Medical Device Link.

MARKET TRENDS

The medical device arena ranges from highly sophisticated electronic implants to simple surgical staples. The $100 billion U.S. market, 55% for equipment and the remainder supplies, has consistently grown at mid-to-high single-digit rates. The question is, will the factors that drove this growth be sufficient for continued success across various industry futures? Specifically, given these potential futures, what are the strategic implications for medical device industry leaders?

Forces at Play

Our study began in the fall of 2006 at a conference titled, “The Future of Biomedical Devices,” on future scenarios for medical devices. It was sponsored by the University of Pennsylvania’s (Philadelphia) Wharton School and its Mack Center for Technological Innovation. More than 60 senior healthcare leaders from the for-profit and nonprofit sectors representing manufacturers, payers, government, and providers attended. During the following spring and summer, we tested the output of the conference through a series of in-depth interviews with nearly 50 senior leaders of major medical device companies.

Our project focused on three major invasive U.S. medical device equipment segments that constitute about two-thirds of the market’s revenues—cardiovascular, orthopedics, and neurology. They are also the largest and fastest-growing segments of the market, and they have some of the greatest innovation potential, especially in the area of mechanical and biochemical combinations.

Figure 1. (click to enlarge) Four key areas drive value in medical devices.

We adopted a time frame that ended in 2015, because it was far enough from the present to enable significant changes, but not so distant as to be tangential to current decision makers. Our project focused on the United States, while fully recognizing the increasing globalization of the industry. As a first step, we examined various value drivers that have been critical in supporting the historical growth and profitability of this market (see Figure 1).

We studied the major forces at work today, covering social, technological, economic, environmental, and political factors, and split these forces into trends versus uncertainties (see the sidebar “Consolidated Trends and Uncertainties”). The usual scenario planning categories—social, technological, economic, environmental/industrial, and political (or STEEP)—are used here.

Trends are defined as those forces currently at play that will continue in the same direction through 2015. Uncertainties are those forces whose outcomes or direction cannot be predicted with any degree of certainty. Given that the scenarios all share the same trends, what differentiates them are the assumptions about how various key uncertainties play out.¹

Primary Uncertainties

From the multitude of uncertainties examined, conference attendees and device leaders identified two as having the most potential effect on the future: reimbursement and the legal/regulatory environment.

Reimbursement. The willingness of insurers and other payers to reimburse the cost of medical devices is a primary and fundamental uncertainty. Although devices may be cost-effective in the long run, they typically have a high initial cost. Will physicians, patients, employers, public and private payers, and regulators continue to recognize long-term benefits? It is not just the level of reimbursement but also the reimbursement system that will greatly affect the future of medical devices. Will doctors continue to play the primary role in specifying which device will be used, often without regard for price? As insurers or hospital buying groups try to exert more control over device use rates, will patients absorb more risk and financial burden, such that the patient’s view of the value of a particular medical device becomes increasingly important?

Legal/Regulatory Environment. There are multiple dimensions underlying this uncertainty, from liability reform to data standards. For example, how will patient safety, efficacy, privacy, and informed-consent regulations evolve and affect the device sector? Medical devices not only generate data on the patient, but can also provide information about the efficacy and safety of device classes and treatments. Today, the United States suffers from a litigious environment and nonstandardized data silos. In the future, could regulators and federal legislators drive product data collection/dissemination standards and require open data access? Could there be divergent initiatives such as liability caps, yet stricter regulatory postmarketing study requirements tied to open national databases on product use, outcomes, and adverse events?

Figure 2. (click to enlarge) Four possible scenarios for the medical device industry in 2015.

U.S. Scenarios for 2015

Table I. (click to enlarge) Scenario blueprint summary: key uncertainties and how they vary by scenario.

To develop scenarios, we crossed the above two primary uncertainties to create the 2 × 2 matrix in which each axis represents an uncertainty range (see Figure 2). After determining the plausibility of each combination, we explored what the future might look like in each cell when considering the other remaining uncertainties, all against the common backdrop of the main trends identified earlier. Table I provides a summary of how several of the critical uncertainties differ across the scenarios. The range of individual uncertainties and the varied interplay across these uncertainties, as depicted in the summary or scenario blueprint, is what drives the distinctions between scenarios. Although 2015 will not look exactly like one of these four scenarios, the wide range of scenarios depicted here will likely capture the actual medical device environments that industry players will face at that time.

