A Disrupted Landscape: The New Medical Device Industry
Disrupting the status quo can be an unpredictable, even threatening endeavor for leaders in any business. Nowhere is it more true and prevalent than in healthcare today, and in the medical device sector in particular.
Never before in the history of modern healthcare has the industry been so ripe for fundamental, strategic disruption. Some of it forced at the hands of regulators, some by market dynamics, some by the need to improve the fundamentals of cost and quality. The question isn't whether it will happen, because it's happening now. The question is how ready are healthcare payers, hospitals, ambulatory surgery centers, surgeons, manufacturers and patients for the disruption headed their way on the implantable medical device front.
Thanks to the research and distribution talents of device manufacturers, the skills of surgeons and the partnership of surgical facilities, implantable medical devices are a great success story of 20th Century medicine. Today, with the advent of accountable care organizations and a general rethinking of how everyone involved in the health care delivery system is impacting patient outcomes and costs, many of those same visionaries that drove amazing innovations in the last century — from manufacturers to providers — are understanding that there is a changing landscape that must be addressed. And they are seeking to partner to actively drive change, which is extremely exciting There's a palpable shift to a next phase of industry development and integration into the entire continuum of care.
Mounting problems beg for disruption
Forty percent of all surgeries in the U.S. involve an implant (defined as metal, clips, screws, tissue, etc.), and those implants account for up to 70 percent of total surgical case costs (eating away at margins for hospitals and they can't pass on as much of the costs as before to make up for it in other areas). We spend more today on a per member per month basis on surgical implants than on radiology and more than home care, behavioral health and durable medical equipment combined. Yet all of those sectors are carved out and managed as specialties, but surgical implants remain largely unaddressed. Overall, total hip and total knee revisions are projected to grow by 137 percent and 601 percent, respectively, between 2005 and 2030.1
It will only get worse. Consider what the New York Times just reported on Aug. 4, that approximately one million knee and hip replacements are performed in the U.S. annually, which is expected to double over the next decade and possibly quadruple by 2030. If insurers paid $36,000 on average for each surgery, a fairly typical price in the commercial sector, the total cost would be $144 billion, about a sixth of the nation's military budget last year.
The wide variations in pricing for the same device from state to state, and even surgical facility to surgical facility in the same local market, only add to the problem. On May 8, the New York Times reported that a hospital in Livingston, N.J., charged $70,712 on average to implant a pacemaker, while a hospital in nearby Rahway, N.J., charged $101,945. Granted, variations in device pricing can be the result of additional burdens carried by academic hospitals, or higher concentrations of a sicker or older patient base and high labor costs, but it's hard to make a case for it when device costs are over 40 percent more or even double or triple in many instances.
Moreover, the vast majority of payments are on miscellaneous codes or costs bundled together, so there is no clue of what should actually be spent. There's a lot of flying blind by all the players in the device sector today. In addition, payments are based on cost plus and percentage of charges, which only encourage price shifting and price increases. What's more, we are missing the data on benchmark pricing and appropriate utilization that leads to the kind of pricing and performance transparency including safety, quality and outcomes, that drives open markets in other sectors of our economy.
Additionally, healthcare reform is casting more garish light on these deficiencies, as it creates accountable care organizations and drives for surgical bundles, which call for a transparent, competitive and comprehensive approach to healthcare and align compensation to performance to motivate all the players in the medical value chain. Reform also created healthcare exchanges in each state, which will require new ways of thinking about costs and value, particularly for health plans (look for narrow networks and volume steerage to those facilities and providers that sign up for lower costs, transparency and use independent groups to assess quality, satisfaction and outcomes).
Medical device mega trends
Given the scale and depth of the problems facing the medical device sector, the marketplace is driving four mega trends that promise to redefine the sector and help all those involved in surgical implants — from patients, health plans and surgeons to surgical sites and manufacturers.
Transparency and big data
For years we've been hearing about consumer-empowered markets driven by readily accessible information, in just about every sector of our economy. Except when it comes to medical devices. There's been very little transparency in the marketplace on how effective and expensive services are from phsycians and hospitals, what devices actually cost from the manufacturer and how effective they are.
That's in the process of changing. Increasingly, payers and patients are seeking to simplify the complexities and reveal the pricing details behind the cost and quality of the devices themselves, as well as the surgical procedure and administrative costs.
To do so will take a comprehensive, "big data" reservoir containing granular detail on not just each device, but on the most effective component parts involved in a surgery to support that device (the right type and number of screws and other requisite parts, for instance), tracking outcomes and effectiveness, analyzing key data sets, and making changes to future devices and procedures to improve sustainable patient outcomes.
