The Waning of the Surgeon Champion
Are we experiencing the waning of the "Surgeon Champion" era?
Are market forces, healthcare reform and tougher regulatory environment around the globe making commodities out of products staying too long in the marketplace and driving down prices?
Will these forces continue to push down prices and shift decision making over device purchases into the hands of the hospital's technology committees and business office?
If Bill Hawkins, the Chairman and CEO of Medtronic, and Ed Dougherty, Senior Vice President of B&D Consulting, are right, the answer to both of these questions is an unequivocal, "Yes!"
Hawkins and Dougherty spoke separately with investors at the beginning of September and outlined their views of structural changes that may alter the way device companies develop, market and sell their products to a changing customer base.
The Rise of the Hospital
Hawkins said during a Morgan Stanley conference on September 13, that while the device companies still market to surgeons, hospitals are increasingly becoming the main focus of sales efforts.
More hospitals are acquiring physician practices, have more physicians on staff and are responding to reimbursement pressures associated with healthcare reform legislation. Hawkins said hospital technology committees are starting to work with their physicians to cut costs and at the same time, hold those physicians more accountable for total costs.
He predicted the device sector on average would see product prices decline 2% to 3% in the near term as the weak economy stalls demand and health reform sharpens the focus on cost savings.
Demand for many medical procedures, once thought to be relatively insulated from economic forces, has slowed as patients react to higher insurance deductibles by postponing or going without treatment.
The end of COBRA (Consolidated Omnibus Budget Reconciliation Act) health insurance subsidies to help the newly unemployed pay for coverage further weakened demand, Hawkins said.
Hawkins said Medtronic still expects to offset price pressures to some extent through new product introductions.
With certain surgeries such as spinal procedures, Hawkins said, a surgeon might opt to take a less aggressive approach initially and wait to see if a follow-up procedure is necessary.
While device selection is still primarily in the hands of surgeons, Hawkins said power is shifting to the "economic" buyer within the hospital.
Increasing Product Shelf Life
Device makers according to Hawkins have historically passed on price increases by introducing new and improved products that could command a higher price tag. He noted that a tougher regulatory environment around the globe has slowed the introduction of such new versions.
The result is that companies are keeping products in the marketplace longer than in the past. As they remain in the marketplace they begin to become commodities, allowing buyers to make decisions based on price instead of features.
Broader Decision Issues
Dougherty, whose B&D Consulting is a division of the Baker & Daniels law firm, delivered a similar message about the changing “customer” base during a Wells Fargo conference call on September 11. He told listeners that decision makers are changing. The surgeon’s influence is waning and hospital technology committees are taking a more objective look at the total cost of full care for a patient.
Dougherty told OTW that the process for evaluating medical devices for purchase and use in the hospital inpatient setting has evolved beyond the traditional manufacturer-surgeon champion relationship.
"While the surgeon’s input is likely to continue to carry weight, broader issues are increasingly being considered, " said Dougherty.
Hospitals are forming technology assessment committees, similar to drug formulary (pharmacy and therapeutics) committees charged with reviewing the published, peer-reviewed evidence, economic impact and likely impact on their specific patient demographics,
Purchasing decisions are also being made in terms of broader “episodes of care”—how will a specific device/specific intervention improve clinical outcomes, enhance productivity and improve quality (OR throughput, etc.).
Acquisition cost will always be an important factor for medical devices, but manufacturers are increasingly being called on to provide broader clinical and economic data—and hospitals and payers are increasingly able to evaluate and use this data.
Dougherty told us that he and his colleagues have heard a number of their clients comment that they are not confident that they understand the key interests or priorities of these "new customers and decision makers."
Purchasing and Evaluation Committees
"They have noted that they understand how to engage surgeons on the clinical value and patient-specific impact, but have not understood how to engage with the purchasing and evaluation committees within the hospitals. This will be an important area for companies to focus on, " added Dougherty.
Wells Fargo analyst Mike Matson summarized Dougherty's comments this way:
"Device manufacturers need to adapt to a new environment. Device manufacturers with a broader range of products and services may be better positioned to respond to the shift in payers' and providers' focus on cost for the entire continuum of care vs. per service or device.
"However, gaining access will come at the cost of some price concessions. Manufacturers also need to focus on devices that can improve productivity and overall quality of care without increasing cost. Device suppliers also need to provide compelling evidence to decision makers in terms of clinical and economic data, as well as work with professional societies to align products with treatment guidelines."
Bigger is Better
Hawkins told his Morgan Stanley audience the same thing in responding to a question about the risks of the healthcare reform legislation.
"Big is better, " said Hawkins.
He said healthcare reform was full of insurance reform. "We sell through hospitals." If the payer mix is unfavorable to hospitals it puts more pressure on hospitals that will be more aggressive with their physicians to try to get them to lower cost. According to Hawkins, larger companies can reduce a hospital's transaction costs by having one big supplier versus many little ones.
In fact, Hawkins believes this environment will be a benefit to companies that have a broad product offering. Such companies, he said can work with the economics by offering modest price discounts over many products.
Another risk cited by Hawkins is the move toward comparative effectiveness.
"We're well positioned in validating the effectiveness of our products with strong clinical evidence."
Hawkins said Medtronic was spending an increasing percentage of the company's research and development dollars on clinical studies and evidence-based medicine instead on institutional investments. Such investments in evidence will give Medtronic an advantage with payers and fuel innovation. Such investments will allow Medtronic to "protect and grow" their business.
Dougherty sees the elimination of fee-for-service as payers move toward a single payment to cover devices and all service providers per episode of care.
This will likely drive increased scrutiny of providers' coding and billing and reduced payment for unspecified services or treatment outside of professional society guidelines.
Hospital consolidation of private physician groups is also aimed at reducing procedure and device volumes, and shifting to economy of services-based pay and incentives. Moving certain procedures from inpatient to outpatient settings can also reduce costs to providers without cutting reimbursements for providers.
While the reimbursement gap between private and public payers may narrow a bit, private payers are still expected to reimburse above Medicare fee level in order to attract/retain customers (i.e., employers) in a competitive environment.
Dougherty believes there will be more transparency in pricing as hospitals share pricing information with their physicians.
Trends Here to Stay
Neither Hawkins nor Dougherty ever used the term “Obamacare” once during their presentations. Both men noted that these shifting structural movements have been in place for a long time and transcend whoever sits in the White House. Neither sees these forces changing much even if healthcare reform is repealed.
There is some bitter irony here. We are just emerging from an era where surgeons had been the focus of prosecutors and regulators for their, sometimes, alleged questionable financial relationships with device manufacturers. Surgeons were accused of putting their pocketbook interests ahead of those of their patients.
If it’s true that power is shifting to hospital economists, whose best interest will they serve and who will watch the counters?