I read a story today in a Minnesota paper about how the state’s formerly booming medical technology industry is slowing to a crawl. Here’s the premise: The medtech industry, long a driver of much business in the region, is now facing third party payers (insurers and Medicare alike) who are now balking at paying for devices, saying there simply isn’t enough money. Succinct story, likely to be accepted at face value by 90% of the audience who reads it. But it just doesn’t ring true.
Manufacturers develop products with at least an argument that the products can be at least as effective as what is on the market. For about ten years now, this has been necessary, but it has not been sufficient to get products paid for. What was also needed was that the products have to do better than what’s on the market or at least as well as what’s on the market while also reducing the overall cost of care for that patient population.
What is being witnessed now is not some culmination of healthcare cost reaching its limit and beginning a rationing of innovation. What is happening is that, in lieu of free-flowing capital (does anyone remember the recent phrase "credit crunch"?), healthcare systems are not able to finance inventories of product. Talk to the early stage or even seed stage companies and ask them how the funding is going (or just search for "equity overhang" in the blog search box in the upper right of this page).
But are companies being denied coverage for new technologies more frequently now? Yes, that is certainly true. Healthcare costs continue to rise (I saw a credible statistic that healthcare premiums will increase an average of 9% in 2010) and third party payers have no choice but to restrict coverage to make their numbers.
Are there still companies developing products that can gain 510(K) approval but that would fail to demonstrate the ability to gain approval by virtue of failing to make a compelling reimbursement argument? Absolutely there are, just as there always have been.
Medtronic’s net earnings for its most recent quarter were up 10% over 2008. While Medtronic, as behemoth as it is, is not representative of many companies who operate at considerably smaller scale, its operations are certainly at least as much likely to reflect some sudden limit being hit on reimbursement, since they are the largest medical device manufacturer in Minnesota.
Reimbursement will ALWAYS be a challenge, but during a time when money is being squeezed everywhere, like it is now, it’s not going to be any easier. Guess what? Those innovative little medtech companies (maybe even the big Medtronics of the world, too) have already figured this out.
From R&D to manufacturing to clinical trial — every step of the innovation process in medical technology has a focus on either serving an untapped niche or serving a previously tapped niche better, faster or just cheaper, this a result of years of the manufacturers being pre-conditioned by terms and phrases like "capitation", "managed care", "healthcare reform", terms that are not going away anytime soon.