Andrew Sorkin for NY Times, June 2, 2014
“I just want to emphasize that this is an industry where it is composed of really great people, working to do good things for patients, for doctors and actually for society, and when I look at our employees, there is sort of a noble purpose to working in the pharmaceutical industry.”
That was Mike Pearson, the chief executive of Valeant Pharmaceuticals International, waxing poetic last week about the virtues of his company. He was doing so as he was trying to sell shareholders of Allergan, the maker of Botox, on his company’s $53 billion takeover bid.
Mr. Pearson may have wrapped himself in the promise of the pharmaceutical industry’s ability to deliver lifesaving breakthroughs, but there’s a not-so-small problem with his self-righteous declaration: Of virtually every big drug company, Mr. Pearson’s may very well be among the least innovative.
To the extent Mr. Pearson has succeeded over the years, he has done so largely by sharply cutting research and development budgets, arbitraging tax domiciles — Valeant left the United States for Canada’s lower tax rates in 2010 by merging with Biovail — and buying rivals so he can cut their costs, too, while they take advantage of his lower tax rate.
Bill George, a professor of management practice at Harvard Business School and the former chairman and chief executive of Medtronic, recently asked a provocative question: “Is the role of leading large pharmaceutical companies to discover lifesaving drugs or to make money for shareholders through financial engineering?”
Mr. George asked the question in the context of Pfizer’s recent failed bid for AstraZeneca, but he could have been talking about Valeant.
Mr. Pearson’s Valeant famously teamed up with Bill Ackman, the activist investor who runs Pershing Square Capital Management, to buy nearly 10 percent of Allergan’s shares through a complicated transaction that some suggested was tantamount to front-running. It hoped to use that leverage to persuade Allergan’s shareholders to accept Valeant’s bid, which it has now raised several times.
Over the last several weeks, Mr. Pearson and Mr. Ackman have engaged in all sorts of criticism and name-calling of Allergan and its chairman and chief executive, David E. I. Pyott.
Mr. Ackman called Mr. Pyott conflicted and said he “appears to be motivated more by personal animus than by what is in the best interest of Allergan shareholders.”
That kind of language may just be part of the game, but it is particularly curious because Allergan isn’t one of those horribly managed businesses that are often the targets of such vitriol. Here’s what the investment firm Sterne Agee said in its recent research report: “The Allergan executive team is one of the best and most shareholder-focused in the pharmaceutical industry.” The numbers tell the story: Allergan’s stock is up 290 percent over the last five years.
And so what we’re left with isn’t a tale about a brilliantly innovative drug company trying to buy a mismanaged fixer-upper; it’s quite the opposite. Valeant, desperate for ways to increase its revenue, needs a cash cow to milk until it can find the next one.
“Allergan spends 17 percent of its revenue on research and development, compared to Valeant’s 3 percent, and Valeant has said it plans to cut around 20 percent of the combined companies’ 28,000 jobs in the merger. We do not believe that this is the sort of economic activity that policy makers should be actively encouraging in their rule-making (or foot-dragging),” Martin Lipton, the co-founder of Wachtell, Lipton, Rosen & Katz, which has long railed against the short-term nature of activist investing, wrote in a note to clients. Given his views, it shouldn’t come as a surprise that Mr. Pyott hired Mr. Lipton’s firm to help defend against Valeant.
In case there is any question about Valeant’s slash-and-burn strategy, here is Mr. Pearson in his own words from last week on the value of research and development: “There has been lots and lots of reports, independent reports, talking about how R.&D. on average is no longer productive. I think most people accept that. So it is begging for a new model, and that is hopefully what we have come up with.”
Mr. Pearson isn’t completely wrong: Research and development has proved to be less efficient at producing blockbusters than it was decades ago. But that doesn’t mean the goal should be to try to purge research and development budgets simply to pay out bigger short-term dividends.
And here is Mr. Pearson on his tax-dodging strategy: “As I think maybe you are aware, we were able to get a corporate tax structure which took our effective tax rate from 36 percent over all to what was actually 3.1 percent, which we hope to continue to work on and move lower.” How much lower can it go?
Mr. Ackman, who has a terrific investment performance record and a mixed activist record — he practically destroyed J. C. Penney while doing miraculous work to resuscitate General Growth Properties — has been encouraging Mr. Pearson to increase his offer to induce Allergan to the negotiating table. On Friday, he announced a new twist that he implied should make it clear this is no short-term play for him.
“Early this morning, I called Mike and offered to give up $600 million of value to the other Allergan shareholders and exchange our shares for Valeant stock if Valeant were prepared to increase its offer to the other Allergan shareholders,” Mr. Ackman said in a statement. “We believe that our gesture to the other Allergan owners makes an extraordinarily strong statement about our belief in the long-term value of this highly strategic business combination.”
