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Deloitte's Life Sciences & Health Care Blog

Paying for innovation in medical technology

Inspired by my wife Kerry, our 14-year-old son, Luca, has become a serious cyclist. Last May, we bought him a new road bike, complete with clipless pedals and shoes. After riding for a few months, he joined a local team and put hundreds of miles on it each month over the summer. In the fall, road season ended and cyclocross season began. So, we had to buy him a new cyclocross bike, along with shoes and pedals. Last month, with road season upon us, we discovered that he had outgrown his road bike. We had to buy him yet another new road bike and, of course, larger shoes. Having proven he is a strong and committed rider, he has moved to a more intensive training program, which required installing a power meter to assess his effort and progress. That required installing a new crank and bottom bracket, as well as purchasing a new bike computer to record his measurements.

By the end of all of this, we were in a spinning vortex of new needs requiring new devices, those devices creating new needs. While this resulted in better performance, it also led to rapidly escalating costs.

This image was not lost on me as I spoke on a panel at a recent summit of CEOs from medical device manufacturers. Innovative devices are transforming prevention, care, and chronic disease management. Each brings new capabilities and the potential to improve outcomes. Of course, each development also comes at a cost.

The US medical device industry is expected to grow at 7.1 percent annual from 2014 through 2019, reaching $52.9 billion annually. Traditional medical device companies and new technology entrants are capitalizing on new technologies, devices, and analytical tools to develop new or improved devices. From artificial pancreases to watch-like biosensors it’s clear the industry is showing no signs of slowing down. Though the Affordable Care Act (ACA) included a 2.3 percent medical device excise tax in an effort to put pressure on device prices, Congress suspended the tax for two years, giving device makers a reprieve…for now.

But what do we get with those growing costs?

Many medical device and technology (medtech) companies are working with providers and health plans under new value-based care (VBC) arrangements that increase standards for evidence to support product adoption. These new models mean that companies are no longer modifying features of a device and promoting to clinicians or competing on price alone. Rather than working to provide a cheaper but comparable product, companies are seeking to show better return on investment through improved results, reduced readmissions, and more efficient care.

Companies like Medtronic, Johnson & Johnson and St. Jude Medical, Inc. have set up shared risk arrangements. For example, Medtronic guarantees that infection rates will be lower for hospitals that use its Tyrx product, which covers cardiac implants with antibiotics. If infection rates are not lower, Medtronic agrees to pay for the cost of treating patients’ infections. Similarly, Johnson & Johnson gives hospitals a discount on its Biosense Webster devices, which are used to treat arterial fibrillation, if patients need a repeat procedure within a year. St. Jude Medical offers rebates on its Quadra heart failure device if patients need a surgical lead revision as a result of certain clinical outcomes associated with the device within a year.

In general, these alternative arrangements have huge potential for a new type of innovation in the medtech industry. But, innovation does not come without challenges. For one, the quality measures have not completely caught up. Bundled payments, where providers accept a lump sum payment for each patient per episode, have increased in popularity. The US Centers for Medicare and Medicaid Services (CMS) has been testing this model for several years through the Bundled Payments for Care Improvement program. More recently, it announced that organizations in 67 geographies across the country would be required to accept bundled payments for joint replacement surgeries. But, many worry that these programs lack the quality measures necessary to ensure patients are receiving the highest value medical devices (see Deloitte’s recent paper, “Delivering medical innovation in a value-based world”). Quality measures that look at improvements in functional status, pain level, quality of life, and others may do more to assess the value that these products can bring to patients’ lives. CMS is awarding grants of $1 million to $30 million to test new payment models that might be scaled up if they are successful. This may be one avenue for testing new ways to pay for medical devices, but the projects CMS is funding are small scale and may take years to implement and show results.

Though the motive behind increased transparency to improve outcomes is admirable, measuring and tracking performance of implantable devices within an appropriate time frame often proves to be a challenge. First, data that the outcome expected is likely to be achieved have to exist. Second, the value attained must be realized by those involved, which often requires that being under a managed- or accountable-care contract or operating within an integrated delivery network.

Finally, taking on risk involves investment by at least one of the parties, which is where it often gets very tricky. When payment is attached to outcomes, distinguishing between the responsibility of the provider and product is important. While a payer, provider, or patient may realize some incremental value as the result of adopting a new device, the manufacturer stands to profit greatly from successfully demonstrating the product can add value. Consequently, the onus may be on them to bear the bulk of the risk. For some innovators, particularly startups, the capital requirements for this may be prohibitive.

These issues will have to be addressed in order to bring more value-generating innovations to patients. Historical examples can serve as cautionary tales about what we risk if we’re not able to align all of the stakeholders. When pacemakers were initially developed, they were not compatible with MRI machines. As a result, health plans would not reimburse for MRIs on patients who had pacemakers. Seeing this as a unique opportunity, manufacturers stepped in and developed a pacemaker that was compatible with MRIs. They worked with health plans to secure reimbursement and providers to get buy-in. However, today, these pacemakers are still not commonplace and radiologists have been slow to break with the existing standard of care.

In Luca’s case, tracking his outcomes has been enlightening. Thankfully, every new device has been accompanied by better performance and accelerated improvement. While the cost has been considerable, the pride Kerry and I feel is priceless. Of course, that’s not stopping us from seeking greater value, so if you’re on the admissions committee of a college that provides cycling scholarships, please let us know.

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Author bio

As director of the Deloitte Center for Health Solutions, Dr. Greenspun serves health care, life sciences, and government clients on key innovation and clinical transformation issues. He has been named one of the “50 Most Influential Physician Executives in Healthcare” by Modern Healthcare, co-authored the book “Reengineering Healthcare,” and has served on advisory boards for the World Economic Forum, WellPoint, HIMSS, Georgetown University. Prior to joining Deloitte, he served as the Chief Medical Officer for Dell.