Acute challenges of humanity and how financial institutions can make the world a better place.
True value is created when a small or large idea is actually transformed into action. It starts with believing in the power of every positive change we make, in our daily lives, and in our companies and organizations. In the next article, I want to touch on two areas that in my humble opinion constitute the greatest challenge facing humanity, the SDG 2 and SDG 3 now. SDG 2 aims to end hunger, achieve food security and improved nutrition, and promote sustainable agriculture. A major cause of hunger is actually a distribution problem. The world produces enough food to feed all eight billion people, but those who go hungry simply don't have the access to it. Ending hunger is also related to SDG 3. The focus here is on ensuring healthy lives and promoting well-being for all people of all ages. Good health includes a variety of aspects and while it is a global problem, each region faces its own specific challenges. These are linked to quality, access and affordability of healthcare, and trust in the system.
As a graduate of the Faculty of Agriculture of the Hebrew University of Jerusalem and as someone who has been exposed to the amazing developments of this wonderful institution over the years, I believe we live in a world where enough food is produced to feed everyone. Yet one in nine people, and in some developing countries, one in three children experience hunger or malnutrition. With an increasing global population and wealth, we can only expect the demand for food to increase. Furthermore, climate change is putting more pressure on food production. So what can we don't to provide nutritious food for everyone in a sustainable, inclusive, and environmentally friendly way?
SDG 2 Zero Hunger, pledges to end hunger, achieve food security, and promote sustainable agriculture. Reaching this goal requires the involvement of many parties in the food and agricultural system such as governments, research, business, individual consumers, and financial markets and institutions. Being on the financial side, let me explain how finance can contribute to solving this problem.
So, there seems to be a puzzle. We have enough food, but still, people are hungry. Perhaps, something goes wrong with the kind of markets on which foods are traded. These are agricultural commodity markets. Trading foods, or more broadly agricultural commodities, plays a key role in providing food to the population and constitutes a major source of income for many developing countries and individuals around the world. Agriculture is the single largest employer in the world, around three billion people, 40 percent of the global population depend on agriculture to pay for food and other costs of living. The majority of the world's hungry people live in developing agricultural countries, where poverty is most profound among food crop farmers. The situation is worsening in South America, Southern Asia, and most regions of Africa.
You may ask "what does wrong on agricultural commodity markets"? Quite simply, people do not only starve because food is too expensive. Rather it is the volatility of prices that hit food producers hardest. Commodity prices are in fact highly volatile, and this volatility has been increasing over time. More volatility means more volatile income for food producers. But also, more problems with planning food production, leading to periods of food shortages or excessive production that is at risk of being wasted or more severely damage the environment. Have you had coffee, already? Let me give you one example.
Between 2000 and 2004, coffee prices fell from one US $1.20 per pound to around $0.45 per pound. This price slump affected around 25 million households that dependent on coffee production worldwide. They suffered from a severe income drop. Dropping agricultural prices led to the crisis in Brazil and Argentina in the late 90s. Paraguay, the world's fourth-largest soybean exporter, saw the value of its soybean exports rise and then fall by over 400 million US dollars when soybean prices fluctuated between 2003 and 2006. Such fluctuating revenues make fiscal planning extremely difficult, and as a consequence, investment in infrastructure, health care, and education suffers. Rising commodity prices can also have disastrous consequences as farmers and agricultural countries can be tempted to engage in straightforward exploitations and focus on the current extensive consumption with no regard for long-term planning or environmental concerns which are critical to growing food.
As another example, commodity futures or options exchanges allow commodity producers to use financial products to transfer their price risks to outside investors who're willing to take on those risks. Thus, making their income from food sales more stable and predictable. But, the challenge is to provide access to well-functioning commodity exchanges for farmers in poor agricultural countries. Currently, the biggest commodity exchanges are located in developed countries like the US, UK, and Japan. Recognizing the challenge to access international exchanges, national and local exchanges have begun to develop. At this point, relatively successful local commodity exchanges exist in Brazil and Asia and they are growing really fast. Financial markets and institutions can play a vital role in further facilitating access to international and national commodity exchanges.
Next to financial markets, financial institutions can also make a difference by, for example, providing farmers with simple access to finance, insurance, and other risk management tools to help them smooth their income. They can also invest in rural infrastructure and agricultural research in developing countries to support the production process. They can harness their technological network (every financial institution in 2020-1 should have one) to bring in technologies and turn-key solutions that will allow for faster and better utilization of land and resources at lower costs.
When it comes to healthcare SDG 3, we face similar challenges. For a short time, I used to serve as the CEO of an Israeli medical tourism company. Israel is a rather attractive destination in this field. During this time, I gained a wide perspective on global healthcare delivery failures and the fact that significant groups in the population fail to receive adequate medical service. Medical service becomes a commodity, a fairly expensive commodity that can be imported and exported and only those who have enough resources can enjoy it.