Of course, the saddest part of this battle between Valeant and Allergan is you never really know if the target is trying to defend itself against a deal it knows to be destructive or if it is just playing its well-rehearsed part in a negotiating dance to obtain a higher price. But if Allergan sells, you know the outcome.
Very proud of my wife Penny who continues to champion integrative medicine. Yesterday she opened the new Penny George Institute at New Ulm (MN) Medical Center, part of Allina Health. Full article
On Saturday I was deeply honored to receive an honorary doctorate from Mayo Medical School and to give the commencement address. My subject was “Challenges for the New Generation of Physician and Scientific Leaders” in which I challenged the graduating class of MD/PHDs, MDs and PHDs to step up to leadership roles to transform the nation’s health care system. The text of my remarks can be found here.
“This is the Titanic.” That’s how former Medtronic Chairman and CEO Bill George described Obamacare.
“It’s just at the iceberg and everyone is looking at the tip: HealthCare.gov,” George told CNBC’s “Squawk Box” on Wednesday. “It’s not going to be solved by the end of the month,” when the Obama administration has promised to have the troubled website working smoothly. Government officials and outside contractors have been rolling out improvements overnight for weeks.
At an Obamacare event in Florida, Health and Human Services Secretary Kathleen Sebelius said Tuesday she’s confident that the government-run HealthCare.gov website is on the right track. She encouraged users who previously had problems to return—promising them a better experience already.
(Read more: Senior officialdrops Obamacare bombshell)
“You cannot solve a management problem with politics,” said George, a professor of management at Harvard Business School. “Sebelius has done her time. … Let’s bring in the pros,” people with private sector experience, he said.
Beyond the website, George said, “Look at this fiasco we have right now, we’re trying to take people’s insurance plans away; now we’re giving them back.” President Barack Obama acted “too late on the insurance plans.”
Obamacare has to be fixed, he continued. “You’re not going to repeal it. It’s not going to be repealed because by 2017 this thing is going to be locked.”
(Read more: Obamacare may need bailout: Ex-HHS head)
One of the ways George said to fix the law is to give people an incentive for living healthier lives. Until then, he said, “We’re going to have a huge snowplow effect of costs. It will not happen in this president’s term. It will happen in the next president’s term.”
As for the tax on medical device makers, like Medtronic, to help pay for Obamacare, George called it a punishment for the industry’s lack of support for the health-care law.
As the disastrous rollout of Obamacare’s federal insurance exchange continues, politicians are palpitating over what went wrong.
On Tuesday Marilyn Tavenner, head of the Centers for Medicare and Medicaid (CMS), expressed regret for the difficulty people have receiving insurance. In typical fashion for the Obama administration, she blamed the contractors and high portal traffic. While President Obama has publicly apologized, no one has yet explained what really went wrong.
This fiasco is rapidly becoming Obama’s Katrina, and it could get a lot worse before it gets better. Hurricanes eventually subside, but flawed software systems rarely heal themselves. Throughout the push for national insurance reform, the President and his Democratic allies in Congress repeatedly overpromised and underdelivered. The Republicans didn’t help the situation, opposing Obamacare long after the U.S. Supreme Court declared it the law of the land.
We can trace the origin of the problems back to the inception of the Affordable Healthcare Act (AHA), which tried to accomplish far too much, far too fast. Instead of offering limited insurance coverage for catastrophic events, the President “overpromised” by offering full health care coverage for all Americans–without a sound way to pay for the cost of 30 million new enrollees. He promised individuals they could keep both their doctor and their insurance plan, knowing full well that the high standards of Obamacare would cause many physicians to refuse inadequate reimbursement and many insurers to drop their plans.
As egregious as these errors were, they are overshadowed by the “underdelivery” of the information technology system managing these processes. Better management certainly could have prevented these problems, but once they arose, the White House staff chose to treat this challenge as a political issue, not a business issue. Eager for power, President Obama’s staff, which has little experience in complex healthcare business issues, did not properly delegate this initiative to the head of Health & Human Services (HHS).
As a consequence, an extremely complex web and software application challenge is being treated as a political issue. The White House communications staff has tried to control the rollout of the healthcare exchanges, taking a political approach instead of recognizing this as an extremely complex technical and business issue. Sadly, this approach is quite typical of the Obama administration which has repeatedly placed politics ahead of leadership and sound management principles.
The fundamental error that Sebelius and Tavenner made was to think they could manage this massive project internally, instead of putting an experienced healthcare contractor in charge. As a result, no one wound up in charge. In her Congressional testimony on Tuesday, Tavenner ducked responsibility, blaming the contractors for the myriad problems involved.
