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Why Health Care's Future Is All About Value


Health care is projected to make up nearly forty percent of the US federal budget by 2025. In an effort to slow down cost increases, some in the industry have begun to explore value-based contracts, potentially transforming the industry's economics. Jami Rubin and Robert P. Jones of Goldman Sachs Research discuss how placing an emphasis on patient outcomes - instead of volumes of medications or services sold - could impact investors, companies and consumers.

This podcast was recorded on July 12, 2017.

All price references and market forecasts correspond to the date of this recording.

This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast does not constitute research or a recommendation from any Goldman Sachs entity to the listener. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefor (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.

Copyright 2017 Goldman Sachs. All rights reserved.

This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanged the Goldman Sachs, where we discussed developments currently shaping markets industries, the economy objects. global head of corporate communications. Here, the firm in United, Aids. Healthcare is basically synonymous these days with uncertainty, especially after the recent collapse of Senate Republican effort to appeal and report the affordable care act, but even as health care form remains in limbo, at best, invest appeared to be by large, given the industry the benefit of the doubt. So what gives to find out? What's too but mine for those in the no and healthcare. I'm Joe Jamie Reuben and Bob Jones of Goldman Sachs Research. Welcome to both thank you. Ve checked a bigger, so Jimmy start with you. From an investor perspective, there has been a lot of uncertainty about the sector what's happening. Washington have
fact the way in which investors are looking at the market and opportunities in the sector. Jack. That's really interest, question actually, despite much uncertainty in the marketplace about healthcare reform. Corporate tax reform, which will talk about health care, has been the second best performing group in the US and pay the sheer and that's really for a couple reasons, number one healthcare was the worst performing group last year after a very tough here in the market, but, secondly, investors started the year nervous about health care because of comments that the true administration made early in the year about drug pricing in there was fear among healthcare investors, that the administration, when introduced punitive actions on drug pricing, which would put pressure on industry profits that doesn't come to pass and in fact quite the opposite is true. It would appear that drug pricing, executive order. That was leaked to the press about a month ago, looks to be relative a benign and, in fact might be even slightly constructive. So I think that
into the air. People were scared. Now that fear is gone, but look. I still think that there are three buckets of uncertainty that investors need to be focused on in number. One is healthcare reform but, as you said, healthcare form looks to be dead, although it may not be entirely debit, that source of uncertainty is probably gone for now. His daddy of a big comprehensive package, seems to not likely to happen exactly but number two concerns around drug pricing still very much alive and drug pricing issues have been a source of concern for the past. Two, maybe even decades. So that's not going away, and I think there are still some questions about what might come. the administration with respect to drug pricing. Initiatives that was about two three weeks ago, that the press leaked a copy of the drug pricing executive order and in fact that order red, relatively benignly for the industry and, in fact, somewhat concerned for the industry. As some of the programmes in place, one called the three
maybe program that relates to hospitals serving low income people. It seems that that programme is to be slightly curtailed, which actually would be a positive for the industry, but look drug I seen remains an issue its source of uncertainty and that something and investors are going to continue to pay attention to in the third bucket. That's really important here is: what's gonna happen to corporate tax reform ties back to the effort to repeal and place, Obama care, because I think there is a view that we needed to address healthcare reform before can address corporate tax reform and the reason why corporate tax reforms important to the industry is because my companies, though, kept pharmaceutical companies, as well as large cat biotech coming are sitting with over two hundred billion in cash outside the. U S and if there were some sort of broad sweeping corporate tax reform would allow them to access that cash without having to pay high taxes. Thou spur a tremendous amount of em an activity. So untold
