Feature Article

A more difficult path is likely for medical technology companies entering the United States (US) market. They can expect a number of challenges, including taxes and price controls, and demands for greater rigour and more supporting comparative effectiveness research. The following essay presents the outlook for the industry in the US, where so much is changing.

By: M.W.C. Howgill, Institute for Health Technology Studies, Washington, District of Columbia, USA

The mood in the United States (US) is gloomy, if not grim, and is moving towards a new practicality. The political parties are fighting, the economy is struggling to bounce back from a near depression, and attempts at nation building in the Middle East face significant opposition from both liberals and conservatives. Within this framework, the White House has pushed for health reform, and any bill, well … any bill will do. Although President Obama initially passed the task of writing the legislation to Democratic leaders in Congress his party has since lost one of its Senate seats in Massachussetts, together with its “super majority.” Under Presidential pressure, the two parties are reluctantly talking about health reform, but the outcome is now less clear. However, this should not lead to complacency among medical technology companies. None of the pressures for reform have been resolved, and their worlds may still be rocked.

 

The impetus for healthcare change that many seem not to believe in has been fuelled in part by comparisons between the US and Europe, where health expenditures are lower and health outcomes appear better. US citizens spend at least twice as much as most European countries, but rank well below them in measures such as life expectancy and infant mortality. With this as justification, the prevailing US conviction is that soaring costs must be curbed or the country will face a bankrupt system.

In 1960, the US spent $27.5 billion on healthcare, which represented 5.2% of gross domestic product (GDP) at that time. In 2008, national healthcare expenses had soared to $2338.7 billion, a staggering 16.2% of GDP. Much of the increase has been disproportionately borne by government, for which health expenses rose to $1107 billion from $6.7 billion. In the private sector, the comparable rise in the same time period was from $20.7 billion to $1232 billion. In other words, where private healthcare expenditures once were three times as large as public expenses, today the two are much closer to equal (a “mere” $125 billion apart).¹

 

All this directly affects the medical technology industry. Only two years ago, the Congressional Budget Office proclaimed that half of the increases in national health expenditures have been the result of medical technology innovation,² which presents the country and the industry with a conundrum. Utilisation of technologies at such a high rate is presumably because they provide value to patients. After all, medical services are rarely sought unless needed, and rarely provided unless proven efficacious. Thus, while invention may produce more tools and methods, it is their utilisation that determines their impact on national expenditures. Blaming advanced technology for better healthcare is akin to blaming the installation of air bags for rising automobile costs.

 

Yet, it is not unreasonable to credit medical advances with the remarkable improvements in longevity and lower
disability rates that have resulted in large part from them. Yale’s William Nordhaus is among a group of US economists who argue that improved medical outcomes made possible by new technologies have a profound effect on the labour force’s ability to be productive. In addition to fewer disabilities, the US work force experiences less absenteeism as a result of shorter hospital stays and returning to work with fewer rehabilitation and physical therapy requirements. Indeed, Nordhaus suggests that the health of a nation has a direct impact on the wealth of a nation.³

Woven together, these threads create a fabric in which the medical technology industry must now work to bring innovation to the bedside. The path forward is not going to be easy. Medical product development will be more closely regulated than ever, justified by concerns for safety or as a tactic to impede additional cost pressures. The rules for sales and marketing of products will continue to be scrutinised, and practices deemed to be conflicting or unethical will be more rigorously rooted out. Whether or not Congress will ultim-ately smother innovation remains to be seen, but recent behaviour foreshadows a more difficult path for new products.

 

As Congressional leaders struggle to devise a bill that their members can support, they have been forced to accept a slew of self-serving amendments required to gain sufficient votes for its passage. All the extra baggage may yet bring reform legislation to ruin, but in the end, sometime in the first half of 2010, President Obama will probably sign a bill that will have significant impact on the medical device and diagnostic industry.

 

This landmark bill will almost certainly expand coverage of the uninsured by approximately 30 million people, who will benefit from greater access to advanced healthcare technology. At the same time, there will be a potential increase in market size for manufacturers, although the amount of that increase is in dispute because many of the currently uninsured are young and therefore unlikely to consume healthcare services.