Coordinated data sets and effective analysis makes pricing crystal clear to everyone involved in the procedure, including the patient. But it also gives manufacturers valuable market perspective on the industry as a whole, from the devices most in demand to safety and quality analytics and provides them with an organized channel for their products. And it provides health plans with access to data and analytics that measure spend and improve member outcomes, while generating savings.
The day of convergence in healthcare is finally arriving, where the cost of care (including treatment, devices and other needed equipment and supplies) and the short- and longer-term outcomes of care (including surgical performance as well as device performance and safety) are coming together under a value-driven model for healthcare in a post-reform environment. It's not about negative rationing of care that earned HMOs of the past a black eye, but rather it's about identifying the best value, just like in most other marketplaces.
Thankfully, at the center of this value-driven system is the patient. Healthcare reform encourages hospitals and systems to integrate the entire patient experience across departments and disciplines, rather than engaging in conveyor-belt care where patients just move from provider to provider with no coordination.
Those hoping to be leaders in this emerging healthcare market need a wrap-around approach to population health, prevention strategies and a proactive attitude that maximizes value and the patient experience, along with clear and actionable patient education. This has to be done overall, and in particular with surgical procedures prior to, during and after surgery.
Intermediaries, generics and formularies
The notions of intermediaries, generic implants and formularies, akin to what was established long ago in the pharmaceutical industry, can run a chill through medical device manufacturers. But given the mega trends in the marketplace today, it;s something worth addressing in order to try and get in front of it as opposed to being pulled along, because the way things are going, generics and formularies will be part of the solution.
The drive for big data, transparency, quality and cost convergence are prompting calls for a thorough understanding of device effectiveness and cost. Those market forces may lead rather quickly to a demand from those paying for healthcare (i.e., patients, employers and health plans) for the kind of consumer-driven choice that generics provide. As long as, of course, generics are FDA approved with full price transparency and measured outcomes.
Similarly, as payers strive to get their arms around the skyrocketing costs of implants, many believe device formularies can't be far behind. This can be a good thing in terms of containing costs and screening out substandard devices. But it can also be a slippery slope if the driving motivation is purely cost, which could hamper device choice and accessibility. There's a fine and careful line that has to be walked there, with the help of independent parties measuring performance and outcomes.
Given the market forces emerging today, more and more payers, hospitals and ASCs are looking to intermediaries with specialized knowledge of the entire surgical implant spectrum, from diagnosis to device acquisition to pre-op to surgery, post-op and beyond.
What's clear is that device manufacturers have a lot to gain from these mega trends. Manufacturers are seeking ways to differentiate their products and expand their market share. An intermediary can help position manufacturers with payers through data to demonstrate use and outcomes, and benchmark data to help manufacturers position their products in a cost effective way with payers and patients. An intermediary also serves as the device purchaser, thereby ensuring stable accounts receivable for manufacturers.
What is important to both manufacturers and surgeons — and should be to the intermediary as well — is to maintain physician choice over the device to be used in the surgery, obviously including an open conversation with the patient as part of the decision-making process.
It's nice to think that all the players in the medical device sector, regardless of their special interests, support one ultimate goal, which is to get patients the right implant at the right price to reduce pain and increase mobility so they can return to activities that fulfill their lives. That's what it's all about. To achieve that goal on a sustainable basis, a lot needs to change.
We need innovative, big data-driven solutions that increase quality and safety, decrease costs, and enhance transparency around implant use and surgical treatment decisions. It'll take an open and honest dialogue, collaboration and a willingness to embrace accountability.
As for industry disruption, pioneering is hard. There will be friction and frustration, delays and disappointment.There is no easy button when it comes to meaningful change, but everything worthwhile is worth working toward. Patients, providers, hospitals and ASCs, manufacturers, health plans and workers throughout the country are counting on it — even if they don't know all the facets quite yet, there is more than a general feeling change for the better is afoot.
Prakash Patel, MD, is the CEO of Access MediQuip, the nation's largest and only comprehensive surgical and implant management services company. He graduated Alpha Omega Alpha with a doctor of medicine degree from Cornell University Medical College and a B.S. magna cum laude from the University of Michigan. He completed three years of an orthopedic surgery residency at the University of Pittsburgh and has 17 years of specialty managed care, information technology and company growth experience.
1 American Academy of Orthopaedic Surgeons, “Projections of Primary and Revision Hip and Knee Arthroplasty in the United States from 2005 to 2030”
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