Hey durations, worked out that cash is just gonna sit, that's right and in fact there has been really no deal activity. The sheer we started out earlier in the year with a couple of small deals, a handful of else have been announced. The sheer, but nothing that's transformative and we ve deals mega done. The part of the sector that stock global, but the bigger play small MA a billion dollar deals but deals in the dreads of billions of dollars, unique corporate tax reform for that took her, and we expect that if we do get some four of repatriation or a territorial tax regime that allows companies to access their cash. I think that the arm. It is right for consolidation because of the prices had whence we ve been discussing and that is going to spur activity and mega deal activity in order to drive growth, but there still is this big looming question: will the death of healthcare reform
spur action is more likely that will get tax reform now, or could it be less likely? get touching where we just don't know and that's sorted the way I would think about thee. Resources of policy uncertainty. is hanging over the sector, so Bob when you step back, The debate in the demise of the effort to repeal and replace Obamacare unaffordable correct, Why is all this noise and Washington police were left the sector unscathed. Consumers have been quite focused on some of these issues, but why investors veto is material. I think to Jamie's point you you're talking about seventy five percent of them. Are the cap in health care really being related to products and therapeutic companies that you might see some kind of volume impact overtime if the proposals that we have seen are actually put in place in one way, shape or form I think that the majority of the market cap within healthcare has really been impacted by all this debate, because I just think enact
Allie over time. It really won't have that much of an impact on the top lines that these companies, the obvious exception, has been hospitals to very small piece of the overall market cap within the health care universe. But dad group has been very volatile relative to some of the proposed was, and deadlines and time mines that have come out from DC around the potential repealing the place. Do you think about it? There probably still gonna, have to provide the care whether these visual currently has met Kate or not, and so you have they did before rival, racked right, it was just reimburse through a simply another mechanism, racked or not at all or nine. Also, I think, that's important. of a very small percentage of the overall in vestibule universe with healthcare. Essentially, a lot of the investor will universe. Really that drug companies in the product companies and a lot of what we think of the healthcare system is consumers is really not invest: bots directors or nonprofit hospitals in the exactly so Jimmy. You recently predicted, though, been drug pricing shake out. As a result, the push back over the skyrocketing cos
some drugs- or do you mean by that, and how do you see, companies responding to that pressure, what we mean by the drug praising check out essentially as having industry, is responding to increased by partisan criticism of the price of their drugs. This has been going on for something like twenty twenty five years. Drug pricing has always been an issue, but it really came to a threshold earlier this year with certain high profile drugs and and see egos going before Congress and defending their drug pricing so clearly drug price, has become a major issue. The reason why is because if you look at the top ten selling eggs in the world? The cost of this Treatments on an annual basis are in the tens of thousands of dollars some M, are over a hundred thousand dollars and then too years ago, if you look at that same less, the average treatment costs for prescription drugs was in their thousands of dollars,
and now with so many people pay more money out of pocket. Because of these high deductible programmes, there on a pocket costs are tied to the cost of the drug, their pain, or five six ten thousand dollars out of pocket, which is prohibitive for some the Americans and that's why? I think that drug pricing has become this by partisan issue. But it's interesting how the industry has responded because they're not tone deaf. Many companies have pledged to minimize the price increases to keep those price increases below ten percent and one time ear. Typically, drug companies take one too. Sometimes three price increases a year that off. He has a companion effect. Secondly, we are starting to see companies when they introduce new products, work with stakeholders like pears and other stakeholders to come up with a price together rather and surprising the market with the big price. We saw a big issue couple years ago with that Hepsey drug, which kind of surprise the payers. Now there were
with those stakeholders. And thirdly, the industry's coming up with value based pricing contracts still in its infancy and Bob will talk about that. In more detail, but we are clearly starting to see some response to consumer and politicians concerns Dr pricing, I would say even short of any kind of official legislation or regulatory change. Minuet actually seen branded prices in aggregate which have been increasing twelve percent a year for the last five years, you're to date there I single did so to Jimmy's point since himself, policing from the branded pharmacist on the generic side, we went through a pure, actually inflation and generics a few years ago, and now we're right back into that high single digit deflationary range, which is more typical. If you think about a commodity product like generic drugs, their natural cycles that that, as the prospect of health reform gets debated in Washington and rises that drug companies gotta keep pricing level down. But then, if, station goes away, or something gets done that we see the prices
