Stormy Outlook for US Healthcare Industry31 March 2010 Thomas C Novelli
Device tax, new regulations and effectiveness research are causing some panic among medical manufacturers in the US. Will the industry be able to weather these changes? Thomas C Novelli of the MDMA investigates.
The recent healthcare reform debate in the US positioned the medical device industry for a period of anxiety unlike anything experienced in recent years. New levels of uncertainty, increased regulatory scrutiny and an imposing new tax sent chief executives scrambling and investors stepping back.
While the debate and uncertainty continues, one characteristic truly unique to the industry is being overshadowed by the larger political debate: the importance and value of innovation in the medical device industry. Multiple factors occurring at approximately the same point lead many to consider a simple question: is there a perfect storm brewing that will harm innovation in the US device industry?
The industry is one of the last truly unique manufacturing industries left in the US that has a positive rate of growth. It is highly competitive globally and leads the world in the innovation and development of novel medical interventions. As the US potentially moves ahead with healthcare reform, and as other regulatory and economic factors arise, the impact on innovation may be great.
A favourable regulatory environment
Over the last 30 years, the medical device industry has experienced unprecedented growth in the US. Devices treat and diagnose in ways unimaginable even 20 years ago. As a result, patients have more accurate and more timely treatment for countless medical interventions. Moreover, the growth of the medical device industry has made it one of the fastest-growing and healthiest industries in the country. For instance, according to recent Department of Commerce statistics, the US has maintained a positive trade export of over $5bn over the past several years. Compared to other industries domestically, the device industry is one of only a few that can claim such positive data.
The favourable economic situation for medical technology development in the US exists because there is an "innovation ecosystem" that fosters innovation of technological solutions to healthcare problems. This innovation ecosystem enables the development of innovative medical technologies and exists because of two primary reasons.
First, there traditionally has been a favourable, albeit challenging, regulatory framework in place which has encouraged entrepreneurs to take risks and develop new technologies. Policies, procedures and regulations have been crafted to enable devices to be approved and delivered to patients in a reasonable time frame while ensuring that products are both safe and effective.
Second, the investment paradigm in which companies are funded has been overwhelmingly favourable. It is an environment where inventors work side-by-side with venture capitalists to fund new medical therapies.
One area that has contributed to the success of the innovation ecosystem is within the regulatory scheme used to approve devices. Device companies seeking regulatory approval in the US must demonstrate to authorities that their particular device is both safe and effective for patient use. In addition, the public expects that it should have access to medical technologies in a reasonable time period.
The Food and Drug Administration (FDA) is the government regulatory agency responsible for ensuring that these standards are met. In 1976, the foundational laws and regulations governing medical device approvals were created. In the years following, however, the FDA became a target of criticism by many patient groups because it was viewed as allowing too much time to pass from a product being developed to actually reaching the specific patient populations.
To address this, Congress and the Agency eventually established performance goals for the Agency to reach. For instance, a device seeking approval under the 510(k) process was expected to be reviewed and approved or not approved within a static time period. When these goals were established, patients began to notice a difference in the time available to have access to these technologies. With more assurance that products were being reviewed in a timely manner, more inventors and companies were willing to take the risk of bringing their ideas to market.
Alongside the ability of companies to successfully navigate the regulatory pathway is their ability to successfully obtain adequate and appropriate reimbursement for their technologies. In most cases, device-depend procedures reimburse at an adequate enough level by public and commercial payers to maintain the appropriate incentives for innovators to innovate. Payers realise that physicians and patients desire the use of many of these medical technologies and are willing to pay for them.
The model in which device companies are funded and eventually commercialised also matured and became more sophisticated, primarily during the mid-to-late 1990s. Venture capital firms began to take notice of the trends developing in the medical technology and other life science areas during this time period. It was a high-risk, yet high-reward environment that many investors found attractive. As more venture capitalists moved into the life science arena, more inventors with innovative ideas and products successfully sought funding. Ultimately, this funding model helped drive the innovative products we see today.
Private funding through venture capital is the primary source of resources for start-up medical device companies. While this is the most prolific avenue, companies often rely on government funding for their projects. For instance, in the US, the Small Business Administration provides funding for medical technology and other industries through the Small Business Innovation Research (SBIR) programme.