 

Together with any benefit, however, industry faces a 10-year, $20 billion excise tax on devices and diagnostic sales. This will significantly slow capital investment in new technology and thus may well retard the flow of innovation that is not only celebrated for its positive effects on human capital and the healthcare delivery system, but also blamed for the major share of increasing health costs.

 

It is worth noting that early-stage investment in new medical technologies has been the engine driving the successful development of many devices and diagnostics originating in the US. Will the proposed excise tax level the international playing field and reduce the US advantage created by its venture capital model? Or worse from a US standpoint, will investors shift their research and development to India, materials and component sourcing to Eastern Europe or Asia, and manufacturing to China?

Adding to this complexity for domestic and foreign manufacturers is the spectre of price controls in some technology sectors, which will even more directly impede the willingness to gamble large investments on new products. Together, new taxes and any legislated price limits will only make it harder for start-ups to prove their concepts or execute an exit strategy that provides an attractive return to the business angels and venture capitalists who believed in them. To put this in perspective, in 2007, venture capitalists invested a record $4 billion in the US medical technology industry. Even if the industry achieved a full decade of record years, which is a fantasy under current economic conditions, the proposed $20 billion tax over 10 years would effectively take half that investment off the table, and would do so in the most destructive way possible by removing funds from profitable companies whose acquisitions motivated the venture capital in the first place.

 

Similarly, existing and successful companies that view acquisitions as their developmental pipeline will now have less capital with which to pick up emerging growth companies. Because most manufacturing operations are already run efficiently, reductions in operating costs will not be easy to find. Furthermore, regardless of whether or not controls are federally mandated, increasing prices amidst national concern for healthcare costs will do nothing to stimulate legislative or regulatory enthusiasm.

Emerging from the reform is a new industry called comparative effectiveness research (CER). Funded by a $1.1 billion package in 2009’s economic stimulus bill, CER appears certain to become a factor in the evaluation of clinical and economic assessments of medical alternatives. The fund is divided among the National Institutes for Health (www.nih.gov), the Department of Health and Human Services (www.hhs.gov), and the Agency for Healthcare Research and Quality (AHRQ) (www.ahrq.gov).

 

Already, the Institute of Medicine (www.iom.edu) has received $1.1 million in new funds to prioritise what should be compared (project completed in 2009), and AHRQ has produced its own set of priorities. For manufacturers, the fear must be that this is the beginning of a US government move towards “cheapest is best,” even though legislators have promised it will be a means for doctors and patients to make better informed and smarter medical decisions that will save money ultimately through improved outcomes, fewer co-morbidities, complications and so forth.

 

It is reported that Senate and House conferees who, at the time of writing are still working on a health bill, acknowledged that the “one-size-fits-all” approach to patient treatment is not medically appropriate and CER must consider subpopulations in its analyses. Yet, innovators and investors now face the prospect that start-up companies seeking to grow in Europe as well as in the US will have to put CER studies on their “to do” lists and develop their own evidence of comparative benefit.

Given the UK experience with its National Institute for Health and Clinical Excellence (NICE) this may come as less of a shock in Europe than it is likely to in the US. Nevertheless, European manufacturers will do well to pay closer attention to the economic tradeoffs that new or improved technologies bring to medical care if a NICE model emerges from US reform efforts.

 

Although it remains to be seen how much CER will drive cost-saving initiatives, it is clear that Congressional intent is not to spend more, but less. For manufacturers in Europe and the US, an emerging challenge is to introduce technologies that do more for the same price or less, rather than to develop new capabilities that add cost to the delivery system.

 

Layered onto this challenge are the complexities of new regulatory attitudes fuelled by product liability concerns. Manufacturers can expect increasing scrutiny of the premarket approval (PMA) process for breakthrough devices and diagnostics, and increasing criticism of the premarket notification (510(k)) process for clearing devices based on their equivalence to predicate devices. Congress and the Food and Drug Administration are calling for more stringent requirements for PMA products and the Institute of Medicine has already been asked to establish a task force to review the 510(k) process. Given that this additional research is neither easy to conduct nor likely to produce a consensus of opinion, the future for device developers appears challenging indeed. 

Martyn W.C. Howgill
is Executive Director, Institute for Health Technology Studies, 1319 F Street, NW, Suite 400 Washington, District of Columbia 20004-1122, USA, tel. +1 202 783 0941, e-mail: mhowgill@inhealth.org, www.inhealth.com