a16z Podcast - When Bad Policy = Bad Business Models = Bad Public Health

Episode Date: April 16, 2020

with @JorgeCondeBio, @julesyoo, and @omnivorousreadIn some ways, the coronavirus feels like it came out of nowhere—a kind of Black Swan event. But at the same time, it's been exposing a lot of the fundamental flaws in our healthcare system that now feel like a perfect storm coming together... and have hurt our ability to address the problem that we should really have seen coming.In this episode, a16z General Partners Jorge Conde and Julie Yoo talk with Hanne Tidnam about some of those big forces and dynamics in the healthcare system, at the intersection of business, policy, and public health: how in healthcare like perhaps nowhere else, broken policy can lead to broken business models that, in the wrong circumstances, can then lead major failures in public health like the one we’re seeing today; where we’ve seen this before, in the markets of vaccines, antibiotics, and diagnostics; and what should be different next time, so that when a new pandemic hits we aren’t facing another perfect storm.

Hi and welcome to the A16Z podcast. I'm Hannah. In some ways, the coronavirus feels like something that came out of nowhere, a sort of black swan event. But at the same time, it's also been exposing a lot of the fundamental cracks and flaws in our healthcare system that feel like a perfect storm when they all come together and have hurt our ability to address a problem that many say we should actually have seen coming. So we're here today to talk with A16Z general partners Jorge Condi and Julie U about some of those big forces and dynamics in the health care system that led us. to this moment at the intersection of business, policy, and public health, and how in health care in particular, broken policy can lead to broken business models that in the wrong circumstances lead to major failures in public health like the one we're seeing today. We talk about where we've seen this before in the markets of vaccines, antibiotics, and diagnostics, and what should be different next time so that when a new pandemic hits, we aren't facing another perfect storm. since we have talked quite a bit about some of the cracks on the healthcare system side, let's start with the business or the market side. What was the underlying problem on the market side that

got us here? Much like a virus attacks the weaknesses in the human body, this pandemic spreads by effectively attacking or exploiting the weaknesses across the health care system at large in the United States. Healthcare is a fairly unique case in that this is one industry in one area where policy sets business. models, and where you have bad policy, you have bad business models, which can lead to market failures, which can lead to public health failures. We've seen it happen in the vaccines industry. We've seen it happen in diagnostics. We've seen it happen in anti-infectives and antibiotics more broadly. And so these aren't isolated examples where the system fails. As a system, historically,

we've made very little investment into prevention in general. Really, where the money has been made is in the treatment of patients who get sick. And so there's been really just an orientation around the incentives being aligned with waiting until those patients do get sick to then provide treatments and therapies and procedures that generate more revenue, unfortunately, and also higher margins for physicians and hospitals. And you're seeing a version of that here where, again, there's been very little investment in preparedness for these kinds of pandemic disasters. So let's pull apart those threads in those three different areas. So because vaccines are so top of mind, let's dive into vaccines. Why is that not a successful market? Well, I think vaccines in general

has been a difficult industry for a couple of reasons. Number one, if you're developing a vaccine for something that already affects humankind broadly, those are considered pretty commodity products today. Your mom's vaccines, your, you know, any of the number of vaccines that children get in their regular stables are relatively commodity products. they're not differentiated. You can't charge a lot for them because these are almost basic staples of public health and therefore, you know, relatively speaking. We all need them. Yeah, yeah, we all need them. They're well covered and they're widely available. The trick comes when you have something that emerges quickly and has the potential to spread rapidly. COVID-19 is not the

first example of this that we've seen. We've seen this happen numerous times, whether it's with SARS or H1N1 or West Nile or Zika. Obviously, Ebola was one that was a wake-up call and made a lot of people nervous. And I think if you look at a lot of those historical examples, generally speaking, what we saw happen was the companies that did have active vaccine programs were asked essentially to stop doing everything they were doing to develop programs against whatever a specific emerging threat was. And they responded to that call for action. And what happens with vaccines is when the threat goes away, you know, the urgency tends to go away as well. And once the urgency has gone. The market goes with that, along with that. These companies that were developing vaccines

