MEDICAL INNOVATION AT THE CROSSROADS

VOLUME II

The Changing Economics of Medical Technology

Annetine C. Gelijns and Ethan A. Halm, Editors

Committee on Technological Innovation in Medicine

INSTITUTE OF MEDICINE

NATIONAL ACADEMY PRESS
Washington, D.C.
1991



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The Changing Economics of Medical Technology MEDICAL INNOVATION AT THE CROSSROADS VOLUME II The Changing Economics of Medical Technology Annetine C. Gelijns and Ethan A. Halm, Editors Committee on Technological Innovation in Medicine INSTITUTE OF MEDICINE NATIONAL ACADEMY PRESS Washington, D.C. 1991

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The Changing Economics of Medical Technology NATIONAL ACADEMY PRESS 2101 Constitution Avenue, N.W. Washington, D.C. 20418 The Institute of Medicine was chartered in 1970 by the National Academy of Sciences to enlist distinguished members of the appropriate professions in the examination of policy matters pertaining to the health of the public. In this the Institute acts under both the Academy's 1863 congressional charter responsibility to be an advisor to the federal government and its own initiative in identifying issues of medical care, research, and education. The Committee on Technological Innovation in Medicine was established in 1988 by the Institute of Medicine to design a series of workshops that would (a) provide a more fundamental knowledge of the process by which biomedical research findings are translated into clinical practice and (b) address opportunities for improving the rationality and efficiency of this process. This volume consists of the proceedings of the second workshop in the series “Improving the Translation of Research Findings into Clinical Practice: The Changing Economics of Technological Innovation in Medicine,” held December 20–21, 1989. This workshop and its proceedings were supported by the Howard Hughes Medical Institute and the Agency for Health Care Policy and Research of the Department of Health and Human Services (grant 5 RO9 HS055 26 02). The opinions and conclusions expressed here are those of the authors and do not necessarily represent the views of the Howard Hughes Medical Institute, the Department of Health and Human Services, the National Academy of Sciences, or any of their constituent parts. Library of Congress Cataloging-in-Publication Data The Changing economics of medical technology / Annetine C. Gelijns and Ethan A. Halm, editors ; Committee on Technological Innovation in Medicine, Institute of Medicine. p. cm. — (Medical innovation at the crossroads ; v. 2) Proceedings of a workshop held Dec. 20–21, 1989, supported by the Howard Hughes Medical Institute and the Agency for Health Care Policy and Research of the Dept. of Health and Human Services (grant 5 R09 HS055 26 02). Includes bibliographical references and index. ISBN 0-309-04491-X 1. Medical innovations—Economic aspects—Congresses. 2. Pharmaceutical industry—Technological innovations—Economic aspects—Congresses. I. Gelijns, Annetine. II. Halm, Ethan. III. Institute of Medicine (U.S.). Committee on Technological Innovation in Medicine. IV. Howard Hughes Medical Institute. V. United States. Agency for Health Care Policy and Research. VI. Series. [DNLM: 1. Economics, Medical—congresses. 2. Public Policy—congresses. 3. Technology, High-Cost—economics—congresses. 4. Technology, Medical—economics—congresses. W1 ME342F v. 2 / W 74 C456 1989] R855.2.C48 1991 338.43'61'028—dc20 DNLM/DLC for Library of Congress 91-14157 CIP Copyright © 1991 by the National Academy of Sciences Printed in the United States of America The serpent has been a symbol of long life, healing, and knowledge among almost all cultures and religions since the beginning of recorded history. The image adopted as a logotype by the Institute of Medicine is based on a relief carving from ancient Greece, now held at the Staatlichemuseen in Berlin.

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The Changing Economics of Medical Technology Committee on Technological Innovation in Medicine GERALD D. LAUBACH, Chair, Former President, Pfizer, Inc. SUSAN BARTLETT FOOTE, Associate Professor, School of Business Administration, University of California, Berkeley BEN L. HOLMES, Vice President and General Manager, Medical Products Group, Hewlett-Packard Company WILLIAM N. HUBBARD, JR., Former President, the Upjohn Company ROBERT I. LEVY, President, Sandoz Research Institute KENNETH L. MELMON, Arthur L. Bloomfield Professor of Medicine and Pharmacology, Department of Medicine, Stanford University School of Medicine PAUL D. PARKMAN, Former Director, Center for Biologics Evaluation and Research, Food and Drug Administration JOHN E. WENNBERG, Professor of Epidemiology, Department of Community and Family Medicine, Dartmouth Medical School Project Staff Division of Health Care Services KARL D. YORDY, Director KATHLEEN N. LOHR, Deputy Director CLIFFORD GOODMAN, Senior Staff Officer ANNETINE C. GELIJNS, Study Director ETHAN A. HALM, Research Associate HOLLY DAWKINS, Research Assistant

