far managed to absorb rising costs will be unable to do so, making the rationing of these new, expensive technologies unavoidable. To control these costs, an approach known as a health technology assessment (HTA), where analysts subject new technologies to a strict value-for-money evaluation, is becoming more common. Its leading proponent is the National Institute for Health and Clinical Excellence (NICE) in the UK.

The stark reality is that patients want access to every technology that can keep them alive longer but citizens do not want to pay for them. Or, as the economist Tom Getzen puts it, "health is an individual necessity and a national luxury". As a result, most developed world systems now face economic crisis, or will soon, and will be forced to limit access to new technologies. The crisis facing European healthcare systems is not as immediate as the one facing the US. With far greater levels of government control and ownership of healthcare assets, European countries are in many ways better placed to deal with the situation.

The Authors
Jonathan Anscombe is a partner and Michael Thomas is co-head, at AT Kearney's pharmaceutical practice, based in London.
Health Out of Balance, on which this article is based, is available at www.healthcare-out-of-balance.atkearney.com
To comment on this article, email pme@pmlive.com

5th March 2009

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