for these specific newly emerging threats, in many cases, they were left holding the bag, where, you know, in some cases orders that governments had put in for them kind of went away when the threat went away. And so the business model of saying, well, ramp up production for an emerging threat, where if you are successful, the market for what you're developing goes away. And so the public health efforts are successful in containing the disease and you don't need the vaccine, and therefore there's no market for it. And therefore you've essentially wasted in the effort. The other thing that's true that has been true in previous pandemics is there's generally a call on the industry by governments to make sure that the vaccines become available

at cost or at low cost. And it's very hard to build a business around that, where if you're building for an event, like you called it a Black Swan event, but at the moment of that Black Swan event, you're not able to recoup profits for some valid reasons that you obviously have to make this widely available. It's a very difficult business model. Unless you're in a situation where it's the entire globe, and then it's all of a sudden. Well, yeah, but then you need the ability to actually ramp up and be able to produce vaccines at that scale and at that speed. Something that's a silver lining in all of this

is how rapidly some of these novel platforms have been at looking to develop vaccine candidates. But for that to work as a business model, you need to either be able to produce a vaccine for every oncoming pandemic, and you need to be able to have a business model that will enable you to essentially recoup and make a profit from the investments you've made

in developing that platform. And that comes back to policy. Yeah, I mean, one interesting thing that comes to mind, Jorge, as you're talking about this, is there's a lot of characteristics of vaccines that are somewhat similar to some of the more novel sort of gene therapies and cell therapies that we've talked about, where you essentially need the vaccine once or maybe a handful of times when it comes to things like booster shots for your entire life. And therefore, the opportunity to monetize that particular intervention is very rare in the context of any one patient. You just have to wonder whether some of the dialogue that's happening around value-based payments for different types of treatments, how that would be applied here? Because to take the traditional fee-for-service

way of thinking about getting paid a commodity price for a one-time intervention just doesn't seem to match well with the paradigm of how vaccines are actually administered. So I think the analogy is valid. And by the way, I think a lot of the proof is in the pudding. Because that kind of incentive structure that you just described hasn't existed historically, there have been several calls for better policy put in place. Some of the key areas that have pioneered this have been sort of the one and done therapies for very rare diseases. And I think the reason why there was room to have that discussion was number one, because the prevalence of those diseases is fairly well understood, even though they're very rare. And so you can essentially run the actuarial

calculation to say, okay, well, if we charge $2 million to treat somatic muscular atrophy, we're still benefiting the system a significant amount by extending life and reducing the need for supportive care and all those things. And so you can actually model those out and it's a rare event that with a high value you can put a high price on. Here it's a little bit trickier because it's hard to model out the actuarials on this because a pandemic is generally speaking an unknown event. So unless you have a policy for pandemics broadly where you essentially provide some sort of incentive, whether they're block grants or success fees, et cetera, that would have to be really large for any institution that comes up with a effective vaccine against a newly

emerging threat. You're sort of trying to solve for an unknown number. But I think we could learn a lot from what we're seeing with these new modalities like gene therapies and cell therapies that have in many ways trailblazed novel business models to make them viable. I understand how for vaccines, that model falls apart when sort of a massive event like this happens really quickly. But how about with antibiotics? That feels like something that everybody needs, that we know there's an increasing demand

for the right kind of antibiotic. Where does the market policy, healthcare, public health failure, come together there? Well, so there's, you know, similar situation with different circumstances, right? So in the case of antibiotics, the public health agencies and the medical practice broadly

have been very focused on how you prescribe antibiotics and in what order, in order to prevent the emergence of resistance. And so we have broad spectrum antibiotics, and then we have narrow spectrum antibiotics, and we have ones that are more potent than others. And once bacteria become resistance to all things, and we have the threat of superbugs

where you basically have no last line of treatment against a bacteria that has become resistant. And so the conventional thinking around antibiotics has been to think of it as first line, second line and third line. And so if you develop a novel antibiotic, you might be addressing a very important unmet need, but by definition, physicians are going to use these new antibiotics as sort of last line of therapy. I develop a new antibiotic, and it's good. It's only going to be used sparingly. And if I'm charging per treatment or per use, that's obviously not going to be a very

