2002 Medical Device Outlook: Business Is Booming

Originally Published MDDI March 2002

BUSINESS CLIMATE FORECAST

Aging baby-boomer patients, fully loaded product pipelines, and evolving business strategies combine to foster a bright future.

Stacey L. Bell

In business, demographics make all the difference. The sheer volume of aging baby boomers throughout the world coupled with the rapid pace of innovation as evidenced by burgeoning product pipelines is positioning the medical device industry for annual double-digit growth for years to come, according to industry leaders who spoke with MD&DI about how they view the business climate in 2002 and beyond.

Of course, device manufacturers will need to negotiate some difficult turns to take advantage of the growth opportunities presented by an increased demand for their products. In the past, industry executives complained that the slow-moving product approval process at FDA impeded innovation. Now leaders say that the implementation of 1997's FDA Modernization Act has improved the situation dramatically. Today, industry leaders are focusing their attention on another agency, the Centers for Medicare & Medicaid Services (CMS), and its lack of speed and understanding in making coverage and reimbursement decisions.

As a result, savvy companies are rethinking their product offerings, sales techniques, and business strategies to better navigate the reimbursement maze and to meet new demands from customers and end-users. These firms expect such adjustments to keep business booming.

COUNTING ON INCREASED DEMAND

For years, medical device manufacturers have prospered because healthcare is often not an optional purchase for consumers—if an artery is blocked, for example, the patient will need to undergo surgery as soon as possible as opposed to waiting until a more convenient time. Today, executives expect the record-breaking number of older people to keep device sales brisk.

"The fastest-growing age sector in the United States today is people over 100," says David Hockenbrocht, CEO and president of Sparton Corp. (Jackson, MI), a provider of design and manufacturing services. "For medical device companies, that's very good news. We all want to live longer, and we're willing to pay a lot to do that."

According to the U.S. Bureau of the Census, more than 76 million Americans are currently age 50 and older. Further, the number of Americans 65 and older is expected to more than double from today's rates to 69.4 million—20% of the population—by 2030.

As a result of the so-called graying of America, experts say that treatments for cardiopulmonary disease, diabetes, and neurological disorders will see great growth, as will orthopedic devices and pharmaceuticals that can help aging baby boomers stay active. In fact, some companies already are being challenged to keep up with increased demand. A number of firms are expanding their manufacturing capacity in 2002 to meet current orders, and most companies should be developing business models anticipating future sales to ensure that they'll have sufficient resources.

The aging of the baby boomers is affecting the medical device sector's most important customers as well. For years, both the number of hospitals and the number of hospital beds nationwide declined owing to the cost-cutting emphasis of managed care. Now that the baby boomers are reaching an age where they need more medical attention, hospitals and other patient-care centers are reaping increased business.

"You need to look at your business proportional to how your customers are doing," explains John Wareham, chairman, president, and CEO of Beckman Coulter Inc. (Fullerton, CA), a producer of laboratory and diagnostic equipment. "Our largest customers are hospitals. Generally speaking, they're busy, and their financial profile is looking better than it has in years."

"Hospitals have already gone through the worst impacts of the Balanced Budget Act and HIPAA [Health Insurance Portability and Accountability Act of 1996], so their capital restrictions have eased up a bit," adds R. Ernest Waaser, president and CEO of Hill-Rom Company, Inc. (Batesville, IN), a manufacturer of patient-care products. "We've seen a resurgence of hospital expansion, renovation, and construction activities during the past year."

Prospects for product demand appear downright bullish for the foreseeable future, but medical device firms are finding that they need to fine-tune their products to better meet their customers' needs, which now extend beyond low prices.

A SWITCH IN SELLING STRATEGIES

Certainly cost pressures will continue to dominate the agendas of hospitals, group purchasing organizations (GPOs), and other medical device customers; however, customers increasingly are looking for other benefits from their device suppliers—namely, help in treating more patients more quickly.

"To preserve market share, especially in a poor economy, companies need to develop relationships with their customers," says Manoj Kenkare, a research manager for the healthcare and life sciences practice at Frost & Sullivan (San Antonio, TX). "Customers are demanding more services and seeking a higher return on their investments."

Carroll H. Neubauer, CEO of B. Braun/Aesculap (Bethlehem, PA), believes customers need help in three areas. "First, cost containment is still a huge issue. GPOs and hospital groups have done a great job of getting rock-bottom prices, but there are still opportunities in the supply chain to reduce costs, and we're making advances there," Neubauer says. "Secondly, safety remains a significant concern because of the risks associated with needlestick injuries and the recent congressional findings regarding medication errors. A third problem that is hurting our nation's hospitals is the critical nursing shortage. We're providing support by developing new products that save nurses time and by standardizing products so that they're easier to use. Nurses will be able to spend less time being trained on the use of new products and technologies, and more time with their patients."

