As the vitriolic debate on healthcare reform dominates the news, healthcare industry leaders continue to focus on several issues: innovation to drive growth and promote cost efficiencies; new offerings to generate higher value for each healthcare dollar invested; and the emergence of attractive new global markets and technologies. They recognize that continued economic weakness and new sets of competitive and regulatory pressures create a more challenging environment to drive business growth. At the same time, they see tremendous opportunities to develop cost-effective products and services that can dramatically improve patient care on a global basis.

At Columbia Business School’s 6th Annual Healthcare Conference held on November 6, nearly 500 students, alumni and other professionals heard more than 35 speakers and experts discuss these issues. The attendees benefited from panels on an array of healthcare topics including biopharmaceuticals, medical devices and diagnostics, healthcare services and information technology, venture capital/private equity, mergers and acquisitions and emerging markets. The day concluded with a networking reception and career fair where attendees met with the event’s 20 corporate sponsors.

Fred Hassan, chairman and CEO of Schering-Plough, gave the opening address. Despite economic, competitive and regulatory pressures facing the pharmaceutical industry, he was confident that new therapies and vaccines would be developed to address large areas of unmet needs, most notably Alzheimer’s disease, which represents a devastating social and economic threat to society.

Following his remarks, three concurrent panels took place in the morning. They focused on information technology solutions, growth strategies of Big Pharma and small-cap biotechnology companies, venture capital and private equity investment strategies in healthcare, and the impact of proposed healthcare reform initiatives on payors and providers.

Mike Barber, vice president and head of Healthymagination for GE, reviewed GE’s new $6 billion global commitment to develop new technologies and services to reduce costs, improve quality and expand access for millions of people around the world. Among other objectives, this initiative will accelerate healthcare information technology, support consumer-driven healthcare, create new wellness and healthy worksite programs and facilitate access to cost-effective healthcare in rural and underserved areas.

Three concurrent afternoon panels covered healthcare mergers and aquisitions, medical devices and diagnostics, and challenges and opportunities for healthcare companies in the emerging markets. Alex Gorsky, worldwide chairman for medical devices and diagnostics at Johnson & Johnson, discussed emerging opportunities to develop new therapies to extend and improve a patient’s quality of life, as well as new cost-effective and less invasive medical devices and procedures. He also commented on the changes underway in global healthcare companies and how employees need to expand their skills and experiences, such as seeking new functional roles and positions in new geographic regions to broaden their understanding of different healthcare systems and customers.

Photo courtesy of the Healthcare Conference

“I was told when I graduated that I had to come back and take a few classes,” Warren Buffett, MS ’51, deadpanned as he took the stage with Bill Gates on Thursday as part of a community forum at Columbia Business School. More than 700 students from the Business School were in attendance at the event, which was filmed for global broadcast by CNBC.

A major theme of the 90-minute Q&A session was optimism about U.S. economic prosperity in the long-term, with a nod to future energy issues. That theme underscored Buffett’s comments about Berkshire Hathaway’s recent acquisition of Burlington Northern Santa Fe for $34 billion last week.

“The railroads are tied to the future prosperity of this country. You can’t move a railroad to China or India or anywhere else,” he said. “As the country grows, the transport of goods will grow — [people] will be moving more and more goods back and forth to each other. And you have the most environmentally friendly and the most efficient way of doing that on the railroads.”

The theme returned later in Gates’ discussion about areas he sees with the most growth potential in the United States. He said those include information technology, energy and medicine. Gates discussed the growing field of alternative energy as a driver for a long-term economic development.

“Solar-thermal, solar-electric, nuclear [energy] is going to go through some of the revival and see if it can solve some of its cost challenges. As a country, we want to make sure all of those get lots of R&D and regulatory enablement because one of them is going to give us much cheaper power,” he said. “We don’t have quite as much R&D going into those things as I’d like to see. We have quite a bit, but I think the government policies could drive for more.” He added that he foresees an energy revolution and the United States is expected to lead the way.

Buffett also discussed his value-investing strategy, saying that it had not changed in light of the financial crisis and the fundamentals were the same. “We like companies with a durable, competitive advantage,” he said. On the economy, both Buffett and Gates lauded the actions of the government and the Federal Reserve.

Both men offered advice and inspiration to students. (Marry the right person, said Buffett. Act on your self-confidence, Gates added). Buffett signaled his optimism for future MBA graduates of Columbia Business School, making a promising offer to those in the audience.

“I would pay a $100,000 dollars for 10 percent of the future earnings of any of you,” Buffett said. “If that’s true, you’re a million-dollar asset right now.”

CNBC will broadcast “Warren Buffett and Bill Gates: Keeping America Great” moderated by Becky Quick on November 12 at 9 p.m. and 12 a.m. ET . Join the conversation with other students on Facebook and on Twitter.

