Healthcare Reform

Healthcare and a Changing Device Environment

Ronald A. Gasser

The next decade of healthcare in the United States has the potential to change dramatically. To be sure, the medical device industry has a significant stake in any changes made to how healthcare is delivered and paid for. To gain some perspective into what medical device industry professionals think about various healthcare reform options being debated on Capitol Hill, the author polled more than 40 industry insiders to get their opinions. Responses were eye-opening. Each individual was interviewed by phone, with limited input on how to respond to questions except that the answers should relate to the medical device industry, not the overall healthcare industry.

In general, and understandably, the responses predict that change is coming.

Before the responses and comments are discussed, a review of the current situation in the United States might provide some illumination. The U.S. population was 307,006,550 as of July 1, 2009, according to the U.S. Census Bureau, and the Center for American Progress reported that the average U.S. health insurance premium in 2009 was $4,800 for an individual and $13,800 for a family plan. Health insurance premiums have increased 131 percent in the past 10 years.¹ Nationally, health spending reached $2.3 trillion, or $7,681 per person, in 2008. That was 16.1 percent of the nation’s gross domestic product, according to statistics released by the White House. The United States is running a budget deficit of $1.4 trillion for fiscal 2009,² and there are 47 million people in this country who have no health coverage.³ It is projected that 1.6 million people plan to seek treatment beyond U.S. borders via “healthcare vacations” by 2012, according to the Deloitte Center for Health Solutions. The big question people are asking is: Where are the healthcare dollars going?

The chart below shows the amount spent, in billions of U.S. dollars, on each major category of health services and supplies. Hospital care spending in 2006 was about $648 billion dollars, for example.

 

The Issues

Most of the respondents think that current assumptions and rules will change. Recent changes in the investment landscape have produced great impact on medical device startup firms. These firms

account for a much bigger share of medical innovations than their numbers would suggest.
All participants agreed that the proposed medical device tax, if implemented, would have a huge impact on the industry. Most think prices will rise, increased regulatory pressure will mount, doing business will become more difficult, and the reimbursement channels for medical devices will change in ways not easily understood today.

One overarching impression seems to be that the medical device development environment will change. How the change will take place is the question, but viewpoints varied. Some participants indicated that medical device markets will move out of central labs and closer to patients, such as physicians’ offices and clinics. Additionally, rising regulatory hurdles and ballooning costs to do clinical trials could have more suppliers considering an offshore approach.

Congressional Action

As this article was written, the Commonwealth of Massachusetts elected a Republican senator, Scott Brown, to fill the seat left by the death of longtime Democratic Sen. Edward Kennedy, which unlocked the Democratic filibuster-proof Senate majority.

The number and complexity of issues are beyond comprehension to most. In the United States, it is hard to find out who is in control since the industry is made up of thousands of firms, each providing a piece to the overall landscape.

Government intervention is likely to have long-term consequences that are not seen or understood. One industry expert questioned the removal of lead from all circuit boards under the European Union’s Restriction of Hazardous Substances directive. It was well-intended and needed, but to achieve it caused changes in many stable processes and products. As one interviewee pointed out, “Regulator reviews are not measured by rejection of products that could save lives, work better or lower costs to use but for products that fail to meet safety standards in the marketplace.”

Sustaining Growth

“The whole field of medical devices is changing and is problematic with our government’s involvement. The medical device market likely will slow down,” said one executive surveyed. The normal axioms of “have a good product, outstanding quality, and make sure the product really fits the market and has a proper value proposition” are still true. It is better to get to market with a sound product than one with all the bells and whistles but be late and miss the real market need. It’s necessary to get good market feedback early and often.

Startup firms hold a special place for medical devices. “Frequently, new products originate from small, innovative firms. These firms become acquired targets, or they strike product distribution deals. The economy has hindered funding of small firms. Increased FDA (U.S. Food and Drug Administration) regulatory activity increases development costs. The combination of less available funding and increased regulatory vigilance results in fewer new products,” said another interviewee.

The summary of the group was that the current product life cycle will change. Existing products will have increased life as the introduction of product replacements slows. Since profit margins are likely to shrink, the need for product development funding will become even more important. Decreased profit potential and increased risk closes doors on marginal projects. Venture capitalists are likely to fund a reduced number of projects with increased risk and reduced profit potential.

Looking Down the Road

What does the future hold? Everyone I spoke with agreed that things are changing. Regulatory hurdles will only get higher. “More foreign players will enter the medical devices market, and regulations will be modified to address offshore medical device development,” said one respondent. It is common knowledge that the U.S. population is aging and will need more medical devices. There is and will be a need for simpler, smaller, more effective and less costly medical devices. But the profit potential will decrease from the five to 10 times cost and become more in line with other industries. This means there must be more compromises.

“Medical devices are moving away from a limiting central lab model. You will see more medical devices in a physician’s office or a clinic. There will be extreme price pressure taking profit out of the industry of medical devices,” said an interviewee. This trend will change the devices in ways not fully understood today. The need for better, less complex and easier to use devices will only increase.

Closing Thoughts

Most believe that change is coming, but the outcome will only be a different look. At the end of the day, overall, the sector will work in much the same way as it does today. The medical device business will continue to have a huge demand for products. There are many medical devices yet to be discovered. We all want better, stronger and less-expensive healthcare. People see the medical device market moving toward a global product, resulting in global competition.

“There will be a constant tension and balancing act between insurance coverage, hospitals, patients and the government’s desire to provide medical coverage for everyone,” according to an executive surveyed. Major changes are likely coming to medical devices to address compromises for these players.

The U.S. economic turmoil uncovered the dependence on startup firms for medical device innovations and disputed their funding. The government via the FDA and other agencies will increase regulatory burdens one must endure to reach the market. Profit return will come under increasing pressure to be reduced. The United States needs better, smaller, less costly and more effective medical devices, and this pressure will only increase.

The door of entry for offshore competitors will likely open wider as governmental budget pressures mount and demands increase for cost reductions and for more healthcare services, while the medical device product development cycle lengthens. The number of dollars needed to provide every individual with full healthcare could soon exceed the U.S. GDP. As one interviewee noted: “A revamped healthcare delivery system in the U.S. is likely.”

So, change, in some form, is coming.

Author’s Note: All feedback to this article was provided before the election.

References:
1. TIME.com, money blog, health-care-statistics
2. The Wall Street Journal, Review & Outlook, Oct. 20, 2009
3. AFL-CIO Web site, Jan. 18, 2010

Ronald A. Gasser has more than 15 years experience in the medical device industry. He earned a BSEE from The Ohio State University and a MBA from Eastern Michigan University. He can be reached at [email protected].