effective model for me either. Right. You don't want to be having to use these unless everything else has failed. That's right. And by the way, we've seen the real world examples of this as well. Large pharmaceutical companies have also exited, like with vaccines, they've also exited the antibiotic space. Novartis has exited. Sanofi has exited. It's very hard for them to find a way to make a profitable business for all the reasons we've been talking about. There was a startup called a cagin that was actually successful in developing a novel antibiotic against a nasty bug. So they had a public health success, but what they found was that they didn't have a business model. And so they went bankrupt. This is a really strange industry where you have something

that's so successful that you cannot build a business on it. Scott Gottlie, the former head of the FDA, who's of course been so vocal and helpful throughout this COVID-19 pandemic, he had floated the idea a year ago of similarly creating some sort of incentive structure so people could develop new business models around novel antibiotics. And these included things like similar with vaccines, success fees for developing a novel therapy. He even floated an idea on something like subscriptions where institutions would subscribe to get access to antibiotics and they wouldn't pay per use. They would pay for access. So it's almost like an all you can treat model versus is a paper pill model.

Why would that need to come from policy? Why wouldn't that just make good market sense for the market to respond in that way? Well, I think you're going to see a combination of those things. Some of it needs to come from policy in the sense that you can require institutions to have a broad toolkit of antibiotics and require them to carry all of them.

And then if you require that, the companies are developing novel antibiotics, come up with new business models to make it viable for them and to make it viable for the hospital systems. But, I mean, I think you do need policy get some level to define what is required for standard of care. And if you can do that, then you at least create some room for companies to develop novel business models. A great example is in cell therapy and gene therapy, like unless you change the way CMS pays for therapies and how

they calculate cost of therapy, you can't have installment models in medicine. So there had to be a policy change there. People do look to CMS to be kind of the tip of the spear with regards to these things. CMS reimbursement is the ultimate policy change that, you know, generally is what triggers this type of business model innovation and adoption of these types of things in the market. And commercial payers tend to follow suit when CMS makes those kinds of policies. CMS did put into place a, what's called a qualified infectious disease products program in partnership with the FDA around antibiotics to essentially up the reimbursement rate for the use of antibiotics and hospital-based settings under certain circumstances. So there is some precedent

that shows that there is a willingness to do this sort of from the top down. There was other legislation proposed that has not yet been passed around the concept of essentially mandate that the hospital report on the utilization of antibiotics and sort of demonstrate that they are abiding by standard of care. And it's sort of a quid pro quo where, you know, in exchange for doing that and sort of demonstrating compliance with that kind of program, the proposal is that there would be higher reimbursement rates for that. The other interesting thing about antibiotics that I find is I've had a number of experiences myself where, let's say you go to an urgent care clinic, you think you have strep, they'll do a test, but the test results aren't going to come

back for a couple of days, and therefore you are put sort of prophylactically on an antibiotic without yet knowing, you know, what the pathogen is or whether or not you even have that pathogen. And, you know, there's studies that show that, you know, it's upwards of a third of antibiotic prescription could be unnecessary, but given the delay and the information needed to determine whether or not it's correct, you know, that's just sort of the general practice of how it plays out. So it's interesting in that this sort of, you know, intersects with how having better real-time diagnostic capabilities could actually impact and just reduce the inefficiency amount antibiotic use as well. So it's interesting, not just the sort of market policy

public health failure starts to come together. Those actual three buckets start coming together as Well, but let's talk about diagnostics now and pull again apart these sort of different failures of market policy, public health. Why is the diagnostic market not as successful? Why was that broken? Diagnostics historically have been a challenging area for a couple of reasons. The first one is it takes a while to develop a diagnostic. It's time consuming and expensive. And it wasn't easy to really recoup that investment because reimbursement rates historically haven't been very high. But why would it not always be better to know if you have some, I'm sort of like not

