Health Care Current: September 24, 2013
This weekly series explores breaking news and developments in the U.S. health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.
From R. T. (Terry) Hisey, Vice Chairman and U.S. Life Sciences Leader, Deloitte LLP
This week, the medical technology (medtech) industry is convening in Washington D.C. for the 2013 AdvaMed conference. The conference has over 100 sessions focused on innovation, policy, tax reform, business development, globalization and more.
Much of the discussion about the life sciences industry and health care reform among the general population has been about prescription drugs because this is a more visible component of the cost in our industry. Health care consumers see prescription drug co-pays increasing and are well aware of what is covered and what is not covered by their plans. Prescription drug spend, in spite of the patent expirations that have resulted in a significant shift to generic drugs over the last few years, represents about 10 percent of the overall health care spend.1 The medtech sector is less talked about, even though it accounts for about 6 percent of health spending.2 There is increased attention in the market today to address these cost categories from buyers that are increasingly sophisticated and organized.
The medtech industry has spent a lot of time talking about the adverse impact of the medical device excise tax that was established as part of the Affordable Care Act (ACA). While this 2.3 percent tax may have a negative impact on the industry, its impact pales in comparison to the effects of the broader transformation of the U.S. health care system on the medtech industry. These bigger effects and factors that medtech companies and other industry stakeholders must respond to, include: consolidation among their customers, increased transparency around pricing and sales activity, the interest in real versus incremental innovation and the need to reduce costs while improving health outcomes and patient safety.
Success for medtech companies going forward will likely be realized not by the repeal of the excise tax, not by adding small incremental improvements to products and not by dealing with markets in the same way with just greater intensity. Success will likely require focus on changes in four key areas:
- Innovation: achieved not just by introducing incremental product improvements but through the development of new products, services, relationships, contracting models and through improved customer/patient experiences that truly break boundaries.
- Commercial models: adapted to the evolving landscape of influencers that drive how and when products are used, with the processes, support systems and skills to deal with a new and expanded stakeholder group.
- Value articulation: demonstrated ability to engage with the market in a conversation where value is addressed as stakeholders would measure and recognize it, with a strong link to clinical outcomes, patient safety and the right economic impact.
- Advanced pricing: to support a world where product and offering differentiation becomes increasingly challenging, advanced pricing becomes a basis for competition where one moves beyond unit cost to a complex approach that looks at product, services, training, outcomes contracting and a variety of other strategies to define and manage price execution.
While product approval can still happen the old fashioned way, product adoption in the marketplace will almost certainly not. The future is “facts beat messaging” and markets will demand value in their terms from tomorrow’s winners. Companies that recognize this and realize the real value of their products and pipelines will likely make the right capital and asset allocation choices. There is little to be gained by lamenting what has happened. Rather, gains may be realized by focus and execution, including these four key areas, in redefining medtech propositions of the future for a market that is forever changed.
1Kaiser Family Foundation, “U.S. Health Care Costs,” http://www.kaiseredu.org/issue-modules/us-health-care-costs/background-brief.aspx
2AdvaMed, “Medical Technology: The Economic and Health Value to Patients,” http://advamed.org/res.download/364
Last Tuesday, the Congressional Budget Office (CBO) released its annual long-term budget outlook projecting that by 2038 the federal debt held by the public would account for 100 percent of gross domestic product (GDP). A portion of the debt growth will come from government health care programs (e.g. Medicare, Medicaid, Children’s Health Insurance Program [CHIP]) and federal subsidies awarded to individuals purchasing insurance on the health insurance exchanges (HIX). CBO expects a 3.4 percent rise in costs for Medicare (net of offsetting receipts), Medicaid and CHIP, which will increase federal health program expenditure from 4.6 percent of GDP in 2013 to 8 percent in 2038. Highlights:
- Federal spending for major health care programs and Social Security will increase to a total of 14 percent of GDP by 2038, twice the 7 percent average of the past 40 years
- Due in large part to the Baby Boomers hitting retirement age, gross Medicare spending is expected to rise from 3.5 percent of GDP in 2013 to 5.8 percent in 2038
- Total spending on everything other than the major health care programs, Social Security and net interest payments will decline to 7 percent of GDP, well below the 11 percent average over the past 40 years
Last Friday, the Administration denied the request from multiple union organizations to allow workers enrolled in multi-employer plans to also receive premium tax credits. In a letter to the unions, the U.S. Department of the Treasury (DOT) stated that workers enrolled in multi-employer health plans are expected to already be offered employer-sponsored health insurance that has been granted tax exclusions, so they would not be eligible for additional tax credits. This decision comes as a blow to unions, after months of lobbying from several groups. The American Federation of Labor and Congress of Industrial Organizations (AFL–CIO) passed a resolution calling for changes in the ACA that would allow union workers to keep their collectively bargained health plans. In July, Teamsters, United Food and Commercial Workers and Unite organizations sent a letter to Congress requesting multi-employer plans be classified as qualified health plans (QHP) so union workers could enroll in them in HIXs and qualify for federal subsidies. Many unions take part in multi-employer plans, a.k.a. Taft-Hartley plans, that provide workers with a large insurance pool from which to get their health insurance.
