Tag Archives: Martin

EpiPen and the Prescription Crisis

The American prescription crisis is no longer coming. It’s here. And we need to focus on how to address it.

According to a study published in the Journal of the American Medical Association in August, for each person in the U.S., $858 is spent annually on prescription drugs, compared with an average of $400 per person across 19 other industrialized nations. Prescription medications now compose an estimated 17% of overall healthcare expenses.

How did we get here and who is to blame: the manufacturer of the drugs or the American drug distribution channel? Both parties are pointing their fingers at one another, with the flames being fanned by the media and government. Who should the consumer believe?

Unless you are living in a cave, you have heard or read about the EpiPen pricing scandal. The manufacturers’ CEO, Heather Bresch, claims that more than half of the new $608 list price is absorbed by the distribution channel. She says the huge price increases are not her company’s fault and attempts to justify the increased price. Is she right, or is she trying to pin the blame elsewhere for her pricing decisions?

See also: EpiPen Pricing: It’s the System, Stupid  

Drug manufacturers, in general, complain that their net incomes continue to remain flat or even decline. They show their financials as evidence and complain about the ratio of the list price of their drugs vs. the realized price, a figure known as “gross-to-net.” When rebates paid by the manufacturer outpace the price increases by the same manufacturer, it is easy to understand why the figure remains flat or even declines.

The pharmacy benefits manager (PBM) serves as the largest component of the manufacturers’ distribution channel, charging a margin/fee as well as collecting a rebate for their services. Somehow, they have redefined the laws of nature by figuring out how to consistently convince their clients that they are saving money, while showing Wall Street steady revenue growth.

The crisis is here, and as an employer you should be up at night wondering how this crisis of prescription costs affects you. The numbers don’t add up, and you are paying for the deficit.

An Opportunity in Resilience Analytics?

In my post last month, I discussed why the insurtech revolution should be focusing more on addressing the protection gap, thereby growing the pool of insurable risks, rather than figuring out how best to eat the insurance incumbents’ lunch.

At a conference in February, Tom Bolt of Lloyd’s noted that an increase of 1% in insurance penetration can lead to a 13% drop in uninsured losses and a 22% drop in taxpayers’ share of the loss. The key to increasing penetration is lowering distribution costs to make products more affordable. That is where insurtech can come in. Many recent startups have business models looking to tackle the excessive intermediation costs that exist in the current insurance value chain.

Sadly, when a catastrophe strikes areas of low insurance penetration, those communities not only suffer from the difficulties of having to seek aid—which can take three-plus months to reach affected zones—but also face the prospect of a significant drag to economic growth. It is unsurprising, therefore, that governments in vulnerable countries are keen to improve their “resilience” and seek solutions to better prepare themselves for catastrophes by working with the likes of the World Bank, the UN and the recently established Insurance Development Forum (IDF). Interestingly, AIR Worldwide announced recently the Global Resilience Practice, which will be led by former U.S. presidential adviser Dr. Daniel Kaniewski.

See also: InsurTech Need Not Be a Zero-Sum Game  

As well as providing low-cost distribution models in new markets, a related opportunity I see for insurtech is working together with the insurance industry in the growing field of resilience analytics. As Robert Muir-Wood recently pointed out on RMS’ blog, the claims data gathered by insurers — which historically has been used for the pricing and managing of risk — have the potential to also be used to reduce the potential for damage before the event. Insurtech companies could work with government authorities to pool this claims data, leveraging it with other key data from external sources and then using the results to influence urban resilience strategies. There are inevitable doubts over the willingness of insurers to share their data, but agile and thoughtful startups are likely better placed to be able to find insights in a world of abundant unstructured data than the more technologically challenged incumbents.

The current size of the protection gap is a failure of the insurance industry, and any companies that can help address it will not only be first movers in new markets but will also be adding social value and much-needed resilience to vulnerable communities all over the world.

Why InsurTech Should Be Like Football

A podcast I enjoy listening to is “Revisionist History” by Malcolm Gladwell, the author of five New York Times bestsellers, including “The Tipping Point” and “Outliers” (http://revisionisthistory.com/). Episode 6 discussed educational philanthropy and the $100 million gift by American Hank Rowan in the early 1990s to an almost bankrupt school in South Jersey, which at the time had an endowment of only $787,000. Gladwell discusses why no one followed Rowan’s lead. The vast majority of the 87 gifts of $100 million-plus since then went to elite schools like Harvard and Yale, which, arguably, do not need it. What has this got to do with InsurTech? Please indulge me.

Gladwell gives some insights from the book “The Numbers Game” by Chris Anderson and David Sally. The book argues that football is a weak link game—success depends not on how good your best player is but how good your worst player is. This is because, in an 11-player game, the result often depends on mistakes. It is, therefore, better to use your resources to upgrade your worst players rather than spend everything on a superstar player. Superstars like Lionel Messi finish off the efforts of teammates, but people forget about the 10 passes before the great through ball that Messi tucks away—still, those mundane passes are absolutely necessary.

Basketball is the exact opposite of football—it is a strong link game. What matters in basketball is how good your best player is. To deal with Michael Jordan, you might need three players, leaving yourself wide open to movement by his teammates.