back up he s back and ninety two. Three during tellers care. Many, the senior executives, work, courted and of Congress and all pledged raise their hands to keep their prices below inflation. And then, when regarding pass? They went back to their earlier practices and landed. Nine. That's right So Jamie's you mentioned, we got gotta sneak peak of a potential give order on drug pricing that, broadly speaking, protest, the issue through deregulation of the healthcare industry. What can we take from that sort of league, and if that remains more or less unchanged and gets put in place? What would it mean for investors while the dry pricing executive order which, as you mentioned, was late to the press a couple weeks ago, but by the way has not yet been issued would appear to be constructive for industry and that our allies were a market based solutions rather than outright price controls. This is a good thing for investors. Investors have fearing the worst or fearing punitive measures,
It would lead to price controls, for example, and again this was a big surprise to investors, but it seems at one of the big changes is too was called. The three forty be probe that's a programme to hospitals who are treating income patients, drug companies are obvious to get bigger discounts, but there has been. abuses to the system, and the order would seem to curtail some of those programmes and that its centrally a positive for the industry, Secondly, there is some discussion about value based pricing contracts. That's a bit ambiguous. exactly what that means, but it seems pretty innocuous and then I'd say. Thirdly, accelerating approval of generic drugs. Will that make sense- and we have had this backlog of generic sitting at the FDA that have been approved and too point Earlier- generic drug price has come under pressure as the FDA approved more drugs. But a couple years ago we ve had situation where many generic drugs didn't have competitors, so they raise their prices.
Seen even coming out of the FDA and Scollops mandate is to try to make the generic market more competitive and has now been on record as saying here's some specific ways in which want to get more generic drugs into specific generic drug classes and Oh, you can imagine that, even though we cut back into a high single the deflationary environment generics if, in fact to accelerate the rate at which there approving the backlog into the market, you shouldn't you would expect deflation to probably continue go further, Sometimes, what looks punitive to the drug companies is popular with consumers, needless to say, so, if He issued as is or something along those lines issued what from the can homer standpoint, do they have to work were to drug pricing and ended. They have any other meaningful ways to exert pressure on pricing. When reading the drought the executive order, it does not appear that there would be any real impact to consumers. The impact is to the drug companies and the impact is positive and constructive
So I think we're just again where, at the beginning of this debate, I think that, from an investor perspective it removes and overhang, but from a market perspective in a consumer perspective. Drug pricing will remain an issue and I think one of the issues that is being discussed right now. Bob sectors involved with this is providing more transparency into drug prices. There's the less price, there's realized price, and unfortunately, most consumers who don't have insurance have to pay for the full drug price out of pocket. or, as we ve seen there's an crazy, high deductible plan so that you ve gotta pay more out of pocket your pain, a percentage of the price of that drug, and it seems that dog so the programmes that need to be reformed in order for consumers to start to see a change or disheartening Some relief from drug pricing, but this exact, I have ordered, does not appear to address any that so bomblets get too value based pricing in the past healthcare spending
completely divorced in a lot of ways from outcomes right when you look at that is the balance shifting so there's more correlation between spend and outcomes They were very very early days, but I think that's the path we can envision the reimbursement system going to your point, a mean Healthcare is expected to make up over twenty percent of GDP and become nearly forty percent of the government's budget by twenty twenty five. I mean, if you think, about forty percent of the governments, but that a lot of other programmes it aren't getting fund because we're trying to pay for healthcare. So I think it's almost because the system can't bear the trajectory of cost that were on right now that you are starting to see people introduce ideas like value based room no more you're, not gonna, get paid just fur volume for number of visits to a hospital you're gonna get paid for me. fishing and individual more effectively and when, Talk about value based reimbursement. I really think that the main areas we're talking about here is a shift to lower costs care setting so getting people out of the most expensive settings if they don't need to be there like the high.
