Why Medical Device Companies Need to Develop Economic Evidence in the U.S.

Why Medical Device Companies Need to Develop Economic Evidence in the U.S.
January 14, 2016 - 3:24 pm, by

Although the U.S. lacks a centralized health technology evaluation agency, as many of the European countries maintain, in recent years there has been considerable pressure to control the rising costs of new biopharmaceuticals and medical devices.[1-5] After relatively slow growth in the 1960s, U.S. health care expenditures grew intensely in the decades between 1980 and 2000, in spite of efforts by managed care organizations in the latter part of that time period to control utilization.

Since 2000, however, growth has slowed considerably as purchasers and payers began looking beyond first-generation utilization controls and turning to second-generation payment mechanisms and organizational changes, including fine-tuning of administrative pricing mechanisms and fee schedules, risk spreading through capitation and bundled payments, and provider integration designed to align incentives more around the concept of “value for money.”

Another important trend is the growth of group purchasing organizations (GPOs). According to one report, “MedTech representatives are losing influ¬ence to group purchasing organizations and distribu-tors. Asked which external parties influence their purchasing decisions, nearly 80% of administrators cited GPOs, 50% cited distributors, and less than 45% named manufacturer’s sales reps. Of those three groups, administrators report that MedTech reps have lost the most influence since 2012.”[6]

In the U.S., the Centers for Medicare and Medicaid Services (CMS) is the largest public payer, and CMS is the ultimate payer for the vast majority of medical devices and medical device procedures in the U.S. The main coverage criteria employed by CMS is whether the device has cleared approval from the U.S. Food and Drug and Administration (FDA). CMS does not currently consider comparative effectiveness or costs relative to alternative treatment options.[7] Private payers, on the other hand, are “increasingly considering evidence of value to support formulary and tier placement decisions and in applying preauthorization or utilization reviews,” typically in the form of input from panels or external programs to interpret existing studies and data and generate evidence where gaps exist.[7]

Medical devices in the U.S. are purchased by hospitals, surgery centers, medical groups or integrated delivery networks (IDNs), with decisions driven by GPOs, risk managers, and hospital purchasing managers. All of these stakeholders can be influenced by physician leaders, who can push for adoption of specific technologies. One common theme, regardless of purchaser, is that medical device makers need to have clear and concise evidence—both clinical and economic—in order to effectively commercialize products.[4] According to one report, “hospital administrators are in the midst of massive data-driven changes and they expect the same from MedTech companies. Hospitals want MedTech companies to provide stronger data and analyses to support purchasing decisions.”[6] According to the report, only 10% of hospital administrators reported that MedTech companies were “completely addressing” the need for clinical data that demonstrates better patient outcomes, and only 9% reported that companies were “completely addressing” the need for return on investment (ROI) analysis supporting purchase decisions.[6]

While “cost effectiveness” (i.e., costs per standardized unit of output, such as life years) is not as commonly used in the U.S. to evaluate medical devices as it is elsewhere in the world, the information contained in a cost effectiveness analysis (CEA) can be used as a proxy for value,[8] and CEA studies can also be adjusted to show cost impact in a variety of economic studies [e.g., hospital value analyses (HVAs)].

Value-based pricing is also tied in part to economic evidence. The main goal for device makers is to find the balance between “market value” and the value of the device in terms of the research and development and production costs associated therewith. The average and marginal costs of production establish the lower bound, or floor, of a value-based price, whereas the “market value” of the intervention constitutes the upper bound. Market value takes into consideration payers’ and patients’ “willingness to pay” for the technology, which may take into account clinical value, such as improved outcomes and lower utilization of future care, but can also include health-related quality of life and convenience considerations.

Consider the recent example of the CardioMEMS heart failure (HF) monitor. The makers of CardioMEMS produced a cost-effectiveness study from the U.S. perspective showing an incremental cost-effectiveness ratio of $30,167 per quality adjusted life year (QALY) gained.[9] Based in part on the economic evidence, one financial analyst updated their sales projections for CardioMEMS from $142 million to $172 million in 2016. In addition, the analyst predicted CardioMEMS sales rising to $286 million in 2017. In sum, establishing the economic value of a medical device can improve market share, or at a minimum strengthen existing market share. Moreover, an assessment of economic value can help improve device companies’ confidence in setting prices.

John Schneider, Ph.D. & Ivana Stojanovic, MA

1. Craig, J.A., et al., A review of the economic tools for assessing new medical devices. Appl Health Econ Health Policy, 2015. 13(1): p. 15-27.
2. Feldman, M.D., et al., Who is responsible for evaluating the safety and effectiveness of medical devices? The role of independent technology assessment. J Gen Intern Med, 2008. 23 Suppl 1: p. 57-63.
3. Iglesias, C.P., Does assessing the value for money of therapeutic medical devices require a flexible approach? Expert Rev Pharmacoecon Outcomes Res, 2015. 15(1): p. 21-32.
4. Lin, J., H. Horn, and J. Henry, Comparative Effectiveness Hits Medical Devices. In Vivo: The Business & Medicine Report, 2010. March.
5. Obremskey, W.T., T. Dail, and A.A. Jahangir, Value-based purchasing of medical devices. Clin Orthop Relat Res, 2012. 470(4): p. 1054-64.
6. Lavoie, R., L. Pain, and J. Funk, Hospitals Adopt New Strategies to Boost Profitability, but Still Face Deep Challenges: A New Imperative for MedTech, in Executive Insights. 2013, L.E.K.: New York.
7. Sorenson, C., M. Drummond, and L.R. Burns, Evolving reimbursement and pricing policies for devices in Europe and the United States should encourage greater value. Health Aff (Millwood), 2013. 32(4): p. 788-96.
8. Firth, B.G., L.M. Cooper, and S. Fearn, The appropriate role of cost-effectiveness in determining device coverage: a case study of drug-eluting stents. Health Aff (Millwood), 2008. 27(6): p. 1577-86.
9. Philip B. Adamson, M., Rupinder Bharmi, MS, Jordan Bauman, MSc, Nirav Dalal, MS, MBA, Melissa Martinson, PhD and William T. Abraham, MD. , Cost Effectiveness Assessment of Pulmonary Artery Pressure Monitoring for Heart Failure Management. 2015.

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