Scenario A: Necessity Is Thy Mother

Driven by economic downturns and rising healthcare costs, the federal government establishes universal data standards and open medical device databases on patient outcomes, with appropriate privacy requirements. Healthcare data flow freely from devices to doctors and across networks.

Highlights

• New opportunities emerge for informatics technology companies.
• Nascent efforts with disease prevention are supported by new business models and data availability.
• Greater regulatory scrutiny of medical devices occurs, with more emphasis on managing data and cost benefits of new products, combined with universal data standards.
• CMS negotiates the rates for all drugs and medical devices.
• Patients absorb more healthcare costs and move toward self-care.
• The general level of reimbursement for new devices and healthcare is reduced.

Specific Medical Device Segments

Figure 3. (click to enlarge) Scenario A: Necessity is thy mother.

Cardiovascular. Continuing controversy about increased rates of clotting over time with drug-eluting stents (DES) has led to greater regulatory scrutiny and longer postmarketing approval parameters. More cardiac surgeons are questioning the high use of DES and are reverting to less-expensive bare-metal stents. The other major segment, cardiac rhythm management systems, is growing as a result of positive clinical outcomes, improved data management capabilities, and decreasing product failure rates.

As a result of FDA mandates, national registries routinely collect patient and product performance data. Although this has lowered the overall operating costs of larger suppliers, the loss of competitive advantage from proprietary product performance databases and lower reimbursement levels has led to greater low-cost competition, foreign manufacturing, and international sales. Increasingly, smaller suppliers are driving new technologies, especially in combination with information technology (IT)-system partners that are relatively new to this segment.

Orthopedics. With lower reimbursement and greater group purchasing organization (GPO) and hospital control over a surgeon’s product choice, most hip, knee, and shoulder replacements are using the least-cost and often foreign-made implants. Newer technologies, such as hip resurfacing and bioadsorbable materials, are only available to private-pay patients.

Technological acceptance and product growth is primarily a function of new informatics capabilities like smart devices that feed data back to the healthcare professional on relative position, wear, and estimated replacement life of the implant. Major suppliers are combining advanced informatics capabilities with the less-expensive foreign-made implants to prolong product performance at lower cost. As a result, market leaders are expanding their IT capabilities through acquisitions faster than their biomechanical engineering staffs.

Neurological. Although the promise of these devices, especially in implantable neurostimulation devices for pain management and epileptic seizures, still seems positive, regulatory hurdles and emphasis on the cost benefit of new technologies have slowed their acceptance. Insurers still generally label such devices as experimental and do not cover implantation costs. Patients must either pay for devices themselves or travel outside the United States for treatment.

The free flow of information, especially less-than-favorable clinical outcomes and only moderate cost-benefit data, quickly enters the public domain, further constricting this segment’s growth. Still, the information explosion has positively affected several specific areas, such as reducing the amount of time and expense physicians spend in calibrating neurostimulation devices for patients. Shared outcomes and adverse-event databases enable nascent protocol developments that should lead to future growth.

Scenario B: Tough Love

Figure 4. (click to enlarge) Scenario B: Tough love.

The benefits of medical devices are well recognized and their long-term cost-effectiveness is proven in a series of large-population, well-controlled studies. However, the federal government has imposed greater regulatory and data ownership and access constraints on private manufacturers in the effort to drive system efficiency and business transparency.

Highlights

• Positive reimbursement rates, especially for new approaches, leads to a growth in procedures across all segments.
• Devices become neural networks that send medical and ongoing performance data and link to sophisticated patient and cost-benefit outcome databases.
• As the number of procedures increases, some question the cost benefit of more-aggressive cases supporting increased patient/provider emphasis on prevention rather than more-sophisticated interventions.
• With heightened competition, many suppliers face declining margins.
• Universities create multispecialty disciplines combining informatics, biologics, material science, and engineering.