clear on the very question of why is a diagnostic not always valuable? You know, look, I think diagnostics are a form of prevention and I think if one thing we've seen generally across the healthcare system is prevention is not always the most effective business model. Whether or not it's valuable isn't the debate, it's how it's reimbursed. There's plenty of examples where reimbursement rates don't always track to value, especially in the system where a lot of things have been around fee-for-service versus value-based care. Diagnostics as an industry is a fairly tricky one because reimbursement levels for diagnostics have, over time, have trended down. If you look at things like diagnostics that could be used to determine which patients should be a candidate for a therapy,

for any therapy, for any number of conditions, those have historically been underutilized. One of the reasons that people speculate is because physicians are going to prescribe a treatment that they think their patients are going to benefit from. And unless a diagnostic is meaningfully going to change that decision, they probably won't use it. They'll use other factors, like risk factors or family history. In many ways, the diagnostics industry has been viewed, I think unfairly, as a commodity industry. There is an element of, you know, you're competing on price and trying to essentially make it up with volume. And that's why you have very large players in the industry that have these very, very large menus of tests that they provide.

and they do it at scale because the amount you're getting reimbursed on a per test basis is relatively small. And so this whole area of diagnostics as being viewed as a commodity has led to generally underinvestment. It's not that it's not perceived as useful. It's more that the price that you get paid for that component of the patient journey is not where the money is made. Like a cholesterol test, a very basic test that's pretty routine. The value of the test itself is probably a few tens of dollars in terms of how much you get reimbursed. for that test. But what the outcome of that test, if you are in fact diagnosis having high cholesterol, the result of that is that you're put on a statin really for the rest of your lives. And that's really

the blockbuster category of drugs. And so that's just an example of where the value distribution is very skewed. CMS very recently just published their list price sort of sheet for how they intend to reimburse for the COVID test. You do a double take when you see it. It's literally in the $35 to $50 range per test that would be reimbursed by Medicare. And, you know, when you think about the value of the information being provided by that test, especially right now when that information could literally mean life or death, it's kind of astounding, you know, to think that it's so little compared to these disaster stories that you hear about patients in the ICU on ventilators, you know, having to undergo anesthesia to get those ventilators in. There's just a huge skew in terms of where the dollars

flow relative to where the perception of the value might be. I think what we've seen in diagnostic in terms of how they have been deployed across the country is a great example of, unless you have very clear policy on who can get tested and what it will cost, it makes it very hard for this to be deployed very widely. And we can put aside for a second any issues that actually took place in the logistics of rolling out tests. The incentives just weren't clearly in place early enough. I mean, what we're talking about is all these broken models that show up when something, do we need to wait for these moments of really kind of horrific?

failure when there isn't a vaccine available, you know, when we don't have the right antibiotics or the right tests in order to change some of these ingredients to prevent it from happening again? Well, I think the specifics will matter. But I think generally speaking, you know, when the next pandemic comes, there are a couple of key things that I think would be helpful to have in place beforehand. One, from a policy standpoint, it should be clear that, number one, there won't be any cost for any member of the public to get tested, you know, assuming tests are available. Number two, for those companies that are providing tests that need to, in many cases, massively scale up capacity in order to meet demand, that they will be reimbursed in a meaningful

and timely manner. Number three, I think it would be helpful to have, from a policy standpoint, coverage of treatments associated with whatever the pandemic is. And that way, you don't have the situation where somebody that's underinsured or uninsured is avoiding the health care system out of fear of cost repercussions. I mean, that's obviously a challenging thing to do in a normal environment. It can be a catastrophic thing to do in a rapidly emerging pandemic environment. And so I think there's certain things you can do from a policy standpoint to make sure that, you know, both the public is responsive, but also industry and those that have technology to address the situation are also responsive.

