Are Device Costs a Burden to the Hospital – Or Not?

ADVAMED (the Advanced Medical Technology Association) has recently started a campaign (link) to preempt the anticipated political and regulatory focus on the cost of medical devices. Both Congress and the White House have focused on the cost of medical care and announced increased scrutiny on drug makers, suppliers – and eventually medical device makers. While pharmaceutical companies have already experienced such scrutiny over the years (and as a result, pharmaceutical costs have been going down, helped by the introduction of generic drugs), medical device makers have seemingly received a hall-pass. But not for much longer, ADVAMED believes, and their recently launched educational campaign is designed to make the point that medical devices are not a significant contributor to the cost of healthcare and that, in fact, the proportion of medical device costs is decreasing as a percentage of the total cost of healthcare: Medical device costs have typically only been 6% of total healthcare costs, and in 2016 dipped to 5.2% ($173.1B).

That should be enough to silence lawmakers and leave medical devices alone while they fix the rest of healthcare. However, providers (hospitals) are experiencing a different reality. Recently, a group of Vizient authors published “The Cost of Medical Device Innovation: Can We Keep Pace?” (link). In this (well written) report, the authors discuss device costs in the cardiovascular space, one of the largest and fastest growing procedure types in the US. Specifically, the authors look at the adoption of new technology and the cost escalation that comes with it. In Cardiology, as in other fast-growing areas, medical device makers focus on constantly bringing new technology to the market. This is great, to the extent such new technology improves patient care, efficacy and outcomes. In 2017, FDA clearances of new devices was up 9% over the previous year – and 40% of these clearances were cardiology-related. Since new technologies are almost always introduced at a premium price (on average 273% increase over predicate devices in the sample studied by the Vizient authors), adoption of new technologies becomes a cost challenge for hospitals. The challenge is the “reimbursement quagmire” that hospitals find themselves in: Increases in reimbursement don’t follow market launch dates, and, in fact, the average time for reimbursement adjustments to accommodate new technology is 6 months. For some cardiology devices, the share of total procedure costs is 70-80% or more of reimbursement, which means that the early adopter hospitals, which still need to cover room costs, anesthesia, supplies, etc., typically lose money on Medicare procedures.

...new technologies are almost always introduced at a premium price (on average 273% increase over predicate devices...)

So, while medical device costs may only be 6% of overall medical cost, this number covers great variation between clinical areas in device costs and represents a real problem for hospitals. Device makers are placing their innovation investment in service lines that are fast growing and where large profit margin can be found. So, on some service lines such as cardiology, there is a “disconnect” between clinicians wanting to use the newest technology and hospital administrators needing to reduce costs.

Where new technology does not have a proven, documented medical advantage, adoption should not take place; where new technology is both less expensive and more efficacious, adoption should take place.

So, the Vizient report tells us three things that are problematic in ADVAMED’s attempt to get a hall-pass on cost reductions:

1. While average medical device costs may be only 6% of medical costs, in key growth areas, hospitals are losing money on Medicare procedures BECAUSE of medical device costs. Ponder the consequences: Are hospitals restricting procedures to minimize their loss (meaning that new technology that produces better results fails to penetrate the market) or are hospitals simply not opening up these service lines?
2. The major medical device makers have not only seen rapidly growing sales, the average stock value of Johnson & Johnson, Abbott Laboratories, Medtronic, Stryker and Boston Scientific have seen their stock value triple over the past ten years, 50% growth over the last 3 years alone. This starkly contrasts with the dangerously low operating margins at most hospitals and the negative profitability of many service lines.
3. 6% of medical costs may be a low share of overall costs, but the call to the industry is not to freeze costs, but to work on improvements that simultaneously improve quality and reduce costs. This doesn’t jive with the Vizient report about new devices being almost three times the price and frequently not providing compelling patient care improvements.

The Heart Rhythm Society conference is coming up in a few weeks in San Francisco (May 8-10). As you walk the tradeshow floor and watch all the new, exciting technologies, please think about two things: Are they going to improve the quality of care? And are they going to make medical care less expensive? If they don’t fit these criteria, it’s tough to celebrate their introduction. Watch my video here.

Rick Ferreira
CEO
Innovative Health