Specific Medical Device Segments

Cardiovascular. Fewer device failures and transparent national registries of adverse events lead to more-efficient recalls and greater public acceptance of devices. Current safety concerns about DES become obsolete, as their use significantly diminishes due to the rapid adoption of next-generation biocompatible stents. Three forces are particularly important in this segment. First, driven by higher R&D expenditures and information system advances, newer cardiac products begin to monitor themselves and provide real-time data on broad health parameters for coordinated care of multiple comorbid conditions.

Second, a growing problem concerns poorly aligned incentives that result in overly aggressive use of these new technologies, with questionable patient health gains. And third, while disease management initiatives are increasing, many providers continue to maintain an intervention versus prevention perspective.

Orthopedics. Accelerated convergence between orthopedics and biology leads to advances in bioabsorbable structures. In addition, growth factors routinely coat fixtures to help soft tissue and muscle healing. With advances in computing and data management, devices entering the market can wirelessly transmit data on joint position and optimal functionality. Although these new product advances support price increases, they also dramatically diminish the privileged manufacturer-provider relationship. With the advent of buying groups and increased interhospital data sharing, more suppliers are facing competitive, multiyear price contracts based on volume.

Neurological. Successful clinical data elevate the use of neurological devices and related procedures from a last resort to the first line of treatment for patients suffering from recurring, hard-to-treat migraines or severe joint and musculature pain. Devices are now also available to treat obesity, depression, and hypertension.

The greatest effect of neurodevices is in the stroke management segment, allowing doctors to identify potential stroke victims sooner and to treat them through less-invasive procedures. As a result, medical devices increase their share from 7% to more than 25% of the $5 billion stroke management segment. Informatics advances enable physicians to diagnose, treat, and monitor neurological patients more rapidly and more cost-effectively. The growth in this sector is generally believed to improve patient outcomes and reduce hospitalizations for significant cost savings with individual treatments.

Scenario C: Stagnation

Figure 5. (click to enlarge) Scenario C: Stagnation.

Low reimbursement levels, technology glitches, and a lack of data standards slow growth.

Highlights

• Healthcare cost containment, by rationing care and raising patient contributions, is of primary concern to most stakeholders.
• Patient privacy is a major issue for patients, effectively halting national database and registry initiatives.
• The potential of medical devices is limited due to information sharing constraints and longer product development cycles.
• Patients bear an increasing proportion of medical device costs, yet struggle to obtain information on their full range of options.
• Investment in R&D declines from private and public funding sources.

Specific Medical Device Segments

Cardiovascular. Informatics and biofeedback capabilities are expanding. Cardiac rhythm management systems did not experience the growth device manufacturers were projecting back in 2007 but still continue to expand, driven by patient demographics and the continuing rise of comorbid conditions. However, the lack of national data registries and biosensor data-driven advances is restraining this segment. The federal government has not pushed universal data management standards, focusing more on patient data privacy and device safety. Low reimbursement levels have slowed the flow of breakthrough technologies as suppliers reduce R&D in a bid to maintain margins. As a result of regulatory hurdles and the growth in foreign economies, new cardiovascular devices are more likely to appear first outside the country, despite most likely being made by U.S. companies.

Orthopedics. Patients seek less-costly solutions. Providers have little to offer in terms of major new devices and often default to the demands of patients who are influenced by direct-to-consumer (DTC) advertising. Foreign-made products at a lower price become more prevalent and several studies report rising product failure rates, especially among elderly, more-difficult-to-treat patients. Although patients seek more information on treatment choices, the lack of product registries and national data management standards hampers the flow of comparative studies across device options. Therefore, most patients are still dependent on their healthcare provider to specify product and treatment choices.

Suppliers face lower reimbursement rates, more-competitive bidding with the rise of GPO power, constricting capital markets for new healthcare technologies, and higher regulatory requirements. As a result, most major suppliers reduce R&D and their direct sales forces to focus on manufacturing cost efficiencies, DTC advertising, and e-detailing covering fewer, more-established products.

Neurological. Growth falters for a number of reasons. Information sharing is further restricted when associated with neurological solutions. Insurers and Medicaid/Medicare are slow to establish reimbursement for the most promising new products—carotid stents to reduce ischemic strokes and implantable neurostimulation devices for pain management, depression, and epileptic seizures.