All too late, HHS figured out it needed a general contractor. Fortunately, it chose CGI Federal and Quality Software Services (QSSI), a unit of UnitedHealth Group that was willing to step up immediately to the challenge. United’s Andy Slavitt, one of the nation’s leading healthcare experts, has personally taken charge of the project. He has been given an impossible deadline of November 30, 2013 to fix what would take most companies 6-12 months. We can only wish him well. If the deadline is missed for sound technical reasons, let’s hope that the Obama administration doesn’t try to blame QSSI instead of stepping up to its own responsibilities for these failures.
Many of us in the business and healthcare communities recognized this disaster in the making. We felt powerless to do anything about it though—especially since we weren’t being asked.
At the start of his second term, the President should have replaced a skilled politician like Secretary Katherine Sebelius with a seasoned healthcare veteran like George Halvorson, former Chair and CEO of Kaiser Permanente, the nation’s largest non-profit healthcare system. Halvorson, who retired at the end of 2012, successfully implemented the nation’s leading health care information system at a cost of $1.8 billion. It’s still not too late for the President to ask Halvorson to save his beloved plan.
Ironically, the states that built their own health care exchanges, such as New York, California, Kentucky, and Minnesota, have fared much better than the federal exchange. What the Obama administration should have done was to test out its system on a pilot basis in one or two states before rolling it out nationally. That’s what any private company would have done.
When the federal exchange is finally up-and-running, we can turn our attention to the real questions: how many people will actually sign up? Will they include the healthy young people the administration is counting on to offset the high cost of older, sicker Americans? How will people react to their inability to retain their current plans and their doctors, a direct contradiction of the President’s promises? How will the government fund the high cost of the new patients in the system?
Ultimately, this administration must get serious about focusing on improving the health of our population rather than focusing downstream when people are really sick. An integrative approach to health in mind, body and spirit that integrates the medical system with a wide range of health and wellness practitioners is required to put America on a healthier path and bring health care costs in line with other nations. Without this, we cannot bring costs under control. Without tackling that fundamental challenge, any IT system is built on a shaky foundation.
Here is an exceptional article, written by Mayo CEO John Noseworthy, addressing fragmentation in health care & solving it through information sharing (http://bit.ly/1cDUkE6). Mayo is taking the lead nationally as a role model of how to solve these problems.
America is a nation of innovators and entrepreneurs. We are a nation that cares for our fellow citizens, yet we have failed to create a health care system that fully meets the needs of people in this country. Health care is fragmented, and the quality of care varies widely, which leads to unsustainable health care spending.
As the Affordable Care Act (ACA) continues to be implemented, we are seeing increased access to insurance coverage for many. But the ACA does little to address fragmentation, quality of care, and the sustainability of the financial model for U.S. health care — how health care is paid for. More work is needed to achieve the drastic change in market forces that is necessary to create a sustainable health care system. To achieve this, we must reduce fragmentation of care, ensure that the highest quality care is delivered in all settings, and build a sustainable health-care financial model.
Health care is experiencing a significant trend of consolidation through mergers and acquisitions. At Mayo Clinic, we have chosen a different path — a path focused on sharing our most scalable product: our knowledge. We believe that fragmentation and variability in care may best be addressed by creating tools to share knowledge than can be used by providers as they care for patients in their own communities.
At the foundation of our approach is a knowledge-management system — an electronic archive of Mayo Clinic-vetted knowledge containing evidence-based protocols, order sets, alerts and care process models. This system, which can be made available to physicians in any location, brings safer care, better outcomes, fewer redundancies, and ultimately cost savings for our patients. Ask Mayo Expert, one of the many tools in our system, helps physicians deliver safe, integrated, high-quality care. Through this system, physicians can find answers to clinical questions, connect with Mayo experts, search national guidelines and resources, and find relevant educational materials for patients. This knowledge is updated in real time and made widely available.
We have used this knowledge-management system to support the creation of our Mayo Clinic Care Network, an affiliation model rather than a merger or acquisition model. This tool supports health care professionals in their communities, enabling them to provide better care locally at lower cost. This network has been built over two years and includes 21 health systems and hospitals in the United States, Puerto Rico, and Mexico — all of which use Mayo Clinic-vetted knowledge so that other patients can benefit from our 150-year history of innovating and improving patient-centered care.
Addressing Uneven Quality
The proliferation of mandated quality measures and programs is daunting and some would argue has done little to improve quality and transparency for health care consumers. Quality in health care must be based on a comprehensive look at the entirety of a patient’s experience. It is alarming to see more than a two-fold variation in health care quality across the country. Streamlining quality of care can be difficult, which is why we’ve incorporated the use of engineering principles to improve our quality outcomes, safety, and service. We purposefully design, implement, and systematically diffuse quality-improvement efforts at all of our locations around the country. Through this commitment, Mayo Clinic physicians and scientists have contributed more than 400 peer-reviewed papers on quality improvement in the last five years.
