Future Scenarios for Implantable Medical Devices¹

By Jim Austin, Director, Life Sciences, DSI
and Paul J. H. Schoemaker, Ph.D., Chairman, DSI

INTRODUCTION

Across the healthcare field, medical devices have been consistent investment winners. In the five years from mid-October 2001 to mid-October 2006, the nine largest Medical Device companies—companies such as Medtronic, Baxter, and Boston Scientific—increased in value at nearly three times the rate of the Dow Jones Industrial Average; while the largest pharmaceutical companies were down a combined 5.6%, the Medical Device companies were ahead nearly 70%. As Kurt Kruger writes, "The medical device sector, here in the first decade of the new century, appears to be as vibrant, healthy and full of promise as ever..." ²

However, of late several major segments seem to have stumbled. In the cardiovascular segment, drug-eluting stents (DES)—a roughly $6 Billion/year market worldwide—are facing questions of inappropriate utilization and increased thrombosis (or clotting) over time. As a result, utilization rates of drug-coated stents, as opposed to bare metal stents, are down from 88% to approximately 73% of stent placements.³ In the orthopedic segment, current pricing power among leading artificial knee or hip manufacturers is under siege.⁴ Finally, the potentially enormous new medical device segment—electro-neurostimulation for pain management—has received several recent regulatory and reimbursement setbacks.⁵

Are these mere "bumps in the road" or indications of more systemic problems? With financial support of the Biomedical Research and Educational Foundation (BREF)⁶ and the Mack Center for Technological Innovation at the Wharton School, DSI examined the opportunities and challenges of alternative, future scenarios for implantable medical devices in the U.S. through 2012. This article summarizes our efforts—involving interviews and a one-day workshop in late-October 2006 at the Mack Center attended by over 60 representatives of medical device companies, not-profits, government and academia—to develop future scenarios for US implantable medical devices.

Medical Devices Market

The medical device arena ranges from highly sophisticated electronic implantables to simple surgical staples. Globally, it has consistently grown at mid-to-high single digit rates. In 2005, the global healthcare equipment and supplies market size was estimated to be $186B, of which nearly 55% was for equipment and the remainder supplies.⁷ Within the U.S., the medical equipment and supplies market recorded sales greater than $86B in 2005, and is projected to surpass $100B in annual revenue by 2009.⁸

BUILDING SCENARIOS

Identifying the Forces

In scenario planning, we first examine forces. The schematic below summarizes the various forces affecting the implantable medical devices sector.

Figure 1 - Forces Affecting Medical Devices

We then split these forces into trends vs. uncertainties. Trends are defined as those forces currently at play that will continue in the same direction for at least five years in the judgment of the group. Uncertainties are those forces whose outcomes or direction cannot be predicted with any degree of certainty by the group. Assumptions about how various key uncertainties play out are what set scenarios apart.

Top Trends

Based on our interviews, the October Wharton workshop and our own research, DSI identified the following major trends, divided into five categories⁹:

Top Uncertainties

Unlike trends, where the direction of the force is stable and predictable, some forces are hard to extrapolate and belong in the uncertainty column. Many complex issues contain both trends and uncertainties. For example, increased home use of broadband connections to the internet is a trend in most countries. But the rate at which this increase occurs may be uncertain. The following uncertainties emerged from our workshop discussion, again divided into five groups. Note that some have underlying trends as well, but the more relevant strategic question is the rate of change rather than the direction per se (in the view of our workshop participants).

Primary Uncertainties

From this list of uncertainties, two main clusters were deemed overridingly important:

• Reimbursement: The willingness of insurers and other payers to reimburse the cost of medical devices is a primary and fundamental uncertainty.
• Availability/Utilization of Information: The future of medical devices will also be greatly driven—according to our Workshop participants—by the availability and utilization of high-quality cost and medical outcomes data.

SCENARIO FRAMEWORK / SUMMARIES FOR 2012

We crossed these two primary uncertainties to create the 2 X 2 matrix shown below.¹⁰

Figure 2 - Medical Devices 2x2 Matrix
[click image to enlarge]

Scenario A: Free Information flow¹¹

Data standards are universally adopted so that information generally flows freely from devices to doctors and across networks, all with appropriate patient privacy safeguards. But while the information itself may be largely free, the rising cost of healthcare constrains reimbursement levels. Whereas each scenario entails a detailed story about how the future may evolve, including influence diagrams that portray dynamic changes over time, we restrict our discussion here to each scenario’s main features. The following bullets capture the essential elements or highlights of each scenario in the year 2012.

Highlights:

• New opportunities for informatics technology companies
• Nascent efforts with disease prevention supported by new business models and data availability
• Greater regulatory scrutiny of medical devices, with more emphasis on managing data and cost-benefits of new products
• Patients absorb more of the costs of healthcare and move towards self-care (education, on-line information, etc.)
• Driven by economic troubles, the general level of reimbursement for new medical devices and healthcare in general is constrained.

Scenario B: Connected world

In this scenario, the benefits of medical devices are well recognized and their long-term cost-effectiveness proven in a series of large population, well-controlled studies. Major stakeholders—the federal government, private payers, doctors and patients—generally believe that medical device advances improve patient outcomes, at lower cost.

Highlights:

• Positive reimbursement rates, especially for new approaches such as disease management, leads to a growth in procedures across all segments
• Devices increasingly are “neural networks”—not only feeding back medical and on-going performance data, but also linking to sophisticated patient and cost-benefit outcome data bases
• As number of procedures performed increases, some question the cost/benefit of more aggressive cases (orthopedic implants for 90 year-olds, etc.)
• With heightened competition, many suppliers face declining margins
• Universities create multi-specialty disciplines combining informatics, biologics, material science and engineering.