The nursing shortage is only part of the problem. While a 2001 Vanderbilt University School of Nursing study found that by 2010, the United States will face a 20% shortfall of RNs, the numbers of other health professionals are slipping, too. Physicians, pharmacists, and orthopedic surgeons are among the professions that are expected to be shorthanded in the coming decade—all at a time when their services will be most needed by an unprecedented number of people. Hospitals and patient-care centers are struggling to treat a maximum number of patients as efficiently and productively as possible, so many manufacturers are reassessing their product offerings.

"One of our long-term goals is to lower the cost of orthopedic procedures by making our products easier to use and more efficient in the hands of an orthopedic surgeon," says Larry Papasan, president of Smith & Nephew Orthopaedics (Memphis). "If we can cut one day off a hospital stay by making a procedure less invasive, that saves a great deal of money. If a technology simplifies use and shortens operating room time, that saves more money."

SOFTWARE SOLUTIONS

In their quest to provide cost-effective, efficient devices, medical device manufacturers have turned to information technology (IT) solutions, which could allow overburdened healthcare workers to treat more patients as well as cut some additional costs from the healthcare system.

"It's important to improve the productivity of work processes and workflow, particularly in hospitals, where they're facing such a shortage of nurses," says Hill-Rom's Waaser. "IT solutions may not provide a clear clinical application, but when they improve workflow through a facility, enhance general effectiveness, or increase the safety and efficiency of the caregiver, they provide a demonstrable value."

In 2002, Smith & Nephew plans to focus more of its R&D dollars on developing computer-assisted orthopedic procedures. "Historically, 4% of sales has been allocated to R&D, because innovation is key in accomplishing high performance and creating more-efficient, cost-effective procedures," notes company president Papasan. "We're increasing our spending on R&D by another percentage point even after having a record-breaking year in 2001, and we'll focus on computer-assisted techniques since that's where the longer-term cost-savings opportunities lie."

VivoMetrics's president Paul Kennedy advocates spending on software solutions as well. He says IT can reduce healthcare spending over the long term by allowing more healthcare treatments to be administered in, and patients monitored from, people's homes. A start-up company based in Ventura, CA, VivoMetrics makes a device that measures the wearer's respiration rate and general state of health. Kennedy hopes that FDA will approve the LifeShirt device for sale in the United States by mid-year (it is already marketed overseas) and that the device will be used to gather patient data for other devices' and drugs' clinical trials.

"Electronic data capture is now more feasible than ever," Kennedy says. "Patients will simply take a data card out of the device they've been wearing, insert it into a computer, and send basically a physiologic movie of their health to their healthcare provider without the inconvenience of traveling to a clinic. The potential ramifications are tremendous—from gathering more-accurate data about patients' health and making clinical trials more convenient for more potential participants, to saving healthcare dollars by being able to spot possible problems before they evolve into more-costly ones."

Sparton Corp. is on the same track. Last November, Sparton and Cybernet Medical Corp. (Ann Arbor, MI) sent a proposal to the state of Michigan titled "A Disease Management System for Chronic Conditions." The companies propose installing a chronic-disease management system that would allow real-time communication of patient medical data from patients' homes or offices to doctors and hospitals. The chronically ill would be provided with a data collection device that would send information over the Internet to healthcare providers, who would make certain that the patient's parameters were within limits set by his or her physician. The companies say the state of Michigan would save $31 million annually in reduced patient visits to healthcare facilities and emergency rooms by managing conditions more effectively and efficiently. The companies hope the plan will be implemented nationally by 2005.

The reduced number of healthcare workers, combined with the take-charge attitude of baby boomers and advances in technology that make self-care more feasible, is creating a surge in the home healthcare market, too. Executives agree that more emphasis will be placed on developing in-home treatments and diagnostic tools in the coming years.

"More medical products are being targeted simultaneously to meet both clinical and home healthcare needs," says Jeff Hovis, vice president of Product Genesis (Cambridge, MA), a product strategy, design, and development company. "They're almost like consumer appliances now in the way they are marketed," he adds.

Of course, this home-health trend does face one large obstacle: CMS appears to be reluctant to approve home-use devices and diagnostic tests for coverage and payment, says VivoMetrics's Kennedy. He alludes to a "dueling dynamic": CMS welcomes the lower-cost in-home treatment alternatives to more-expensive in-hospital care; however, it fears that rapid market penetration of such technologies would overtax an already cash-strapped system. Until the agency takes a longer view of the situation—recognizing that self-management devices will help patients and their physicians spot healthcare troubles before they develop into more-serious problems requiring more expensive treatments—medical device manufacturers will be forced to consider reimbursement issues before investing too heavily in the development of additional in-home products.

REIMBURSEMENT TAKES CENTER STAGE

Medical device manufacturers have two of the three elements of business success firmly in hand: great products and great demand. The third factor, receiving payment for products, appears to be the greatest stumbling block for the near future. Because reimbursement issues are so complex and complicated, most manufacturers would be well advised to hire specialists to help them tackle these challenges.

Last summer, when the former Health Care Financing Administration changed its name to CMS, U.S. Department of Health and Human Services Secretary Tommy G. Thompson said, "We are not just changing the name. We are changing the way we do business." Among the proposed changes: goals to streamline the reimbursement process and to "encourage innovation." Nine months later, medical device executives are still waiting to see evidence of those changes.

