Insights (Essays)

Insights (Essays) September 2015

In July 2015, Omar Ishrak, Chairman and Chief Executive Officer of Medtronic, spoke in Toronto to a group of senior healthcare leaders at an event co-sponsored by Medtronic Canada and Longwoods Publishing Corp. Mr. Ishrak shared his thoughts on the potential benefits and desired outcomes of transitioning to value-based healthcare.  Following his talk, Mr. Ishrak sat down with Michael Decter, former Ontario Deputy Minister of Health and founding Chair of the Health Council of Canada to further discuss his perspective on the issues.

Medtronic is the world’s leading medical technology company, with more than $27 billion in annual revenue, and operations reaching more than 160 countries worldwide. Medtronic offers technologies, solutions and therapies to treat a wide range of medical conditions, including cardiac and vascular diseases, respiratory, neurological and spinal conditions, diabetes, and more. Medtronic’s mission is to alleviate pain, restore health, and extend life for millions of people around the world.

Decter: The debate in Canada is whether you should pay physicians a fee for service or pay them on a capitated model.

Ishrak: I think that's fundamental. The alternative to fee-for-service is capitation, and value-based healthcare is in fact capitation. That's why the outcome is so important – you've got to lock in a certain desired outcome. If you're not specific about the outcome (granular and specific), what the outcome measures are (functional as opposed to activity), and that the time horizon is very specifically defined (because it'll change over time) – you can always cut the cost by not providing care. So you don't have a governor, a counterbalance, to that requirement. That's why I feel that the proposal that CMS [Centers for Medicare & Medicaid Services] has just made is so appealing – it defines the outcome, it defines the time horizon, and it has a penalty if you don't reach those outcomes.

I think if you do that, then the fear of capitation goes away. Then you can talk about cost reduction through efficiency, because you're not going to compromise care and because the penalty for compromising care is going to be greater than the penalty for inefficiency.

Decter: In this iteration of U.S. healthcare reform and what the accountable care organizations are doing in terms of these newer models, there is more hope for getting genuine efficiencies rather than just managing costs in a way that sheds care or sheds quality.

Ishrak: That did not work in the U.S. What was tried in the ‘90s was to some degree capitation, and that didn't work, and for the right reasons. I think this situation will. I'm optimistic that we're going to find some route toward this goal. I would have preferred if the move had been more decisive. The realization that there is in fact a win–win here has really not been driven home effectively and there's a fear that there's a win–lose.

Decter: It is harder to translate from large-scale Phase 3 trials to actual economic benefit. It seems to me that you are in a real leadership position, given your scale and global nature and the nature of the diseases you're dealing with in different parts of the world, where people still aren't getting basic things like pacemakers. How does your strategy differ – how does it differ when you compare India with Canada?

Ishrak: The notion of a value-based system is good for everybody – if you're going to create a system from scratch, you should think about it that way. However, on the scale of problems, the access problem in India or China is far greater than in the developed market. So the priority in those countries is actually just to provide access – first, to people who can simply afford the care. There's enough of a population who can afford the care, either because it's already reimbursed in some fashion or because they can pay out of pocket. That redirection of discretionary funds toward people's own healthcare – an extension of their own life – is enough to create an infrastructure and create economies of scale that will provide a greater degree of affordability to the people. If you address people who can afford the care at the beginning, you can in fact create a system through which that affordability will start to trickle down, based just on higher volumes.

The cost will come down. It will reach the next level, and the numbers are so large that it will make the entire developed market pale in comparison to what we can achieve. I think that will have a dramatic influence on the economics of healthcare, and so how to address that is really, in our view, a priority, rather than addressing the bottom of the pyramid first. Here, it's a redirection of funds and an organized approach to identifying patients who need care and delivering that care efficiently when they can already afford it. That creates an economy of scale that reduces cost, and you move down the chain. If you start at the bottom of the pyramid, you try to solve too many problems at one time; not that you should completely ignore it, but you should be more selective about the problems you address there.

Decter: I was at a conference in Madrid; the most riveting presentation was by a vice-president of an Indian hospital chain. He put up the provocative title, the $3,500 heart surgery, and then talked about it, and he admitted they weren't at that level. But what was impressive was the operating room; the basic technology was very similar to anything you'd see in North America, but not the surrounding activities. So when the patient was in for surgery, the family was in a lecture theatre, learning about post-surgical care. I was struck that we probably had more to learn from them than they had from us, but those markets are rapidly expanding. They have different cost structures, so do you have issues of trying to be in those markets?

