CFA Society Thursday, February 7, 2013

Harry R. Jacobson, M.D.

Costs are too high and rising too fast (Despite the fact that cost reduction has been a

central goal for over 20 years!) Quality problems are pervasive – medical

errors occur at high rates. There is an amazing gap between what we

know and what we do. Variability in practice is huge. Proven medical advances take years to be

widely implemented.

$253 Billion

$714 Billion

$1.35 Trillion

$1.98 Trillion $2.42 Trillion

$2.70 Trillion

0

0.5

1

1.5

2

2.5

3

1980 1990 2000 2005 2007 2011

$ Tr

illio

ns

3

Source: Centers for Medicare & Medicaid Services, Office of the Actuary, National Health Statistics Group; U.S. Department of Commerce, Bureau of Economic Analysis, and U.S. Bureau of the Census.

9% GDP

17.9% GDP

16% GDP

15% GDP

12% GDP

13% GDP

2002 – 2012 8.6% average annual growth rate in Medicare spending. Enrollment growth only 2% annually

2012 – 2020 (Forecast)

5.9% average annual growth with enrollment growth of 3% annually (probably too optimistic)

Why? •Non-physician provider payment reductions (this money will go towards expanded government coverage so no overall budget savings) •Physician payment reduction from SGR in the BBA of the 90’s (this will not happen) •Reduction in payments to Medicare Advantage Plans (Doesn’t address the 75% of Medicare beneficiaries that are in fee-for-service)

Price Providers Charge • Salaries/Incomes of Health Care Workers (Doctors) • Costs for Prescription Drugs, Devices, Equipment, etc. • Uncompensated Care

“Overhead” Reflected in Price Providers Charge • Administrative Costs for Billing, Collecting, Compliance, etc. Embedded in Providers • Readiness Factor – Cost of Building, Owning, Maintain Certain Infrastructure – Level 1 Trauma

Centers, etc. • Cost of “Over Capacity” • Malpractice

“Overhead” Elsewhere • Administrative Costs Within Insurers

Volume • Lack of Evidence-Based Decision Making • Variability in Practice • Overuse, Misuse, Underuse of Resources

GAP

Price Overhead

Volume / Variability

Insurer

Provider

U.S. Europe, U.K., Canada

($100B) ($300B) ($600B)

Development of: • Prospective payment systems • Payment mechanisms • Managed care plans • Consumer-driven health plans • Medical savings accounts • Accountable Care Organizations - ?

No Significant

Impact

Traverse City, MI 50.1% Fort Lauderdale, FL 41.8% Birmingham, AL 32.0% Columbia, SC 19.6%

12 Dartmouth Atlas of Healthcare 1999

Elyria, OH Jonesboro, AR Ashville, NC York PA

16.9 15.0 2.6 2.5

13

Dartmouth Atlas of Healthcare 1999

Redding, CA 11.5

Bloomington, IL 9.8

Santa Rosa, CA 3.6

Albuquerque, NM 3.1

Dartmouth Atlas of Healthcare 1999

McAllen, TX $ 9,033

Miami, FL $ 7,783

San Luis Obispo, CA $ 3,553

Lynchburg, VA $ 3,074

Dartmouth Atlas of Healthcare 1999

Source: Data from The Dartmouth Atlas of Health Care, www.dartmouthatlas.org

Variation in practice results in: • Excessive cost • Under intervention • Over intervention • Poor outcomes

Variation results from: • Poor information sharing • Lack of agreed upon standards • “Cookbook” medicine opposition

6712 Individuals in 12 Cities Only 54.9% received recommended care Only 54.9% received recommended preventive care Only 53.5% received recommended acute care Only 56.1% received recommended chronic care

Examples: Hip Fracture 22.8% (Range 6.2-39.5%) Atrial Fibrillation 24.7% Depression 57.2% Senile Cataract 78.7% (Best performance)

E.A. McGlynn, et. al., NEJM, June 26, 2003

Screening Prevention Education Routine Acute Care Serious Acute Care Management of Chronic Illness Rehabilitation Senior Care End-of-Life Care