Through SBIR grants, in partnership with the National Institutes of Health, small device companies can compete for various grant awards to assist in the development and commercialisation of their technologies. This has become an even more critical source of funding in the past year as companies have dealt with a sluggish economy.
Evidence of change in the innovation ecosystem is also apparent at the FDA. Chronic and systemic problems at the FDA are plaguing the industry and the ability for device innovators to have their technologies reviewed in a fair and reasonable time period. Over the past few years, companies have started to notice a significant lag in the approval process.
In addition, there is a greater tendency of FDA reviewers to over-analyse the clinical data presented and compel companies to conduct additional studies. For instance, there have been several cases where FDA reviews have required companies to conduct additional studies on component products that have been deemed safe and effective for decades and already have a body of post-market data to confirm such endpoints.
This additional requirement by the Agency had led many start-up companies to simply stop the development process because they can no longer afford to conduct such studies.
The Agency has come under criticism over the past few years from members of Congress and others concerning the approval of a small number of devices. These criticisms were focused on the process associated with the device approval, and not the ultimate safety or effectiveness of the product itself. Nevertheless, the increased scrutiny has likely caused the Agency to move in a conservative manner.
The health reform debate has asked many questions of lawmakers, patients and providers of healthcare. While most interested stakeholders are in agreement that some level of change will be necessary, the difficult decision has been what type of change is needed and how much. In the minds of many medical technology stakeholders has been one simple question: what will be the impact on device innovation?
The policies set forth in the multiple proposed health reform measures have not been favourable to the industry. Most apparent is the proposed tax on device companies. Lawmakers have looked to the industry as a method to "pay" for the health bill to the tune of a $20bn tax over the course of ten years. Even more troubling is that there does not appear to be much, if any, relief for small medical device companies, which comprise the majority of the industry. Many companies justifiably are concerned that the new tax will cut into razor-thin profits and force layoffs or prevent new hiring.
The tax is the most prominent issue of concern to manufacturers within the context of healthcare reform. However, it is not the only issue on which the industry is focused; there are other issues within healthcare reform that have entrepreneurs and venture capitalists concerned. The uncertainty of comparative effectiveness research has led many to question whether or not it is viable to invest in a specific therapeutics area if there is a substantial risk that public health programmes, and ultimately commercial insurers, will not appropriately reimburse for a medical technology.
In short, comparative effective research is simply a way to examine which medical interventions, whether drug, device or behaviour, are the most effective for certain populations of patients. Comparative effectiveness studies can look at clinical outcomes as well as fiscal outcomes of technologies. This has been one of the driving issues of concerns in the healthcare reform debate for many politicians. While perhaps unfounded in some cases, there is a concern among some Congressional members that comparative effectiveness research could lead to "rationed care".
The implications of comparative effectiveness research on device manufacturers and innovation could be great. Specifically, the greatest concern in the industry is whether comparative effectiveness research will lead to reduced reimbursement rates for medical devices or even decisions not to reimburse at all for specific device-dependent surgical procedures. For instance, a comparative effectiveness study may be conducted to determine the most effective method to treat a cardiovascular condition. The study may look at a variety of treatments including drug interventions and device procedures.
While the goal of the study would be to determine the most clinically effective outcomes, there could also be conclusions reached, such as which intervention is the most cost effective. In most cases, drug interventions would be the least costly and may be more appealing to insurers. However, in the long term, the cost savings achieved by devices could be greater. This is the concern of manufacturers; comparative effectiveness studies might consider cost effectiveness in addition to clinical effectiveness. Moreover, if cost effectiveness is considered, the concern is that studies would be focused on short-term cost savings and perhaps not savings achievable in the long term.
What happens next?
Assuming a health reform bill ultimately passes Congress, the impact for innovation in device companies will likely be immediate. Venture capitalists, already wary of a more difficult regulatory system at the FDA, are looking at the bill very pessimistically.
Simply put, if the risk-reward equation used to determine funding strategies is not attractive, venture capitalists will choose to fund areas outside of life sciences. This means that the next innovative medical technologies may not see the light of day because they will not have the resources to navigate a challenging regulatory environment.