Photo credit: Eileen Baroso

They are two icons of American business — Warren Buffett, MS ’51, and Bill Gates. On November 12, Columbia Business School students will have the opportunity to connect with them in person. They will appear together in a special hour-long community forum at Columbia Business School, which will be filmed by CNBC for global broadcast. During the event, Buffett and Gates will field questions from students about the economy, the future of capitalism and corporate social responsibility.

It is the first time Buffett and Gates, who met each other in 1991, have appeared together at Columbia University. The last student forum they participated in was in 2005 at the University of Nebraska at Lincoln. Of the many bonds in their friendship, philanthropy and a shared philosophy of giving back to society is one of the strongest. In 2006, their relationship made the history books when Buffett announced that he would give the bulk of his estimated $40 billion fortune to the Bill & Melinda Gates Foundation.

Gates and Buffett’s latest ventures have been in recent headlines. Last week, Berkshire Hathaway announced a $26 billion deal for the railway company, Burlington Northern Santa Fe. Earlier in this year, Berkshire invested in BYD, a Chinese electric car company.

In a speech in October, Gates called for a new green revolution in agriculture and announced a $120 million package of agriculture-related grants to nine institutions around the world. Taking a page from Berkshire’s playbook, Gates wrote the foundation’s first annual letter this year and said the foundation will give away $3.8 billion in 2009.

CNBC will broadcast “Warren Buffett and Bill Gates: Keeping America Great” moderated by CNBC’s Becky Quick on November 12 at 9 p.m. and 12 a.m. ET . Join the conversation with other students on Facebook and on Twitter.

Photo courtesy of Columbia Business School

About one-fifth of the adult population in the United States experiences some kind of mood disorder, with about 6 percent of the population suffering from severe mood-related disorders. The most prevalent instances fall into one of two classes: depressive disorders or anxiety disorders. But why do some people develop depression during very stressful times while others develop anxiety disorder? The answer may lie in regulatory fit and regulatory engagement.

My work on motivational systems recognizes a distinction between the two different types of basic preferences that people exhibit when pursuing their goals, each corresponding with a distinct regulatory state.

People who tend to make decisions and pursue their goals in an eager way, seeking opportunities for advancement, operate in a promotion state. Promotion people are more likely to consider a number of courses of action and exercise a greater willingness to take risks. People who are motivated primarily by cultivating safety and security as they pursue goals operate in a prevention state; they are intently concerned with avoiding errors and less likely to consider a wide variety of options.

When a promotion person operates in an environment in which there is a lot of innovation and risk taking, her environment fits her regulatory state. If you put that same promotion person in an environment where most of her colleagues are vigilant and slow to take risks, she’ll have a hard time operating in the prevailing prevention state — it’s a nonfit for her promotional motivation system. Conversely, when a prevention person finds himself in an eager, risk-taking work culture, she’s in a nonfit environment. (You can read more about the underlying research and its management and marketing applications in Columbia Ideas at Work.)

Depression versus anxiety

I’ve long been interested in why some people fall into depression and others develop anxiety disorder. And I believe that the logic of the two regulatory states, prevention and promotion, can account for these two very different reactions to stress.

Depression and anxiety both represent failures in goal pursuit — depression is a failure in promotion pursuit, while anxiety is a failure in prevention pursuit. When life isn’t going well, people with a promotion focus become sad and discouraged; people with a prevention focus become anxious, tense and worried.

To more fully understand how the promotion and prevention regulatory states inform depression and anxiety, I’ve investigated the role that engagement plays in intensifying how we value the activities we take part in and the goals we pursue.

Engagement is a way of understanding value — how much people value an activity or goal. And engagement is directly related to intensity. Typically when someone’s engagement in an activity or in pursuit of a goal increases — under fit conditions — intensity increases. Sometimes obstacles to goals can make us engage even more intently in what we are doing — and as a result, a goal can become more highly valued; sometimes obstacles cause us to disengage in what we’re doing, and goals and rewards become devalued.

Under fit conditions, both motivational types are engaged. But promotional people decrease their engagement after failure, while prevention people increase their engagement after failure.

When people with a promotion focus fail, they become less eager, and become sad and discouraged. They are no longer enthusiastic — and that’s a nonfit for promotion, there is less of the eagerness that fits their system. The nonfit causes a promotional person to disengage, and that deintensifies all the positive things in life. Loss of interest in even the good things in life is the major symptom of depression.

Prevention is the exact opposite — when prevention-focused personalities fail in prevention, they become more vigilant, anxious and on guard than ever. In prevention, the increased vigilance fits their system — so they actually become more engaged, intensifying all the negative things in life. All the negatives become more negative — which is precisely the main symptom of generalized anxiety disorder.

