David E. Williams: This is David Williams, co founder of MedPharma Partners and author of the Health Business Blog. I’m speaking today with Per Lofberg. He’s chairman and CEO of Generation Health. Generation Health is a startup health management company that specializes in helping employers and payers manage medical costs by ensuring optimal utilization of genetic testing. Per is a veteran of the health care industry. He used to run the pharmacy benefit manager Medco and headed up Merck Capital Ventures.
Per, thanks for being with me today.
Per Lofberg: Well thank you, David. Pleasure to talk to you again.
David: Per, what opportunity are you addressing with Generation Health? What made you decide to jump into this?
Per: Well I think the primary opportunity is the emerging science of linking the understanding of people’s genetic profiles with their disease, their reactions to medications and so forth. So we’re using the rapidly evolving science and medicine for the benefit of payers of health care and for patients.
David: What will the service feel like for a patient or for an employer customer?
Per: I think it will be a feature within their respective benefit plans. So if you are an employee of a company that has its own health benefit program, which is very common among large corporations, or if you are an insured member of a health plan, you will hopefully before long have a program within that health benefit that deals with the whole field of genetic testing and personalized medicine. This will become analogous to the prescription drug program, the mental health program, the behavioral assistance program, many specialized kinds of carve out opportunities in the health benefit area, where services have been developed to do a better job for plans and for their covered members in those specific areas. We intend to do the same thing with genetic testing and personalized medicine.
David: On your website you mention that there are some parallels with the PBM business which, of course, you know a lot about having run Medco. What are some of the things you see as the same at this stage of development and what are some the difference between this opportunity and the PBM business?
Per: This field is not dissimilar to the way the prescription drug field was about 20 to 25 years ago when the PBM industry first started to take shape. First off, if you look at the portion of health spend that is directly related to the field of genetic testing it is still pretty small. Probably half of a percent or even less of the total health spend for health plans is directly attributable to genetic testing.
However, it’s growing rapidly and over the next several years we expect that it will become a major focal point for every insurance company and every payer. So while today it’s still low on the radar screen, based on the explosive developments on the scientific front, we could see that changing pretty rapidly over the next several years.
Another similarity between the two areas is that about 25 years ago there was very poor data capture of what actually went on in the prescription drug area, and the same thing is true now in the field of genetic testing. So basically, when people wanted prescription drugs 25 years ago they would go to the retail pharmacy, basically just pay for the drug and they would attach their cash receipt to their insurance claim and they may or may not have gotten some reimbursement back from the insurance company at the end of the day.
That’s very similar to the way the genetic testing field is dealt with by payers and insurance companies today. So first off, there is no systematic program for reimbursement or coverage in this area. Some insurance companies cover some types of tests, others don’t and very few have developed clear guidelines in terms of which tests have clinical utility, which ones are more interesting from a scientific standpoint but may not really mean anything from a treatment standpoint.
And there’s very poor data capture so when claims are filed for genetic tests it doesn’t allow the payer to know what the claim was actually for. It just says that it was a certain type of diagnostic test but it doesn’t give you for example the disease it was addressing, that sort of thing, so you can’t go to a payer today and basically say, what is the amount of testing that is being done to try to prevent breast cancer, for example, in your population. They just don’t have access to that kind of data.
So that is also analogous of the drug business 25 years ago and one of the things we sought to do here is try to create a much more organized and systematic data capture of transactions that are happening in plans that relate to genetic testing to allow for better reporting on what is actually going on in this area.
David: One of the unusual characteristics in the PBM business is the multiplicity of different revenue sources and the complexity of the revenue model. Do you expect to have a similar situation evolve in this business or will the revenue model be more straightforward?
Per: If we can show enough value to payers to make them comfortable with a more straightforward per member per month subscription, that would be quite attractive from a business standpoint. So, it hinges on our ability to demonstrate with both clinical and economic modeling that the benefits of the tests actually far outweigh the actual cost of the testing. And that it’s in the payer’s best interest and, of course, in the patient’s best interest to proactively ensure that the right people get access to these benefits, and get tested, and that the doctors are acting accordingly based on the test results. So if we can do that, I think there’s a very good chance that we can ask for a straight per member per month subscription model.
David: What sort of organizations do you think of as your target customers? I know eventually it could probably be quite broad, but are there particular kinds of organizations, either because of their size, maybe the characteristics of their employees, that are good targets for you upfront?
Per: Our primary target is actually fairly limited. It focuses on large employers that have what you might call an early adopter approach to the benefit programs. Employers around the country cover a wide spectrum of health benefit strategies. So some employers are extremely cost focused. They are trying to limit the benefits as much as possible. They’re trying to cut costs year by year as much as they can. Other employers that are little bit more forward looking, take a little bit more strategic approach to the health benefit programs, where they’re really looking for the health benefits as a way to do the right thing for their employees. In part to attract and retain high caliber staff and so they’re much more focused on the long term benefits or health benefits, or their health benefit program. And those are the types of employers we’re going to focus on.
They will include large high tech companies, and they will include pharmaceutical manufacturers, for example. Many companies will also have a business reason to be interested in this area. And they’d like to be proactive in terms of incorporating these types of programs for their own employees.
David: You have an interesting set of co founders with you including some people that worked with you at Medco, the head of a medical data mining company, the head of a genetic testing and analysis company and a leading healthcare VC company. How did you come together and how did you think about what each member of the team would bring?
