Transcription
C H A P T E RAn overview of themedical device industry7
C H A P T E RAn overview of themedical device industry7Chapter summaryIn this chapterBecause Medicare does not pay directly for medical devices, the Commission Introduction Overall size andcomposition of the medicaldevice industry The development of newmedical devices The role of the Food andDrug Administration Key features of the medicaldevice market How Medicare pays formedical devices Conclusionhas not historically studied medical devices in depth in its evaluation ofMedicare payment policy. In response to recent Commissioner interest,however, this chapter provides an overview of the medical device industry andreviews how Medicare pays for medical devices.The medical device industry makes an enormous number of products—ranging from surgical gloves to artificial joints to imaging equipment—andplays a crucial role in developing new medical technologies that can improvethe ability to diagnose and treat illness. The industry has a relatively smallnumber of large, diversified companies and a large number of smallercompanies that are mainly engaged in research and development of newdevices for specific therapeutic areas. The industry is distinctive both forits tendencies to make frequent, incremental changes to its products and itsextensive ties with physicians.Like prescription drugs, medical devices are regulated by the Food and DrugAdministration (FDA). However, the regulatory framework that the Congresshas established for medical devices is less stringent in many respects, duein part to underlying differences between medical devices and prescriptiondrugs. Most low-risk devices can be marketed without prior FDA review,and most medium-risk devices are required to demonstrate only that they areReport to the Congress: Medicare and the Health Care Delivery System June 2017207
“substantially equivalent” to an existing device before being marketed. Very fewdevices must demonstrate that they are safe and effective before being marketed.The FDA’s surveillance of devices after becoming available to the public has alsobeen limited historically, although improvements are being made through initiativessuch as requiring unique device identifiers on all devices.The market dynamics for medical devices can vary greatly depending on the device.Markets for conventional devices such as surgical gloves and other routine surgicalsupplies are more competitive; companies compete heavily on price and often needhigh sales volumes to be profitable. In contrast, markets for advanced products likeimplantable medical devices involve opaque pricing, are harder to enter, and areless competitive, which allows device companies to charge higher prices and earnsubstantial profits. Large medical device companies are consistently profitable andtypically have profit margins of 20 percent to 30 percent.Medicare pays for medical devices indirectly by reimbursing providers when theyuse devices in the course of delivering care to beneficiaries. Medicare bundles theaverage cost of medical devices into its overall payment rate for many services,giving hospitals, for example, an incentive to use lower cost devices. However,physicians often do not have an incentive to use lower cost devices becausephysicians are generally not financially responsible for the cost of the deviceand may have financial connections to the device industry. Bundling also makesit harder to measure how much the program spends on medical devices, butMedicare cost report data for 2014 indicate that hospitals spent about 14 billionon implantable devices and 10 billion on medical supplies (e.g., handheld surgicalinstruments) for Medicare-covered services.Because of the indirect manner in which Medicare pays for most medical devices,future changes designed to improve the quality of medical devices Medicarebeneficiaries receive and to reduce their associated costs could focus on improvingthe availability of device- and provider-specific information and aligningprovider incentives. Such improvements could entail adding more device-specificinformation to administrative claims, improving reporting by physician-owneddistributors (PODs) under the Open Payments program, limiting the number ofPODs, and more broadly allowing initiatives that encourage hospital-physiciancollaboration to reduce device costs. 208An overview of the medical device industry