This work represents the first time in psychology that there has been a theory for why depressed people lose interest in everything and why anxious people generalize their anxiety to everything: they are reacting differently to failures in their distinct regulatory states with respect to both regulatory fit and engagement, which deintensifies positives in one case and intensifies negatives in the other.

If failures in promotion and prevention do account for the two major symptoms of depression and anxiety and explain why they are different, what does that imply for treatment? Tim Strauman of Duke University and I have received a grant from the National Institute of Mental Health to consider this question. Our hypothesis is that by increasing engagement for promotional personalities you can make life’s positives once more positive, and by decreasing engagement for prevention personalities you can deintensify the negatives. We intend to pursue new interventions in therapy that directly address the differences in engagement.

Photo credit: Yoel Ben-Avraham

The key challenge that healthcare enterprise leaders face is determining how to drive innovation while addressing problems of affordability, inefficiency and gaps in quality. This task is now complicated by strong economic headwinds that limit the resources available to attack these problems. Industry executives are also dealing with new sets of competitive and regulatory pressures on their efforts to drive business growth.

At Columbia Business School’s 5th Annual Healthcare Conference held in New York City on November 21, over 500 students, alumni and other professionals heard more than 40 speakers and panelists discuss these issues.

The featured healthcare leaders said they are embracing change to develop creative solutions to the industry’s growing problems and to provide attractive investment opportunities on a global basis. A career strategies panel of executive and corporate recruiters also presented their views on the skills and talents necessary for healthcare professionals to succeed in this dynamic environment. This was followed by a concluding career fair and networking reception with the conference’s 17 corporate sponsors.

Ed Ludwig ’75, chairman and CEO of BD (Becton, Dickinson), gave the opening keynote address. Ludwig said that a successful global healthcare company must use technology, scale, global reach and operational excellence to offer value-added products. These products should reduce costs, enhance the quality of patient care and generate sustainable earnings growth.

Following his remarks, four concurrent panels took place in the morning session on the topics of pharma and biotech, medical devices, diagnostics and payor/provider issues.

The pharma and biotech panel discussed the trend among companies to narrow their therapeutic priorities, focus on biologics, pursue licensing and target acquisitions and seek enhanced productivity and cost savings. Numerous early-stage biotechnology companies are turning to larger pharma and biotechnology firms to survive as they are unable to secure capital from the public market. Global medical device companies are seeking to introduce innovative and cost-effective products in a challenging regulatory and pricing/reimbursement environment and pursuing acquisitions and new markets to meet growth objectives. The consensus of the payor/ provider panel was that any healthcare reform in 2009 would likely be incremental due largely to economic and political headwinds, and that a key focus would be on information technology and expanding access to those without insurance coverage.

Robert Essner, former Chairman and CEO of Wyeth Pharmaceuticals and now executive-in-residence at Columbia Business School, provided the lunchtime keynote speech. He suggested that although the pharma industry faces significant challenges, the combination of new drugs, biologics and vaccines in key areas of unmet need (e.g. Alzheimer’s, cancer, congestive heart failure) and the massive influx of informed baby boomers, who are demanding health solutions, provides favorable long-term growth prospects for innovative global pharmaceutical companies.

Three afternoon panels covered M&A, life science investments and emerging markets. It is anticipated that healthcare M&A will remain active across all sectors and that consolidation among Big Pharma companies appears inevitable. Early-stage life science companies and investors face a capital squeeze, which is threatening the viability of existing companies with lower levels of funds available for new investment. Emerging markets are an increasing focus for global pharmaceutical and medical device companies that are seeking new markets for their products.

The final panel of the day focused on the changing talent acquisition and development strategies of major healthcare enterprises. Panelists commented that successful leaders will need to have global and cross-functional experiences; that employees should be open to lateral moves that broaden their skills and experiences; and that healthcare companies considering new hires are seeking a broader “toolkit” of skills that reach beyond the traditional focus on healthcare backgrounds.

For more information about the conference and sponsors visit www.cbshealthcareconference.com.

In his address last night President Barack Obama tried to rally support for his health care reform agenda, and announced for the first time that he would consider raising taxes on families earning more than $1 million a year, which is a scaled-back version of an earlier proposal that would have imposed a surcharge on households earning $350,000 or more.

Rita McGrath, associate professor of management and author of Discovery-Driven Growth, worries that the cost of health care reform could still take an overwhelming toll on small businesses.

“I’m concerned with the plans for funding it,” says McGrath. “It seems disproportionately aimed at smaller businesses and small business owners.”

McGrath argues that the taxes hikes needed to underwrite the reform program will fundamentally alter the “structure of incentives” (a term borrowed from William J. Baumol’s “Entrepreneurship: Productive, Unproductive and Destructive”), for small business owners.

