Medical Device Innovation and the Healthcare System

1. University of MinnesotaThe Healthcare MarketplaceMedical Industry Leadership InstituteCourse: MILI 6990/5990Spring Semester A, 2017 Stephen T. Parente, Ph.D. Carlson School of Management Department of Finance sparente@umn.edu

2. Medical Technology Overview • History of medical device innovation • How medical devices ’fit’ in the current system? • Case example of a new technology • Relevance to the Medtronic Case and IT ‘enablers’ • From bench science to reimbursement schedule • The FDA Process • Pharmaceutical Market Contrast • Developing a ‘Medical Technology Dossier’

3. What is a Medical Device? • Working definition from the Food and Drug Administration: A medical device is “an instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article” that is intended for use in “the diagnosis of disease or other conditions or intended to affect the structure or any function of the body of man” (and woman) “or other animals and which is not dependent upon being metabolized for the achievement of any of its principal purposes.”

4. How are Devices Different from Drugs? • The FDA makes a key distinction: • Drugs are metabolized and devices are not. • Size of markets are quite different • Pharma is larger • Reimbursement policies are different • No DIRECT prescription drug coverage for Medicare (It is through private insurers paid by Medicare/consumer) • Devices are covered by Medicare • The consumer is different • For devices, marketing more focused to hospitals and physicians.

5. History of Medical Device Innovation • Pre-1900: Entrepreneurial Tinkerers • Physicians/medical tinkerers build/patent a ‘device’ and it is sold unregulated. • No insurance reimbursement, no government intervention, some University initiatives. • 1900-1940: Birth of FDA, NIH & Industrial Labs • 1906: Start of FDA (Pure Food) in response to ‘medical quackery’ • 1910: General Electric’s first Industrial Research Laboratory: Develops X-ray market, at first as a loss-leader. • 1928: A call for private sector to develop new innovations. No real response from industry. • 1930: National Institutes of Health Act passes: Later a huge player, but at first a small institution focused on basic public health issues.

6. An example of Medial Quackery

7. History of Medical Device Innovation-II • 1940s-1966: NIH as catalyst; private industry takes off • Wartime research acts as catalyst and establishes template for future • Civilian administration • Managed in equal partnership by: • Academics • Industrial scientists (e.g., GE) • Military • Funded by government, but researchers worked in their own institutions. • NIH funded for medical science research dramatically increases • Funded medical science research by universities creates medical device knowledge industry to trigger private sector investment.

8. History of Medical Device Innovation-III • 1966-present: Medical inflation, Medicare, rockets and managed care • Medicare programs begins. It acts as ‘rocket fuel’ to the low-tech device industry by providing $$ for a new elderly consumer. • To begin to control medical cost inflation, the 1974 Certificate of Need Act led to review of any high-priced medical technology device by a local health planning agency. • NASA (National Aeronautics and Space Agency) provides significant resources for basic science and specifically materials science research that will become essential for medical devices. • NIH funded shifts in 1970s away from basic science due to budget constraints, leading universities to seek more private sector partnerships. • NIH retools in 1980s to encourage more ‘technology transfer’ from basic science to technology development. • Reagan administration repeals Certificate of Need Act and leaves individual states to determine their own medical technology cost inflation strategies. • Medicare program cracks down on low tech medical device fraud and creates stricter reimbursement guidelines. • Managed care/Medicare start using technology assessment committees to determine reimbursement, based on the proven cost-effectiveness of a device.

9. Today’s Medical Device Players • Private Industry • Industrial laboratories • Manufacturer, market and distribute • Medical Providers • Private Insurers • Universities • Public Insurers (Medicare, Medicaid, DOD, VA) • NIH • FDA

10. How Medical Devices ‘Fit’ in the Current Healthcare Delivery System • Ordered by Medical Providers almost exclusively • Used for diagnostic as well as therapeutic benefit • Often complements to other medical therapies (for ex.): • Surgery • Home care • Pharmaceuticals • Reimbursed by both public and private insurers • Innovated by government, university and industry teams • Heavily regulated by government • Yet, heavily subsidized government

11. An Example from Industry

12. Relevance to the Medtronic Case and Health IT ‘Enablers’ • Vision 2010: Transforming For the 21st Century • Medtronic illustrates the typical post-war medical technology firm. • Started in 1949 by a U of M engineer • Garage firm generated revenue and started to acquire other firms and innovate. • Became a $11 billion highly diversified firm by 2005. • Wants to be more then an technology company • Help patients manage chronic disease. • Wants to be an information technology and information services company

13. Medtronic Market Research

14. Key elements to strategy • Partner with providers • Clinical pathways • Fund studies with providers to demonstrate outcomes • Provide physicians monitoring tools to make tracking patients easier • Create direct patient demand for products • Leverage existing web sites • Symptom-based direct advertising • Continue to profile patient stories • Provide physicians a tool for ‘self research’ patients • Give physicians web-based management practice tools • Link physicians to central Medtronic information