The New Paradigm

Innovation in the Delivery of Healthcare Services

Innovative Service Delivery

Healthcare Services Demand Modules

Screening Prevention Education/ Behavior

Modification

Routine Care

Serious Acute Care

Chronic Illness Mgmt

Rehab Elder Care End of Life

OUTCOMES Quality Cost Right care, right

place, right time

SCIENCE Tools: drugs,

devices, diagnostics Knowledge:

evidence

2 1 1 4 - 5 4 - 5 2 3 2 1 - 2

20

Workforce

Process

Venue

Supporting Technology

Performance: 5 = Outstanding, 1 = Poor

In 2011 12 million jobs in health care (1 out of every 11 workers; 5.5 million hospital jobs)

7 of the 20 fastest growing occupations are health care related

Health care creates 250-300,000 new jobs a year

1. Service Providers Hospitals, outpatient facilities, specialty groups, etc.

2. Payors/Insurers Aetna, Cigna, United, Anthem, Blue Cross Blue Shield, etc.

3. Pharmaceutical Merck, Pfizer, Lily, Novartis, etc.

4. Medical Devices Medtronic, Boston Scientific, Stryker, etc.

5. Information Technology McKesson, Cerner, Eclipsys, etc.

6. Biotechnology Amgen, Biogen, Genentech, etc.

BIOTECH

INNOVATORS

ADMINISTRATORS/WATCHDOGS

SERVICE PROVIDERS

Physicians

HCIT

Pharma

Device

Hospitals Outpatient

Facilities

Insurers

Regulators

Long Term Care

BioTech

Professional Societies/

Special Interests

Accrediting Agencies

DM

Employers

CAM

Media

Academic Medicine

CONSUMERS

Allied Health Professionals

Advances in science are creating unprecedented opportunities to create diagnostics and therapeutics that can improve quality of care, make care more individualized, and bring true value (better outcomes at a lower cost) to care.

24

Genomics Proteomics Pharmacogenomics

Biomedical Engineering Physics Chemistry Nano-Science

Chemical Biology Structural Biology Pharmacology Biotechnology

Advances in Medical Technology – The Opportunity

25

The marriage of Physics, Chemistry, Biology, Mathematics

NEW SMALL MOLECULE AND BIOLOGIC THERAPEUTICS

NEW DIAGNOSTIC AND THERAPEUTIC DEVICES

PERSONALIZED MEDICINE

Sir William Osler (Circa 1910) was not the last man to think he knew everything there was to know – he was just the last man to be right about it

Ignorance has increased as information has exploded

Informatics – the science that deals with the structure, acquisition, and use of information – it’s not about recording things o a computer but about the tough job of orchestrating an ever changing evidence based toward the goal of efficiently improving health outcomes

At its core the maintenance of health and the restoration of health depends on making the right decisions based on the best evidence. Health care is an information dependent service business – the right information, in the right setting, at the right time. When this fails, we get variability in practice, overuse and misuse of resources, and suboptimal outcomes (including medical errors).

27

All investments focused on healthcare All portfolio companies should improve patient

care The funds: ◦ TriStar I – TNINVESCO-$500,000-$1.5 million ◦ TriStar II - $500,000 - $2.5 million ◦ Medcare - $5 million - $150 million ◦ Epiphany – Startup - $50 million

Only invests in service innovation

Portfolio Company Fund BioStable 2

Cerebrotech 2

Cobra Stylet 2

Device Innovation Group 1

Diabetes Care Group (DCG) 1 & 2

Diagnovus 1

Goba 1

MedCenterDisplay 1 & 2

Molecular Sensing 1

OnFocus Healthcare 1

Pathfinder 1

VenX 1

Ambulatory Services of America (ASA)

BioNumerik Cardiovascular Care

Group (CCG) CeloNova Biosciences Diabetes Care Group

(DCG) digiChart G-Con

Informatics Corporation of America (ICA)