IntroductionMedical devices play an important role in the deliveryof many health care services. Defined broadly, medicaldevices are items that are used for the “diagnosis . . . cure,mitigation, treatment or prevention of disease” and are notabsorbed or metabolized by the body.1 The term applies toeverything from common medical supplies such as latexgloves and syringes to advanced imaging equipment andimplantable devices such as cardiac defibrillators. Themedical device industry is thus an important component ofthe larger health care system and plays an essential role bydeveloping new medical technologies that can improve theability to diagnose and treat illness.Most medical devices serve as inputs in the deliveryof health care services and are usually not consideredservices by themselves. The major exceptions are medicaldevices that are used as durable medical equipment,prosthetics, or orthotics. As a result, Medicare has chosento pay for many medical devices in an indirect manner, byincluding an amount for medical devices in its paymentrates for services in which devices are used. For example,Medicare’s payment to a hospital or ambulatory surgicalcenter for cataract replacement surgery includes an amountfor the cost of the artificial lens.Since Medicare does not pay directly for medical devices,the Commission has not historically studied medicaldevices in depth in its evaluation of Medicare paymentpolicy. In response to Commissioner interest, however,this chapter provides an overview of the medical deviceindustry by reviewing its overall size and composition, thedevelopment of new medical devices, the role of the Foodand Drug Administration (FDA), and some key features ofthe medical device market. It also examines how Medicarepays for medical devices in greater detail.Overall size and composition of themedical device industryBecause of the wide range of items that can be consideredmedical devices, there is no standard way of defining themedical device industry, and estimates of its overall sizevary. For example, recent studies by the CongressionalResearch Service (CRS), BMI Research, and theAdvanced Medical Technology Association (AdvaMed,the industry’s main trade association) have estimated thattotal U.S. spending on medical devices was 119 billionin 2011, 125 billion in 2013, and 172 billion in 2013,respectively (BMI Research 2015, Donahue and King2015, Gravelle and Lowry 2015). All three studies arebased on the same underlying data source—sales datafrom manufacturers that are collected by the CensusBureau—but differ by which sales are counted as medicaldevices and the adjustments made to convert sales datainto estimates of overall U.S. spending.These estimates indicate that medical devices accountfor roughly 4 percent to 6 percent of total U.S. spendingon health care (BMI Research 2015, Donahue and King2015). The AdvaMed study also found that the share oftotal U.S. spending on health care devoted to medicaldevices has changed very little over time, suggesting thatspending on medical devices has grown at about the samerate as the broader health care sector (Donahue and King2015).Estimates of the total number of companies and employeesin the medical device industry also vary somewhat.According to two studies that used data from the CensusBureau, there are roughly 5,300 to 5,600 U.S. companiesin the industry, with approximately 330,000 to 365,000employees (BMI Research 2015, International TradeAdministration 2010). Medical device companies arelocated throughout the United States, but the industryhas a larger presence in California, Massachusetts, andMinnesota.International trade also plays a significant role in themedical device industry. Between 35 percent and 40percent of domestic U.S. production is ultimatelyexported, and a similar share of domestic U.S.consumption is imported (Gravelle and Lowry 2015).Foreign sales represent 40 percent to 50 percent of overallrevenues for U.S. medical device companies when salesby foreign subsidiaries are taken into account (Seligman2013). The largest export markets for U.S. medicaldevice companies have traditionally been the countriesof the European Union and Japan (International TradeAdministration 2010). The United States is the largestsingle market for medical devices and accounts for about40 percent of worldwide sales (BMI Research 2015).Most of the companies in the medical device industry arerelatively small. One study that analyzed economic datafrom the Census Bureau found that 73 percent of medicaldevice firms had fewer than 20 employees and that 88percent had fewer than 100 employees (InternationalReport to the Congress: Medicare and the Health Care Delivery System June 2017209
TABLEThe 10 largest medical device companies, 20157–1RankCompanyCountryGlobal medical device revenue(in billions)1MedtronicUnited States 27.72Johnson & JohnsonUnited States27.53GE HealthcareUnited States18.34Baxter InternationalUnited States16.75Siemens HealthcareGermany15.86Becton DickinsonUnited States12.37Philips HealthcareNetherlands11.28Cardinal HealthUnited States11.09Abbott LabsUnited States10.110StrykerUnited States9.7Note:Some companies shown in this table, such as Johnson & Johnson, generate substantial revenues in industries other than medical devices; the figures for thesecompanies are for their medical device divisions only. Figures for Medtronic and Becton Dickinson reflect their acquisitions of Covidien and CareFusion,respectively. Since its acquisition of Covidien, Medtronic has been headquartered in Ireland for tax purposes.Source: Medical Product Outsourcing 2015.Trade Administration 2010). These figures suggest thatcompanies with