New treatments and hospitals’ attempts to cut inventory costs will cut into the medical device industry.

By Joe Flower

From Hospitals And Health Networks Online, March 14, 2006

Borrow this lens for a moment: For a look at the way internal and external stressors are laying waste to one assumption after another about what’s “normal” – what defines “the way things are done” in this business – focus on the fractious and shifting relationship between the hospital and medical device sectors.

On the surface, the medical device sector looks like it’s doing nicely, thank you very much. For instance, as the first wave of baby boomers (the born circa 1950 cohort) hit their late 50s and early 60s, industry analysts project an 18 percent or greater compound annual growth rate in the cardiac rhythm management business (pacemakers and defibrillators) at least through the rest of this decade.

On the other hand, these analysts operate in a breakthrough-free atmosphere, and likely are not taking into account the effect of such in-the-pipeline drugs as Atherogenics’ antiplaque AGI-1067.

At the same time, the sales in stents are not keeping up with the growth in the aging target market and have begun to slow. “Cracked chest” bypass grafts are becoming rarer as reimbursement rates drop sharply, as minimally invasive techniques improve, and as even these procedures are increasingly supplanted by techniques that can be carried out in a cath lab.

The same curve is happening in orthopedics, the other area that has traditionally had a big payoff for hospitals. Price rises in orthopedic devices have been cutting deeply into hospitals’ margins. Now these rises, typically about 2 percent to 4 percent per year, have slowed, and they show signs of flattening completely under the cost resistance of customers.

The theme cuts across the whole sector: New technologies and growing cost pressures are driving greater shifts in relationships, expectations and economics.

Financial Considerations

Ever-growing cost pressures turn the crank on the value equation: The question is increasingly changing from simple clinical efficacy (“Does it work better?”) to a combined clinical/financial judgment (“Does it work better/faster/cheaper? Does it save FTEs? Will we have to train people? Does it need its own special suite of rooms?”). These more complex questions shift the buy decision away from clinicians judging solely by clinical utility and personal preference, and toward a new class of “financial buyers,” i.e., buyer’s groups, policy committees and finance staff within medical organizations.

The same cost pressures push doctors and hospitals into each other’s arms. Hospitals are loathe to interfere in clinical decision-making, yet they must have physicians’ cooperation if they are to have any hope of keeping costs in line. This is the birthing bed of “gain-sharing,” in which hospitals rebate a percentage of any savings (from standardizing on one device or brand) back to the doctors. Still experimental, operating in a few places under CMS waivers,­ and fiercely opposed by the device industry, gain-sharing is getting a favorable hearing on Capitol Hill. The most likely possibility is that it will be legalized for the entire industry soon.

New Partnerships

Gain-sharing is just one possibility for redefining relationships between clinicians and the organizational structures of health care. Through at least the rest of this decade, “consumer-directed health care” will be driving (and information technologies enabling) new types of partnerships between physicians and health care organizations. These partnerships will be designed to control costs, raise quality and shelter physicians from the blizzard of reporting requirements, infrastructure expenditures and malpractice risks that are driving more and more of them out of medical practice.