But how about from a market perspective? I mean, are there things that you can do to fix these sort of like basic market dynamics of dealing with rare emerging diseases and last. line of defense antibiotics, things like that. So if the policy were to be, anyone that can provide a validated test against a pandemic is going to be reimbursed X amount, and these are going to be the reimbursement criteria, then you have incentive to very quickly scale up production to do that. If the policy is that anyone who wants and seeks out testing, regardless of whatever that individual circumstances would be, they can get access to that test and they won't be

charged at all for that test, you've also created demand. In effect, what's necessary in a pandemic is to ensure that you have a guaranteed buyer, whether you're developing vaccines that are going to be deployed broadly, whether you're developing tests that need to be distributed around the country or around the world. You know, whatever the situation may be, if you need to scale something up for a one-time event, you need to be sure from the supply side that someone is going to buy that product. And really the only institutions that have that kind of scale when you're talking about pandemic level events are nation states or countries. And so I think another key aspect of the right policy in place is essentially have the backstop guarantee that the government is going to step

in and buy product if you develop it to address an unexpected event like a pandemic. One of the big failures that we're experiencing right now is that we who are told to stay at home and avoid the hospital don't have a means to get tested at home. And, you know, there were, I think there was a set of unintended consequences that occurred when the FDA intervened and put into place this emergency approval process for new tests that were being developed for COVID, did actually. And I think this was done unintentionally, but is one of the major reasons why there's been such a bottleneck in getting new tests developed, unintentionally created a need, a requirement

that the FDA does approve under these emergency provisions, every test that is being developed. And so we saw a bunch of innovative companies, startups, etc., spin up home-based tests that would work for patients in their home setting, which would not require them to go to a lab or go to a clinic to get the testing done. But those were unfortunately shut down because they did not comply with these emergency rules. And I think things like that where there are sort of intersecting policies that may conflict with each other between different government agencies have to be looked at differently such that the next time this happens, we're able to respond and have the market, you know, sort of do

its thing and be able to get new product out there in a way that doesn't get hung up in bureaucracy. Yeah, it's interesting because I feel like a lot of what we're talking about is this delicate balance of regulation, right, in a heavily regulated space where regulation can push forward innovation in some ways, but then time passes and you don't want that to then become kind of a weight that you're dragging along when events change or things unfold. Like, how do you generally think about that balance between the heavy regulation that we need in place for helping to sort of perhaps create market incentives or the relaxation we need in others, like in testing therapies? How do you think about how those evolve over time and making sure that we keep that balance? Yeah, I mean, we talked a little bit about this with regards to telehealth and the fact that many of the laws, both at the state and the federal level, that have prevented or at least created friction for telehealth.

to be very broadly adopted are laws that were put into place like decades ago before anyone contemplated telehealth. And so, you know, even though it's unfortunate that this kind of event and pandemic is the forcing function for us to revisit some of those things and actually undo them because the world has changed so much, because technology has changed so much, because the way that we deliver care is changing so much, where the laws that have been put into place are, you know, maybe very outdated. I think that's just a general thing that this whole pandemic is shedding a light on is the fact that so many of those rules that have been put into place, you know, likely don't make sense anymore in this day and age.

Look, I think the idea that we need to ensure that, you know, we do no harm, that things that we develop to be an effective intervention against how we treat or manage disease are, in fact, effective, to ensure that we have the processes in place to make sure that we are, in fact, not blind to issues around safety or efficacy, I think is very important. But as we've talked about before, the world has changed in terms of, you know, what medicines look like. You know, now we have gene therapies and cell therapies and digital therapies, and I think

the regulation has to evolve so we can properly evaluate those opportunities to change how we treat disease. And we're also seeing a lot of innovation that's coming down the pipe right now in terms of how we think about how do we monitor patients, right? Historically, that was always done, you know, at the point of health care, at a hospital or at an institution. But it's, you know, things like, you know, monitoring of patients with wearables. emerge, it's going to change a lot of paradigm. So I think the reality is that, you know, it is true

that regulation is always lagging behind innovation. I think that will always be true. But I think what we need to do is find ways to close the gap between the innovation that emerge and the regulations that help us govern those innovations. And to the extent that we can further close that gap, we'll obviously be in a better position, you know, for future emerging health threats. Thank you guys so much for joining us on the A16s podcast.