Scenario C: Stagnation

Low reimbursement levels, technology snafus and public sector constraints on medical device suppliers is slowing the growth of this sector.

Highlights:

• Healthcare care cost containment, increasingly by rationing care and raising patient contributions, is of primary concern to most stakeholders
• Patient privacy is a major issue for patients
• The potential of medical devices limited due to information sharing constraints and lengthening new product development cycles
• Patients bear an increasing proportion of medical device costs, yet struggle to obtain information on the full range of options open to them
• Investment in R&D is low from both private and public funding sources
• Less skilled workers are more typical of those who must install, calibrate and manage ex vivo medical devices (such as diagnostic equipment and IV pumps).

Scenario D: isolated Islands

While reimbursement is readily available, medical devices have not fulfilled their potential in large part because of data management and informatics limitations. Devices stand alone and do not benefit from being linked to broader networks.

Highlights:

• Reimbursement for medical devices is strong, supported by a growing economy and the “graying of America”
• National or regional data management standards and protocols are lacking
• Privacy concerns and increasing data security problems have further delayed data sharing networks
• Consumers generally play a small role in therapy or product selection
• With lack of data sharing networks, and increased privacy legislation, devices focus more on disease-specific treatments than broader, disease prevention
• Medical device companies are growing, but within defined niches and established competencies.

IMPLICATIONS

According to Kurt Kruger, past successes of the medical devices market are a result of:

“First, growth is sustained by the regular installments of new products that are perhaps less impactful and more orthodox than those of the past, but which are more proven and successful. Second, price behavior has rationalized as markets, companies, and products have become more homogeneous—that is fewer players offering similar products to customers that are not price sensitive. Third, profitability is maintained at above-average rates due to manufacturing scale efficiencies, evolutionary (not revolutionary) product changes, and well-developed marketing and selling channels.” ¹²

Each of these characteristics is challenged in various ways across our four scenarios. While few forecast major reimbursement changes to the U.S. healthcare system within the next five years (as opposed to longer-time frames), one key uncertainty remains the level and nature of future reimbursement systems supporting this dynamic industry.

In addition, there is the near-term possibility of major information system changes. For example, networking technologies and data management capabilities—uniting disparate legacy systems—will become much more efficient, easy to utilize and less costly in the relatively near future, affecting the medical devices industry in at least three ways:

• First, depending on the scope and scale of information system changes, the individual devices could become more efficient, more capable. Given how rapidly 510K approvals can occur—often in less than a year—such developments are not an impossibility by 2012 (outlined most fully in Scenarios C and D).
• Second, depending on how much progress is made with data standardization and information exchange requirements—most likely driven by changes in the reimbursement system (e.g., CMS’s pay-for-performance pilot projects)—device data could be leveraged into broader healthcare data management initiatives (e.g., disease management as outlined broadly in Scenarios A and B).
• Second, depending on how much progress is made with data standardization and information exchange requirements—most likely driven by changes in the reimbursement system (e.g., CMS’s pay-for-performance pilot projects)—device data could be leveraged into broader healthcare data management initiatives (e.g., disease management as outlined broadly in Scenarios A and B).

In summary, the rationale for believing that the past successes of the medical device sector will continue into the near future is compelling but far from guaranteed. Indeed, 2012 could be very different from today and key stakeholders need to plan accordingly.

Notes
¹ We thank Mark Day, Robert Gunther, Michael Mavaddat, Nanda Ramanujam, Franklin Shen and Eric Strang for their research support and comments on earlier drafts, as well as Ron Riegman from Organon.
² Kurt Kruger, “The Medical Device Sector”, Chapter 6, Lawton Robert Burns, ed, The Business of Healthcare Innovation (Cambridge University Press, 2005), pg. 305.
³ Barnaby J. Feder, “ Safety of Drug-Coated Stents Tough to Assess, Report Says”, NY Times, 2/13/07.
⁴ Reed Abelson, “Marketplace: Pricing Power at Risk for Orthopedic Makers” NY Times, 6/29/06, pg. C4.
⁵ Mike Rice, “Implantable Neurostimulation Device Market Poised for Explosive Growth” (1/7/2006) Future Fab Intl. Volume 20, AMI Semiconductor.
⁶ The Biomedical Research and Education Foundation (BREF) is the leading provider of expert evaluations of medical technology for physicians, patients and investors. BREF is a not-for-profit foundation created in November 2003 to create independent information resources about the biomedical products in use today. BREF supports novel biomedical research that helps the advancement of medicine and strengthens the ties between financial communities and medical research.
⁷ Data Monitor, Global Healthcare Equipment and Supplies, 2006.
⁸ For a definition of Medical Devices, see FDA, “Medical Device Definition”, 6/30/98, http://www.fda.gov/cdrh/devadvice/312.html#link_2
⁹ The usual categories-Social, Technological, Economic, Environmental and Political (or STEEP)-are used here except that we substituted Industry forces for Environmental ones.
¹⁰ The other uncertainties are listed in a "scenario blueprint" form. This provides a brief overview of how the four scenarios differ in the way the various uncertainties are presumed to play out. Like the blueprint for new house, it determines the foundation and basic structure of the scenarios. Additional information is added to the blueprint to transition from a skeleton outline to coherent scenarios that have their own narrative, viewpoint and key messages.
¹¹ Influence Diagrams are schematic portrayals of how different forces could interact to create each scenario.
¹² Kurt Kruger, "The Medical Device Sector", Chapter 6, Lawton Robert Burns, ed, The Business of Healthcare Innovation (Cambridge University Press, 2005), p. 274.