According to a report released last week from the Centers for Medicare and Medicaid Services (CMS), national health spending is expected to grow by 6.1 percent in 2014 and 6.3 percent in 2015 compared to a 4 percent growth rate in 2013. This increase is due to anticipated economic improvements, an increase in the aging population and expanded health care coverage under the ACA. National health expenditure (NHE) is projected to make up 19.9 percent of the total GDP. Federal health programs will account for 49 percent of health care spending, totaling $2.4 trillion by 2022; and, the ACA will increase health care spending by 0.1 percent ($621 billion) from 2012-2022.
“The latest NHE projections from CMS’ Office of the Actuary contain both good and potentially ominous news for the health care industry. In the short term, projected spending will increase more rapidly across all major sectors of the industry. In the long term, the “cost curve” has not yet been bent. CMS projects that after short term disruptions due to ACA insurance coverage expansions and economic recovery, NHE growth will outpace GDP growth by about 2 percent annually – about the same as the average rate seen in the 20 years prior to the enactment of ACA. NHE is projected to reach 20 percent of GDP by the year 2022, compared with 18 percent this year.
In light of these predictions, concerns about the sustainability of our national health care spending are likely to persist and may produce further major legislative actions in the years to come. Meanwhile, the industry will continue to have an opportunity to address sustainability concerns, through improvements in costs, efficiency and quality. CMS employs a rigorous methodology in their NHE projections; however their report appropriately cautions that their results are subject to “substantial uncertainty”. In particular, if economic recovery or ACA reforms proceed more slowly than anticipated, NHE growth could be slower than CMS projects over the next few years.” ― Kevin Kenny, Director, Life Sciences & Health Care, Deloitte Consulting LLP
Friday, the U.S. Food and Drug Administration (FDA) released the long-awaited final rule on unique device identification (UDI) system for medical devices, requiring device manufacturers to implement a computerized system to track and recall devices when necessary. Manufacturers will now have to assign a unique number to every version or model of a device, called a unique device identifier, which will also include the product’s lot or batch number, expiration date and manufacturing date, for post-market surveillance by the agency. FDA will also establish a publicly searchable database, the Global Unique Device Identification Database (GUDID), which will allow consumers to access a reference catalogue for every device with an identifier. Neither the UDI nor the GUDID systems will contain any patient information that may be associated with or stored on the device. According to Dr. Jeffrey Shuren, director of the FDA’s Center for Devices and Radiological Health, “UDI represents a landmark step in improving patient safety, modernizing our post-market surveillance system for medical devices and facilitating medical device innovation.”
Last Thursday, The Compounding Clarity Act (H.R. 3089) was introduced by Representatives Gene Green (D-TX), Morgan Griffith (R-VA) and Diana DeGette (D-CO) as a response to the meningitis outbreak of 2012 that was traced to fungal contamination of steroid injections prepared by the New England Compounding Center (NECC) and resulted as the cause of 64 deaths. The bill would replace Section 503A of the Food, Drug and Cosmetic Act (FDCA), which currently outlines FDA’s authority over compounding pharmacies, with a more stringent regulatory framework aimed at improving communication lines between the FDA and state boards of pharmacy. The Generic Pharmaceutical Association (GPhA) and a large biotechnology trade association have raised concerns regarding the bill in a letter sent last Friday to House members, specifically a provision that would require no more than 5 percent of sterile and non-sterile compounds dispensed for individual patients within 30 days may be for use in a practitioner's office, compared to a Senate version of the bill which would set a 10 percent cap. The letter also highlighted concerns over the language in the bill regarding the approved drugs and the lack of a prohibition clause for drugs on the marketed drug shortage list. Although FDA already has some authority over the distribution of compounded pharmaceuticals, the meningitis outbreak brought to light several areas where it was unclear which governing body had the authority or duty to intervene in NECC’s operations.