MedSolutions Outpatient Imagining

Affiliates (OIA) Quality Health Care

International (QHCI) Refocus Group Seno Medical

Sector Revenues

R&D as % of Revenues

Pharma $200 Billion 12-14% Biotech $75 Billion 15-20% Medical Technology $140 Billion 10-12% Services (hospitals, clinics, extended care facilities, physicians)

$1.6 Trillion

Almost nothing**

* U.S. total R & D spending as % of GDP – 2.62% ** AHCs should be the R&D engine for the service sector just like they participate in R&D in the other sectors

Healthcare Services Innovation Services are largest system cost

Conduit for biotech, devices and IT innovation

Outdated governance and business models

Inefficient coordination, collaboration and consistency

Sub-optimal use of diagnostics, therapeutics and evidence-based medicine

Starved for innovation capital

Source: Centers for Medicare and Medicaid Services.

U.S. Healthcare Expenditures: 2010

Source: PriceWaterhouse and National Venture Capital Association MoneyTree Report.

Healthcare VC Investment by Sector 1995 – 2011 ($ billions)

Biotech Med Device & Equip Healthcare Services

$1.0

$0.0

1995 2000 2005 2010

$2.0

$3.0

$4.0

$5.0

$6.0

$7.0

Investment Process STAGE 1: CONCEPT DEVELOPMENT

- Identification -Risk / Return Assessment

- Preliminary Research - 20+ Concepts

STAGE 2: CONCEPT VALIDATION - Management Team Identification

- Preliminary Business Plan - Initial Investment Committee Review

STAGE 3: INITIAL SEED FUNDING - Management Team Engaged

- Detailed Market Research - Multi-year Strategy and Capital Plan

- Approximately 7 Companies - Average Investment of $750k per Company

STAGE 4: INVESTMENT COMMITTEE REVIEW - Assessment of Viability and Return Potential

LAUNCH FUNDING - Proof of Concept Phase

- Approximately 5 companies - Equity Financing of $2.0 - $3.0 MM

EXPANSION CAPITAL - Commercialization Phase

- Approximately 4 Companies - Equity Financing of Up to $10.0MM

GROWTH CAPITAL - 3 to 4 Companies

- Equity Financing of $30.0 - $40.0 MM

EXIT - Sale to Private Equity Firm

- Strategic Sale - Initial Public Offering

- Growth Recapitalization

Estimated 90%+ of investable capital deployed to most successful companies

Estimated 4-6 year cycle per company that achieves exit

Costs of Diabetes $ 4,400 Average annual health care costs / person without diabetes. $11,700 Average annual health care costs / person with diabetes. $20,700 Average annual health care costs / person with diabetes and complications.

____________________________ Based on data from 10 million United Healthcare members.

“The United States of Diabetes: Challenges and Opportunities in the Decade Ahead”

United HealthGroup Center for Health Reform & Modernization, November 23, 2010.

Background Diabetes Care Group’s clinical model:

- enables individuals with diabetes and related metabolic disorders to manage the disease

- allows health plans and self-insured employers to eliminate or reduce the preventable medical costs of diabetes and its related complications

Developed as a prototype in a single market, the business model

has proven cost-effective, portable, reproducible, and scalable within the market.

The clinical model is the functional equivalent of a medical home for individuals with metabolic disorders and is translatable to other disease states and populations.

Economics of DCG Model

“The essence of the DCG model is its proven ability to improve A1c levels among diabetics. A clinician looking at the results … understands the importance of what has been achieved. The economic analyses are designed to provide a full context for what these clinical results mean for third party payers, employers, and society.”

DCG Outcomes / Economic Consequences

Actual twelve month outcomes for DCG patients with severely

out of control diabetes (A1c > 9.0)

Donald H. Taylor, Jr., Ph.D. Sanford School of Public Policy Duke University

Virtually all medical costs associated with the preventable complications of diabetes and other

metabolic disorders are preventable, and prevented, by the timely application of the DCG program.