fewer than 100 employees account forroughly 15 percent to 20 percent of total employmentin the medical device industry. CRS found a similarpattern when it looked at corporate tax return data forU.S companies whose primary activity is making medicalsupplies and equipment: 83 percent of companies hadless than 1 million in assets, and 95 percent had lessthan 10 million in assets (Gravelle and Lowry 2015).These smaller companies are engaged primarily in thedevelopment of new medical technologies and are oftenfocused on relatively narrow therapeutic areas.At the other end of the distribution, a relatively smallnumber of large companies account for most of the medicaldevice industry’s overall employment and revenues. Thesame CRS study found that the top 1 percent of firms in themedical device industry accounted for 82 percent of totalassets, with the top 0.2 percent of firms alone accountingfor 56 percent of overall assets (Gravelle and Lowry 2015).These companies operate in many countries around theworld and are highly diversified, making medical devicesfor several different therapeutic areas and often producinga broad range of medical devices within a therapeutic area.The 10 largest medical device companies, including thosebased outside the United States, are shown in Table 7-1.210An overview of the medical device industryThe development of new medicaldevicesLarge and small medical device companies both play arole in the development of new medical devices. Smallmedical device companies are engaged primarily indeveloping new medical technologies, and typicallytheir work is narrowly focused on a specific therapeuticarea. These companies have traditionally been funded byventure capital firms that hope to profit if the companiesdevelop promising products. The prospects for thesecompanies are uncertain given the challenges of securingenough start-up funding, developing the new medicaldevice itself, figuring out how to manufacture the device ina cost-effective manner, obtaining the necessary regulatoryapprovals, and marketing the device to providers suchas hospitals and physicians. These companies typicallyspend a large share of their revenues on research anddevelopment and may be unprofitable for years beforedeveloping a viable product or going out of business(Seligman 2013).The overall amount of venture capital funding for medicaldevice companies has declined somewhat in recent years.Between 2007 and 2009, the total amount that venturecapital firms invested in medical device companiesdeclined from 3.7 billion to 2.6 billion, and, since then,
annual investment has ranged between 2.2 billion to 2.9 billion. Similarly, the share of total venture capitalfunding going to medical device companies declinedbetween 2007 and 2015, from 7.9 percent to 6.1 percent(PricewaterhouseCoopers and National Venture CapitalAssociation 2016). Even with this recent decline, thetotal amount of venture capital funding going to medicaldevice companies is still substantially higher than it wasin 1992, when the industry received about 400 million inventure capital funding (Advanced Medical TechnologyAssociation 2017). The recent drop in venture capitalfunding has been partly offset by greater funding fromlarge medical device companies, which also invest instart-up device companies (Walker 2013). However, thedecline has raised concerns that the industry’s ability todevelop new medical devices could suffer (Ernst & Young2015).15 percent of their revenues on research and development,with most companies somewhere in the middle of thatrange (Fuhr et al. 2013, Moody’s Investors Service 2015,Seligman 2013). Companies that make technologicallysophisticated products such as implantable cardiovasculardevices tend to spend more on research and developmentthan companies that make less innovative products suchas artificial joints (Moody’s Investors Service 2015). Themajor medical device companies typically spend moreon research and development as a share of sales revenuethan other industrial firms (3 percent to 4 percent) but lessthan pharmaceutical manufacturers (15 percent) (Seligman2013). However, these figures should be viewed withsome caution because there is no standard way of definingwhich activities constitute research and development;some companies may classify activities as research anddevelopment that other companies or observers would not.Start-up companies that develop promising new productsare often acquired by one of the large medical devicecompanies.2 These acquisitions benefit each side in anumber of ways. Small companies can find it challengingto market their products, while major device companieshave established distribution networks and relationshipswith hospitals and other providers. Large companiescan also provide additional resources to further developand improve new medical devices. An acquisition alsoallows the venture capital firms that supported the start-upcompany to withdraw their funding and realize a profit.3For the large companies, acquisitions provide anotherway to conduct