Patients also fear more experimental approaches where longevity and treatment outcome data are tightly controlled or lacking. Patients, providers, and manufacturers continue to lean on traditional methods of treating neurological problems instead of new technology and device breakthroughs.

Scenario D: Isolated Islands

Figure 6. (click to enlarge) Scenario D: Isolated islands.

Although reimbursement is readily available and innovation continues, medical devices have not fulfilled their potential in reducing healthcare system costs or improving life quality. This is in large part due to public data management and informatics limitations. Devices stand alone and do not benefit from being linked to broader networks.

Highlights

• Reimbursement for medical devices is strong, supported by a growing economy and the aging population.
• National or regional data management standards and protocols are lacking.
• Privacy concerns and increasing data security problems delay data-sharing networks.
• Consumers play a small role in medical device therapy and product selection decisions.
• With lack of data-sharing networks and increased privacy legislation, devices focus more on disease-specific treatments.
• Medical device companies grow within defined niches and established competencies.

Specific Medical Device Segments

Cardiovascular. This segment is strong, supported by several high-profile medical studies and healthy reimbursement. However, product failures with implantable defibrillators and their leads continue. To meet these challenges, the major cardiovascular suppliers are increasing their support for key opinion leaders, continuing medical education through more direct sales force channels, plus sponsoring national symposia on new health interventions and applications for medical devices.

At the same time, they are looking to control more of the patient management healthcare value chain. Many of the major companies are pursuing horizontal integration by providing treatments for the entire continuum of cardiovascular disease. To maintain the flow of new technologies, start-up companies and universities are actively courted for their science in specific areas. Lastly, suppliers religiously guard proprietary databases on product performance and recalls.

Orthopedics. The demand for orthopedic products is high. Several new foreign entrants, particularly high-quality, low-cost alternatives from India and China, have caused increased pricing competition. Still, with key supplier opinion leader relationships the norm, market share gains by the new entrants have been small. A fast-growing new product area is growth-factor coating of different fixtures to help soft tissue and muscle healing, especially in older patients.

Larger suppliers are joining with cardiovascular segment leaders in joint public relations and lobbying campaigns to fight national registries of medical device products. Although R&D is developing smart devices that monitor ongoing stress, wear, and performance, such systems are not linked to broader disease management or patient databases.

Neurological. Advances in neurostimulation devices for pain management have opened up several new therapeutic areas. Physicians may still be hampered by poor data systems to calibrate optimal therapies, yet demand has increased greatly for these procedures. With increased reimbursement and venture funding, more-portable and less-invasive devices have been developed and are completing clinical trials. Finally, recent newspaper articles on the advances of the medium-to-larger players have increased patient demand. With new congressional leadership in 2012 supported by medical device manufacturers, FDA is under more pressure to reduce the review times of several new technologies. Many patients, plagued by continuing pain management problems, are paying for these services themselves, even though insurers continue to label them experimental and thus nonreimbursable.

Implications

Kurt Kruger succinctly outlined the three components that produced the historical growth and profitability of the implantable medical devices sector:

First, growth is sustained by the regular installments of new products that are perhaps less impactful and more orthodox than those of the past, but which are more proven and successful. Second, price behavior has rationalized as markets, companies, and products have become more homogeneous—that is fewer players offering similar products to customers that are not price sensitive. Third, profitability is maintained at above-average rates due to manufacturing scale efficiencies, evolutionary (not revolutionary) product changes, and well developed marketing and selling channels.²

Each of these characteristics is challenged in various ways across the four scenarios. Although many industry observers forecast major changes to the U.S. healthcare system in the next several years, one key uncertainty is the level and nature of reimbursement. For example, at an AdvaMed conference in October 2007, more than 120 attendees at a DSI/industry presentation on this report were asked to raise their hands if they thought there would be major U.S. healthcare reform in the next five years. Fewer than 10 persons responded.

As Scenarios B and D outlined, more-generous funding, especially combined with relatively benign regulatory structures, could support continued growth for medical devices. A critical question is how strongly correlated such funding will be with strong economic growth as well as wildcard exogenous events, such as conflict of interest scandals that rocked the hospital supply and home healthcare industries in the 1990s.

