No truer words ever spoken

No truer words ever spoken

“There is growing consensus that transitioning to outcomes-based payment is fundamental to driving cost reducing innovation among providers in achieving a financially sustainable healthcare system. Almost everyone agrees that we must migrate from a largely fee-for-service system to one focused on delivering the best patient outcomes at the lowest possible cost.

Medical device company such as ours need to be cognizant of this as we approach R&D. We will be successful only to the extent that we generate true cost reducing innovations.”

This statement was made by Terry Gregg last week when Dexcom (NASDAQ:DXCM) reported 2014 first quarter results; a statement which should be read and reread not just by diabetes device companies but every company in the diabetes market. The fact is everyone in healthcare agrees that at some point in the future reimbursement for drugs and devices will move away from simple fee for service and be at least partially based on patient outcomes. Diabetic Investor has long been noting that in the future physicians will also be incentivized for helping patients achieve better outcomes.

Diabetes in almost the perfect disease for outcomes based payments for several reasons. The disease continues to grow at epidemic rates and is becoming not just a major burden to the healthcare system but also a very expensive burden. Second, the measurements used to determine good control are well established, it is generally accepted that patients with an HbA1c of 7 or below are under good control those above 7 are not. Third, although we can always use better drugs and devices, most diabetes experts agree that the existing crop of drugs and devices can get the job done when properly used by the patient.

Looking ahead to a world where outcomes based payments becomes a reality Diabetic Investor sees the business of diabetes changing as well. While drug companies will always strive to develop more effective, simpler to use medications in the future they will also focus on making sure patients use these medications as intended. Ask almost any physician who treats patients with diabetes and they will state that medication compliance is the most important factor in achieving better patient outcomes. That being said Diabetic Investor believes in the future drug companies must become more proactive with patients perhaps taking a page from the retail sector offering loyalty or incentive programs to insure patients take their meds.

Diabetic Investor also believes that drug and device companies will become more closely aligned or put another way this move towards outcomes based payments will move us closer to companies that sell a complete diabetes management system, not just individual parts of the system. Back in the day Diabetic Investor envisioned that such a system would include just drugs and devices this was before the explosive growth of mobile technology. There is no question that interconnected diabetes management will be driven not by technology but by this transition to outcomes based payments. The simple fact is when companies and physicians have skin in the game they will do whatever they can to more closely monitor and coach patients using their drugs and/or devices.

Already we are seeing companies like Novo Nordisk (NYSE:NVO), Sanofi (NYSE:SNY) and Johnson and Johnson (NYSE:JNJ) experiment with patient loyalty or incentive programs; programs which include a critical component to achieving better outcomes; patient education.  Although it’s too early to determine just how effective these programs are, one thing is becoming clear companies are finally waking up to the fact that education matters and that patient education can lead to greater sales. Perhaps the best example of this is JNJ who through a pilot program is incentivizing patients to monitor their glucose levels regularly. JNJ understands that the BGM market has turned into a commodity style market and that most patients really don’t care which monitor they use given this dynamic why not differentiate their product line by rewarding patients who use these products.

Think about this for a moment as the same principle applies to drugs as well. As Diabetic Investor has been stating for some time the diabetes drug market is also becoming a commodity style market. While all the drug companies would argue differently the fact is there really isn’t much difference between all the DPP4’s, GLP-1’s, short-acting insulin and soon SGLT-2’s. In the old days this meant that drugs like Januvia and Invokana enjoyed the advantage of being first to market however in the future with companies fiercely fighting for market share. Just take a look at recent results for Januvia, by far the leader in the DPP4 category, where increased price competition has cut into sales. Looking towards the future it would not be unrealistic for a company like Merck (NYSE:MRK) or Sanofi to fend off competition using a patient loyalty or reward program.

The wild card with any patient loyalty or reward program is the role payors would play. While it’s proven that patients respond to such programs, it’s also known that formulary status is a major factor in which drugs and devices are prescribed. This is why Diabetic Investor sees drug and device companies partnering with payors who have a vested interest in better patient outcomes just from a different perspective. Just as it’s well known that education is the most effective tool for helping patients achieve better outcomes, it’s also well known that patients under good control avoid or delay many of the costly complications associated with poorly controlled diabetes.

The key here gets right back to the statement made by Mr. Gregg; “There is growing consensus that transitioning to outcomes-based payment is fundamental to driving cost reducing innovation among providers in achieving a financially sustainable healthcare system.” The simple fact is outcomes based payments will be the driving force behind the coming change to how diabetes is managed. It will force companies in the business of diabetes to think way out of the box, to embrace new and innovative platforms.

The harsh reality is the old way of doing business just doesn’t match the new realities of the marketplace. BGM companies can longer afford to give away free meters by the boatload, drug companies can no longer give away free samples. There are just too many me-too drugs and devices on the market. Like it or not managing diabetes is just as much about cost as it is about outcomes. Even with outcomes based payments cost will still play a major role in determining the winners and losers in the diabetes market. Yet if the companies in this market are stand a chance they must adapt to new realities of the market, to get way from the past and embrace the future with a vengeance; a future which will include interconnected diabetes management, patient loyalty and/or reward programs.

Diabetic Investor for one welcomes this transition to outcomes based payments as better overall patient outcomes is the ultimate win win scenario. Let’s see which companies are bold enough to also embrace this transition, to adapt and thrive. While change is always difficult it also offers opportunities for any company which is willing to depart from the past and move towards the future.  Let’s who steps up to the plate and who remains living in the past.