Stephen T. Parente, Ph.D. $ $ Carlson School of Management, Department of Finance

University of MinnesotaMedical Technology Evaluation and Market Research Department of Healthcare ManagementCourse: MILI/PUBH 6589Spring Semester, 2012 Stephen T. Parente, Ph.D.$ $Carlson School of Management, Department of Finance

Class # 2Government Regulation, Technology and the Health Care Economy • The path from idea to reimbursement for medical technologies • How are new medical technologies reimbursed? • Why are we creating evidence? • Information demand – who is demanding evidence? • What is the ‘supply chain’ of information dissemination?

Government Regulation and Private Insurance • The role of government is the most important difference between marketing non-medical technologies and medical technologies • The government agencies determine approval and payments • The second most important difference is that the users of technology generally do not pay for it—their health insurance company does

Government Regulation and Private Insurance • Need to understand the process and the bureaucratic details in order to plan the tech assessment • Technology assessment is the gathering and analyzing of information on the performance of a technology • Once a stage in the development / regulatory processes has passed, the chance to gather important information may be lost forever. • An understanding of the whole process of development and reimbursement is necessary to prevent this from occurring

From Idea to Use--How Does A New Technology Make It to Market? • For a new medical device/drug, what is the process by which you take the technology from idea to the marketplace? • Four Key Steps-- these will vary from country to county and even innovation to innovation

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 3. Payers must agree to cover the drug / device / 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

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 from application date • Drugs can get important extensions • Pediatric testing--6 months

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

Obtaining FDA Approval • Clinical Trial, Phase I (1 year) • Human trials of those without the disease • Drug's pharmacokinetics and pharmacological effects obtained • 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 • Clinical Trial, Phase III (3 years) • Usually involves 1,000 to 3,000 patients in clinics and hospitals. • Very Expensive

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.

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

Effective Patent Length Patents given protection from direct competition for 20 years FDA approval process can take 8 to 10 years The effective patent life is then 12 to 10 years After the patent expires, generics can enter Hatch-Waxman Act Abbreviated New Drug Applications (ANDA) Need to be strategically aware of this time line

Post-Market Approval FDA does not have clear policies for addressing post-market drug safety In response to the Vioxx case, the FDA has recently created the Drug Safety Oversight Board However, there no systematic tracking of ongoing safety issues -- reporting of adverse events is voluntary Legislation is likely to change this post-market monitoring by the FDA-- potential use of claims data Does this mean that once FDA approval is secured it is easy street? Off-Label Use FDA approval is for treatment of a specific condition/disease MDs can proscribe the drug for other conditions/populations The case of Gabapentin

In-Class Exercise During the concept, patent, pre-clinical and clinical trial and FDA NDA approval process what non-clinical trial information might you want to collect at each stage of the process in order to make a “go/no go” decision? Hypothetical drugs: 1) new treatment for bi-polar disorder; 2) a new weight-loss drug; 3) a new hypertension treatment; 4) a new treatment for Alzheimer's; 5) a new drug to treat heart attacks.

FDA Approval -- Medical Devices • Two common methods to be able to get clearance to market a device • Pre-market approvalapplications (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

What is a Medical Device? • “An instrument, apparatus, implement, machine, contrivance, implant, in vitro reagent, or other similar or related article, including a component part, or accessory which is: • Recognized in the official National Formulary, or the United States Pharmacopoeia, or any supplement to them, • Intended for use in the diagnosis of disease or other conditions, or in the cure, mitigation, treatment, or prevention of disease, in man or other animals, or • Intended to affect the structure or any function of the body of man or other animals, and which does not achieve any of it's primary intended purposes through chemical action within or on the body of man or other animals and which is not dependent upon being metabolized for the achievement of any of its primary intended purposes.”

Medical Device Classes • Class I (General Controls)products are the lowest risk and most are not subject to pre-market review. • Still need to meet other regulations of listing, registering, labeling and “Good Manufacturing Practices” • Class II (Special Controls)products pose either a low or moderate risk • Usually are cleared via 510(k) • Class III (Pre-Market Approval)technologies generally are higher risk, breakthrough products that are not similar to currently marketed products • These technologies require a PMA application

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

501(k) Submissions • A 510(k) submission must show that the product is "substantially equivalent" to an existing, legally marketed medical technology. • These technologies have a proven track record in the marketplace and usually represent incremental improvements to existing devices. • The many products covered by the 510(k) process include surgical instruments, patient monitors, catheters, oxygen concentrators, and diagnostic imaging equipment like ultrasound and x-ray machines. • Typically approval is less than 90 days.