18. The Healthcare Landscape <90% Income Federal Government Congress Main Street Medial Technology Big Business Physicians 99% Income 91-99% Income Courts Insurers Hospitals

19. Integrated Delivery SystemIT Network Decision Support Life Support Data Hardware

20. Data Available to the Average Medical Provider About a Patient’s Care 10% of Care 25% of Care 15% of Care 15% of Care 35% of Care

21. Actual eLinks To Build <90% Income Federal Government Congress Main Street Medical Technology Big Business Physicians 99% Income 91-99% Income Courts Insurers Hospitals

22. Medtronic Critique • Direct to consumer advertising is effective but it requires a massive cash outlay which shareholders may not authorize. • IT enablement requires an existing infrastructure that has yet to emerge. Medtronic’s participation will support the development of this infrastructure, but it is unlikely to serve as the catalyst. • Bursting of ‘e-commerce’ bubble undermines much of the information and communication strategies proposed. • With 2020 on the horizon, Medtronic may want to proposed a Vision 2030 portfolio.

23. From Idea to Use--How Does A New Technology Make Money? • Suppose you have a new molecule or medical device that has you believe provides significant health benefits • What is the process by which you bring in revenue from payers? • Four Key Steps -- these will vary from country to county and even innovation to innovation

24. Four Important Steps • Obtain a Patent • Recall a patent grants exclusive rights to sell the product for 20 years • Regulatory approval from the FDA that the new device or drug may be marketed • A very long, multi-stage and expensive process

25. Four Important Steps 3. Payers must agree to cover the procedure. • Differing standards by payers • Medicare-- “reasonable and necessary” 4. Providers must be persuaded to use/proscribe the innovation • Without the providers benefiting in some way, the product will not be used.

26. Getting a Patent • It takes from 6 months to 2 years for the patent office to grant a patent • “Anyone who invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent” • The Standard: Novel and non-obvious • Patent Life is 20 years • Drugs can get important extensions • Pediatric testing--6 months

27. Obtaining FDA Approval—Pharmaceuticals • There are 4 phases to an FDA approval--The standard is “safe and effective.” • Pre-Clinical Phase (3 years) -- Laboratory and animal testing • Purpose is to asses safety and biological activity • At this point file an Investigational New Drug Application (IND) at FDA • IND shows results of previous experiments • The chemical structure of the compound • How it is thought to work in the body • Any toxic effects found in the animal studies and how the compound is manufactured.

28. Obtaining FDA Approval • Clinical Trial, Phase I (1 year) • 20 to 80 health volunteers • The tests study a drug's safety profile, including the safe dosage range. • The studies also determine how a drug is absorbed, distributed, metabolized and excreted, and the duration of its activity • Clinical Trial, Phase II (2 years) • Controlled studies of approximately 100 to 300 volunteer patients (people with the disease) to assess the drug's effectiveness

29. Obtaining FDA Approval • Clinical Trial, Phase III (3 years) • Usually involves 1,000 to 3,000 patients in clinics and hospitals. Physicians monitor patients closely to determine efficacy and identify adverse reactions. • Very Expensive

30. Obtaining FDA Approval • New Drug Application (NDA) • Following the completion of all three phases of clinical trials, the company analyzes all of the data and files an NDA with FDA if the data successfully demonstrate safety and effectiveness. • The NDA must contain all of the scientific information that the company has gathered. NDAs typically run 100,000 pages or more. • By law, FDA is allowed six months to review an NDA. In almost all cases, the period between the first submission of an NDA and final FDA approval exceeds that limit; the average NDA review time is about 30 months.

31. FDA Approval • Once FDA approves the NDA, the new medicine becomes available for physicians to prescribe. • The company must continue to submit periodic reports to FDA, including any cases of adverse reactions and appropriate quality-control records. • For some medicines, FDA requires additional studies (Phase IV) to evaluate long-term effects.

32. FDA Approval -- Medical Devices • Two common methods to be able to get clearance to market a device • Pre-market approval applications (PMAs) for breakthrough technologies • Pre-market notifications (also known as 510(k)s) for more established products • FDA receives about 50 to 70 PMAs and over 4,000 510(k)s per year • The agency in the FDA responsible for approval of devices is Center for Devices and Radiological Health • One or Two step process--Initial Report

33. Medical Device Classes • Class I products are the lowest risk and most are not subject to pre-market review. • Class II products pose either a low or moderate risk • Usually are cleared via 510(k). • Class III technologies generally are higher risk, breakthrough products that are not similar to currently marketed products. • These technologies require a PMA application.