The promise of the emerging science of health care delivery is profound, some say game-changing, in its ability to both reduce costs and improve quality. The full potential will be realized through the distribution of the right tools and resources. One such resource is the work of Optum Labs, which we formed with Optum earlier this year. Optum Labs, an open R&D facility with a unique set of clinical and claims data, is being used to drive advances that will improve health care for patients and our country. We are now inviting others — providers, life science companies, research institutions, consumer organizations, and policy makers — to be part of Optum Labs. This opportunity to apply world-class analytical tools to both cost and quality will provide the evidence necessary to deliver care that reduces costs and increases quality at the same time. This effort will allow health care to finally measure value for patients and payers.
Creating a Sustainable Future
Investment in health care is critical at this time. At Mayo Clinic we are investing in new areas of research that will define the future of health care, such as individualized medicine and regenerative medicine. We are also intentionally investing in our most precious resource: our staff. We constantly strive to have the most talented health care workforce anywhere in the country and are investing in their growth and knowledge expansion. For example, we have initiated team-based methods to enhance learning about new regenerative-medicine therapies that help us tailor diagnostics and hold promise to teach the body to heal itself from within. We use the same team-based learning approach to drive ongoing improvement in the quality of care through the discipline of the science of health care delivery.
Just as the private sector must continue to fund research, the same is true for government. Funding for the National Institutes of Health and other agencies is essential for the health of Americans and the economic vitality of our country. Recent reductions in research funding put our nation’s competitiveness, economic security, and future at risk.
We also must embrace the elusive goal of value — higher quality of care at lower cost. We need a payment system that recognizes the spectrum of health care delivery across primary, intermediate, and complex care while rewarding the quality and value of each. This includes all payers — both private insurance and government-funded programs, particularly Medicare. The sustainable growth rate should be replaced with new, negotiated payment models that tie reimbursement to quality outcomes across the spectrum of care.
To transform health care in America into high-quality, patient-centered care that the nation can afford, we must address fragmentation, we must address variable quality, and we need to create a sustainable health-care financial model. Collaboration is key. Mayo Clinic has a long history of innovation focused on improving the value of health care, but we can accomplish much more by working together — integrating and sharing knowledge with one another.
Together, we must create the future of health care, a sustainable future that Americans expect and deserve.
From DMC, August 13, 2013
Former Medtronic CEO and business ethics leader Bill George called Destination Medical Center “the most important thing for Minnesota’s future” in an interview with TPT’s Almanac last week.
George, a member of the Mayo Clinic Board of Trustees, was appointed to the Destination Medical Center Corporation Board, which is the governing board responsible for overseeing the DMC initiative.
“… It’s brand new – it’s a whole new idea that has never been tried here – I’m not sure where it’s ever been tried,” he said of the $6 billion economic development inititative that will leverage Mayo Clinic and private development to ignite growth and create jobs over the next 20 years.
“I see this as the most important thing for Minnesota’s future,” he said. “This is making Minnesota a health care mecca. Our best opportunity for economic growth, jobs and good health is making Minnesota the healthiest state in the nation … that should be our goal.”
Watch the full interview with George on TPT.
On Friday, the Destination Medical Center board, of which I am Mayo Clinic’s representative, was kicked off by Minnesota Governor Mark Dayton. Over the next 20 years the state of Minnesota will contribute $585 million of tax dollars as part of a $6 billion investment to upgrade Rochester MN and the surrounding area, including a $3+ billion investment by Mayo to make it the nation’s leading medical destination. This is the largest such undertaking ever by the state of Minnesota, and I feel privileged to be part of it. Here is the story and interview by public television on “Almanac”: http://www.mnvideovault.org/mvvPlayer/customPlaylist2.php?id=24745&select_index=0&popup=yes#2.
By Katharine Grayson, Minneapolis St. Paul Business Journal
The Mayo Clinic on Tuesday selected former Medtronic CEO Bill George to represent it on the board overseeing its Destination Medical Center (DMCC) expansion project.
The state in May committed $327 million to support the DMCC initiative, and the legislation called for Mayo to appoint one person to an eight-member board of directors.
Gov. Mark Dayton also appointed four members to the board on Tuesday, including Minneapolis Mayor R.T. Rybak and former Wells Fargo Minnesota CEO James Campbell. The other two Dayton-appointed members are Tina Flint Smith, Dayton’s chief of staff, and Susan Rani, president of Minneapolis-based engineering firm Rani Engineering.
George, a professor of management practice at Harvard’s business school, serves on the boards of Goldman Sachs and ExxonMobil.
“Mayo Clinic’s decision to invest several billion dollars over the next 20 years and establish its global DMC in Minnesota presents an unprecedented opportunity for our state and the Rochester area specifically,” George said in a press statement.
The city of Rochester’s mayor and city council president, as well as a representative from Olmsted County, also will sit on the board.