Ishrak: No. You've got a gap for the local markets, and you have to be cognizant of the cultural aspects. And you’ve got to address the cost issue, although I don't want to overplay this because there is money available that needs to be redirected in an efficient fashion. It isn't that money isn't available; if you go to these countries you see the number of hospitals that are not being utilized. It’s not that people can’t afford the hospital but rather an issue with their referral system. They don't have an effective method of training, of finding patients and directing them to areas of expertise. This is about the fundamental affordability of therapy. Then there's an environmental aspect, which you've got to be pragmatic about. So I think that's the way to approach it.

I think you raise a good example because the way in which the family is able to provide support means that the methodology for post-acute care in those settings is going to be different from here. That's fine, but the actual treatment itself is not different. You have to maintain safety, efficacy and quality; you can't compromise it. They do have the advantage of economies of scale – there's no shortage of patients. It's a matter of finding them, and it's a matter of leveraging the scale. That's why I feel strongly that addressing a population who can afford the care – creating scale with that – will automatically reduce the cost to a degree where the next level of affordability will become enabled. Then you just keep going down that chain until you go a long way. By that point, you can start to work on some other methods where access becomes a bigger problem, for example, in villages. You try to solve other problems there. Without any roads, without any system of getting to places, you must address a different layer of complexity, and it must be done in parallel.

Decter: Let me turn in a slightly different direction. You made a major acquisition – Covidien. What lessons have you learned from that?

Ishrak: That was a big acquisition. In many ways, it was complex because of the controversies around the move of our financial headquarters, and there were efforts, both in the media and the government, to make it difficult. We got through it relatively unscathed, only because of a number of principles that were adhered to.

The reason we made this acquisition, very clearly, both through ourselves and the external world, was that it accelerated a strategy that we had already talked about way before we even thought of the acquisition. We could point to that and raise specific terms, not only as a communication vehicle for others but as a business model – sort of a value creation, a financial value creation effort for our shareholders. That led us to working through this process in a very consistent and transparent fashion, and I've got to say that my biggest lesson learned from this is simply the importance of consistency and transparency in the work. In the end, our story never changed because there was no other story. That story was our strategy that led us to speak about it in those terms, and act on those terms, all the way to the integration priorities that we had to a fairly granular level; that consistency helped us internally and externally.

The second reason was because it was consistent and we had no other story; there was no reason for us to be anything but completely transparent about it. We had nothing to hide, and we had nothing to be ashamed of. Sticking to those principles really paid off; it reinforced our belief that if you are consistent and transparent, and act according to what is strategically right for your patients and your overall adherence to your mission, everything else will fall into place.

Decter: I'm presuming you're open to further acquisitions over time?

Ishrak: I think further acquisitions depend on three things. The first, and most important one: does this strategically align or not? Or if you want to change your strategy, is it a big enough thing for you to change it, and why are you doing that? In the end, what does not change for Medtronic is our mission. Strategies may be changed, depending on what we want to do. But in the end, a means toward accomplishing our mission – that's the most important thing. The second piece is do we have the financial bandwidth? Do we have the cash, and can we make the overall ongoing P&L impact – earnings impact – something that we can manage?

And the third is management bandwidth. Is it in our strategy, can we afford to do it, and do we have the people and the capability to take this on? How big is it? Who are the people and specifics? And that varies according to the nature of the acquisition. We might do a very big one, or a relatively big one within a certain business unit or where you have the management bandwidth available, and the process of integrating is more straightforward. There may be others that are smaller but more complex, which will affect your corporate resources or resources that are still tied up in integrating our present acquisition, which is big. That's the way in which you look at it – is it in our strategy? Do we have the financial bandwidth and do we have the management bandwidth?

Decter: How do you move from the work we're in to one that is based on value and outcomes? There is a lot of discussion of that in Canada – very early and somewhat tentative discussions of bundled payments and jurisdiction. There's a tendency in Canada to always look south for models, and I've always been on the side of saying we need to look at Europe because –

Ishrak: Look in every direction but north.

Decter: In addition to the Dutch and some of the Americas, are there places you think Canadians would be well advised to look?

