The Journal of Healthcare Contracting

Manufacturers’ Point of View
Dealing with a cost-containment environment among the many challenges facing manufacturers, AdvaMed’s David Nexon says.

Medical products manufacturers have a lot on their plates these days. Yes, there are the perennial sales-and-marketing issues, such as securing and capitalizing on GPO contracts, and fending off competition. But they face many "behind-the-scenes" issues that aren’t as apparent to Journal of Healthcare Contracting readers, such as gaining FDA clearance to market new products, financing R&D, conducting clinical trials, sourcing raw materials, securing and defending patents, etc.

Recently, JHC spoke with David Nexon, senior executive vice president of the Advanced Medical Technology Association (AdvaMed) about a number of these issues. Based in Washington, D.C., AdvaMed represents more than 1,200 developers and manufacturers of medical devices, diagnostic products and medical information systems. According to the association, its members manufacture 90 percent of the $75 billion of healthcare technology purchased annually in the United States, and more than 50 percent of the $175 billion purchased around the world annually.

Nexon served as the Democratic health policy staff director on the Senate Health, Education, Labor and Pensions Committee, and as senior health policy adviser to Sen. Edward Kennedy (D-Mass.) prior to joining AdvaMed in February 2005. During his 20-year career on Capitol Hill, he worked on a number of issues, including COBRA extension of health insurance coverage, Kassenbaum-Kennedy health insurance reform, the FDA Modernization Act of 1997, and the Child Health Insurance Program.

Journal of Healthcare Contracting: What issues keep manufacturers up at night?

David Nexon: In healthcare, we’re in an era with tremendous pressure for reform. There are 46 million Americans, by last count, who don’t have the opportunity to access all the wonderful health services that manufacturers develop and people in hospitals provide. That’s not an appropriate situation. At the same time, there is tremendous concern about the cost of healthcare, and how can businesses absorb the rapid escalation of costs. Our concern is that, particularly in a cost-containment environment, instead of focusing on the underlying issues, there will be a focus on the "cheapest is best" approach to medicine - and that’s not good for hospitals, medical innovators, or, most of all, patients.

JHC: In June 2007, AdvaMed released its healthcare reform plan, in which the association asserts that improved quality, health promotion and disease prevention are fundamental to controlling the cost of healthcare and reducing the economic and human burden of disease. According to AdvaMed, savings from the association’s proposal would arise primarily from better treatment and prevention of chronic illness, wider use of health information technology, and medical innovation. Can you explain how AdvaMed’s proposal would improve this country’s healthcare system?

Nexon: Studies by Ken Thorpe, a respected health economist from Emory University, show that improved prevention, improved quality and improved efficiency would save enough money to pay for the entire universal health program. [See "Fact Sheet: AdvaMed’s Plan to Provide Quality, Affordable Health Care," www.advamed.org.]

Ken didn’t cost out the fourth piece - medical innovation. It was too speculative for him to say what the savings would be from medical cures that haven’t been invented yet. So we took several innovations that have a reasonable prospect of being developed, and put together fairly solid estimates of what would happen to costs. Delaying the onset of Alzheimer’s disease, using medical innovations that extend the current rate of decline in disability among the elderly, and increasing the efficiency and effectiveness of cancer treatment by 25 percent would result in savings of $138 billion in national health expenditures.

JHC: Can you comment on the proposals regarding medical innovation in AdvaMed’s plan for healthcare reform, namely: 1) Make medical innovation a national priority, and ensure that each major healthcare policy decision or rule include an analysis and statement on the anticipated effect of the policy on medical innovation; 2) invest in critical path research for drugs and devices at the U.S. Food and Drug Administration, and incorporate results of critical path research into the regulatory process; 3) maintain a steady rate of increased investment in the National Institutes of Health and the National Science Foundation; and 4) streamline the process of Medicare coverage of new, breakthrough technologies, including coding, coverage and payment decisions.

Nexon: The first is a novel one. What I came to appreciate once I came to AdvaMed two years ago was how much payment rules and decisions affect the development of new medical treatments. That’s not usually considered in most rules, such as those by Medicare. We thought that something analogous to an environmental impact statement would help people focus on whether a healthcare policy decision would have a harmful or helpful effect on medical innovation.

The second proposal, regarding critical path research for drugs and devices, would reduce the time and cost of developing medical products, particularly those requiring a PMA [premarket approval, which is the most stringent type of device marketing application required by the FDA]. The FDA is investing a very small amount in this, and it’s almost all on the drug side. In the context of our trillion-dollar healthcare economy, this could make quite an important difference.

