How about a surgery to go with that implant? -(Part 2)
Unraveling mysteries of the implantable medical device industry
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We are looking at a pocket of the industry that doesn’t get talked about in “health-tech” even though it was the original health-tech. Part 1 of this series covered the market dynamics, regulatory requirements, and reimbursement in the medical device industry with a focus on implantable medical devices. Part 2 of the series covers the market inefficiencies and policy options to create transparency in this opaque pocket of healthcare.
Competition is for losers. Are we all winners then?
A basic premise of laissez-faire is that markets must be competitive. A competitive market is characterized by many sellers selling similar products that are good substitutes for each other. This kind of market has low barriers to entry, and there is reasonably high fidelity information available about prices, quality, performance, and perception of products in the market. Price setting in the implantable medical device market is a laissez-faire affair. But the market itself is anything but competitive. As we discussed in Part 1, a small minority of medical device companies dominate the market, and it is tough for new entrants to break in.
There are structural barriers to competition arising from complex and costly regulatory approvals and patent protections. There are some natural operational barriers to competition as well. Implantable medical devices are technically sophisticated devices that require physician training and in-person operating room support for nurses and surgeons. A third-party distributor model is unviable given the training needed on the part of the sales representative. The direct feedback of ideas and problems that feed into future development is also a big reason for medical device companies to directly employ a sales force. The result is that startup medical device companies that typically cannot afford a direct sales force cannot compete and scale. Besides these natural operational barriers, some “un-natural” operational barriers result from a lack of transparency and financial ties.
Zip it means no price transparency
The lack of price transparency in implantable medical devices indirectly impacts patients. A 20% co-insurance payment for medical services or drugs may directly affect how much the patient has to pay out of pocket. However, since the medical device payment is often bundled with the procedure cost, the patient may not see a different out-of-pocket cost directly. Regardless, we all pay for the devices one way or the other. When a hospital’s margins compress due to high-cost medical devices, it makes up the difference by inflating the costs of all other procedures. So price transparency is still essential to empower new market entrants to spot opportunities and to enable payers, providers, and patients to understand the impact of medical device pricing on overall procedure costs.
Medical device companies insert confidentiality terms in contracts that forbid hospitals from disclosing their purchase prices to anyone, including physicians who implant the devices, patients who use the devices, and insurers who pay for the devices. The lack of transparency prevents hospitals from comparing their device purchasing costs to those paid by other hospitals. Medical device companies’ price discriminate, and the list prices (often known) are what the least savvy end of the marketplace will pay. Bundled payments naturally limit how much a hospital can spend on a medical device depending on their cost structure. With the rising clamor for price transparency, medical device companies have sought to sue consultants who have attempted to aggregate price data from multiple hospitals. In general, there is very little data available about the prices paid by hospitals to buy implantable medical devices.
Do Hospitals have any power?
Even if there was a way to mandate manufacturers to disclose their prices, other challenges make it hard for hospitals to negotiate lower medical device prices. Here’s a quick summary -
Fragmented demand - Like the rest of healthcare, hospitals are trying to beef up by merging to improve leverage against large health insurers, large PBMs, pharma companies, and medical device manufacturers. Still, there is a fair bit of fragmentation, given that healthcare is local. The result is that many hospitals do not have the purchasing volume to negotiate significant discounts. Hospitals cannot collaborate with each other on pricing since that falls afoul of antitrust laws. Hospitals can work with Group Purchasing Organizations (GPOs) to aggregate demand and negotiate discounts. However, there are open questions about the savings provided by these GPOs. Like Pharmacy Benefit Managers (PBMs), GPOs receive administrative fees (rebates) from device manufacturers and suppliers via safe harbor from the Anti-Kickback-Statute. They are typically 1-2% of overall sales volume and represent 90% of the GPO’s revenue, thereby creating a misaligned incentive to control costs from manufacturers. Regardless, most implantable medical device companies do not sell to GPOs and will only sell to the hospital directly.
Lack of performance data - In Part 1, we discussed how most implantable medical devices are brought to market via the 510(K) process that does not require clinical testing. As a result, it’s hard to compare new devices to the ones already on the market. The medical device company will typically have some internally developed tests to demonstrate performance. Regulatory advice is often to conduct the minimum necessary tests that trigger the least number of red flags in a 510k filing. The company will acquire competitive products and will subject the competitive devices to the same test methods. The results of these tests are primarily for marketing purposes. When new devices are introduced, surgeons try them out, and sales reps talk about their benefits and differentiators. Physicians and surgeons talk amongst each other about the newest devices they have tried and if they liked the device. Some research-oriented physicians may choose to do a study comparing the performance of competing devices which might yield some clinical data. But overall, there is very little high-quality performance data available.