"Reimbursement in the United States stands out as the most challenging problem in 2002," says Terry Shepherd, CEO of St. Jude Medical Inc. (St. Paul, MN). "In the wake of September 11, there's a spending deficit in healthcare due to monies being funneled into security. The pool of available funds for Medicare patients is shrinking even as technology is flowering. It's a hard equation to make work."

"Without question, the single biggest area of concern we hear about is reimbursement," concurs Product Genesis's Hovis. "There's more certainty when working with FDA; companies feel comfortable with that agency and process. Reimbursement is far less predictable. Part of the challenge is that CMS is only one piece of the payment puzzle. Companies need to weave their way through a maze of several hundred payers to win reimbursement coverage and payment throughout the country. This is particularly difficult for smaller companies to do, and it takes a lot of time."

In fairness to CMS, FDA's product approval process is more straightforward. FDA asks the question: "Is a device safe and effective?" and seeks a yes or no response. Coverage and payment issues are more subjective. CMS asks, "Is this product substantially different from currently coded products? Is the patient's outcome so much better that additional reimbursement is appropriate? If so, how much?" Evaluating the cost and benefit of a technology is still an evolving field, leaving plenty of room for debate.

That said, CMS still takes an inordinate amount of time to make coverage decisions. AdvaMed (Washington, DC) research shows that of 26 coverage decisions in 1999–2001 that did not involve Medicare Coverage Advisory Committee reviews (which take longer than typical reviews), the average review time was 175 days. Congress has directed that the process take 90 days. AdvaMed currently is updating its research on CMS review times and expects to release its findings this summer.

"We're hoping that CMS is getting a little faster," says Stephen Hull, AdvaMed associate vice president of payment and policy. "Last year a big cohort of pending decisions, 17, were all averaging 182 days."

Winning coverage can be time-consuming; winning appropriate reimbursement can be beyond difficult. "Coverage alone for a new technology may not mean any additional payment," Hull explains. "Many products struggle to get assigned a unique code that distinguishes them from existing technology, but even after a code is assigned, Medicare payment may not reflect the new costs of the service for several years." Healthcare facilities won't use products that don't receive proper payment, so such reimbursement decisions could derail the future of small medical device start-ups.

Hull advises both large and small manufacturers to work collaboratively with local payers for most reimbursement needs. "Local coverage is the best way to get reimbursement most of the time. Ninety-five percent of products don't need to go to the national level for coverage decisions, and they shouldn't."

This year, manufacturers also face substantial reimbursement challenges thanks to a rider on one of the economic stimulus packages passed in December. The legislation reduced outpatient service payments approximately 12%, says Jennifer Murray, president and CEO of The JGS Group (Arlington, VA), which specializes in reimbursement issues. "CMS found discrepancies in many of the reimbursement allowances, so the regulations were tabled until March 31, 2002, but we're going to have to fight this. Medicare dollars are diminishing, and it's becoming even more difficult to find funding for new technologies because of the need to pay for events like September 11 and the war in Afghanistan.

"Further, there used to be a system of transitional pass-through codes that providers could add to a base-code reimbursement to get higher reimbursement for high-end technologies," Murray continues. "This new legislation bundles these payments, so in some instances where a hospital might have received $9000 for a device, they'll now receive $7500. This regulation will affect a lot of companies because if hospitals aren't reimbursed to the necessary degree, they'll stop using that product. Smaller companies with only one product might go out of business, and larger companies might adjust their products to meet existing reimbursement rates, which is not a good thing."

Of course, baby boomers won't be likely to settle for low-technology solutions to their healthcare woes. It stands to reason that Internet-savvy consumers who are well educated about their choices and who have become conditioned to ever-better home, entertainment, and business products will expect to receive tier-one healthcare treatments as well. The politically powerful baby boomers could even succeed in convincing lawmakers to implement laws that will foster better healthcare options for society at large.

Some manufacturers are already marketing medical devices and diagnostic tests directly to consumers in recognition of the growing role patients are playing in planning their own treatment regimens. In some cases, manufacturers and consumers have even joined forces to educate local payers about the value of a technology. In the years ahead, more manufacturers might partner with consumers to win funding for products and help ensure that innovation continues to thrive.

CONCLUSION

Opportunities and challenges will continue to abound in the medical device industry, but the aging of the world's population, as well as bursting product pipelines and additional IT solutions for medical device end-users, should encourage healthy gains well into the future—if manufacturers can successfully negotiate the reimbursement quagmire.

Ernest Waaser of Hill-Rom says manufacturers need to plan a course of action. "I don't think this Congress will act on Medicare reform because it's an election year, but in 2003 it will be forced to address the issue because of an overburdened system trying to manage in the face of shrinking funds.

"It's not 2002 that worries me—2002 should be a good year," Waaser concludes. "But we need to be concerned about the costs of the healthcare system versus how those costs will be met. As part of the healthcare community, manufacturers need to start addressing that problem now, or it will be addressed for us."

Stacey L. Bell is a freelance writer based in Tampa, FL. She frequently writes for MD&DI.

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