The healthcare industry is on the cusp of significant change. The value-for-money evaluation of a product/treatment on a patient-by-patient basis, the increasing integration of electronics and communication and the move towards diagnostic test kits and medical devices directly linked to individual health portals are driving this change and creating demands for new systems and devices.
A lucrative sector
The rising cost of healthcare is placing huge pressure on payer institutions. The recent financial crisis has placed an even greater focus on controlling this expenditure. A recent report from the Congressional Budget Office (CBO) in the United States (US) said, “rising health care costs constitute the principal challenge of fiscal policy, no other single factor will exert more influence over the long-term balance of the [US] federal budget . The situation is similar in developed countries around the world.
Although most of the focus has been on prescription medicines, medical device companies are not immune to this presure anymore. Not surprisingly, payer institutions are initiating a series of reforms to respond to this situation. Although private sector supplied products represent only a small proportion of overall healthcare expenditure (prescription medicines are approximately 8–10%, medical devices significantly less), they have become an easy target for governments trying to control costs. Medical device companies are not immune to this pressure anymore. The National Institute for Health and Clinical Excellence (NICE) in the United Kingdom (UK) initiated a programme on 1 July 2009 to coordinate the evaluation of medical devices and diagnostics for adoption in the National Health Service. Value for money is listed as one of the criteria to be used for evaluation. Similarly in the US, part of President Obama’s economic stimulus package included funding for “comparative effectiveness” research, which involves testing different product and treatment regimes, including medical devices, to evaluate value for money. Furthermore, recent US congressional legislative proposals plan to levy a 2.5% excise tax on the sale of medical devices, in an attempt to reduce what they see as excessive profit in the industry.
Against this rather gloomy backdrop, a trend is developing that is often overlooked. Large companies that have not traditionally played a part in the healthcare sector are investing time, resources and finances in an effort to position themselves in this market. Although these companies come from a wide range of sectors including defence, food and consumer products, perhaps the most interesting factor is that the pillars of the communications and media sector such as Google, Microsoft, Cisco, Intel and Vodafone are investing heavily in healthcare.
What they see
Although it may be worrying to many that healthcare costs are rising so significantly, the result is that healthcare is a sector of the economy that continues to grow, even in challenging economic times. With growth in many sectors of the economy stagnant at best, healthcare expenditure is growing and predicted to continue rising throughout the first half of the 21st century. According to the CBO report, healthcare expenditure in the US has tripled every twenty years since 1965. Although growth in healthcare spending in the developed world may slow, it is likely to continue to grow, both in real terms and as a proportion of gross domestic profit (GDP). Many experts believe healthcare expenditure is likely to reach 30% or more of GDP in the US and other developed countries by the middle of the century; the CBO report predicts it will rise to 31% in the US by 2035.
Although many often-cited factors influence this continued rise in expenditure (ageing population, changes in payment coverage, increases in personal wealth), the single biggest factor leading to the rise in healthcare expenditure is the impact of technology advances and the associated improvements in clinical services and medical care . These technological advances have revolutionised diagnosis and treatment over the past 50 years. With some recent healthcare technologies starting to mature (genomics, proteomics, biotherapies) and many others in their relative infancy (nano-medicine, personalised healthcare, translational medicine, stem cell therapies), this trend looks set to continue. Thus, it is no wonder that this sector looks attractive to other companies:
The sector has been growing for many years with growth more stable than other parts of the economy and is predicted to continue growing throughout the first half of 21st century.
The growth is fuelled by a potent combination of social forces and technological advances.
Incumbent companies are under political and economic pressure to change their business model and are showing signs of reduced innovation
It is apparent that the healthcare industry is on the cusp of significant change and this change will heavily influence the shape of the private sector healthcare market (medical technology and pharmaceutical) and the winners and losers therein. The four trends that will drive this change are described below.
Payment by results
The increase in healthcare expenditure has given rise to the need for healthcare technology assessment (HTA) agencies around the developed world. In the UK, NICE leads the field and primarily uses the Quality Adjusted Life Year methodology that is provided by a treatment to decide whether it should be reimbursed. Currently, this evaluation is usually, although not exclusively, made at the patient population level.
However, this is showing signs of evolving into payment on a patient-by-patient basis, especially for expensive treatments for life-threatening diseases such as cancer. Increasingly, it is technologically possible and economically desirable to single out patients where the treatment is working and to identify those where it is not; the payer tailors reimbursement to the effectiveness of the treatment. The evaluation of cost-effectiveness can then be made at the individual patient level. This model is already being used for some pharmaceutical products, including Velcade, a treatment for multiple myloma (a form of bone cancer) and Herceptin, a treatment for breast cancer. It is inevitable that this model will spread to medical devices.