34. Medical Device Classes • The agency examines extensive data on all but the very simplest medical products, like tongue depressors and adhesive strips, before allowing them on the market. • Approximately 30% of all medical device types are placed in Class I, 60% in Class II and 10% in Class III • All devices are subject to “General Controls” --marketing, proper labeling and monitoring its performance once the device is on the market. • Radiation emitting devices face additional standards

35. Summary: From Bench Science to Reimbursement Schedule • NIH/Industry support basic science research • Basic science yields an innovative material or missing link for therapeutic or diagnostic value • New product development within a firm. • Prototype developed • Prototype used for clinical trials • If prototype proceeds to human trials, cost-effectiveness analysis commissioned. • Successful human trials leading to FDA approval combined with positive cost-effectiveness analysis are used to solicit reimbursement from public and private insurers. • Technology added to reimbursement schedule after medical technology review by internal insurer auditors. Medicare reimbursement often a signal of positive reimbursement decision.

36. Is Technological Change Worth It? • How much would you be willing to pay everyday from this day forward for a better than 50% chance you will live five more years than without such an the investment?

37. The Drive Towards Cost-Effectiveness • Increasingly, health care systems are insisting on manufacturers presenting a cost-effectiveness case for a product to justify unit pricing and affordability within health care systems • Evidentiary and analytical standards are demanding and few pharmaceutical and biotechnology companies have staff skilled in meeting these standards

38. Cost-Effectiveness Analysis ‘Standards’ • National Institute for Clinical Excellence (UK): Guide to the Methods of Technology Appraisal (2004) (www.NICE.org.uk) • Pharmaceutical Benefits Advisory Committee (PBAC): Guidelines for the Pharmaceutical Industry on Preparation of Submissions to the Pharmaceutical Benefits Advisory Committee (2002) • WellPoint Pharmacy Management, Health Technology Assessment Guidelines, Drug Submission Guidelines for New Products, New Indications and New Formulations (2004) (www.Wellpointrx.com) • WellPoint Pharmacy Management, Health Technology Assessment Guidelines: Drug Submission Guidelines for Re-Evaluation of Products, Indications and Formulations(2004) (www.Wellpointrx.com)

39. The Pharmaceutical Market:Where Health Economics Gets Real • The principal role of the health economist in the pharmaceutical industry is to develop and recommend a sustainable global unit pricing strategy • A sustainable pricing strategy is one that is consistent with achieving and maintaining reimbursement in key global markets and market segments at a unit price that is consistent with an acceptable market share and rate of return on research and development expenditures

40. Health Economist’s and their ‘Jamborees’

41. Preparing a Global Health Technology ‘Dossier’ • To underscore the role of the health economist and the importance of health economics activities in the life cycle of a drug • To emphasize the importance of meeting health technology assessment evidentiary and analytical standards • To detail the role of a dossier in supporting a global reimbursement strategy • To consider the contents and scope of a global technology dossier

42. The Need for Consistency and Transparency • The commitment to a health technology dossier at pre-Phase I in product development and the support for that dossier over the life cycle of a drug ensures: • Validation of assumptions driving business opportunity decisions to support product development • Validation of the epidemiology and market opportunities in a disease state • A coherent and consistent assessment of comparative clinical performance • Core models to support cost-effectiveness and system impact claims • A framework for assessing the impact of a changing competitive environment • A basis for preparing for disease area and therapeutic class reviews

43. Dossier Structure • Target Disease Classification • Epidemiology • Treatment patterns, resource utilization and costs • Product description • Comparator product/procedure description(s) • Clinical summaries and meta-analyses • Modeled cost-effectiveness case • Modeled system impact case • Product claims, monitoring and verification

44. Dossier Scope • Dossier must identify and report on all key markets and market segments for content description and analysis: • US (managed care, VA, Medicaid, Medicare) • European Union (UK, France, Italy, Germany Spain) • Canada • Australia • Japan • Developing countries (Mexico, Brazil, India, China)

45. How Apples to Apples Comparisons of Products are Made • All product claims must be presented in terms that make them empirically evaluable • Claims which are not empirically evaluable would be rejected • Manufacturers must present (and get agreement) as to which claims are evaluable to support both cost-effectiveness and system impact impacts, which must be detailed in the dossier • Manufacturers must agree to the process by which claims are monitored and validated, which must be detailed in the dossier

46. Also, Don’t Stay STATIC • Over the balance of the product life cycle the dossier must be updated to reflect not only the results of product claims monitoring and validation but also changes in the competitive environment for the manufacturer’s product • The dossier should support ongoing disease area and therapeutic class reviews • Update of clinical summaries and meta-analyses • Review of comparator choice • Re-evaluation of modeled cost-effectiveness and system impact case for the product • Revisions to empirically evaluable product impact claims

47. Summary • There large market opportunities from medical technology. • But with opportunity, there is risk….. • The increasingly prescriptive requirements that manufacturers meet ‘gold standard’ evidentiary and analytical criteria in formulary submissions and product re-evaluations have profound implications for the process of product development and assessments of comparative treatment effects. • Manufacturers must recognize that all claims are potentially discoverable and that a consistent global approach to clinical assessment will minimize adverse assessments of false or misleading claims. • As future consumers, none of us would want anything less.