She points to several ways that could happen: high taxes will diminish the amount of working capital companies have available; the tax structure places artificial constraints for the number of employees (fewer than 25) for small businesses to remain in a lower tax bracket; and small business owners’ energy will be diverted from innovating products to innovating ways to not pay more taxes. Ultimately, she argues higher taxes will diminish a strong spirit of entrepreneurialism in the United States. She writes in her blog:

With the small business growth having led us out of most recessions in the past, get ready for this sector to add jobs far more slowly and with far greater caution than it had previously — a big blow to an economy that desperately needs a vibrant and growing small business sector.

At the macro level, the effects of higher individual taxes on rates of entrepreneurship are without an exception, negative. It is well accepted, and has been for decades, that the desire to have a vibrant entrepreneurial economy is at odds with the desire to operate a welfare state, due in large part to the way in which welfare states allocate resources. When the upside to undertaking the risks of entrepreneurship decrease, and the downside of not doing much at all are limited, it becomes hard to justify making the effort. If it is possible to live quite a comfortable life without too much bother, why take on the long hours, the worry and the headaches of small business ownership?

Photo credit: apox apox

As the debate over the revamped health care system intensifies this week, one of the central arguments on both sides of the aisle is about cost. New research from Professor Frank Lichtenberg suggests that increasing health insurance coverage could be key in lowering rates of health spending. That underscores a central premise of Obama’s healthcare plan to expand coverage while reducing costs.

“It is almost a presumption in the debate that uninsured Americans are not getting medical care and therefore their health outcomes are compromised,” says Lichtenberg.

“But there is a lot of evidence that people who lack health insurance still get medical care, albeit in a costly and inefficient matter. They go to the emergency room instead of seeing a doctor on a regular basis,” he says. “Therefore, it is more costly for people to be uninsured.”

Data from Lichtenberg’s research, published by the National Bureau of Economic Research, focused on the reasons Americans are living longer. Using state-level data, he found that higher quality of medical care, newer drugs and better diagnostics are the principal factors for increased life expectancy. However, he also found a correlation between increased health insurance coverage and a slower growth in per capita health spending.

“States where health coverage is expanding faster actually have lower rates of growth for health expenditure,” he says.

“I think that is part of the reform pitch Obama is making, that we can’t afford not to have a much higher rate of coverage and my results are consistent with that,” says Lichtenberg. “It’s not that people are going to live longer, but they won’t live any less long, and it will actually save the system money.”

Photo credit: Tim Hoffman

This past Monday, President Obama announced a series of proposed changes to the tax code. The changes include a reform of a long-standing tax deferral for multinational companies on revenue drawn from their foreign operations, a permanent extension of an R&D tax credit and a curb on offshore tax havens.

Professor Andrew Schmidt says the Obama administration hopes that the overall effect of the proposed corporate tax code changes results in a shift of more investments to the United States by effectively minimizing the incentive for foreign growth and improving resources for R&D in the U.S.

“The idea is that eliminating the tax deferral will drive up [companies with foreign operations’] tax rates and potentially curb the incentives to invest overseas. The result could be reduced investment in foreign operations as firms may have less cash to expand plants or factories,” says Schmidt.  “The revenue raised by eliminating the tax deferral would then be used to permanently extend the R&D tax credit, which would encourage firms to make some of these investments in the U.S. instead.”

He adds, “The R&D credit was a temporary provision and was re-upped every few years when it was about to expire. By making it permanent, firms can rely on that subsidy and not wonder if it will expire. This will be a big deal to certain industries, like Big Pharma, which has heavy R&D.”

On the issue of curbing tax offshore tax shelters — a political hot potato — Schmidt says that one effect would be a reduction in the tax gap, which according to the most recent figures from the IRS (fiscal year 2001) is between $312 and $353 billion.

Listen to an interview with Professor Schmidt on WNYC.

Photo credit: kalavinka

Is the tale of Exubera — an inhalable form of insulin that Pfizer launched in 2006 and withdrew in 2007 after poor sales — a bellwhether for Big Pharma?

“It taught me that the organization lacked accountability and the willingness to make hard decisions,” Jeff Kindler, chairman and CEO of Pfizer, said in a recent address to students as part of the Silfen Leadership Series. “But we have made a lot of changes over the last two years and we’re dramatically different now. That’s why we are able to do the Wyeth deal.” (See post, “A Perspective on the Pfizer-Wyeth Merger.”)

In an hour-long lecture, Kindler, who came to Pfizer in 2002 from the McDonald’s Corporation and who has been in the company’s top post since 2006, discussed how Pfizer is changing its strategy to confront impending patent expirations and other value chain challenges, such as the company’s declining stock price and public opinion of leadership. He also discussed the company’s integration with Wyeth.

“Every element of the value chain had been severely challenged, and many people think the Big Pharma model is irreparably damaged,” he said. However, Kindler said that January’s merger with Wyeth represents a “terrific diversification” and a “big change in the blockbuster business model.”

