Innovators, entrepreneurs and small companies have long been the driving force of the medical technology engine. While the largest companies have tremendous sales and marketing capabilities, the truly novel ideas still primarily emerge from smaller companies working with doctors and engineers, and it is vital to create an environment that is conducive to smaller companies.
With more than 98% of the medical technology industry consisting of small businesses, challenges continue to exist in developing the next great technology. However, if these challenges can be overcome, the possibilities to improve the quality and cost of care are endless.
Companies face a host of challenges, whether it is getting a device cleared or approved by the FDA, receiving adequate reimbursement by Medicare and private payers or gaining access to the hospital marketplace through hospital buying groups (known as group purchasing organisations, or GPOs).
Over the past decade, small businesses and entrepreneurs in the US medical device industry have come to share a growing concern that changes in policy have combined to significantly reduce competition, stifle innovation and create unforeseen barriers to market entry for small to medium-sized manufacturers.
These include the relaxation of the anti-trust laws, the promulgation of safe harbours in Medicare’s anti-kickback provisions for GPOs, and the concentration of market power in two dominant GPOs. This has harmed small business entrepreneurs and compromised the safety and health of US healthcare workers and their patients.
The opportunity to compete for GPO contracts has become more difficult for small and medium-sized manufacturers, especially if they compete with the established product lines of incumbent manufacturers. Given the exclusionary and often anti-competitive behaviour of certain GPOs and others, in concert with certain large manufacturers, small to medium-sized manufacturing firms are effectively denied the opportunity to market or sell their products to the vast majority of hospitals. As a result, small manufacturers – the primary catalyst for innovation in medical technology – are faced with the unappealing option of either selling their company to a larger manufacturer with GPO ties or facing near certain financial ruin.
In September 2004, the US Senate Judiciary Subcommittee on Anti-Trust, Competition Policy and Consumer Rights conducted its third hearing in as many years to explore the continued problems innovative manufacturers were having in accessing the hospital marketplace. Manufacturers with clinically preferred products offering greater savings were still being denied access to doctors and patients.
The GPOs had attempted to reform their practices through a voluntary industry code following the first Senate hearing in April 2002. However, the information gathered at the most recent Senate hearing indicated that the codes were not working as quickly or as effectively as the US Congress had intended.
As a result, the chairman of the Senate Judiciary Antitrust Subcommittee, Republican Mike DeWine, and ranking member Democrat senator Herb Kohl, introduced bi-partisan legislation on 1 October 2004.
The Medical Device Competition Act of 2004 will help to ensure that physicians and patients have access to the best, safest and most cost-effective life-saving medical devices. The bill would authorise the Department of Health and Human Services to prevent hospital GPOs from engaging in anti-competitive or unethical practices.
Industry has hailed the bill as a vital step in addressing anti-competitive and other questionable practices by certain GPOs that have long prevented cost-effective medical technologies from reaching the market.
While action on this bill has not occurred yet, the medical technology industry remains hopeful that passage will occur in 2005. In addition to enhancing the quality and cost of current care in the USA, this legislation will open the marketplace and drive investment from the venture capital community, resulting in greater advances in the future.
The other major issue impacting medical technology companies that is likely to be addressed in 2005 will be modifications to the Medical Device User Fee and Modernization Act (MDUFMA).
Often the first major hurdle that companies face in the USA is navigating the regulatory process at the FDA. The amount of time, energy and resources a company expends on this process can be staggering. However, medical device user fees, established in October 2002 by the act, were designed to provide the FDA’s Center for Devices and Radiological Health (CDRH) with additional funds to improve the quality and timeliness of its review process. In a number of ways, however, the act has not played out as expected. Fee increases, congressional appropriation shortfalls and unimpressive goals threaten to undermine the programme’s effectiveness.
AN UNCERTAIN FUTURE
In drafting the original legislation, members of Congress included a ‘sunset’ provision that forces the act’s programme to expire after three years if certain conditions are not met. This provision allows legislators and interested parties to reconsider a programme’s structure before allowing it to continue. Many believe some important modifications are needed.
The financial burdens the current programme places on manufacturers, especially small entrepreneurs, will have detrimental effects on the industry’s ability to innovate, attract capital and bring to market breakthrough devices. Patients are the ultimate losers, since raising the bar for new technologies not only limits access to new products, but may help to stifle the very innovation that results in technology breakthroughs. The industry is committed to ensuring that the FDA has adequate resources to do its job well. However, device companies cannot bear a disproportionate burden of the increased cost.
FUNDS FOR THE FDA
At the end of 2004, the House Appropriations Committee approved a spending bill that only included $214m for the FDA’s CDRH. This funding fails to make up for the shortfalls from previous years totalling $30m and does not even provide the full amount for the programme’s third year.
Congress has approved a final appropriation for the 2005 financial year of $215m, but the act’s programme will still receive less than half of the funds the government committed for the act’s first three years. Over those same three years, the industry will have contributed approximately $81m to the programme – a disproportionate share of the load. Since the user fees have failed to work as intended, the industry supports modifications to the programme.
The ‘sunset’ provision of the act calls for the programme to end without $60m in new, inflation-adjusted funds for the CDRH. It is now clear that the funds will not be there, thus Congress will be forced either to modify the programme through legislative action or to allow it to end. This is an opportunity to strengthen the user fee programme.
MODIFYING THE ACT
In 2005, Congress has some important work to do to strengthen this programme. Of primary concern are the skyrocketing user fee rates themselves. Rapidly escalating rates cannot be sustained. In the programme’s first two years alone, pre-market approval (PMA) fees increased by nearly 60%. In 2005, a PMA applicant will pay $239,237 for a review. At this rate, the PMA will exceed $300,000 by 2007. This is a startling trend, and one that cannot continue.
The only way to ensure some stability is to limit these fees in future. The current proposals are to eliminate the compensating and workload adjusters, cap annual increases at a certain percentage or cap overall fee rates. Industry input should be considered in the light of expected congressional support, FDA resource needs and true performance improvement goals.
To the FDA’s credit, the agency has made great strides in this area. However, those improvements were occurring before any additional infusion of industry money. And now that user fees are being paid, the agency claims that it does not need the full support from the government.
In short, it is not clear what the FDA’s total funding needs are. Internal assessments have failed to provide realistic estimates. An independent third party should complete a thorough audit of the FDA’s resource needs. Without this data, it is impossible to set rates for congressional and industry support moving forward.
During the act’s negotiations, the FDA promised a 25% improvement in 510(k) and PMA review times. However, the Office of Device and Evaluation’s 2003 annual report shows that, for 99% of submissions, the FDA was already meeting or exceeding the decision goals under the act before the law was even enacted. The $150m investment the industry will pay over the first five years merits more than maintaining the status quo. The original expectations of the act were obviously unrealistic. For future years, the industry and FDA need assurances that a certain level of appropriations will be in place. Otherwise, the programme cannot continue.
From the time user fees were first proposed, the industry has been closely engaged with the FDA and Congress in the development of the programme. The industry will continue to collaborate to strengthen the act in a responsible manner.
The industry wants a solution that satisfies the FDA’s funding needs and injects some responsibility and predictability into user fee rates. However, if congressional appropriations do not materialise for 2005, the programme will be in jeopardy.
While the prospects for medical technology companies look promising in 2005, important issues must be resolved to ensure that patients and carers have access to innovative technologies. Failure to address the anti-competitive practices of certain GPOs and to modify the act to address the skyrocketing costs for FDA reviews will result in long-term problems for this industry. And, ultimately, it will be the patient who loses out.