Purchasing Medical Innovation: The Implications for the Medical Device Industry

James Robinson’s book, entitled “Purchasing Medical Innovation: The Right Technology, for the Right Patient, at the Right Price” seeks to unpack the often precarious relationships among medical device makers, the purchasers of those devices, the insurers, who are often the ultimate payers for medical care innovation, and the end-users, or beneficiaries—the patients.  In this post, we recap the main points of Chapter 7 of Robinson’s book, which reviews the implications for the medical device industry.

In Robinson’s estimation, value-based purchasing, which is a program administered by the Centers for Medicare & Medicaid Services (CMS) that rewards acute-care hospitals with incentive payments for the quality of care they provide to people with Medicare coverage, will change the future of the medical technology industry.  There will be an emphasis on comparative clinical effectiveness studies to support the cost of a technology.  Hospitals and their staff will need to work more closely with manufacturers and distributors of the new technologies in order to promote more efficient use of the technologies.  Patients will be more informed via consumer cost sharing, and therefore economic costs in addition to clinical benefit will have to be taken into serious consideration.

In the past, the FDA was viewed as a minor hurdle by the manufacturers of medical technology and drugs, but the landscape has clearly changed.  The FDA’s focus is shifting to post-launch surveillance for devices and drugs, especially ones that underwent accelerated review.  Instead of relying on off-label use of a drug to promote broader and more frequent use, drug companies must now expand their products’ labels to new clinical indications.  Growing increasingly important is the need for head-to-head product comparisons, and subsequent network meta-analyses necessary to make sense of multiple head-to-head and placebo trials within therapeutic areas.  Comparative effectiveness research offers one tool that can help physicians select the most appropriate technologies for patients, given the coverage restraints of purchasers and insurers.

In general, insurers and producers both want the most appropriate and best technologies for patients.  In the real world, however, both parties want what is best for them.  Insurers retain more money if patients do not use expensive tests and treatments, whereas producers of the technologies make more money when their products are being used; device makers want the broadest available use of their products. Herein lays the conflict, a tension that can impact innovation and impact the availability of new products and treatments.

Ideally, new products that prove to be better than their competitors should obtain full and prompt coverage, and when there are many therapeutically equivalent products, insurers can contract selectively with a smaller number of vendors to leverage purchasing power.  Technology firms need to accept that comparative effectiveness research (e.g., cost impact models, budget impact models, cost-effectiveness analyses, etc.) will be the “foundation for insurance coverage.”  Moreover, insurers need to pay well for new breakthrough technologies when those technologies are accompanied by robust and compelling evidence.  They need to recognize that innovations involve risk-taking and high expenses on behalf of the innovators for research and development.  The manufacturers also have a responsibility to charge prices proportional to their overall value and in alignment with reasonably close alternatives.

Another important area of alignment is between physicians and hospitals– critical pieces of the health care value chain that, in the U.S., bill separately for their services and for the most part face divergent economic incentives.  The more closely aligned physicians and hospitals are, in general, the better it is for medical technologies with good evidence of effectiveness.  For many medical technologies, the integrated delivery system is now the manufacturer’s main customer, and manufacturers are not just vendors whose commodities can be purchased in bulk based on cozy relationships.  Evidence-based committee discussions need to happen.  Creating a relationship with manufacturers will benefit both parties, and it will lead to better innovations.   Hospitals can help the innovators improve their product designs, with physicians giving input on how to make devices overall better.  Both parties will profit greatly from a tight, collaborative engagement.

Underlying these economic relationships are patients, who have their own preferences and their own incentives—both of which are playing an increasingly vital role in the 21st century health industry.  The effectiveness of a new test or treatment depends on the patient’s understanding of his/her options, adherence of the patient to the chosen care path, and the decision to change behavior to encourage good outcomes.  As the pressure builds on the innovators to demonstrate their value, real-world use of the technology will become increasingly important.  Many manufacturers already aid in the patients’ financial access to their products by covering copayments, and in some cases manufacturers will cover the cost for the uninsured.  Innovation needs to consider the needs, preferences, and budgets of consumers.  Products cannot cost more than the value placed on them by users.  The future of medical technology industry will consist of cost-effective products that are within constrained budgets. As Robinson concludes, “Innovation is the bond between the present and the future, a transfer of resources from today’s society that finances research to tomorrow’s society that benefits from new treatments.”

-Cara M. Scheibling & John E. Schneider, PhD

John Schneider

Dr. Schneider was one of the founding partners of the Health Economics Consulting Group, LLC (HECG) which merged with Oxford Outcomes in 2009. Since that time Dr. Schneider has served as Senior Director of the U.S. health economics operations of Oxford Outcomes, which in recent years has included facilitating integration between Oxford Outcomes and ICON plc. He started Avalon Health Economics in 2013 by bringing together the consulting practices of several industry and academic colleagues, building on what he started with HECG in 2004. Prior to starting HECG Dr. Schneider was on the faculty in the Department of Health Management and Policy and the Department of Economics at the University of Iowa. His PhD is in Health Services and Policy Analysis from the University of California Berkeley, with a concentration in health economics. He has over 25 years of experience studying economic and organizational aspects of the health care industry, including professional appointments at the Center for Health Economics Research (Waltham, MA; now part of RTI International), and the California Association of Health Plans (Sacramento, CA).Dr. Schneider has also served as a consultant to managed care organizations, state health departments, trade associations, medical device manufacturers, large pharmaceutical companies, and others. He has also served as an expert witness in several legal proceedings. Dr. Schneider’s expertise include analysis of medical care costs, health insurance and managed care, regulation, hospital competition, specialty hospitals, physician ownership, outcomes research, technology assessment, process change, and insurer-provider contracting. Some of his research has been published in Medical Care Research and Review, International Journal of Healthcare Finance and Economics, Tobacco Control, Health Economics Review, Health Affairs, Inquiry, Health Services Research, Review of Industrial Organization, International Journal of Technology Assessment in Health Care, American Journal of Medical Science, Prevention Science, and Health Care Financing Review. He is co-author of The Business of Health (AEI Press, 2006).

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