research and development and can eithercomplement or substitute for the company’s internalefforts. Large companies can also use acquisitions tobranch out into new therapeutic areas or bolster existingproduct lines (International Trade Administration 2010,Moody’s Investors Service 2015, Seligman 2013).One notable difference between the medical device andpharmaceutical industries is that physicians are much moreinvolved in the development of medical devices. Devicemakers often seek the input of physicians about the designand potential uses for new products and solicit feedbackfrom physicians who use their products. In some cases,physicians bring their ideas for new or improved productsto manufacturers. Research has found that physiciansaccounted for about 20 percent of the patents issued formedical devices between 1990 and 1996 (Seligman 2013).However, the extensive relationships between physiciansand device companies have also raised concerns aboutthe ability of device companies to influence physicians’treatment decisions (Ornstein and Weber 2011).Although small companies play an important role in theinitial discovery and development of new technologies,large medical device companies perform most of theindustry’s research and development. CRS found, basedon corporate tax return data for U.S. companies that makemedical supplies and equipment, that the 17 companiesthat had more than 2.5 billion in assets claimed 56percent of the tax credits for research and experimentation.The companies with more than 500 million in assetsclaimed 80 percent of the credits (Gravelle and Lowry2015).4Research by financial analysts suggests that large medicaldevice companies typically spend between 5 percent andOne particularly important feature of the medical deviceindustry is its tendency to make “many incrementalmodifications of existing products, punctuatedoccasionally by an innovation that offers a significantlynew mechanism of action, design, or risk profile”(Robinson 2015). Since medical devices are oftenmodified, the life cycles for individual products can berelatively short compared with prescription drugs; theindustry has said that most medical devices are replacedby a newer version every 18 to 24 months (AdvancedMedical Technology Association 2015a). The shorterlife cycle means that the payback period for research anddevelopment is also shorter, and that successful medicaldevices are typically not as profitable as blockbusterprescription drugs (Seligman 2013). Nevertheless,large medical device companies have been consistentlyprofitable.Report to the Congress: Medicare and the Health Care Delivery System June 2017211
TABLEFDA classification and review of medical devices7–2CategoryLevel of riskto patientClass ILow Elastic bandagesExamination glovesHandheld surgical instrumentsMost devices required only to register;a small share must submit a 510(k) notification.Class IIModerate Powered wheelchairsInfusion pumpsSurgical drapesMost devices must submit a 510(k) notification;a small share of devices are required only to register.Class IIIHigh Heart valvesSilicone breast implantsImplanted cerebella stimulatorsDevices must submit a PMA application;in the past, a significant number of devices were able tosubmit a 510(k) notification.Note:ExamplesType of review beforedevice can be marketedFDA (Food and Drug Administration), PMA (premarket approval).Source: Johnson 2016.Like the pharmaceutical industry, medical devicecompanies frequently obtain patents to prevent othercompanies from copying their products for a period oftime. The U.S. Patent and Trademark Office has issuedmore than 75,000 patents for medical devices over the past30 years. However, patents for medical devices are usuallynot as specific as patents for prescription drugs, whichmakes patents on medical devices easier to circumvent andlawsuits for patent infringement common. The shorter lifecycles for medical devices also reduce the value of patentsbecause many devices can become obsolete before theirpatent expires (Seligman 2013).The role of the Food and DrugAdministrationBefore medical device manufacturers can market a newproduct, they must comply with the requirements ofthe FDA, which is responsible for regulating medicaldevices. When the FDA was created in the 1930s, itsauthority over medical devices was relatively limited. Theagency could prosecute individuals who misused medicaldevices, but medical device manufacturers did not haveto obtain FDA approval before marketing their productsin the same manner as pharmaceutical manufacturers.This arrangement ended in 1976, when the Congressestablished a new system for the FDA to regulate medicaldevices (Seligman 2013). However, medical devices that212An overview of the medical device industrywere already on the market were not required to complywith all aspects of the new regulatory system. Thisdistinction between preamendment and postamendmentdevices—terms referring to the Medical DeviceAmendments of 1976—remains relevant 40 years laterbecause many devices can enter