J.P. Morgan Healthcare Conference, Kaiser Permanente Aims for “Total Health”

SAN FRANCISCO, Westin St Francis Hotel, January 7, 2013. The Alexandra’s room at the 32^nd floor was filled with attendees. Many people were standing around the seating area and out into the hall to hear speakers from Kaiser Permanente (KP) give their talk.

President and COO, Bernard Tyson opened the KP presentation with basic details about the big health care company.  He said that the not-for-profit HMO is in nine states and has 37 hospitals.  Its facilities occupy some six million square feet.  He said that the firm generated about $50 billion in revenues in 2012.  The firm has 17,300 doctors.  Their mission is to provide the highest quality care to the most patients possible.  Bernard said “This is the same mission created by Henry J. Kaiser when KP was founded.”  KP is active in prepaid care, is technology enabled and stands for “Total Health.”  He said that the future of it care focus has three parts: Quality, Accessibility, and Affordability.  Referring to J.D. Power member quality studies, Bernard said “Quality is rated as #1 with 5 stars.  Seven out of eight regions are rated at 5-stars.  Northern Calif. is rated at 5-stars.”

Tyson went on to say that they have made improvements in care delivery.   KP uses the EPIC information technology system that helps KP deliver healthcare.  He said that quality is an increasing trend and that variation in practices is going down, which is a good thing. With its race-based data system, KP doctors can to look at all ethnicities, which helps to build good data.

Tyson said going forward KP would mainly focus on:

1. Staffed beds (in-hospitals)

2. Face to face meetings (in doctor’s offices)

3. In-home care (in patient’s home)

4. Technology/ virtual care.  (email and mobile apps)

Bernard said that in 2012 KP had 20 million e-visits to doctors and expects the see this activity grow to 25.3 million in the next few years.  He said that in 2012, KP had about 40 million face-to-face visits to doctors.  He is excited about the future.

He introduced Kathy Lancaster, Executive VP and CFO.  Kathy provided some color on the financial details.  She said that quality drives affordability, so investments help the KP regions to achieve NCQA (National Committee for Quality Assurance) goals that ultimately drive better financials. She mentioned that KP received the J.D. Power quality award (2012 national member health plan quality survey).  She said that the investment in quality dramatically drives down affordability costs. The “over-65” (population) group is growing at 3X the rate of the “under-65” group.

She spoke of EBITA data and said that cash is at 3.3X of debt. Managing cash internal to its business is the reason for KP to come to the capital markets.  KP supports about nine million members. Twenty percent of KP’s capital investment goes into IT.  KP developed a $38 billion capital plan.  She said that KP rebuilt 15 of its hospitals in California for seismic repair, etc.  She said that KP is getting ready for Obama Care and its new patients.

Kathy wrapped up her remarks by saying that “Total Health” is staying healthy, returning to health, and healthy aging.  The “80/20 rule” says that patients with most illness cost 80% of the overall healthcare expense.  The “over-65” group is the fastest growing group.

Healthcare Reform and Its Impact on the Medical Device Firms

I recently attended the The BIOMEDevice Exhibition and Forum held at the San Jose McEnery Convention Center so that I might learn more about the medical device industry.  During the opening luncheon I listened to an interesting keynote talk given by Robert Grant.  Mr. Grant is a the President of Bausch and Lomb’s Surgical Division. He previously worked at Allergan, the company known for Botox and various eye care products.  Robert gave out some interesting information about national healthcare spending, a key regulatory and legal case involving a medical device and his comments about the impact of the recent ‘Healthcare Reform’ law on the medical device industry.

Robert said that the annual US healthcare spend has reached about $2.5 trillion. That figure works out to about $8,000/year,  for each person living in the US.  The US spending figure exceeds healthcare spending in other industrialized nations. Compared to the US, the country with the next biggest healthcare spend is Sweden, with $5,000/yr per person.   Australia and the UK are about the same, at $3,400/yr. per person

According to Robert, the high costs in HC are driven mainly by aging and obesity (diabetes). He also asserted that another spending driver is by how we educate doctors in this country.  It takes 4 to 6 years longer in the US to train doctors than it does in other countries.  For example, in other countries, students go from high school straight into medical school. In contrast, the costs of malpractice in the US is going up every year. Other countries have limits on malpractice claims against doctors.  Furthermore, all payors, device manufacturers, and so on, are profit-centric organizations that are looking to get higher earnings per share.  None of tese economic drivers have been addressed in the recent healthcare reform law.

The FDA is the safety watch-dog and is really tightening down now on device manufacturers.  This situation is especially likely following  the outcome of the Riegal vs. Medtronic case. Charles Riegel and his wife, petitioner Donna Riegel, brought suit against respondent Medtronic after a Medtronic catheter ruptured in Charles Riegel’s coronary artery during heart surgery. The catheter is a Class III device that received FDA premarket approval. The Riegels alleged that the device was designed, labeled, and manufactured in a manner that violated New York common law. The District Court held that the MDA pre-empted the Riegels’ claims of strict liability; breach of implied warranty; and negligence in the design, testing, inspection, distribution, labeling, marketing, and sale of the catheter, and their claim of negligent manufacturing insofar as the claim was not premised on the theory that Medtronic had violated federal law. The Second Circuit Court affirmed this case.

Medical device manufacturers go through the FDA, therefore the FDA is on the hook for the safety of medical devices.  The FDA is not motivated to get products to market.  As a result, they are not in a hurry to approve devices because of risk of products.

Robert summarized his observations and concerns with the following points:

• Companies are having trouble raising money so they are leaving the country.
• Aging and diabetes will break our healthcare system.
• The High Cost of Malpractice Cases
• The Doctors’ Education System Needs to Change
• The FDA is not willing to take needed risk to get products on market sooner. Top people left the FDA since the Obama election.  Dan Schultz left FDA.  All that has led FDA to become more risk adverse.

He said that smart companies understand that the best opportunities often arise during the more difficult situations such as recessions or economic downturns. We’re going down such a time right now.  Republicans say ‘No’ to everything, but that’s not a good idea.

Robert said that its OK for companies to take reasonable business risks and make mistakes. People learn from mistakes, innovate, and improve their companies.  His company’s product is Crystalens, an intraocular lens.  Actress Florence Henderson is their spokesperson.  Their product is for cataract surgery. Cataract surgery patients can only get 20/40 vision from the procedure.   He said that their product is better than Lasik.  CMS has agreed to reimburse for their product.

For example, Robert said that when he was at Allergan, Cindy Crawford went up to him while he was attending an industry event and asked to be a spokesperson for their product Latesse, an eyelash grower. Robert was surprised that she knew about him and was very flattered.  He discovered that Baby Boomers want premium outcomes. Robert believes there’s a great opportunity in bad times.  Healthcare is at a precipice at this time.  It is unfortunate that medical device companies have to pay a new tax now under the new ‘Healthcare Reform’ law.

In closing his talk, Robert recited from memory the opening sentence from US Constitution, which listed several visionary points.  He talked about these points and also talked about President John Adams, one of the writers of the constitution.  He said that he viewed a TV show about him on HBO.  In 1776 John Adams described what should happen every July 2, but it actually turned out to be July 4^th.  July 3^rd he predicted future celebrations which continue to do every year.