When we talk about healthcare and how the system works, we would typically look at three aspects of healthcare: quality, affordability, and accessibility. The last two are strongly interlinked. If healthcare is too expensive and we cannot afford to go to the doctors, then the accessibility of healthcare is also low. The big challenge in healthcare is that costs are rising so fast that even if current trends continue, each one of us will spend a quarter of our income or more on healthcare. The challenge in developed economies is to make healthcare financially sustainable. If it's not, the whole healthcare system can collapse.
The key to solving this problem is value. Our current system is focused on production instead of value. Most actors in the healthcare system are rewarded for producing. A hospital earns more the more it produces. The simplest way to explain value is health outcomes divided by costs. So what we want is that every actor in the system is rewarded to create health outcomes that matter to the patient, and for the lowest possible costs. For example, imagine a hospital having a patient with hip problems. A production-driven hospital would replace the hip because it solves the patient's problem and it generates the most money for them.
A value-based hospital on the other hand would think, wait a minute, can we achieve the outcomes that the patient is looking for without replacing the hip? The patient is not necessarily looking for a new hip, but for some functionality that they want to get back. More than that, 7 In 8 Tonsillectomy surgeries are unnecessary, one-third of knee replacements for Arthritis is unnecessary and there is no end to such examples. With incentives that stimulate production volume instead of value, such value thinking does not happen by itself. You may ask "If these actions are actually the best practice used by the healthcare system, what tools are available to us to change the practice"? Fortunately, there are tools available. SerenusAi, is an AI-based technology aims to empower medical decision at critical post-diagnostic crossroads. The application of this technology by a medical institution makes it possible to determine the most accurate treatment in each case. This is not just about personalization at the highest level, these are the extraction of all the medical knowledge available for the benefit of each individual patient. Such a solution not only can reduce costs for the medical institution, the patient, and the insurer, it serves the time dimension excellently and as is well known in medicine the time dimension is acute.
So, yes, the technology is there and it can probably save the healthcare system hundreds of billions a year, so awareness of the very existence of the technology becomes a challenge.
Another reason why hospitals and other healthcare institutions don't optimize value for patients is that we have compartmentalized healthcare. Such compartments are for instance primary care, hospital care, and home care. For many conditions, value for patients is created across such compartments when primary care, hospital care, and home care are coordinated well. But as long as each actor is rewarded for production and is paid from a different budget, there's actually little incentive to optimize healthcare value across compartments. In many developed economies, there is a so-called purchaser-provider split, meaning that there are organizations that provide the care and other organizations that decide which healthcare organizations are going to be contracted and what kind of contracts they will get. We call these latter organizations the purchasers of healthcare, insurance companies for example. In order to make the change to a value-driven healthcare system, such purchasers need to be able to execute a value analysis. As a purchaser, you want to contact the suppliers that generate the most value with the right type of contracts and with value-based incentives instead of production-based incentives.
A proper value analysis consists of at least the following elements. First and foremost, the focus should not be on quality per se, but on how the supplier contributes to performance outcomes for the customer. In health care terms, this means analyzing how the provider contributes to outcomes that matter to the patient. These outcomes are broader than just clinical outcomes and include also patient-reported outcomes and patient experience. Second, the analysis, particularly in healthcare, should identify how the provider interacts with other healthcare providers in a complete cycle of care. Next, there needs to be an analysis of costs. In this step, it's important to have a focus on total costs, moving beyond the purchase price, but also, including all indirect costs. In a value analysis of a healthcare provider, this analysis includes the cost per treatment episode, per patient or per group of patients, and any costs generated in other parts of the system as a result of the healthcare provided by this provider. Let me give you an example, a provider could have a higher treatment cost per patient, but the patient could be needing less rehabilitation care and less home support reducing healthcare costs elsewhere in the system and returning to work sooner reducing societal costs. If at the same time, the outcomes are similar to cheaper providers or maybe even better in terms of complications, patient quality of life, and satisfaction, then the value analysis identifies this provider with the higher treatment costs as the high-value provider.
The purchasers making contracts with healthcare providers are key players in turning the healthcare sector towards value-based thinking. If the purchasers start rewarding providers for the outcome total cost ratio, healthcare costs would rise less sharply which would improve affordability and accessibility. Value-based healthcare purchasing can help solve the cost crisis in developed economies and is also the route to the future of affordable and accessible healthcare in developing economies. This kind of thinking can be applied to any industry. Looking holistically across the value chain and basing your decisions on an integrated analysis of outcomes and cost is challenging, but it is the way forward towards good health and well-being for all.
In conclusion, the availability and efficient accessibility of food and health resources are critical to the world to which we are marching. Financial institutions have a responsibility not only to provide access to funding for essential projects but also to increase awareness of the solutions available in order to direct funding to relevant technologies.