Across all four scenarios we see a tension between the advances of individual company technologies versus the opportunities for societal data transparency and management, supported or hindered by alternative regulatory and legal environments. Today, the U.S. healthcare system generally suffers from antiquated systems, commercial data fiefdoms, stringent data-privacy issues, and risk-averse patient management practices. Will these change significantly by 2015?

FDA has several pilot projects under way on national data registries tied to medical device bar code or radio-frequency data capture systems.³ Adverse-event and product performance databases are the responsibility of private companies today. Questions about the scope, scale, reliability, and cost of third-party changes to existing data management roles and responsibilities are often cited to support the status quo.⁴

Networking technologies and data management capabilities may become much more efficient and less costly in the relatively near future. Such dynamics could affect the medical device industry in three ways. First, depending on the scope and scale of information system changes, individual products are likely to become more efficient and capable. Given how rapidly 510(k) approvals can occur, such developments are not at all inconceivable by 2015.

Second, depending on how much progress is made with data standardization and information exchange requirements—most likely driven by changes in the reimbursement system—device data could be leveraged into broader healthcare data management initiatives, especially disease management and consumer-driven healthcare systems. Recognizing that the United States has been very slow in setting medical data collection and use standards, some may be less sanguine about this coming to pass quickly.

And third, could an information system evolution lead to biosensor capabilities in future medical devices that tie such devices into a much broader healthcare prevention and management practice paradigm?

In addition, various forces could move in divergent directions. For example, while states might enact universal healthcare programs, could the federal government drive liability and regulatory approval reforms that make it easier and less costly to bring next-generation products to market? Or, while electronic data capture and use will certainly improve in the future, might evolving federal privacy or data management strictures limit the potential for the medical device industry to capitalize on advances?

Looking ahead, medical device companies may wish to contemplate several implications from our project. First, the rationale for believing that the past successes will continue into the near future is compelling but far from guaranteed. The year 2015 could be very different from today, and by 2020, even more-profound changes may occur. An underfunded healthcare system serving an aging population, combined with technological progress, may result in solutions that only the wealthy or those with insurance can afford.

Second, with the potential for major change and the impending collision of opposing forces, medical device leaders must assess what it will take to succeed across the multiple scenarios presented, and not simply extrapolate past successes while tweaking a few e significant variables. Specifically, they must build ever-more-flexible organizations with acute sensing capabilities and strong peripheral vision to have timely responses to evolving market conditions.

Conclusion

Finally, what about our three specific segments? Cardiovascular and orthopedics are likely to continue to be the largest, most vibrant segments of this market, although both confront immediate challenges. Cardiovascular is facing DES potential to cause longer-term clotting as well as acquisition integration issues, and orthopedics is confronting pricing and channel control issues.

Our scenarios recognize the complex dynamics posed by reimbursement, future technology developments, information management, and control systems. The wildcards include new standards for data management, national registry mandates, economic downturns, and congressional leadership changes affecting FDA and CMS. For example, several of those interviewed felt FDA might be broken into two parts—a drug-device approval- granting body and a postmarket, epidemiological study agency. In a world of technological convergence, these medical device segments are rapidly bridging into biologics and informatics.

The neurological segment is the most enigmatic. Starting from a much smaller revenue base, this segment could literally explode in the foreseeable future given the remarkable advances in multiple technology platforms, growing patient needs, and significant clinical trials aimed at firmly establishing patient benefits.

Scenario D, which paints a richer healthcare environment with regulations and business models similar to today, may be the most appealing to companies in this segment. Conversely, if several current clinical trials are inconclusive, payers may balk at covering high prices, especially if symptoms remain hard to verify objectively. Payers will oppose high-cost treatment modalities for small or select groups of patients. If so, this segment will enter 2015 not with a bang, but a whimper.

Jim Austin is director of life sciences at Decision Strategies International Inc. (DSI; Conshohoken, PA), Terry Fadem is managing director of corporate alliances at the University of Pennsylvania School of Medicine, and Paul Schoemaker is founder and executive chairman of DSI. They can be reached at austin@thinkdsi.com, fadem@mail.med.upenn.edu, and schoemaker@thinkdsi.com.