Payers and providers scrutinize new technology, but some wonder, have they gone too far?
Contracting executives are used to the balancing act – trying to hold down spending on medical devices, supplies and equipment without incurring the wrath of the clinical team. Everyone involved wants to deliver outstanding clinical care, but there is that bothersome issue of cost.
So contracting executives employ tools such as value analysis, vendor credentialing (which some vendors prefer to call “vendor management”) and even group purchasing contracts to slow down the flow of vendors – and potentially expensive new technology – into their facilities. But in their bid to limit spending, are they shutting the door on potentially beneficial technologies?
“Bringing innovative technologies that address unmet clinical needs has never been more difficult,” says Wende Hutton, general partner, Canaan Partners, a venture capital firm. “A combination of factors has created a perfect storm to inhibit innovation,” says Hutton, who brings close to 30 years of venture capital experience to the matter.
First, there’s the U.S. Food and Drug Administration. Five to 10 years ago, the agency had a good working relationship with the medical device community, she says. But three or four years ago, the pendulum swung in the other direction. “They assumed a posture that industry was uncooperative and not properly equipped to do the kinds of rigorous studies they were asking for.” The agency’s demands for studies were somewhat unrealistic. What’s more, reviewers were poorly trained. “There was a standoff attitude coming from the FDA,” she says. The good news is that the pendulum seems to be swinging the other way again. “We see more constructive dialogue today, like we saw 10 years ago.”
But even after receiving marketing clearance from the FDA – itself is a multiple-year process – manufacturers must often wage another three-to-four-year battle with payers for reimbursement.
The current system – imperfect as it is – calls for medical technology companies to publish peer-reviewed articles and seek recommendations from specialty societies, which then advise the American Medical Association on issuing new specialty code guidance to the Centers for Medicare & Medicaid Services, Hutton explains. Only then will the government (Medicare, Medicaid) consider issuing a reimbursement code for CMS and private payers to use in patient care. All the while, the start-up company is receiving zero revenue except on a case-by-case basis, yet is under pressure to get the word out about its novel technology to validate demand for it. So it hires salespeople, spends money on advertising, exhibits at trade shows and trains physicians.
“It’s an un-economic model” for small companies, which often lack the cash reserves to tide them over, she says. Only the big companies can afford to deploy the resources to work through three or four post-FDA-approval years before realizing income on their innovative technologies.
Suppose the American Medical Association and Centers for Medicare & Medicaid Services give the green light for reimbursement. Now, the entrepreneurial company has to work through the sales cycle in individual hospitals and IDNs, many of which have an inherent distrust of new technology, says Hutton. Working through value analysis and technology assessment committees might consume another six to nine months. And for the start-up, it’s one IDN at a time.
There’s another issue involved, one that is having an adverse effect on medical technology developers as well as healthcare providers, says Hutton: As lawmakers (think Sunshine Act) and hospital administrators work to restrict vendors’ access to clinicians, they threaten to cut off the flow of new ideas, she says. Healthcare professionals should be concerned, because innovation takes place with the free exchange of information and ideas among engineers, product managers and end-users. And that’s not unique to healthcare. “Every enterprise in this country is built on assessing customers’ needs and then trying to build something to address them,” says Hutton.
Nothing can replace a spontaneous exchange between an engineer and surgeon who says, “I don’t like the way this handle works,” or “What I really need in surgery is a device to do XYZ,” she says. “If you’re not allowed to stand next to that surgeon in the OR, or you’re restricted from getting meetings with surgeons, you’re not serving the needs of physicians or patients.”
The result is that innovation is drying up in cardiovascular medicine, orthopedics and other disciplines. “Distribution [in these areas] is concentrated in the hands of large companies,” leaving little room for entrepreneurial firms, says Hutton.
Given these obstacles, innovative companies do have a few options, she says. For example, they can pursue technologies for which reimbursement already exists, or that have a reasonably clear FDA pathway. Or they may focus their efforts on technologies that lend themselves to direct payment by patients (rather than private or government payers). Ophthalmology, dermatology and aesthetic medicine are a few examples.
Future of innovation
Medical device makers know the pressures facing healthcare providers today. “Every smart entrepreneur I talk to has a very good understanding that we’re not in a fee-for-service, premium-price marketplace any longer,” says Hutton. “They know that any kind of product innovation they’re going to bring forward has to reduce costs in the hospital environment.” They’re also aware that the fee-for-service system has led to excessive use of some of their technologies.
“But to make the argument that technology is at the heart of [high healthcare costs] is a bit misguided. It comes down to, what kind of premium do you want to pay for advances in technology, and whether that premium is appropriately deployed. I would encourage hospital administrators to embrace the medical device industry as innovators who can help bring about change.”
Failure to do so may put more power into the hands of a very few companies, and it could dry up innovation.