In Conversation with Paul Simms: Rice Powell, CEO, Fresenius Medical Care

Rice Powell, Chairman of the Board and CEO for Fresenius Medical Care, speaks to Paul Simms, eyeforpharma Chairman. Fresenius Medical Care is a company well-known for being the first to successfully pioneer a vertically-intergrated, service-oriented model within healthcare.

An edited transcript of the interview follows.
Paul Simms: Fresenius Medical Care is primarily a device company. However, if you were to suddenly wake up tomorrow as CEO of a pharma company with a huge breadth in your portfolio across therapy areas, and you wanted to differentiate yourself along service lines, what would you do?   
Rice Powell: My first idea would be to look to where my biggest value is - in particular which disease state - and I would probably try to rank those by priority.  Then I would ask: "where do I have the best opportunity to get closer to my specific customer base to begin a dialogue about how we, as a company, add more value? How do we help get to better outcomes for patients?"  People are going to over-react to the current M&A climate and they’re going to consolidate like companies did back in the eighties when everybody got into pharmacy benefit; and just buying it because you’ve got the balance sheet just doesn’t make sense. 
So I would try to do something different, which is prioritizing my portfolio. "Is there something we can do here to make this better?"  And see where that takes you.
Paul: Well at Fresenius Medical Care you have been very resolute in sticking with the single therapy area. If you were a pharma executive, once you’ve prioritized, would you look to sell off other parts of your portfolio?
Rice: I think that if I were really going to look at vertical integration, you can't be all things to all people. So again, I would have prioritized where we are. Let's say cancer. If we’ve got an additional cardiology division and we’ve got a generic drug division and they’re really not outstanding from a value-added perspective - should we free ourselves of that burden?  And should we really then create a singular focus in cancer where there’s still lots to be done there? I think it’s been a lot easier for us because we were in renal, and always had been, but the thing I would say is chronic conditions really lend themselves to vertical integration.
Paul: Previously you’ve talked about a lot of the pain that you endured when it came to reimbursement questions - in other words, will you get paid for services? How much of the decision, when you are deciding to become vertically integrated, is down to reimbursement versus simply meeting patient need?
Rice: If you’re going to stratify your book of business, meaning you’re going to look at your patient base, you’re going to need to understand how much of that patient base has insurance today - whether they’re privately funded, which gives more pricing flexibility versus what’s the percentage of our patient base that’s going to be in medicare where reimbursement is going to be much more difficult. You’re going to have to really look at that mix of payers and decide fundamentally whether being vertically integrated, if there is enough scope there to maintain and grow margins, and what other things will I have to do in order to be able to obtain margin expansion? And one of the things we look at is, insurers see this chronic population of dialysis, and it is very expensive, so our value proposition and our building of assets has to get us to a place where at some point, we can go into any kind of Insurance Company potentially  and say “we are willing to go at risk with you, if we can guarantee you these kind of outcomes and a healthier patient and it costs less, let’s share in that together”.
That’s the ultimate outcome of vertical integration and predictability. To be able to go to your payers and give them something by way of savings, but yet, for that, you want more volume, you want longer term contracts, you want the kind of things that are going to give you a chance for margin expansion.
Paul:  Do you actually fear that companies like yours, and pharmaceutical companies in general, are in danger of losing their seat at the table when it comes to determining a lot of the reforms that need to be made?
Rice:  I think that we won’t lose our seat at the table, once we are in the room with regulators.  Where we have lost something valuable is, in the perception of our patient base, as well as the general public, who believe that we’re not in this for better patient outcome, we’re in this for profit only and we don’t really embrace change.  Admittedly, we haven’t done a good job of getting people to understand that we try to take a long term view here.
Paul: Certainly pharma has endured a poor reputation for a long time and it’s only now that they’re seeing this as such a barrier to progress, moving forward. Again, if you were head of an association, is there any single thing that you think that the industry collectively could do to make a genuine impact on improving their reputation?
Rice: I would be more likely to look at who is willing to lead the change individually and probably not try to bring the whole pack along at the same time. Because my history in business tells me you’re never going to get them there.
Paul: I want to talk about the business conditions that led to the original vertical integrated model.  Was there a singular moment or a series of developments?
Rice: We believed, by looking at the demographics eighteen years ago, that our patient population was going to continue to grow, the expense was continuing to multiply, and we thought the best way to try to manage for better outcome, and more cost efficiency, was through vertical integration.  Being a provider of care wasn’t enough, just selling products wasn’t enough. I have to give credit to my predecessors who were in Germany at the time, they really viewed this as an opportunity.  What they saw was there is going to come a point with this patient base, particularly in the US, which is going to continue to grow, it’s going to get more expensive, and all of a sudden, people are going to wake up and say ‘payers, what am I getting for this money?  Are patient lives improving?  Are they living longer?’  So what is it we can do to get ahead of competitors in bringing that to fruition and that’s what really led them, to take somewhat of a leap of faith, to do the vertical integration.