Per: Well, I think it’s a little bit two degrees of separation. All of us really have strong ties going back for many, many years. So first off, of course, Ricky Schatzberg and myself, who are the two management founders for this entity. We worked together for the past 20 years, since the very early days of Medco, and have been through the whole evolution at Medco. And I think both of us, really quickly saw the analog between what we had been working on for the past 20 years, and what we’re looking to do here. Then D2Hawkeye is very interesting. It’s a privately owned medical claims data mining company. It’s focused on analyzing medical claims for health care payers, including drug claims, hospital and doctor claims, sometimes lab claims. They have a particular capability to add value in this instance because we use their data mining capability to evaluate the strategic value of these tests from an overall outcome standpoint. So we can look at for example, something like breast cancer, and we can evaluate the extent to which we can actually impact the overall cost of treating breast cancer for a payer, by more targeted genetic testing, and more prophylactic treatment for those people that are at risk. So they bring the critical data mining capability to this field.
Chris Kryder, who is the founder and chairman of D2Hawkeye, is a compatriot of mine. And I’ve served on his board of directors for a number of years. David Margulies is likewise the founder of Correlagen and also a board member of D2Hawkeye. The three of us have spent quite a bit of time together in that venue.
Correlagen is a relatively small privately owned genetic testing lab, which conducts a spectrum of genetic tests exactly along the lines of what we’re focused on with Generation Health. And they have in depth subject matter expertise, both in the field of genetic testing (how you actually conduct the tests) and also in the field of analyzing and reporting the results of the tests to physicians and to patients.
So Correlagen brings the state of the art genetic testing know how to this venture. And they will be a key component, but not the only part of the genetic testing lab network that we plan to build up to cover the spectrum of tests that we can focus on.
And then finally, of course, Highland Capital is one of the regional venture capital firms that focused on health care early on. Bob Higgins is one of the founders. He’s somebody I’ve known for a very long time. I’m delighted that they were interested in this and willing to back us, especially in the challenging investment environment. And so Bob and one of his associates, Graham Gardner, are serving on the board of Generation Health.
David: We talked before about some of the parallels between Generation Health and the PBM business. I’m wondering also if you think there will be overlap between this business and the PBM, disease management and wellness markets. For example, I’m thinking that what you do on genetic testing has some impact on personalized medicine and drug utilization and companies like your former employer, Medco, are active in that space. And then on the disease management side and wellness side, when you’re identifying particular patients who need certain interventions , will you find yourself competing with some of those organizations?
Per: That’s a very important point. There’s no question that this field is going to be an important field for the PBMs also. And Medco, in particular, where I still have many, many close friends, they have taken a few very interesting early steps in this area focusing primarily on the pharmacoeconomic opportunities. And that fits very nicely with their business model of really trying to help payers optimize the use of pharmaceuticals. So, the slice of this sort of pie that they are particularly focused on and interested in is the use of genetic testing to identify those patients who may respond more or less well to a particular drug therapy. And they have a couple of pilot programs in that field. So that’s a key part of this. And, undoubtedly, all the PBMs in one degree or another will be active in this area.
Their approach differs from what we do in a couple significant areas. They’re not focused yet on what you might call the hereditary field of gene variations that are of importance in medicine. They’re strictly focused on those that impact the response to pharmaceuticals.
So, part of the issue for payers is how do they deal with the growing number of tests that have really nothing to do with a particular drug therapy but that have something to do with your hereditary predisposition for some disease. And it may be things like Alzheimer’s or autism or heart disease.
There are a growing number of testing opportunities to help doctors diagnose those types of conditions. And that really falls outside of the gamut of the typical PBM. That’s not to say that they won’t get into that, too. And obviously for us, in the future it remains to be seen to what extent these PBMs will be competitors, to what extent they’ll be allies, to what extent we can collaborate with them on certain types of programs and that sort of thing.
David: How do you go about building sustainable advantage in this field other than being, obviously, a first mover?
Per: I think that remains to be seen, quite candidly. I think a piece of this resembles the way the PBM business evolved. It has to do with assembling the critical mass of subject matter expertise and then to build systems that are specifically focused on this business. So, if you go back to the PBM base again, there was really nothing patented or highly proprietary about what the PBMs did. But, what ended up happening was that the systems that were built became significantly different from the traditional insurance company medical claims payment systems.
Likewise the knowledge, the expertise that was being acquired to design drug specific benefit programs became so different from what the typical insurance company account executive had that, after a while, once a critical mass was established that was the essence of the competitive differentiation.
Any of the big insurance companies could have gotten into the business if they wanted to. But they would then have to deal with a pretty significant handicap to get to the same level of expertise. And, as a result, many clients opted to carve it out of the program and go with a specialized provider.
So, there may be similar opportunities for us. But, as I look at this, I doubt that there would be highly patentable or proprietary features. I think the question is one of timing. If we are right in this, we’ve caught this opportunity when it developed far enough that actually payers will take it seriously and be interested in it. And I think it is right at that point where it has been well established in medical science for a couple decades.
It is just now beginning to gain a foothold in clinical practice where an increasing number of diseases in one way or another involve some sort of genetic testing to try to better diagnose and treat patients. And it’s just now entering the reimbursement and the payer realm.
So, we’re hoping that this is a time when payers will want to be early adopters and take a lead in building programs that are going to be incredibly important for them for the next couple of decades.
David: I’ve been speaking today with Per Lofberg. He’s Chairman and CEO of Generation Health. Per, thanks for your time today.
Per: Thank you.