but all like any kind of impatient facility, if they dont need to be there. One major initiative within value based reimbursement, the other one is moderating: price inflation, whether that be on drugs or on procedures and devices used within procedures. That's another major bucket. When we talk about valley, its reimbursement and in the last one is really just trying to this industry waste, there's a lot of inefficiencies is probably the biggest pocket that valuable reimbursement goes after just unnecessary Herr, unnecessary diagnoses and tests costs that come up in the system, because folks aren't being inherent to their meadow, nations or their particular therapeutic regiments. The? U s them because of the amount of money we spend. If you just look at the outcomes that we experience to date and we spend two and a half times more per capita,
on individuals in this country than any other industrialized nation and yet our results are mortality rates, are number of patients with chronic diseases is amongst the highest in the world. So I think the system is kind of presented itself where people are forced to bring solutions to the table to help and that costs curve, and we, as a team, you believe the database reimbursement is one of those should have that could really start to help end the cough carbon and while Obama CARE was very polarizing. This one piece of it that should have allowed some pilot programmes did get some a partisan support, a man. I don't think many Republican supported Obamacare anyway. but there are some programmes in place there is applied, women in very polarized environment around healthcare that we see continued support coming at a Washington, fit outcome based reimbursement, that's a good point, and I do think that one of them tangible examples. They came out of Obama. Care that does in fact seem to have by part of the support is the formation of the accountable care organization ratios,
those programmes have had. Several generations now have grown quite nicely. Mrs reclaim, explaining what they do so essentially, this is a hospital system or a provider network raising their hand and saying we want to be a part of this particular seo initiative by which we will get reimbursed at set amounts for certain things that we do as opposed to the current format of reimbursement witches had paid for every time. We do a procedure. We have paid every night. Somebody stays in hospital, this them saying give us almost have bundled payment and will manage to it. The probe now in its third generation, the next in Asia, that over nine hundred systems now across all the issues. But this one is the most recent connection, Asia and this actually is hospital systems raising their hand, saying. Not only will we take on the upside of were able to manage below the reimbursement levels that you'll give us for whatever procedure that it is that we're talking, bowed, but will also share in the downside, if were unable to manage these patients within that bundled payment that you agree,
to pay, as you can see, there really tying the incentive of the actual healthcare system to want to manage these patients more effectively The policy makers would like to see a little bit more that especially that lower costs and proves outcomes for consumers of healthcare. Likewise beyond the sector does discuss what other healthcare industry players my benefit or be hurt If this were really to gain traction. Well, I think it's still early enough, where the decisions that these companies within the various sub sectors and health care are still gonna, buy enlarged control, their own destiny. Hospitals that just sit back and try to operate in a fee for service environment are probably going to be left behind. If this, in fact, is the way reimbursement world is going manage care, I think, has a choice. To make a mean, those companies can decide to more aggressively try to construct reimbursement mechanisms.
based around value and things like partnering with farmer to come up with outcomes based pricing on drugs and contracting with hospitals to come up with ways to reimburse people on outcomes as opposed to just volume psychic manage terror. Can control its own fate and I think Farm Ionia Jamie can can jump on the table no violent farm, I would say, is probably the same thing. It's not just this idea that over this is gonna put a cap on the amount that you can charge for something. I think it really depends on how the individual companies approach it. Here, we ve had a couple of examples of value based reimbursement contracts and the industry, for example, Redpath, and which is it straw, Loreen drag. The company has signed a contract with insurance companies and basically Saint Look of the drug doesnt work. We must make you pay for it if it does work we'll get reimbursed, so we ve had a couple of examples or pilot I'm so valuable contracts, but their tricky, and that's me, has gathers in law behaviour rather get sick for different reasons, which may have nothing to do with the drugs. So again, I think that
and very very early days, and I think that the most innovative companies will lead the charge and defining the parameter. for these value. Based contracts and, as Bob said, I think, companies it can you need to operate in a fee for service world and assume nothing has changed, will be left behind with top level about the breakthrough drugs and how this might affect them in our seas. talked in the past about immunity, college drugs and they can provide dramatic survival benefit. Yeah dramatic result in improvements in quality. Life, but sometimes you know how do you measure that improvement in many ways and they tend to be costly right, so power Pharma companies think about what value means for their businesses? How do you think about extending I've been removed by certain conditions. I think that the drug companies think about when they pricing a new drug. There He met the overall economic value that that new drug brings to a patient, so, for example, in image on quality, we ve seen those drugs have an impact on survival, most of them not all of it