Ishrak: I don't know. I think you can look elsewhere, but no one's got a perfect answer. Being clear about what has to be achieved, setting a roadmap to achieve it, and being decisive about it are more important than looking around. There's no big professor who's imparting wisdom; everyone's trying to figure this out. Being a single-payer system and having a relatively small population to deal with, in relative terms, Canada actually has the capability, and with clear objectives and decisive thinking, to move forward more quickly. The benefits can be seen much more clearly in a system like this, because the single-payer system does have the expense, but it also has the benefit. And you can realize the benefit more effectively than in a highly distributed system like the one we have in the U.S. Although in the U.S., we're more of a single-payer system than one might think, given Medicare and Medicaid, but the delivery is much more fragmented and benefits are realized in all kinds of different pockets. There are subsidies, there's this, there's that – all kinds of different complications that must be pooled together carefully to be able to really accrue the benefits. While in Canada, the simple notion of getting the efficiency, getting the benefits of the efficiency, and then reapplying it to more preventive care can all be done much more effectively by some clear thinking from the top.

Decter: The pooling is there. Canadians are always startled to hear that the U.S. spends more public dollars on healthcare than we spend total dollars, and then in addition to that, they spend some private dollars. But I think some of the emerging innovation in Medicare in the U.S. holds some promise for care.

Ishrak: I think it does. I have a lot of hope that, in the U.S., both in the public and in the private sectors, there's true realization that a move toward value-based healthcare has to happen. There is a level of, for lack of a better word, confusion and let's say inconsistency in the interpretation of what value-based healthcare is and what has to happen. But the general, philosophical concept of moving to a value-based system is well accepted by everybody. What that's done is to create lots of thinking amongst innovative teams to try to address the problem, and we're just one player doing this. I could point to CMS trying this in many different ways, and they've been trying for a while. They did begin to converge it, and I give them credit for that. And insurance companies are also experimenting with this – it's not that people are sitting still. And providers – major providers – are also looking at this, and integrated providers. So I think there's a level of innovation – business innovation – going on that, in some ways, is a little confusing, but I think is highlighting different ideas that make me optimistic for a good conclusion at some point.

Decter: There seems to be a focus on the high-cost patient in every jurisdiction.

Ishrak: I'm not sure it's quite as clear-cut as you say. When I hear people talk, there is still a debate. Although it shouldn't be a debate because they are complementary discussions, but there is an intuitive progression toward either a population health approach or an acute-care approach, almost as though the two approaches are polarized, when one should be a subset of the other. And people get passionate about this, and think, hey, this is the answer, when in fact they're complementary. I find it interesting how many different ways one can define value-based healthcare. If you just say value-based healthcare work, you can define it in acute terms, activity terms or functional terms, and they all have different end points. So if nothing else, there is convergence on definitions, and they all have value. By value, I mean usefulness in their thinking, but you've got to put them in the right context.

Decter: Not all interventions have much evidence behind them and many of them, as I am fond of pointing out, require governments to use up their political capital as people aren’t keen to have what they perceive in the first round as the “nanny state.” And then they come to accept it, but it's different from dealing in a more value-based way, with the episodes of acute care, and so there are definitional challenges. I do think, though, that both U.S. medicare and Canada are starting to understand that we don't do a very good job of being organized outside of the hospital around acute care.

Ishrak: Very poor and very fragmented – that's the linkage. Look, in the end, therapy is the value proposition of healthcare. If you don't have therapy – if you don't cure somebody – why do you bother with healthcare? So that is the central value proposition of healthcare, and thinking about a referral system that feeds a therapy, and post-acute care that maintains the quality of the therapy, is the right way to protect that very expensive episode. That is where their concentration is. I think if the others are mismatched, you get inefficiencies there as well. You’ve got the wrong people getting the therapy, which is a major cost item. It's expensive to do, and you don't get the result. And in fact, it may get more expensive to keep retreating, so the early act of proper stratification and diagnostics to stratify our known therapy has a much higher value than diagnostic works that define a condition that has no treatment. Today, there is no prioritization placed on aligning diagnostics to high-value therapeutics. Not only does that not exist, but that referral chain is not perfect either. I think this is an example of efficiency that can be realized if you look at healthcare in a much more integrated fashion.

About the Author(s)

Michael Decter, former Ontario Deputy Minister of Health and founding Chair of the Health Council of Canada
Omar Ishrak, Chairman and Chief Executive Officer of Medtronic


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