JHC: Are you referring to critical paths that innovators can follow in developing new medical technologies, or critical paths that the FDA could take in expediting review of them?

Nexon: I’m referring to the FDA and industry working together to develop scientific knowledge that will shorten the development process. The first part involves the steps that innovators must take when testing their medical innovations, that is, defining the requirements for clinical trials. There are questions to be answered, such as, "Can you substitute computer analysis in your trials?" and "To what extent can you segment the population?" The second part is making sure that the FDA recognizes as adequate the new pathways that are developed. The FDA is very committed to this process, but hasn’t had the resources to develop it.

Our third proposal, relating to the National Institutes of Health and National Science Foundation, is simply that these agencies are critical to scientific endeavors in general.

And our fourth proposal - streamlining the process of Medicare coverage for new, breakthrough technologies - would ensure that patients can take advantage of these technologies more quickly than they can today. For people to benefit from them, technologies have to be covered by insurance. But obtaining Medicare payment and coding can add up to two years to the development process. We think there should be a process to speed up payment and coding. We’re hopeful there will be major health reform, and that this will be part of it.

JHC: In 2002, President Bush signed into law the Medical Device User Fee and Modernization Act, which called for medical device manufacturers to subsidize the FDA review process, presumably, to speed it up. The Act is up for reauthorization. [At press time, the Act was in conference between the House and Senate, with reauthorization mandated by Oct. 1.] What is AdvaMed’s stance on this?

Nexon: There’s tremendous public interest in having the FDA promptly review new medical products, whether they are drugs or devices, so that if they are meritorious and an improvement over existing technology, they can get into the hands of the American people. The user fee program has contributed to that in a variety of ways. Most important, it has given resources to the FDA to hire additional staff - epidemiologists, examiners, etc. - so they can do a more thorough and rapid job of reviewing device and drug applications. We’re very pleased with it, and we believe that a substantial increase in resources will result in continued good and improved performance.

JHC: AdvaMed has expressed disappointment that the House of Representatives passed H.R. 1908, "The Patent Reform Act of 2007." Can you discuss some of the issues involved, and why AdvaMed opposes this bill?

Nexon: What has driven this bill is a fight within the computer industry, largely between small, innovative companies and the big companies. The big guys complain that the small companies stake out a path where they haven’t done a lot of groundwork; then, when the big guys develop a similar product, the small ones sue them. This hasn’t been a big issue in our industry yet. But what the bill does is bend over backward in reducing patent protections, which we and other life sciences industries rely on. So we’re very concerned about it.

Patents are the lifeblood of the medical device industry. It’s about coming up with a better mousetrap to solve health problems. A lot of innovation in our industry comes from small companies. A couple of people have a bright idea and they develop it; then they either grow into a big company or, if they don’t have the resources to fully exploit the idea in terms of clinical testing and marketing, they sell or license their technology through a large company. But if they don’t have basic patent protection in the first place, there’s no incentive to develop better products; they can’t get investors to put up the money, and they can’t find people who are willing to put their life and soul into one bright idea.

We think the bill erodes patent protection. It sets up a formula for damages that essentially, in our view, discounts the value of patented components.

JHC: AdvaMed has committed to collaborating with the FDA to identify ways to refine post-market monitoring of medical devices and communication about product performance. How do you propose to do so?

Nexon: The postmarket-monitoring issue is threefold. First, how do you promptly identify problems with a product? Second, how do you decide on the appropriate action to take? Third, how do you communicate that to the public and physicians? Currently, the FDA learns about adverse consequences associated with a medical device primarily through the MDR [medical device reporting] process - adverse-event reports, submitted by manufacturers and users. Because these are primarily paper-based, the FDA is overwhelmed by them. The agency is working on ways to try to make these submissions electronic, so they can manipulate data more efficiently. We’re working closely with them to try to help them come up with ways to do that.

JHC: What are the challenges that face small medical technology companies who are trying to bring their innovations to market?

Nexon: An awful lot of small companies exist in this industry. Many don’t yet have any products on the market; they’re developing them. They’re innovators, and they rely on venture capital. It’s true that venture capital goes into risky businesses, but if the businesses are too risky, the venture capitalists won’t invest in them. The more uncertainty that is created by a capricious or inefficient regulatory environment, the greater the difficulty of getting a new technology covered by insurance, etc. These things are deterrents to companies, particularly small ones, developing products. To that, add the inherent difficulties of coming up with new ideas, and you can see the daunting challenges they face. A large part of what we do as an association is work on the regulatory and payment systems, so they are receptive to innovation, whatever its source - big or small companies.

