3 Myths and Facts about the reforming market in 2015 for Medical Devices

Aren’t we done with reform yet? This law is over 5 years old, and by now it’s a virtual certainty that everyone understands it, right? Unfortunately not. The Patient Protection and Affordable Care Act (PPACA of ACA) is like the un-returnable gift that keeps on giving. Modifications keep cropping up, new programs are rolling out, and others change. The law was confusing to begin with, but now it is even more so.

Here are a few myths and facts about the current market that affect Medical Devices sales, their design, and distribution. There’s no particular order, but one theme is clear: from here forward “appropriateness of care” will guide coverage, payment, and utilization of your devices

TIGI may be on our own here, with an unpopular position, but we don’t see how the device tax will be dropped. The cost offsets required to fill the gap a repeal would create are significant, and with the successful repeal of the Sustainable Growth Rate and Physician Fee Schedule Adjustment, there’s a bigger hole to fill. The cost burden placed on Manufacturers and Distributors has had adverse effects, but the overall impact on healthcare prices (at hospitals) has been small, and therefore the cost-pass-through has been lessened. Device makers appear to be simply paying their taxes.

As for the argument that innovation will cease because of the tax, the pipeline of new healthcare venture capital investments, and novel diagnostics, therapeutics, and devices being rolled out currently provide a strong counter-argument. New treatments like Trans-Catheter Aortic Valve Replacement (TAVR) are growing rapidly, and appear to be cutting the amount of open heart surgery performed today in the PPACA era.

Furthermore, there is little evidence that Research and Development spending has retreated at a rate greater than other market forces would predict. We do observe some device industry consolidation as the result of this tax, but this too is being driven by a larger secular downturn in demand for equipment and devices on offer at premium prices.

Therefore, the device tax remains unpopular, just like all other taxes.

Fact 1: Bundled Payments are crimping margins because a good enough device is just that.

There are thresholds in clinical effectiveness that, when reached by more than one device maker, create a price competition and a substitution market. This means that incremental medical technology advancement does not guarantee market adoption. Beyond a specific level, a new improvement often fails to deliver an adequate cost-benefit ratio that supports switching.

The major driver of this regression toward mediocrity is the rise of bundled payment/episode based payment schemes in the marketplace. In these Medicare and private payer sponsored schemes, device costs are the primary area for cost reduction, and corresponding gain sharing among providers.

Providers are using their Electronic Health Record systems and Clinical Decision Support Systems to monitor outcomes and adjust formulary decisions accordingly. Similarly, payers are scrutinizing their utilization data to make new coverage determinations. Furthermore, as large scale studies are completed their findings are evolving the standards of care toward more conservative therapy options in many cases.

All together, payment changes are accelerating the commoditization of large sectors of the device business.

Myth 2: Providers are getting ready to enter into gain-sharing agreements with suppliers.

Providers are forced to take on more population, utilization, and financial risk under the ACA. To gather support for this requirement, there is some evidence that long term partnerships are being established. However, the number of these arrangements that exist in the device space are very few. Gain sharing agreements are hot, but the action is between different providers and cooperation on the process of care delivery. Little activity is seen between suppliers and providers, where the supplier takes risk for the outcomes associated with the device. The scope of such an agreement requires such an intimate relationship between parties with different business models, that the contingent liabilities and hazards are almost impossible to overcome.

Fact 2: Providers are interested in novel technology, if it improves clinical outcomes, processes and financial returns.

Improving quality and reducing cost simultaneously is an imperative of the ACA, and these requirements are changing the market. Therefore, incremental innovation in healthcare technology is increasingly difficult for manufacturers because the dimensions of a solution are multiplying. Not only must a device improve the clinical capabilities of the practice area, but it must be compatible with the skill mix, process norms, and technology of the provider.

Furthermore, the solution needs to create a compelling improvement in all these areas, as well as garner reimbursement at a level high enough to offset the risks associated with solution implementation. In TAVR for example, physicians need extensive training, and new clinical protocols. The OR also usually needs new imaging equipment, and other technology. This is expensive, and the cost of the devices and construction must be paid back within a short period of time. Therefore, the valve maker faces a series of obstacles in between clinical buy-in and purchasing activity. Fortunately, the market is ready to leverage TAVR, and it is proliferating.

In contrast, robotic surgery solutions have encountered difficulty in overcoming these obstacles; unexpected slower processes in the OR, greater physician training costs, and inadequate reimbursement come together to challenge growth of these systems in the market.

Myth 3: Accountable Care Organizations (ACOs) and Patient Centered Medical Homes (PCMHs) are new sales targets

There is a lot of confusion on the part of suppliers about the way ACOs and PCMHs are organized, operated, and incentivized. Some sales and marketing teams have considered how to target these entities and start promoting devices and services directly to them. Those efforts have borne little fruit because ACOs and PCMHs are focused on clinical integration, process of care-based innovation, and population health management. Devices are not a primary resource in this effort; they are ancillary.

Calling on this layer of healthcare providers needs to be done if the device has a population health management, population risk-mitigation, or utilization reduction capability. Few medical devices have these capabilities designed into the solution, even if they are integral to the achievement of these goals. Informatics solution providers, and population health IT providers will get attention, but not device companies.

Therefore, enlightened device maker organizations should monitor the actions of ACOs and PCMHs to determine which populations and disease states they are addressing. By tracking this activity, the positioning of a device in the care delivery setting can be done in the right context. For example, if an ACO is working on reducing heart-failure complications and costs, the clinics and cardiology departments where these events land are still the location of the sales call. However, the enlightened salesperson will orient the discussion toward clinical risk-management, outcomes improvement, streamlining processes, and complication avoidance, tied to the relevant solution attributes. In the clinical care delivery setting the messages will resonate. In front of the ACO head, the device centric discussion will fall flat.

Fact 3: Today is a good day to be in the Medical Device business

This has been, and will continue to be a crowded marketplace. The way it was 5 years ago is now history. It’s a new day, and lots of suppliers with many different devices will still make calls on providers and discuss the merits of a new solution. But, the conversation today has changed, and privileges the suppliers that can re-orient toward a value-based marketplace. Pricing does not need to erode if Clinical, Operational, and Financial value for providers can be expanded. Those companies that seriously consider the requirements of this new normal in healthcare and adapt to it will see an ocean of demand. Demographics are driving a huge wave of new patients. Reform is funding the healthcare spending requirements for these patients. Technology is improving the ability to deliver better care to everyone. It is up to this industry to rise and spur provider effectiveness, and efficiency. Doing so will have substantial rewards.

by:
Gunter F. Wessels, Ph.D., M.B.A.
Partner, Healthcare Practice Principal