the market by effectivelydemonstrating that they are similar to devices approvedunder the preamendment rules.While the FDA now regulates both medical devices andprescription drugs, its regulation of medical devices is lessstringent in many ways. To some extent, these regulatorydifferences reflect underlying differences betweenmedical devices and prescription drugs. In particular, anyregulatory scheme for medical devices must recognizethat the number of medical devices on the market is muchlarger, that the level of risk associated with different kindsof medical devices varies more widely, and that medicaldevices typically evolve over time through a series ofincremental improvements (Robinson 2015).The FDA’s regulation of medical devices can be dividedinto two broad areas: premarket requirements, whichapply before devices can be marketed, and postmarketsurveillance of devices after they enter the market.Premarket requirementsThe FDA’s premarket requirements are based on thenotion that the amount of scrutiny that should be given to amedical device before it can be marketed should reflect the
level of risk that the device poses to consumers. The FDAuses a three-tier system to categorize medical devices byrisk (Table 7-2).Medical devices that are considered low risk arecategorized as Class I devices, which is the lowest tier inthe FDA’s system. Most medical devices in this categorydo not require any kind of FDA review before they canbe marketed. However, the manufacturer of the devicemust notify the FDA beforehand by registering thedevice in a central database known as the FDA UnifiedRegistration and Listing System and must follow a numberof standard requirements that apply to the manufacturingof all medical devices, such as the need to use goodmanufacturing practices (Johnson 2016).The 510(k) notification processMedical devices that pose a moderate level of riskto consumers are categorized as Class II devices.Manufacturers of most Class II devices must getpermission from the FDA before marketing them bysubmitting a premarket notification, which is morecommonly known as a 510(k) notification, after thesection of the Federal Food, Drug and Cosmetics Act thatauthorizes the process. Some Class I and Class III devicesalso use the 510(k) process (Johnson 2016).Under the 510(k) process, a manufacturer mustdemonstrate that its device is “substantially equivalent”to another device that is already on the market, which iscalled the predicate device. Manufacturers decide whichdevice to use as the predicate.5 The 510(k) process isdifferent from the FDA’s approval process for prescriptiondrugs because the manufacturer usually does not have todemonstrate that the medical device is safe and effective.6Instead, the manufacturer has to show only that the newdevice is substantially equivalent to an existing device.Since many predicate devices were themselves clearedthrough the 510(k) process through comparison with evenolder products, many medical devices that are clearedthrough the 510(k) process are ultimately being comparedwith devices that were first marketed before the enactmentof the 1976 legislation that expanded the FDA’s authorityover medical devices.7 These so-called preamendmentdevices were not required to demonstrate their safety orefficacy (Johnson 2016, Robinson 2015).The FDA reviews about 4,000 510(k) submissions eachyear and clears most of them in 3 months to 6 months(Johnson 2016, Seligman 2013). Between 2013 and 2016,the agency cleared between 79 percent and 85 percentof 510(k) submissions within three months (Food andDrug Administration 2017a). The time needed to obtainFDA clearance has been a persistent concern for themedical device industry, and with the industry’s backing,the Congress in 2002 authorized the FDA to collect userfees from medical device companies to help defray theagency’s costs (Johnson 2016). However, wait timeshave continued to be an issue. Between 2005 and 2010,the average wait time for a 510(k) decision (mostly usedfor Class II devices) rose from 90 days to 154 days. Theaverage wait time has decreased since then, reaching 128days in 2014. The figures for wait times include time thatthe FDA spent reviewing the submission (typically 70 to75 days in all) and time that medical device companiesspent providing additional information (Food and DrugAdministration 2017a).The premarket approval processThe FDA’s highest level of scrutiny is reserved for mostClass III medical devices and is known as the premarketapproval (PMA) process. Under the PMA process,manufacturers must submit clinical data that providereasonable assurance that a device is both safe andeffective.8 As part of its review, the FDA may convene anadvisory committee of outside experts to help it evaluatethe PMA application. Because of the requirement todemonstrate safety and efficacy, the PMA process isthe area of medical device regulation that most closelyresembles the regulation of prescription drugs, but thereare some important differences (Johnson 2016).First, the clinical