Kindler said Pfizer is focused on six strategies: investing and focusing in areas of unmet need such as Alzheimer’s, oncology and inflammation; becoming a leader in biotherapeutics; having a larger presence in the area of vaccines; taking advantage of its position in developing markets where there is large unmet need; establishing more generic products; and strengthening other areas, such as animal health products.

“[The Wyeth acquisition] puts us in a position to advance every one of these strategies. When we’re complete, we will be extraordinarily diversified and able to operate across the whole health spectrum,” Kindler said.

Photo courtesy of Columbia Business School

Throughout my time at the School, I really wanted to come up with The Next Great Idea. It didn’t come then, and I waited for the right opportunity to arrive. In 2007, I had the idea for ZocDoc, an online service to connect patients with doctors, and I quit my job to give all of my time and attention to the company. The challenges came right away. But so did the lessons.

The common attitude towards business school is that grades don’t matter. True as this may be, your reputation does. People need to know they can count on you. This served me well when we were looking for angels — half of ZocDoc’s angel investors were classmates of mine.

Though many people supported me in this venture, I definitely heard “This will never work” more than I cared to. But I pressed on. Healthcare is the largest sector of the U.S. economy, and it also happens to be plagued with problems. It was always my intention to fix one simple problem instead of trying to fix them all, and I think this is an effective way to succeed in the healthcare sector. Focus on one problem and do it better than anyone else.

With the nation’s current climate, I’m glad to be working in healthcare. It has always been a strong industry, and with the economy we have now, ZocDoc isn’t affected as much as other startups might be. People will always need to find a dentist or a doctor. Also, healthcare seems to be high on the Obama administration’s agenda, and we look forward to positioning ourselves as a leader in the changing landscape that surely lies ahead.

The future of healthcare in America is bright, and if you are interested in starting your business in this space, be patient with yourself. Wait for the right idea, and then go for it. All in.

Merck announced yesterday that it is acquiring Schering-Plough in a stock and cash deal valued at approximately $41 billion. The move follows Pfizer’s announcement in January that it will acquire Wyeth in a $68 billion deal (see blog post “Perspective on the Pfizer-Wyeth Merger”).

The rationales behind these acquisitions are similar. Both Pfizer and Merck are reacting to the industry’s perceived overcapacity on a global basis and are seeking to broaden their technology platforms. The companies each face slowing revenue growth as a result of the unique life cycle of prescription drugs (where sales of a major product can vanish in a matter of months upon patent expiration) and a downturn in the number of new drug approvals. Lastly, Pfizer and Merck see their respective horizontal mergers as significant opportunities for cost savings.

For Merck, the acquisition of Schering-Plough broadens its product line, research pipeline and technology platform (e.g., biologics) and creates a larger base so that no single product has a material impact on the company’s earnings or infrastructure. The acquisition will also allow Merck to “smooth” earnings post 2010 when the patents on two of its main drugs, Cozaar and Singular, expire. In addition, Merck can consolidate the joint venture it has with Schering around blockbuster cholesterol-lowering drugs Vytorin and Zetia for more effective decision making.

The transaction raises a number of questions, however. First, there is an inherent integration risk complicated by Merck’s relative lack of experience in orchestrating these large transactions and the ongoing integration of Schering’s earlier acquisition of Organon. Merck is also betting on the strength of Schering’s research and technology platform and promise of its pipeline. There also may be questions involving Schering’s arrangement with Johnson & Johnson around Remicade and its follow-on a rheumatoid arthritis drug (hence the rationale for the reverse merger) — plus there is growing competition in that category. The ability for Merck to reignite growth of the Vytorin/Zetia franchise also will be a challenge. Lastly, the new combined entity remains reliant on the global prescription drug sector that faces increased challenges and threats.

Bottom line: the deal can be viewed as a logical response to an industry that has overcapacity, unique (and now shorter) product life cycles, and slowing top-line growth. Merck and Schering-Plough have largely complementary therapeutic and product portfolios and technology platforms, and have been working together for years through the Vytorin/Zetia joint venture. The key questions relate to execution risk, i.e., Merck’s ability to integrate without major disruptions to its business, and whether this transaction will materially improve Merck’s longer-term growth prospects.

However, the transaction shows Merck management is willing to take bold action in seeking to strengthen the company in the face of an increasingly challenging and competitive environment.

Photo courtesy of Schering-Plough

Last August I talked about the actions Big Pharma may take to address its slowing top-line growth and the upcoming slew of major drugs facing patent expiration in the next several years. A “horizontal merger” was one option discussed, and yesterday Pfizer proceeded with that strategy with its $68 billion acquisition of Wyeth. So why did Pfizer pursue this strategy, and will it encourage other Big Pharma players to pursue a similar approach?

