Medical Device Link.

Originally Published MX March/April 2003

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

To launch that first product into the medical marketplace, try a strategy of least resistance.

Lionel Joyce and Rod Carlisle

Starting a medical device manufacturing enterprise successfully requires that company executives know how to leap the regulatory, reimbursement, and other hurdles on the way to market, rather than stumbling over them. The medtech market is unique. Entering it takes more effort than simply putting products up for sale. A great deal of planning is necessary.

Other manufacturing businesses for the most part target their products at the end-user, and use distributors to streamline the selling process. Medtech companies, however, are developing new products that will be selected, paid for, and used by independent entities for the ultimate benefit of the patient—who is completely outside the marketing loop. And sophisticated devices need to be approved for the market by FDA. A company just entering the medical device marketplace, or a young company building its product portfolio, can gain a market foothold if it knows how to find opportunities within the challenges of the healthcare industry.

Small Steps Lead to Progress

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Breakthrough technologies change the practice of medicine, of course. But the first ultrasound imaging, cardiac pacemaking, and respiratory life-support devices came into general use only after 15 to 20 years of research and trials, even though each promised to fulfill a pressing need.

A start-up medical device manufacturer eager to enter the market is better off not trying to revolutionize healthcare delivery. A new product that is a useful improvement to an accepted technology will do. An important concept that the medtech executive must grasp early on is that regulation provides a kind of medical device industry infrastructure as well as an obstacle course.

For example, a new radioisotope imaging modality that builds on existing techniques and procedures can proceed along a fairly straightforward path to acceptance. It can be reasonably assumed that radiologists will use the product to diagnose cardiac diseases or cancer. FDA will already understand the key safety and efficacy issues. A decision pertinent to reimbursement for use will draw from precedent. Doctors and technicians accustomed to preparing, using, and servicing similar equipment will take naturally to the modest innovation. Thus, technological gradualism—building on existing patterns of medical technology and its use—simplifies clinical trial, approval, user identification, training, and reimbursement issues.

By contrast, a wholly new device concept will draw into question the review process, reimbursement amounts, and the medical specialties likely to adopt the technology. These questions all have answers, but those answers can take a long time to emerge. Adoption by the mainstream medical community might require a couple of years in the case of an advancement in a sensor or monitor. However, if the technology base is completely new, a full generation could be necessary.

Developing absolutely new technology concepts serves a medtech company's long-term strategy. Incremental product improvements, on the other hand, stimulate the near-term sales of probably greater importance to a young firm.

The Customer Is Not the Beneficiary

Society spends billions of dollars on healthcare. Millions of people in poor health need treatment to alleviate their pain and suffering. These are tempting market statistics. Yet, except in the case of simple over-the-counter products, the patient is not the buyer of a medical device. And "society" almost never is. While their value to the general community may be enormous in terms of health maintenance, medical devices are purchased by people who are interested in a return on investment.

This reality means that the entrepreneurial device company must focus on the entity that will actually write the check to pay for the product. Whether the customer is a hospital, a clinic, or a private practice, the medical device will usually be bought by a purchasing agent upon the recommendation of a physician and after approval by a budget committee. Funds expended in the purchase of a new device must be justified by measurement against the cost of improving, upgrading, or replacing existing devices that have already proved their worth. This introduces another key issue.

Healthcare Delivery Is a Business

A medical device, whether a multimillion-dollar magnetic resonance imaging system or a simple digital thermometer, must be profitable for its owner as well as improve the delivery of healthcare. Medtech executives can test the economic advantage likely to be provided by a new product by answering the same three simple questions a buyer will ask and answer.

Does the new device reduce the cost of treatment for the healthcare provider? In the case of disposable products that have replaced reusable ones, for example, the value to the provider is a reduction in costly sterilizing procedures.

Does use of the device increase patient throughput? Just as physician's assistants and nurse-practitioners in the past few years, by addressing matters of routine care and treatment, have enabled physicians to see more patients, some new devices are meant to achieve the same end. These are welcomed. A good example is the five-minute application of basic noninvasive imaging technology that can replace insertion of a diagnostic catheter in certain urology procedures, a 30-minute process.

Does the device make possible an additional service? Products that allow a doctor to conduct a test of a patient's blood, tissue, or urine in the office rather than send the sample to an outside laboratory readily gain market acceptance. Devices that offer such extra capabilities as these not only deliver a more timely outcome for the patient, they also generate additional revenue for the care provider.

Approval and Reimbursement Are Critical

As mentioned, the use of medical devices in the provision of healthcare is a service seldom paid for by either the immediate provider (the physician) or the immediate beneficiary (the patient). Rather, the medical reimbursment branch of the federal government (the Centers for Medicare and Medicaid Services [CMS]) and the major healthcare insurance companies are the principal buyers of medical treatments.