data supporting a PMA application areoften less robust than those of prescription drugs. Onestudy found that about two-thirds of the PMA applicationsfor implantable cardiovascular devices relied on clinicaldata from a single study and that most of those studieswere not randomized controlled trials (RCTs) (Dhruva etal. 2009). The FDA has traditionally required data fromtwo RCTs when it reviews a new drug, although about halfof its approvals for new drugs between 2011 and 2015—mostly those used to treat rare diseases—were based on asingle trial (Gassman et al. 2017).9Second, once the FDA has approved a device,manufacturers can often make minor modificationsto it without submitting new clinical data by filinga “supplement” to the previously approved PMAapplication instead of filing an entirely new application.Supplements have lower user fees and shorter reviewtimes than traditional PMAs, which makes it easier fordevice manufacturers to make incremental improvementsReport to the Congress: Medicare and the Health Care Delivery System June 2017213
in a device. Some devices are modified dozens of timesin this manner: One study examined the PMAs forimplantable cardiovascular devices and found a medianof 50 supplements for each original PMA (Rome et al.2014). Once a device has been modified many times, therelevance and value of the original clinical data becomeless clear (Rabin 2014).Very few medical devices enter the market through thePMA process. One study found that 67 percent of medicaldevices that entered the market between 2003 and 2007were exempt from any FDA review (these are mostlyClass I devices that need to be registered only beforethey can be marketed), 31 percent entered through the510(k) process, and 1 percent entered through the PMAprocess (Government Accountability Office 2009). TheFDA reviews about 40 original PMA applications eachyear (Maisel 2011). The FDA is supposed to make adetermination on a PMA application within 180 days, butthe process can often take longer: In 2014, the averagewait time for a decision on a PMA application was270 days (Food and Drug Administration 2017a). Formedical device companies, the costs of submitting a PMAapplication are anywhere from 4 times to 10 times higherthan the cost of submitting a 510(k) notification (Seligman2013).Postmarket surveillanceThe FDA’s regulation of medical devices continues afterthey enter the market. The agency can never fully assessthe safety and effectiveness of medical devices beforemarket entry, so postmarket surveillance is an importantelement in regulating medical devices. However, devisingan effective system of postmarket surveillance can bechallenging because devices typically evolve over time asmanufacturers make incremental changes to their designs.The FDA uses a variety of methods to monitor theperformance of medical devices after they enter themarket. For example, medical device manufacturers andhealth care facilities such as hospitals are required toreport to the FDA any adverse events that involve theuse of a medical device. The agency can also requiremanufacturers to study a device’s safety and effectivenessafter it enters the market, but research has found that thesestudies can take a long time to complete and may be oflimited value (Colvin et al. 2014, Lenzer and Brownlee2010, Reynolds et al. 2014).The agency is also planning to more actively monitor thesafety of medical devices through an initiative known as214An overview of the medical device industrythe National Evaluation System for health Technology(NEST). Under NEST, the FDA would gain accessto and analyze many different sources of electronichealth data such as claims, electronic health records,and registries to generate more timely and completeinformation on medical device performance (Food andDrug Administration 2017d). For example, NEST couldmake it easier for the FDA to assess reports of safetyproblems with individual medical devices and reduce theneed for medical device companies to conduct postmarketsurveillance studies. The incorporation of unique deviceidentifiers (see next section) into electronic healthinformation is a key requirement for the development ofNEST (Califf 2016).The FDA can also order product recalls for medicaldevices that are found to pose a health risk. For example,the FDA recalled two widely used types of leads forimplantable defibrillators (leads are wires that transmitelectric shocks from the defibrillator to the heart tokeep it beating properly) that were found to be prone tofailure, which could result in the defibrillator deliveringunnecessary shocks or not functioning at all. Mostrecalls are carried out with the cooperation of the devicemanufacturer (John
The 10 largest medical device companies, including those based outside the United States, are shown in Table 7-1. TABLE 7-1 The 10 largest medical device companies, 2015 Rank Company Country Global medical device revenue (in billions) 1 Medtronic United States 27.7 2 Johnson & Johnson United States 27.5 3 GE Healthcare United States 18.3