One contributing factor to Pfizer’s deal with Wyeth is the company’s impending loss of patent exclusivity for its blockbuster drug Lipitor in 2011. Lipitor had $12 billion in sales last year, amounting to 25% of Pfizer’s total sales. However, Pfizer is also keenly interested in gaining access to Wyeth’s long-established biologics expertise and portfolio (Pfizer did not have critical mass in this area), its promising (albeit risky) experimental Alzheimer’s drug, as well as its vaccines franchise, consumer healthcare business and animal health franchise. The deal broadens Pfizer’s portfolio and provides added flexibility in managing earnings over the next five years.

However, the deal is unlikely to contribute to top-line growth in the near term for several reasons. Wyeth has its own patent expiration issues over the next three years, and large pharma mergers are inherently disruptive, particularly to R&D divisions, which are the lifeblood of these companies. The acquisition premium Pfizer paid (approximately 30% over last week’s price) will require Pfizer to be very aggressive in cost-cutting to make the deal accretive to earnings by year two, and that may exacerbate the organizational disruption. Pfizer announced it was cutting its dividend in half to help finance the acquisition (one of the reasons investors previously held Pfizer shares was its high dividend yield).

Will we see other Big Pharma mergers in the near term? Well, virtually every company is considering the possibility, however, challenges remain for other deals, including pricing, financing, social issues (such as who will run the combined entity), antitrust and expected market reaction. Two of the major players are already tied up in other large transactions: Roche’s bid for the remaining shares of Genentech that it does not already own, and Novartis’s two-step acquisition of a controlling interest in Alcon. It is doubtful that the Pfizer deal materially changes the competitive dynamics in the industry. Other Big Pharma players must consider their own internal capabilities and growth prospects and determine whether it is worth taking on the inherent risks of a large pharma merger in today’s competitive economic environment.

Photo credit: Dan Buczynski

This is part of a series of posts on healthcare industry topics that will be discussed at the Columbia Business School Healthcare Conference on November 21. The “Payor/Provider Panel” will discuss new paradigms in medical cost and outcomes management and how these paradigms will be impacted by the election of Barack Obama.

Attempting to restrain healthcare spending in the U.S. is a bit like trying to extinguish a forest fire: while one of the smaller fires on the periphery may be easy to put out, the ones deep in the core of the forest are much more difficult to stop. Many of the propellants that have fueled national healthcare expenditures are deeply entrenched (“core”) aspects of either the healthcare system or our society’s values. As such, they have largely resisted many of the efforts made to control them.

According to the the Centers for Medicare and Medicaid Services, the share of U.S. GDP devoted to healthcare grew from 9.1% in 1980 to 16.0% in 2006. By 2016, healthcare expenditures are predicted to grow to $4.2 trillion dollars, or 20% of GDP. It is clear that it is necessary to control costs; however, the current recession will make doing so even more challenging.

Here is a cross-section of the social and logistical issues that cloud cost-cutting:

National Wealth

In spite of a potential global recession, the U.S. is likely to remain one of the wealthiest nations on earth. U.S. per capita spending on healthcare is 48% higher than that of the next highest-spending country (Norway) and 83% greater than Canada’s, according to the Organization for Economic Cooperation and Development. Princeton’s Uwe Reinhardt points out that the “ability to pay, as measured by GDP per capita, has repeatedly been shown to be one of the most important factors” driving a nation’s healthcare spending.

Administrative Costs

The U.S. healthcare financing system is very complex and entails significantly higher administrative costs than those of other countries. A study by Harvard Medical School and the Canadian Institute for Health Information estimated that approximately 31% of U.S. healthcare expenditures ($1,000 per person per year) are directed to administrative costs, about double what is spent in Canada.

System Inefficiencies

Poorly coordinated care, variations in provider practice patterns and misaligned financial incentives are just three of the inefficiencies of the U.S. healthcare system that drive up costs.

Cost of the Uninsured

A recession could force a greater number of people to live without insurance. The cost of paying for these patients when they show up at our nation’s emergency rooms is exorbitant and borne by the general public.

Cost of Technology/Resistance to Rationing

Most of the major medical technology/life science innovations over the past two decades have been priced at substantial premiums to previous technologies. In the absence of national pricing/reimbursement reform, this pricing structure will probably remain intact. The desire of Americans to always have the best doctors and the newest technologies drives up costs. Modestly intrusive practices that control the use of the most expensive treatment options, such as therapeutic substitution and step therapy, have gained some traction in the pharmaceuticals marketplace. More intrusive restrictions, such as rationing care or establishing annual cap amounts over which all care becomes out-of-pocket (a practice employed in some European countries), are much less likely to take hold. Outside of Oregon, America is probably not ready for measures as radical as rationing care.