After FDA has approved a medical device for the market, CMS undertakes to determine whether use of the new product should be reimbursable. The determination typically is the result of a review by committee members from government and the medical specialties who compare the new tool or procedure against those already in existence. CMS also decides on a dollar amount to be paid by Medicare and Medicaid in reimbursement for the product's use, which is based on judgments about the medical efficacy and economic advantage offered by the device.

Once CMS has given the signal by establishing reimbursement, private insurance companies and health maintenance organizations will follow, generally paying more when the device is used than CMS will (as much as a third more).

Payment by private individuals surely covers less than 10% of medical treatment costs. Normally, private payment for device use involves only experimental devices still under review for approval and reimbursement. The existence of such private payers can promote the early adoption of a start-up company's product, but it will seldom have much to do with creating a substantial long-term market for the new device.

Medtech company executives are not helpless bystanders to automatic approval and reimbursement processes. They can be influential in sorting out the payment protocol and making sure it is on track.

A new device manufacturer can "manage" the approval process by formulating a guiding strategy that hinges on relatively modest claims for the device. A device improving on an existing noninvasive ultrasound diagnostic tool, for example, might be accepted by FDA in months following a demonstration that it relies on previously established technologies and is substantially equivalent to approved products. On the other hand, a cancer treatment based on heating cellular tissue by ultrasound could wait years for approval, owing in part to the approval and reimbursement issues previously noted, as well as to the difficulty of recruiting patients willing to forgo established treatments in favor of an experimental one.

As with product approval, the effort to establish reimbursement requires corporate engagement. The review process does not begin until a care provider uses the new device and applies for reimbursement. The manufacturer's marketing managers customarily assist early-adopting physicians with the process of filing initial payment claims. Once CMS has completed its review and approved for reimbursement the device's use, the device can begin to be employed routinely in the treatment of Medicare and Medicaid patients.

Private insurance carriers also need to be stimulated in this way, state by state, in order to make reimbursement for device use commonplace.

The importance of assisting physicians and alerting the payment providers cannot be overstated. These represent perhaps the crucial opportunities for corporate managers to accelerate market acceptance of a new product.

Physicians Can Be Champions of Innovation

"Be neither the first nor the last to adopt a new technology" is a guiding principle for physicians. Using a new device before it is proven can be perceived as reckless, but waiting too long to employ an evidently beneficial technology is to be behind the times. But some doctor must go first.

To get a new product adopted for general use, leaders of the manufacturing company must seek out well-known researchers of distinction and secure their help in assessing its effectiveness in medical practice. The insights of such physicians can further the design and development of innovative products. But more than that, they are opinion leaders who disseminate their appraisals of cutting-edge technologies through published papers and seminar presentations to the profession. These leading physicians will establish the validity of new products and thereby influence manufacturers' success in selling them to mainstream practitioners. Only when promoted by the luminaries and endorsed by the medical societies can an innovative product be generally marketed by traditional methods.

Marketing Partnerships Can Open Doors

New product acceptance is a process that takes anywhere from several months to many years, depending on the complexity of the necessary approval. The manufacturer's marketing department can make good use of that time by helping the early adopters to present the device to the healthcare industry as an attractive tool for care delivery. Supplying products, training, and service to these providers can help prepare the market for launch. In turn, these pioneering users can assist the sales force enormously by establishing—as unbiased practitioners—the compelling benefits of the new device.

Because the device cannot provide mainstream sales yet, the early revenues it generates will be insufficient to fund the adoption effort. Whereas large companies may sell a broad array of established products that generate revenues to cover the cost of a new product launch, a start-up will not have these resources. New market entrants can take advantage of features inherent in the modern distribution system to overcome this deficiency, however.

The healthcare market is populated by well-qualified sales and distribution organizations, some captive, some independent. These distributors rely on a supply of new products to keep their lines up to date. Fully attuned to new product introductions, such sales networks often in effect further the process of getting a new product accepted in exchange for the opportunity to carry it.

In addition, sales and distribution groups of necessity follow physicians in focusing their knowledge and skill in specialty practices. Since products must be sold to the specialist cardiologists, oncologists, and radiologists who will specify and use them, the salespeople employed by distributors also become specialists.

Small device-manufacturing companies can take advantage of this specializing tendency by partnering with distributors that sell into the particular market their product serves.

Conclusion

The challenges that come with the attempt to introduce a new medical device can be a serious problem for the unwary, the too-eager, or the unprepared. The problem might be rather easily solved, however, once medtech executives realize the marketing advantages of selling small technological improvements that genuinely help the care provider while benefiting the business enterprise for which that provider works. These advantages are best seized when company leaders recognize the necessity of shaping the approval and reimbursement reviews to the extent possible, and of drawing the attention of a particular medical specialty to the availability and utility of their innovation.

Lionel Joyce is president and Rod Carlisle is senior program manager at Market Strategies Inc. (Seattle), a consulting firm specializing in market research and business planning for manufacturers.

Copyright ©2003 MX