Class III Approval • FDA Pre-market requirements for Class III medical technologies cover every aspect of product development • Design, bench testing to clinical trials • These breakthrough technologies are often first-of-a-kind devices that provide new treatment options for the most serious disease conditions • These products must be supported by extensive clinical and preclinical data that takes years and millions of dollars to gather. • The time to perform the clinical and preclinical data is similar to a drug

Class III Approval • FDA reviews this data, as well as other information on labeling and manufacturing processes, as part of a PMA to determine the safety and effectiveness of the technology • Products subject to PMA review include artificial heart valves, coronary stents, novel diagnostic tests, bio-artificial skin, and spinal implants. • It typically takes the agency over a year to complete a review of a PMA • More Info at: http://www.fda.gov/cdrh/devadvice/

Quick Tour of Some Devices http://www.fda.gov/cdrh/devadvice/3131.html Blood pressure cuff v. pacemaker

So Your Technology is Approved -- Now What? The Case of Drugs • Two key interrelated steps: • Get Insurers to pay for them • Get Physicians to prescribe them • How do drug companies influence MD proscribing behavior? • What about ‘lifestyle’ drugs? • Physician demand will often lead to formulary admittance • The key to is to show effectivenessand better yet cost effectivenessthrough published articles • Role of published studies -- this is marketing! • US v. World

Prescription Drugs and Health Insurance • Non-Medicare enrollees--most have some form of prescription drug coverage (roughly 80%) • Need to be mindful of who is paying • Drugs for the elderly -- Medicare Part D • Drugs for the under-65 -- Employer Sponsored Insurance • Drugs for Pediatrics -- Medicaid and Employer Sponsored Insurance • Co-pays and inclusion of formularies are relevant for both Medicare Part D and employer based insurance • Anti-psychotics (and other drugs to treat Mental Illness) -- Medicaid • Special rules for Medicaid payments for drugs

So Your Technology is Approved -- Now What? The Case of Devices More complicated than drugs Devices are used in many different settings and the flow of payments are

How do hospitals get paid? • There are two classes of hospital procedures/treatments • Inpatient • Outpatient or Ambulatory • Medicare and most private payers treat them differently • They use different types of payments for the different settings • It is important to recognize the setting in which a medical technology will be used as the reimbursement strategy will be different

Medicare Part A—Inpatient Services for Hospitals • Hospitals get a fixed payment from Medicare for each admission independent of the Length of Stay or other costs incurred by the hospital • The payment is determined by the diagnosis • Over 500 different Diagnostic Related Groups (DRGs) • DRG payments roughly increase in the complexity and cost of the treatment • Payment covers all of the hospital expenses including implanted or used devices • Why should the DRG payment be of interest to device manufacturers?

DRGs • To get paid, the hospital submits a form that lists the diagnoses and procedures. • The diagnoses and procedures are in the form of a code – International Classification of Disease—9th edition (ICD-9) • Acute Myocardial Infarction is 410.1 • Heart Transplant is 37.51 • Different sets of codes for diagnoses and procedures • Software takes these codes and groups them into DRGs (“DRG groupers”) • Upcoding

Outpatient Services Hospitals • Paid according to the Ambulatory Payment Classification (APC) system • This is a Prospective Payment System (PPS) • Divides all outpatient services included in the new payment schedule into 451 groups. • The services within each group are clinically similar and require comparable resources

Outpatient Services Hospitals A hospital may furnish a number of services to a beneficiary on the same day and receive an APC payment for each service Beneficiary is responsible for 20% of the costs Technology Pass-through Private Health Insurance either relies on the Medicare or a percent of changes structure Why Does this matter for Device Manufacturers?

Medicare Claims Processing • Mostly claims are processed electronically • CMS (Center for Medicare and Medicaid Services) contracts out with different organizations to do the claims processing • Carriers – handle claims of physicians • Financial Intermediaries (FI)– handles claims of hospitals, skilled nursing facilities, home health agencies, renal dialysis facilities and hospices • The Carriers/FI determine if a bill should be paid

Medicare Coverage Decisions • Medicare decides what to cover • Usually specify that a procedure is covered if certain conditions are present • Standard is “Reasonable and Necessary” but recent evidence suggests that the cost effective standard might be relevant • Discussions occur at the National or FI level • More about this later

Private Insurance – Providers Payments • Employers (and ultimately the workers) pay for health care – Self-insured v. non-self-insured • Rates are negotiated with providers • Payment schedules vary but they can include: • Capitation – a single payment regardless of treatment • Carve outs • Payment based on DRGs, HCPCS, Visits, or Inpatient Days • Insurers have Coverage Committees that reviews the evidence and decides on what to pay for • Often follow Medicare’s decisions • Cost Effective evidence is very helpful • Negotiation with medical device suppliers re-selling the equipment to providers or insurers.

Where does Tech Assessment fit into all of this? • Technology Assessment is the collection, analysis and dissemination of information • Relevant at almost every stage • Need to collect the right information at the Clinical trail level • Payers will likely need to see evidence of effectiveness or cost effectiveness before they agree to pay for it • Physicians must be convinced to use/proscribe the technology or none of this will matter • There needs to be something in it for them—either their patients are going to be better served or it will allow the MD to bill more or it will need to allow them to reduce costs

Stephen T. Parente, Ph.D. $ $ Carlson School of Management, Department of Finance