Information is king
Viable commercial models will be required by the private sector to develop and sell products and services profitably in a payment for results environment. These commercial models will rely on the ability to monitor, store, access and analyse information. In this future environment, information will be used to manage medication, monitor patient compliance and modify treatments in response to diagnostics. Reimbursement will be based, at least in part, on the effectiveness of the treatment as determined through analysis of the data. This will be driven by the integration of electronics and communications, and the processing and analysis of vast amounts of data in near real-time. Increasingly, these same technologies will provide patient coaching, education and stimulus.
Technologies of this type are already being combined in products. For example, the easypod from EMD Serono (www.emdserono.com) is a fully electronic injection system for growth hormone delivery. It not only supports treatment through preset dosing, dose memory and compliance aids, it also provides graphics to allow users to personalise the device. Industry standards for network connection are also emerging to enable interoperability of devices from a variety of suppliers, which removes barriers to entry and reduces costs. Perhaps best known is Continua Health Alliance (www.continuaalliance.org), a nonprofit industry coalition that is developing methods for healthcare device connectivity. This wealth of information will provide more informed decisions to be taken by healthcare providers and patients regarding treatment options. Transparency around these options and the likely outcomes will also drive greater competition, particularly in the medical device sector, where detailed information on short- and long-term product performance as linked to individual circumstances could greatly influence purchasing decisions.
New entrants take hold
This reliance on information to drive emerging regulatory and commercial models has opened the way for a number of non-traditional healthcare companies to enter this market. Many of these are not small-time start-ups, but global giants such as Google, Intel, Microsoft and Cisco, which have dominated their own industry sectors and are now viewing healthcare as the next growth opportunity. In fact, most of these companies have already entered the healthcare market with initial products and services targeted at assisted living programmes to move more care to the home and provide personal healthcare management. These companies are in a far better position to manage the growing information exchange than traditional healthcare suppliers.
Of course, e-health and telehealth initiatives have been around for some time. Previously, these initiatives have tended to play at the edges of healthcare provision, often targeting disposable income. However, payment for results places communication and information services at the heart of healthcare provision. Reimbursement will be based on the data monitored, collected and stored not only in hospitals and clinics, but also in residential and work environments and even on the move.
It is not merely communication and media companies that are moving into healthcare, other companies are following suit; they are identifying a range of opportunities at different points in the supply chain that are not fully realised by the incumbents. Defence companies are exploiting sensing and materials technologies, racing car companies are exploiting remote telemetry, retail outlets are exploiting logistics solutions and access to consumers. Where previously the barriers to entry into the healthcare market were seen as too high, opinions have changed and companies are finding business opportunities within this growth sector.
The move to prevention and wellness
These new entrants are not encumbered by the historical positioning of the market. They bring a fresh and often more customer-oriented perspective into healthcare. This has helped to renew the debate around disease prevention and general wellness. The vast majority of healthcare expenditure is spent on detection, diagnosis and treatment of disease and injury. These areas are highly regulated and driven by clinical protocols that determine safety and efficacy. It is easier for new entrants to work outside this highly regulated environment, focusing on prevention and wellness and therefore targeting health conscious individuals and the worried well.
Healthcare expenditure is constantly under review, and payers and providers are becoming increasingly interested in prevention and wellness as a means of controlling costs and changing behaviours. This growing market has not escaped the eyes of the traditional healthcare sector providers either. Pharma-ceutical companies are rebuilding their consumer health divisions and marketing a greater number of “lifestyle” drugs. Similarly, medical device and diagnostic companies increasingly see prevention and wellness as viable markets for new products and services. As healthcare becomes more connected, we will increasingly see diagnostic test kits and medical devices directly linked to individual health portals, bringing some front-line services directly to the consumer.
New focus on the individual
The era of delivering treatments to patients in whom the therapy is at best noneffective, and at worst harmful, is coming to an end. In 30 years time, being prescribed a drug or having a medical device implanted without the means of determining its effect and hence how much to pay for it, will be the exception rather than the rule. Treatment will be determined by the status of a person’s condition and personalised assessment of safety and efficacy for the individual, combined with monitoring and feedback to demonstrate effectiveness and determine payment.
1. The Congress of the United States, Congressional Budget Office, “Technological Change and the Growth of Health Care Spending,” January 2008.
2. D.M. Cutler, “Technology, Health, Costs and the NIH,” paper prepared for the National Institutes of Health Economics, Roundtable on Biomedical Research, September 1995.
Kevin Deane and Bob Damms are technology experts at PA Consulting Group
Reproduced by kind permission of European Medical Device Technology. To read the full article, please click here.
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