JHC: You were quoted in an article two years ago as opposing gainsharing, saying that it could lead to substandard care and that it could indirectly inhibit the introduction of new technologies. Do you still believe that’s true?

Nexon: We understand the desire of hospitals and purchasing agents to procure products at the lowest rate possible. That’s part of our free market economy. But we’re concerned that in pursuit of those products, they might enter into agreements that lock out competitors and don’t leave room for the therapeutic judgment of physicians. These products are not identical. There are reasons why an alternative might be better. One product might be better for some patients, while another might be better for others. So we want to make sure that physicians’ therapeutic choices are not limited in the attempt to achieve economies. We’re not supportive of gainsharing. We don’t think it’s the right way to go, to the extent that it focuses narrowly on limiting products to obtain discounts.

JHC: Are there any other issues that the manufacturers’ association might want to make IDN contracting professionals aware of?

Nexon: All of us have to face up to the fact that we’re entering a cost-constraint environment. The issue is whether all our institutions and companies can cope with it, and how we as a society will choose to address these problems. Will we support better care and better outcomes, or will it be a meat-axe approach, with rationing of care?

Sidebar: Medical Technology’s Role in Reducing Costs According to AdvaMed, advancements in medical technology yield savings across the healthcare system by replacing more expensive procedures, reducing hospital stays and allowing people to return to work quicker. Here are some examples, cited in the association’s recent healthcare-reform proposal. (Original sources can be checked by visiting the URL cited at the end of this article.)

The lifetime treatment costs of diabetes complications, such as vision loss, renal disease and vascular disease, are $8,400 lower for pump therapy as compared to daily insulin injections. The incremental cost-effectiveness ratio for pump therapy compared with daily insulin injections is $18,300 per life year saved.
Total knee replacements save an average of $77,000 per patient in lifetime healthcare costs, primarily due to the reduced need for custodial care. Three hundred thousand total knee replacements annually results in approximately $23.1 billion in lifetime savings.
Use of medical imaging to diagnose and treat stroke leads to better outcomes and shorter hospital stays (a net economic benefit to society of roughly $8 billion in the 10 years following completion of the studies).
Unnecessary hospitalization from incorrect diagnosis of heart attack costs $12 billion annually. Using creatine kinase, myoglobin and troponin testing for accurate, rapid detection of heart attack in patients presenting with chest pain in the ER can reduce costs by 30 percent.
Appropriate use of diagnostics averts between $28-$46 million in prescription drug, outpatient and inpatient costs.

Quality of life AdvaMed argues that in addition to financial savings, advancements in medical technologies and treatments have been a major contributor to saving human lives and enhancing patients’ quality of life. Some examples cited by the association:

Current health technologies return, on average, $4 in life value for every medical dollar spent.
CT angiograms, which cost $500 to $1,000 per patient, can be completed in 10 minutes with no time needed for recovery, while traditional angiograms take 30 minutes, require 24 hours for recovery, and cost more than $16,000 per patient.
Minimally invasive image-guided breast biopsy costs roughly a third of what a surgical biopsy does; takes one-fifth the amount of time; reduces complications, and allows women to return to normal activities in half the time that it takes after open surgery.
Low dose CT screening for lung cancer costs less than $200, and surgery for stage I lung cancer is less than half the cost of late-stage treatment.
Low compliance with diagnostics-based quality measures for diabetes, cardiovascular disease, colorectal cancer and breast cancer was linked to 56,200 avoidable adverse health events and $899 million in unnecessary healthcare costs in 2004.
Intensity modulated radiation therapy (IMRT) precisely maps and targets tumors with better control and fewer side effects than other forms of radiation. IMRT increases the success rate of tumor reduction from 43 to 96 percent, and reduced complications from 10 to 2 percent.
Between 1984 and 1988, the cost of treating heart attack patients rose $10,000. However, innovations in medical technology increased the life expectancy of heart attack patients by one year - a value of $70,000 and a net benefit of $60,000.
Using renal angioplasty to unclog arteries costs significantly less than open bypass surgery. When post-procedure costs are factored in, renal angioplasty costs $14,000 less, takes an average of three hours less than bypass surgery, and reduces hospital stays by more than two weeks.
Widespread use of left ventricular assist devices could result in a 50 percent decrease in heart failure-related hospitalizations.

Source: AdvaMed, "Fact Sheet: AdvaMed’s Plan to Provide Quality, Affordable Health Care" (www.advamed.org/NR/rdonlyres/ED891283-DEA3-4D70-B6C5-658AA85BA762/0/HealthCareReformPlan FactSheet62107.pdf)