According to the CBO, the Medicare Patient Access and Quality Improvement Act of 2013 (H.R. 2810) would cost $175 billion over the next 9 years. The bill, introduced by the House Energy & Commerce Committee, would update the current Sustainable Growth Rate (SGR) payment system, which determines the rates physicians get paid under Medicare, by replacing the current system and creating payment systems that incentivize providers for high-quality performance outcomes and give providers more control of pilot programs. The House legislation is estimated to cost more than locking the current pay rates in for the next 10 years, which CBO previously estimated would cost $138 billion.
Pennsylvania Governor Tom Corbett (R-PA) submitted a Medicaid expansion proposal to the U.S. Health and Human Services Department (HHS) last Monday, reversing his February decision to reject the expansion. Governor Corbett’s proposal would involve Medicaid dollars being used by individuals to purchase private insurance on the HIX, which is similar to the Medicaid proposals submitted by governors in Iowa and Arkansas. Additional elements of Governor Corbett’s proposal include restricting benefits for non-disabled adults who are already on Medicaid and mandating that unemployed Medicaid beneficiaries commit to search for work through an online program run by the Corbett Administration or participate in a job-training program, which may come up against resistance since that requirement is forbidden under federal law. There is no indication how long negotiations with the federal government will take, or if the Obama Administration will accept all of Governor Corbett’s demands.
Last Monday, Michigan Governor Rick Snyder (R-MI) signed the state’s Medicaid expansion legislation into law, touting bi-partisan support. Due to delays in voting, the eligibility expansion is expected to take effect in March or April of 2014 instead of January 1, 2014. “Healthy Michigan” will mandate that new enrollees pay premiums which can be raised if a beneficiary stays on Medicaid for more than four years or lowered if a beneficiary makes healthy lifestyle choices. Michigan expects to be awarded over $1 billion in federal funds for the program to cover up to 470,000 newly eligible residents and estimates saving approximately $200 million per year in general fund spending.
Last Tuesday, Maryland Insurance Commissioner, Therese M. Goldsmith, approved policies and rates for 13 carriers slated to sell health insurance in its Small Business Health Options Program (SHOP), Maryland Health Connection. Commissioner Goldsmith stated that the approved rates “compared favorably” to those seen throughout the country. In comparison to current small group rates provided by insurance carriers, the new rates range from 4.9 percent below to 14.6 percent above current rates. SHOP enrollment begins January 1, 2014 for businesses employing 2-50 full-time (or full-time equivalent) employees; and, coverage is scheduled to begin March 1, 2014 or later.
Three health care systems in New Jersey—Meridian, Atlantic and Hackensack—will partner with four health care systems in Pennsylvania—Lancaster General Health, Lehigh Valley Health Network, Reading Health System and WellSpan Health—to create a health consortium expected to reach $10.5 billion in revenue serving six million customers in the area. The alliance, AllSpire Health Partners, includes 25 hospitals and will focus on taking advantage of the collective power created by the network, exchanging best practices to deliver health care, population management and medical research. The partnership is not designated as a merger and the health care systems expect to continue operating independently.
The market for wearable sensors in health care is expanding outside of personal fitness and wellness and rapidly increasing. In 2012, 107 million sensing units were shipped globally and this number is predicted to grow to 515 million units in 2017. These health care sensors are being designed to provide early detection capabilities, enable continuous monitoring of physiological functions and measure rehab progress and adherence to prescribed treatments. The most promising area in the sensor evolution is the ability to manage chronic conditions and diseases which affect more than 140 million individuals in the U.S. Many of these sensor devices provide wireless capabilities through Bluetooth or Wi-Fi to capture real-time data via smartphone applications. Sensor devices are in development that would be able to continuously monitor glucose levels through non-invasive wireless transmission. Also, sensors are in development to provide early detection of breast tumors by monitoring cell temperature and changes over time.
ChipCare Corporation, a Canadian technology company, has developed a handheld blood testing tool that could provide point-of-care diagnostic solutions for health care facilities in remote and developing parts of the world. The mobile technology would allow patients to insert disposable cartridges with a pinprick of blood into the chip-enabled reader that can be connected to a smartphone. The reader then analyzes the cells through proprietary detection methods and the smartphone would generate blood test results. ChipCare received one of the country’s largest health care angel investments of over $2 million to develop and market the technology over the next three years. The device would allow testing of multiple diseases through protein/enzyme, pathogen detection and cell counting; and combines patient identification, blood testing, communication and external quality management in one integrated monitoring system.