Paul: I want to ask you about your priority list.  Patients first, employees second, stakeholders third, was how you put it previously.  I’m just interested why it was necessary to produce such a list, and why it was necessary to prioritize in that way?
Rice: I think you have to run a business with priorities, you can't be all things to all people, and I think you have to set priorities and you’ve got to have the will to stay with the mission.  We’re in healthcare and I think it is extremely important that if we’re going to be in healthcare, we’ve got to put the patient first, because that’s why we’re doing this.  In a company with 100,000 employees, easily fifty thousand of those people are nurses and a large percentage are physicians, and so they’ve spent all that time getting themselves ready to take care of patients and we have to focus on that.  If you’re going to care for patients, your employee base, the people that are going to touch those patients, the people that are going to make the artificial kidneys, if they’re not a high priority, then you’re going to fail in your mission.
If you walk into a clinic and you see happy employees, and you see people that love what they do, you’re going to know the patients are happy and the outcomes are going to be good.  So they [patients and employees] are my first and my second priorities.  And thirdly, I’m very sensitive to stakeholders or shareholders, but if I do right by one and two, three will invariably take care of itself.  If we do the right things for the employees, all of my financials, everything is transparent, I’m not being overly generous to the employees to the point that it’s to your detriment, but look at your returns, look at where we’ve been over the last 15 years, the strategy works.  You’re getting a fair return, as long as we’re doing the things we should do.
Would you want to be investing in me, if I had the worst mortality rates of any provider in the world?  You wouldn’t, you’d leave and you’d go someplace else, and it’s a discussion that comes up from time to time, but that’s just the way we’ve tried to live our values.
Paul: You mentioned in your annual report that you still feel you can go a lot further in the holistic treatment of your patients.  I am just wondering if there is a line that you wouldn’t cross?  You’ve mentioned vascular access, you’ve mentioned your own pharmacy chain. How do those things actually provide additional value to the patient?
Rice:  Every dialysis patient has to have an access, meaning that you’ve got to get to their blood in order for them to hook up to do their treatments three times a week, so vascular access is basically where we’re putting the access in. Secondly, every dialysis patient takes somewhere between eight to nine different drugs, because of the disease state, so we got into our own pharmacy because we wanted to make it easy for patients. What we’re trying to do, and we’re willing to move into other areas, in order to A, make it as convenient as we can for our patients and B, for us to be able to gather as much data about our patients as we can, so it helps us calculate what the outcome predictability could be.  If we’re providing you with your medication, then we know when you’re reordering your meds, then we know whether you’re taking it or not.
So that helps us as we develop our algorithms for how we want to manage your disease state, it’s a benefit for us because we have more data about the patient if he’s not taking his meds, so we need to talk to him about it, but if you’re running down to the local drug store, we don’t really know if you’re getting your meds or not.  So it’s just another way for us to manage the variables in the patient’s treatment.
Paul: That’s really interesting, obviously you said that came about because of the fact that patients often take eight plus medications.  Do you think that companies in that sort of situation could be looking at their own pharmacies, or is it really unique to yourselves?
Rice: I think it’s unique for our industry  in that we can; because we see these patients three times a week, we’re able to ship to them, but if I am in the pharmaceutical business and I’m pondering this, it would clearly, based on disease state, make me begin to think about all their fulfilment houses or their pharmacy benefit places that I need to talk to, do I want to go out and see what kind of relationships may be there.  Here’s a good example. 50 per cent of our patients are diabetic, and so after lots of research and consideration, we’ve talked in the US to the Jocelyn Diabetes Centre, and we’re partnering with them for better education materials, better ways to interface with diabetics before they become end stage renal disease patients. Those are the kinds of relationships and thoughts that I believe if I were in the pharma world, I would be thinking about, and I know that happens today in some cases.  But those are the kinds of things I think you have to be open to.
Paul:  And any other therapy areas, do you ever really think about that strongly, or are you absolutely committed to staying in this area only?
Rice:  No, we’re very committed to staying in the renal area where we see the ability to branch out a little bit as we learn what would be of benefit to our patients; is it better diabetic education, is it getting into the pharmacy?  We’re willing to move into those areas as long as we can really understand, will that give us a better benefit for our patients?  Can they live longer?  Can we give them a better outcome?  So we’ll evaluate those things, but you’re not going to pick up the paper and read on my watch, that we decided to get into orthopaedic surgery because we have a few patients that need orthopaedic surgery.  That will not happen.

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