Graying of America/Expense of End-of-Life Care

Healthcare expenses for persons over 65 are about three times those of the under-65 population, according to government data. When it comes to end-of-life care for relatives, most Americans want to keep family members alive as long as they have a “fighting chance.” Approximately 10-12% of the total national healthcare budget and 27% of the Medicare budget is spent on end-of-life care, according to the Center to Advance Palliative Care (CAPC). Like rationing, euthanasia is not likely to gain a foothold in the U.S. anytime soon, if ever. With the aging of our nation, this “core” issue will only grow in prominence. According to the U.S. Census Bureau, the percentage of the U.S. population over 65 will increase from 12% in 2006 to 20% by 2030.

What thoughts or questions do you have about healthcare spending? Please share your comments.

While the Olympic games and Michael Phelps’ spectacular array of medals distracted us for a few weeks, the political season is now back upon us in full force. John McCain and Barack Obama are sparring on a number of topics, but remarkably there is one issue on which they agree: “taking on” Big Pharma.

However, it is their support, not attacks, that the industry really needs. Drug companies today are in their most precarious positions ever; budgets are being cut and employees are being let go in record numbers. Investors, realizing this, have taken the market caps of nearly all the major U.S. drug companies down dramatically — Merck and Pfizer, the traditional industry leaders, have each lost about half their value since the beginning of this decade.

We can no longer assume that this industry will continue to pursue the business model that created many of today’s medical miracles and enabled many others. Anyone reading this might already be familiar with the numbing economics of the drug business today. It takes an average of one to two billion dollars to bring a new drug to market and a decade or more to develop it. On top of this, nearly every project that begins in the laboratory ends in disappointment. This, more than any other reason, is why nearly every new therapy is invented and developed in the private sector. Governments and academia lack the stamina to sustain repeated and expensive failures.

Politicians who really care about our future, our health and our happiness should today be worried that the drug industry won’t be able to fulfill its mission, that it won’t keep supplying us with the new drugs and vaccines that we need to keep our healthcare system functioning and solvent in the face of the massive influx of the aging Baby Boomers.

The Baby Boomers are coming, and they are bringing with them chronic conditions as they age in numbers we’ve never seen before. Take Alzheimer’s disease for example. More than one in 10 people who live past age 60 will become a victim of the disease, and for those who live past 80, the figure approaches half. The Alzheimer’s Association projects that treatment costs for Medicaid alone will increase by $100 billion per year from 2005 to 2015.

The Boomers also bring something new to healthcare: an absolute belief that they are entitled to the best care available. This sense of entitlement and their willingness to use their political and legal power to get it means that demand for sophisticated healthcare will skyrocket in the years ahead.

The only realistic way we can satisfy the needs and expectations for healthcare over the next three decades is with new technology, new drugs, new biologicals and new vaccines. We need meaningful treatments for Alzheimer’s, congestive heart failure, cancer and all the other conditions for which current treatments are still vastly inadequate. It is in the laboratories of the drug companies who are today investing over $40 billion each year on R&D where these advances will happen. These companies — who are putting billions on the line into high-risk projects to improve public health — need a government that understands that they deserve to make a good economic return when they are successful.

But there is little hope that you’ll hear any of this from either campaign this fall; the “get tough” rhetoric polls too well. Maybe when the campaign is over, our new president will realize that we need to nurture pharmaceutical innovation, not attack it.

As part of an ongoing series, the Wall Street Journal asked top political and business leaders how they would spend $10 billion to create solutions for some of the world’s problems. Sidney Taurel ’71, chairman of Eli Lilly & Co., expressed his wish list in an op-ed in Monday’s paper.

“I would invest half of the $10 billion in comprehensive treatment programs that could be sustained by the countries with high incidence of [malaria, tuberculosis and HIV/AIDS], and which have leaders committed to long-term solutions,” Taurel writes. “I would use the remaining half of the $10 billion to foster investment in research, and I’d leverage it as I would the treatment programs — by working to make it sustainable.”

What problem would you tackle — and how much would you spend — to make significant progress solving a global crisis? Please add your comments.

This is the first in a series of blog posts on healthcare industry topics that will be discussed at the upcoming Columbia Business School Healthcare Conference on November 21.

As growth slows in the pharmaceutical sector, shareholders are putting pressure on companies and their executives to make some difficult decisions. Pure-play companies — the ones focused on discovering, developing and marketing breakthrough prescription medicines — must decide whether to remain as is, diversify into other healthcare businesses, merge with another global pharma company or find other means to grow their businesses and/or diversify their risk.