Manufacturer influence - As we discussed in Part 1, medical device companies work closely with physicians to understand their needs and iteratively develop products that can solve real problems. A natural outcome of this close association is that physicians develop strong loyalties toward certain devices or companies. Sales representatives are on-call and on-text and build close relationships with Operation Room (OR) staff - nurses, inventory managers, surgeons, and hospital administrators. The sales representatives can even act as an extra pair of hands to gather supplies from the stock room or to move equipment. The company will also help schedule educational sessions to help nurses achieve the continuing education credits required to maintain licensure. This friendly relationship helps influence device selection and builds loyalty. Manufacturers also directly market to patients, who may request a particular brand to be used for their procedure. As a result, even though hospitals foot the bill for the device, hospitals have limited control over the selection of the device in the procedure.
Lack of control - Physicians decide which implant gets used in a procedure, not hospitals. If a surgeon learned the technique for a particular brand of implant during their residency, that’s what they will feel comfortable using. Techniques do vary, and new tips and tricks specific to a particular implant emerge over time. All these things make it hard for physicians to switch brands. Hospitals don’t want to annoy their star surgeons for fear of losing them to a competing hospital or ASC. The physicians themselves have very little idea of how much devices cost. At the end of the day, hospitals are on the hook to control costs, given bundled payment arrangements. Physicians have no such incentive to think about costs. The success of the device depends on the perception of these physicians and the sales and marketing muscle. Hospital administrators are increasingly becoming important stakeholders, but physicians still hold considerable sway over hospital decisions. Shared savings arrangements are illegal under the gainsharing civil monetary penalty (CMP) law, the anti-kickback statute, and the physician self-referral law. However, Medicare has carved out exceptions and is testing gainsharing arrangements under Bundled Payments for Care Improvement (BPCI) arrangements that allow hospitals to share the savings with physicians.
Physician Conflicts of Interest - In 2015, US healthcare providers were paid $2.3 billion by medical device companies that engaged them in various activities - research, marketing, consulting, speaking engagements, panel invitations, free tickets to conferences and sporting events for professional networking, etc. Payments for non-clinical work may exceed physicians’ professional fees for performing surgical procedures. The Sunshine Act requires medical device companies to report detailed information about payments and other “transfers of value” worth over $10 made to physicians and hospitals. The information must be reported to CMS for inclusion in a publicly available database. The act itself does not prohibit industry-physician collaboration or transfers of value. It’s important legislation since medical device companies work so closely with physicians. Studies have shown that physicians tend to use a manufacturer’s product more when they have a financial relationship. Sometimes, physician-owned distributors can have even more problematic conflicts of interest.
The medical device industry has been very good at flying under the radar. It has attracted minimal scrutiny and regulatory pressure, and there is little data regarding inefficiencies in the implantable medical device market. However, there is broad agreement that there is a need to encourage competition, increase transparency and innovate payment models.
Price transparency - The policy-making machine in DC has shown impressive resolve over the last few years to force price transparency for hospitals and other healthcare services. A similar rule targeted toward medical device companies could drive transparency. Invalidating gag clauses for medical devices will allow hospitals to share pricing information with physicians and consultants is another way this could happen organically. When prices are broadly available, hospitals could negotiate better contracts if data on the volume of devices purchased was also made public.
Conflict of interest disclosure - The Sunshine Act requires disclosure. Still, this information rarely reaches a patient or payer who can recognize the conflict of interest. Some states like Vermont, Massachusetts, and Nevada have restricted activities between medical device companies and physicians. There is a need to do more to require disclosure from physicians to patients, hospitals and payers.
Performance and outcome reporting - The Federal Drug Administration (FDA) keeps a database of medical device complaints called the MAUDE database. The database is a reactive surveillance system requiring medical device companies to report performance-related issues. However, the database is incomplete, inaccurate, untimely, unverified, or biased, according to the FDA. There is a need to have publicly available data comparing performance and clinical outcomes from devices. For example, this can come through mandatory funding requirements for clinical research post-release and/or requirements to release in-depth bench top testing methods and protocols so that new devices have to demonstrate performance to their claimed predicate.
Besides the above policy options, there is also an opportunity to increase competition with reference pricing, competitive bidding, and commercialization programs for startups to scale, challenging anti-competitive behavior among device manufacturers. The is an opportunity to continue innovating on payment models through self-insured employer-driven direct contracting with centers of excellence, expansion of gainsharing arrangements between hospitals and physicians, and nudging the commercial health insurance segment towards bundled payments and value-based care models.
We have covered a lot of ground on implantable medical devices. That’s it! Do you have a different point of view? Reach out or comment below and share where I got things right and where I got them wrong. Always open to feedback!
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