but most of them and not all patients, but what sort of price you put on survival? What price do put on a patient who is face? in an incurable disease, but lives. Another two three four months, that's priceless. So I think that you know when the companies come up with a price there. Thinking about are we carrying disease? Are we the lane? The progression the disease. Are we keeping that patient out of the hospital? And so there looking at the holistic price of a drug problem is that the payers are necessarily looking at it holistically because the insurance companies matched our companies are looking at a patients, for about one year, though not looking at ten years out, as I think one challenges that the whole industry is facing is how we going to deal with the price of cures because think one of the areas in the industry by farming industry this generated the most excitement have been drugs and actually chore patients. Gene therapy car tee
Jeanne editing where you're going in the dna and actually at anything, a mutant Jane. How do you put a price on that those tree? whence are potentially a one time treatment, but the insurance companies are not looking to treat patients. They go Their medical ass ratios, which occur over a period of one to two to three years, saw the structure of our ensure, the industry is a quite ready for cures, we have actually seen more embracing of cures in Europe where you have a single payer government with a longer I'm further much longer time frame and a lot more data on those patients, and we are in the: U S: it will be interesting to see how that I'll plays out. So, in June, Jimmy you hosted the research divisions, annual healthcare, competent and California, and one end of course, it came up with technology, because technology Zawoiski disrupted a lot of industries, starting with maybe books, spend more from now on e commerce and restarting Satan transportation sector, a whole bunch, other sectors that seemed impervious to our technology disruption
Health care is a little different, is highly regulated technology as his role. A lot of companies are technology companies in many ways, the ones that are providing products and devices. But why the industry been less penetrate a more or less disrupted, maybe than other industries in how're you thinking about that investors? Thinking about that going forward tat? What is a fascinating topic, and I think that technology is here to stay. We're gonna see an impact biscuit likely ass. She said because this is a fresh: mounted industry and highly regulated books, highly regulated, there's no FDA for Box or for retail. So it's a much more complicated but you know what, as we sit here today, there have been dramatic advances and data, storage and computer power, combined with significant investments by technology. Companies, like Microsoft and Apple, say: you'd, think that we'd be at a tipping point for change.
but nothing has really changed. My relationship with my doctor hasn't changed that your relationship with your doktor hospitals, eccentric, cetera, cure it can make an appointment more easily, but we, See. Let's not forget, though, that where we have seen major answers and where we ve seen major advances has been in drug development by gene sequence, and better understanding of the bodies DNA, but that has come from the biotech industry or the tools companies not from the traditional technology companies and that has had a significant impact industry. I'm it used to be the development of drugs used to be a very random process, and now there is shhh analogy because of increased and improved data, but we ve had as in other areas that have had a modest impact like three printing surgical robots, tell it actors consumable whereabouts but has not had a disruptive impact on health care. The ads
is now, as you think, about outcome, based reimbursement and getting more valued. That seems like a place where big dad an artificial intelligence should able to help payers providers and others think more coherently about outcomes in and about value. Going back to your previous question, yes about sectors that could be beneficial. Clearly, health care. I t, is a sector that, in the epicenter of conversation that, if I think about it more from the healthcare delivery standpoint, so less about development, more budget, the delivery of care. I think there is a lot of opportunity a lot of different players to come and really make a difference on where we stand today within the health care delivery system is yet we kind of digitized everything railway, the Hi Tech, ACCA, two thousand nine kind of All hospitals have electronic medical records that by and large, fully play out and so now, what do you do with all that data that you have, and I think that's where we're really add, we are going to see a lotta up