Major pure-play drug companies generate more than 90 percent of their revenues from branded, not generic, prescription drugs. Top-line industry growth is slowing from the double-digit figures we saw between 2000–2003 and is now expected to reach low single-digit growth over the next five years. There are several reasons for this:

• Companies face patent expirations of their largest drugs and eight of the 10 largest products today will lose exclusivity in the next four years, which represents more than $50 billion in sales
• New product approvals in the past year were the lowest in a decade
• Cost–containment efforts by third parties that pay for drugs (governments, insurers) are forcing companies to prove that their drugs are not only safe and efficacious but are also cost-effective

On the plus side, there remain large areas of unmet need (cancer, Alzheimer’s disease, obesity, diabetes, vaccines) and new developing markets (BRIC) to penetrate. As well, better technology is improving drug’s chances for success. Despite the industry’s declining growth rate, these pharma companies have among the highest profit margins and most are sitting on hordes of cash with little debt. They are among the highest valued companies in the world — a far different scenario compared with other industries under assault (auto, airlines, financial services, retail, etc.).

Diversify or stay “pure”?

So is this the time to pursue a new diversification strategy for these global pharma companies?

Drug giant Novartis apparently thinks so. In the past few years, the company has spent $8 billion to acquire a large generics business (Hexal), $5 billion to acquire a vaccines and diagnostics company (Chiron) and recently announced a two-step $40 billion acquisition of a 77 percent interest in an eye care company (Alcon).

Contrast that strategy to drug company Bristol-Myers Squibb, which spun out its orthopedics business (Zimmer) and sold its U.S. consumer health business (to Novartis). It recently announced the sale of its wound care business ConvaTec and plans to spin out a portion of its nutritionals business (Mead Johnson). All this is in order to focus more on its core branded prescription pharmaceuticals business.

A major acquisition of a large, faster-growing healthcare-related business may diversify the risks inherent in drug development and enhance growth; however, companies will pay for this growth in high acquisition costs (using cash and/or lower PE stock) without assurance that sufficient synergies will be generated to cover the acquisition premium.

Purchasing a large generics business may be a possible solution given the large number of drugs coming off patent, the attractiveness of “biogenerics” and use of generics in emerging markets. However, operating margins are lower in that competitive segment due to heavy price competition (especially in the U.S.), and the generics business is a very different business/operating model from the research-based branded pharma companies.

The “urge to merge” was strong in the mid 90s. Today it has lost some luster. Companies (and investors) are concerned about the integration risks of combining two global drug companies and question whether this would indeed enhance top-line growth.

Stay the course

The likelihood is that these major pure play pharma companies will stay the course — at least for now — with the belief that their research pipelines, augmented by targeted acquisitions, will generate a sufficient number of innovative drugs and vaccines to sustain competitive growth rates. Payers and investors should continue to reward innovation. Meanwhile the companies are cutting costs and seeking efficiencies in their global businesses to sustain modest growth, high profit margins and favorable dividend yields.

Will this strategy work? Stay tuned!

Photo credit: Michelle Tribe

Now Reed and Eric Chesin ’09 have come up with a way for pharmacies to organize medications that increases the chance of compliance. The idea, Bluepak, recently won CBS’s 2008 Outrageous Business Plan Competition; their elevator pitch is below.
 

The competition, which is in its ninth year, drew 46 submissions in a diverse cross section of industries. You can see all the pitches in this real media video, including a crêpe business pitch that shows how to make crêpes right in a manila folder.

“Whenever journalists write about emergency room delays, they tend to oversimplify the problem, and they usually connect the increase in emergency room wait times to the increased percentage of uninsured patients. It’s true that the percentage of the uninsured is increasing, but all the research I’ve seen shows that the percentage growth in visits to emergency rooms is greater for insured patients than uninsured patients.

“So it’s not about uninsured people, it’s about people in general. And the reason more people are going to the emergency room is that the wait time to get an appointment with a primary care physician has gone up to an average of three and a half weeks. There are just are not enough primary care physicians, and there’s no financial incentive to become a primary care physician when other specialties are much more high-paying.

“And while the growing difficulty in access to primary care is certainly a factor in the growth of emergency department visits, it’s likely not the only cause. We are also experiencing increased numbers of people with diabetes, heart disease and other serious chronic diseases, and these also contribute to the increase in visits.

“There is also a growing number of patients being ‘boarded’ in emergency departments while waiting for an inpatient bed. These require the attention of the emergency department physicians, which results in the physicians having less time available for the new arrivals into the department.

“Hospitals do try to adjust the number of physicians that are on call to accommodate patient flow — for example, they realize more patients show up at noon than at two in the morning. They just don’t do it very well because they don’t know how to do it very well. Most hospitals are not run by MBAs. They are run by physicians, and physicians aren’t familiar with management techniques that are used in other industries. Banks, supermarkets, airlines and call centers all use mathematical models. Hospitals don’t use these mathematical models so it’s not surprising that they don’t operate efficiently.

“It does take up a lot of time and energy from the hospital managers to keep the hospital afloat. Most hospitals are in financial straits — one third of them operate in the red, and they don’t focus on emergency rooms because it’s not where they make money.”