See also: Matching Game for InsurTech, Insurers  

The strong link/weak link framework is very useful in thinking about certain types of problems. Efficiency of air travel is dependent on how good the poorest airports, not the best ones, are, as delays in the former have a knock-on effect and can disrupt even the most efficient. Air travel is a weak-link problem.

There are parallels in this framework to the accelerating amount of investment into InsurTech. Most business models I see are looking at addressing strong-link problems—i.e. taking existing products and making incremental improvements, most likely through taking out cost across what is currently a heavily intermediated insurance value chain. In contrast, business models that look at weak-link problems are focused on where that incremental dollar of investment could raise the bar, improve the average and make a real difference to society. These companies are seeking to address the unacceptable protection gap that exists today, using technology to make yesterday’s uninsurable risk insurable and providing solutions to vulnerable communities to help them become more resilient to catastrophes.

More football, please!

InsurTech Need Not Be a Zero-Sum Game

This summer, I have attended a number of disruption/innovation insurance industry conferences in London that often, to varying degrees, come down to a debate regarding the extent to which InsurTech startups will be able to come and eat the lunch of industry incumbents. There is little argument that, should the insurance industry fail to better engage with its customers and continue to poorly communicate its social value in protecting people, communities and assets somewhere else will transform what today for many is a “grudge transaction” into a delightful relationship.

However, I believe InsurTech does not have to be a zero sum game. I am a proud member of the International Insurance Society (www.internationalinsurance.org) led by Michael Morrissey. In Singapore at the IIS annual conference, a keynote presentation was delivered on the recently formed Insurance Development Forum (IDF). The IDF was formally launched in April and is a collaboration between the insurance industry, the World Bank, the UN and various other institutions. The IDF is chaired by Stephen Catlin, with Rowan Douglas leading the Implementation Committee that includes industry heavyweights such as Dan Glaser, Nikolaus von Bomhard, Greg Case and Inga Beale. Its mission is to incorporate the insurance industry’s risk management expertise into governmental disaster risk reduction and to give insurance a larger role in providing resilience to communities all over the world.

In a speech at the conference, IDF Chairman Stephen Catlin noted, “We talk about innovation and new products. The reality is we are not even selling well the product we know and love dearly.” I believe the less insular InsurTech community — with its diverse skills sets (often from outside of the insurance industry) — can help insurers start to address the obvious misunderstanding consumers, governments and regulators share of the social value of the insurance product. Sam Maimbo of the World Bank, who sits between deep technical insurance teams and the public sector, noted he spends 70% of his time explaining what the industry has to offer. Addressing this communication gap has parallels to what many InsurTech companies are trying to do in providing better engagement with consumers than is currently provided.

There is real opportunity for InsurTech to work with the insurance industry in addressing blockages in the system that, if unlocked, would drive increased demand and grow the overall insurance pie. We are seeing a bit of this in microinsurance with companies like MicroEnsure and Bima providing low-cost insurance solutions to customers that, before recent technological advances, were just not possible. For instance, we need to see more examples of smart contracts founded on blockchain technology. In Africa, it is now possible to buy crop insurance through a mobile device that pays out based on a parametric weather-related trigger through a blockchain-validated third party source that almost eliminates the cost of handling a claim.

I am confident we are at the start of this kind of innovation and look forward to seeing more InsurTech companies look to grow the overall industry pie for the benefit of themselves and society as a whole.

What Should Prescriptions Cost?

In the prescription benefit world, there seems to be surprise that Anthem filed an unprecedented lawsuit against Express Scripts, stating that Anthem has been overcharged by more than $3 billion annually over the existing 10-year contract term.

The eye-popping damages claim was certain to garner headlines as was the fact that, after months of discussions, a major health insurance company followed through on its threat of legal action against a major pharmacy benefits manager (PBM). What people should really be talking about, however, are these two key questions:

1. How did Anthem, a sophisticated health insurance company, get into this situation with a PBM?

2. Is my employer, which is not a sophisticated health insurance company, in the same boat as Anthem?

Right now, everyone is starting to question what their prescriptions really cost.

It appears Anthem may be in a position to argue over a number of issues, including ill-defined contract terms (such as “competitive benchmark pricing”) that its legal team apparently agreed to when it executed its PBM contract. One phrase within the 100-plus page contract the two companies intended to govern their 10-year agreement could potentially become center stage in this lawsuit. Anthem’s CEO has repeatedly used the word “overcharged,” which is a relatively vague term that would need to be more clearly defined and argued should this case ever go to trial (which I don’t believe it will). Neither company wants to air the details more publicly than it already has. A more sensible path—to agree to disagree and craft a financial arrangement to resolve the issue—will most likely prevail.

Ironically, 2015-year end industry reporting shows that growth in drug spending is comparable to the other parts of the healthcare system. In fact, for many employers, increased prescription volume was a larger factor in cost escalation than actual drug price increases. This increased volume is a good sign, because increased pharmaceutical spending generally decreases overall medical spending. Employers that are willing to tightly manage their prescription drug program should be able to achieve spending increases of no more than 3.3% and as little as 0%.

However, without the implementation of a system to guarantee what you purchased and what you continue to pay, you will find yourself in Anthem’s boat — with even less leverage.