darts come in and lay on analytics things to help manage patient populations better, getting back to value based reimbursement? I certainly think that they'll be players our non traditional healthcare companies like Microsoft, like Apple who already have initiatives to play a bigger peace and taking all this data and actually making more use of it so that work? to manage patients more effectively and more efficiently. Looking ahead What might the consumer see over the next two or three or five years in terms of changes? I think one Jamie mentioned before is them salvation for them to be more involved. I think his kind of involved just because it again the cost in the system, so the amount of high deductible plans has tripled since two thousand and ten and it's about thirty percent of people today or in a high deductible, plan, so there's just a more natural incentive in the system today for people to care about their own health because they're paying for more of it. I think what you'll see if this path continues more towards value,
over time is, I think, you'll see a lot more engagement with the consumer so for a lot of these systems and reimbursement structures to work, you have to manage and be in touch with the individual, more consistently information. Following up on to make sure there taken their medications on time, if you're really getting paid for the holistic cost, that individual over a longer period of time. You have to engage with them more, so I think you'll see things like you, no more care management tools, apps on phones, automatic alerts to individuals to the end, consumer just bring them more into the management of their own care. Overtime then, has that lead to improved outcomes yet now absolutely not, but I think there has to be something for the consumer, and that is. I am now a shopper
of care is opposed to the Euro consumer without being a shop or your consumer without being a sharper. You have no idea what things cost and you don't care, because your insurance companies pay for that, but that is all changing. Another reason: why may be technology hasn't taken off and why we haven't seen any major disruption is that the stakes are high enough yet while there are a large number of patients who are paying money out of pocket, it still relatively small compared to what their pain for other things from an invest. The perspective from markets perspective. What might do we see over the next twelve eighteen months? I realise a lot its unknowable, because we don't know exactly what will happen in Washington, but we have more clarity than say we didn't January right. We are selectively constructive on the sector, We continue to see major advances of innovation, drugs move drug stocks, it's really drug product cycles that Dr Top, like Rome, Unfortunately, I think we're on the good part of the innovation cycle, where we are seeing very exciting new technologies in oncology and immunology technologies within the smaller
biotech universe, including cartesian gene therapy, Jean editing, but also its and understand that industry hasn't given up yet on Alzheimer's disease. So there are still a lot of unmet medical needs that the industry is focused on, and I think that its innovation, that will can new, to drive big port of the industry The same time, pricing had ones aren't, gonna go away and the whole move towards value based reimbursement may require structural changes throughout the EU. story in our view is that, with two hundred billion of cash sitting on the balance sheets of biotech in pharmacies Oh companies, I think emanate, will also be another major driver of growth for these companies and again, pressure on the industry. Not ever company has a great pipeline and companies need to buy pipelines and pricing pressures probably never entirely abating. I think that leads. Consolidation in the industry and not just in the dragoon biotech industry, but other sectors as well
hospitals, managed care supply chain as the whole industry tries to sort of readjust reshape itself for what see as a value based reimbursement, world and also from the services side near companies. I think twitter agree with Jimmy. You know anybody who use in enabler trying to be more progressive and helping build the infrastructure for that type of reimbursement landscape in the future. I think be somebody who, beyond the winning side of things, I think companies that are still and a dependent on drug pricing and aren't really being progressive or adding new services that kind of evolve into this new reimbursement, landscaper, probably the ones that putting on the loser side within the health care service that I think anyone whose really linked to r and d and trying to like anywhere contract research organisations, anybody who is linked to the eye de growth or other value added services to help progress.
Innovation at Bio Farm, I think, is also somebody who view opposition as we look to the future Jimmy Bob thanks so much for joining extract. Thank you. That concludes this episode. Exchanges Goldman Sachs, thanks for listening- and we hope you join us again next time, this by Ass was recorded on July twelve, two thousand seventeen all price references and market forecasts correspond to the date of this recording. This podcast should not be copied, distributed, published or reproduced in whole or in part. The information contained in it. Podcast does not constitute research or recommendation from any Goldman Sachs Entity to the listener. Neither Goldman,
nor any of its affiliates makes any representation or warranty as to the accuracy or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed. The views expressed in this podcast, or not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person. A client of any Goldman Sachs Entity.
Transcript generated on 2021-10-13.