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The Changing Economics of Medical Technology EVANSON JOSEPH, Project Assistant THELMA COX, Project Assistant DONALD TILLER, Administrative Assistant Division of Health Sciences Policy RUTH BULGER, Director STEVEN J. BONGARD, Director, Forum on Drug Development

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The Changing Economics of Medical Technology Acknowledgments The Committee on Technological Innovation in Medicine thanks the authors for presenting their papers at the Institute of Medicine workshop “Improving the Translation of Research Findings into Clinical Practice: The Changing Economics of Technological Innovation in Medicine, ” and for preparing their subsequent chapters. The committee also recognizes the substantial contributions of the moderators, panel discussants, and workshop participants, who provided valuable insights into the issues discussed in this volume. Special thanks are due to Fredrick W. Telling, Jane Newman, and Cathy Barr for their input to the planning of the workshop. The committee also values the skillful and expeditious editing of the papers by Edward Edelson. The committee would like to express its gratitude to Samuel O. Thier, President of the Institute of Medicine, and Enriqueta Bond, Executive Officer, for inspired leadership and support of committee activities. The committee is equally grateful for the substantive and organizational support of Ruth Bulger, Steven Bongard, Kathleen Lohr, Holly Dawkins, Sharon Baratz, and Wallace Waterfall. The workshop and the publication of this volume would not have been possible without the dedicated efforts of Evanson Joseph and Thelma Cox, who devoted long hours to the logistics of the meeting as well as to the preparation of several drafts of this manuscript. Finally, the committee acknowledges a considerable debt to Clifford Goodman, Annetine Gelijns, and Ethan Halm for their organization of the workshop and for the editing of this volume.

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The Changing Economics of Medical Technology The Committee on Technological Innovation in Medicine greatly appreciates the opportunity provided by the Howard Hughes Medical Institute and the Agency for Health Care Policy and Research (grant 5 RO9 HS055 26 02) to investigate the process of medical innovation. GERALD D. LAUBACH Chair IOM Committee on Technological Innovation in Medicine

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The Changing Economics of Medical Technology Preface GERALD D. LAUBACH This volume summarizes the second in a series of Institute of Medicine workshops whose intent is to examine critically the process by which biomedical research is translated into actual benefits in medical practice. Contemporary biomedical research has given us a rich harvest of innovation—new pharmaceuticals, biotechnology products, medical devices, and clinical procedures— which in the aggregate essentially define modern medicine. As always, such success is accompanied by challenges and problems. Not least among those challenges and problems is the fact that the economics of medical innovation itself has changed substantially. The cost of research and development (R&D)—particularly for the regulated medical technologies such as pharmaceuticals and devices—has escalated dramatically over the past two decades. Significant factors associated with higher R&D costs include the shift in research emphasis toward more complex chronic conditions and, more importantly, demands for more extensive demonstration of safety, efficacy, and cost-effectiveness. Simultaneously, the economic returns to the innovator have become increasingly constrained by a host of policies intended to contain health care expenditures. These policies take varied forms, but not infrequently they raise barriers to technology adoption, restrict reimbursement, and force price concessions among technology suppliers. In addition, we see the emergence of models of “managed care,” defined for our purposes to include various entities ranging from health maintenance organizations to modified fee-for-service programs that attempt to create incentives for physicians and hospitals to provide more cost-effective care. These policies will have implications for technology diffusion as well as for its development.

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The Changing Economics of Medical Technology In view of these trends, the Committee on Technological Innovation in Medicine chose to devote its second workshop to an examination of the economics of medical innovation, drawing on experience in the United States, Europe, and Japan. The papers presented in this volume provide a rich array of insights into how the economic incentives for technology development and diffusion are changing, and what their likely impact will be on the provision of cost-effective care and future innovation. One of the important conclusions, however, is that the need is clear for additional research on the economics of innovation in medicine. As a result, this volume tends to pose more questions than it answers. For example, important questions remain about the impact of recent policy changes on the small and often highly entrepreneurial parts of the innovation enterprise: the new biotechnology company, the small device company, and the individual physician innovator. The committee has decided to have its third workshop examine in more detail some of the issues raised in this volume about the impact of managed health care systems on medical innovation. In addition, a workshop is being organized that intends to explore actual case studies of medical innovation to provide more empirical data on the nature and dynamics of the innovation process itself. Together, this series of workshops will offer a coherent body of study and analysis for improving our understanding of medical innovation. It is our hope that this work will encourage a more rational and efficient transfer of biomedical research findings into direct patient care.

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The Changing Economics of Medical Technology Contents     LIST OF TABLES AND FIGURES   xi     LIST OF ABBREVIATIONS   xiii  1.   AN INTRODUCTION TO THE CHANGING ECONOMICS OF TECHNOLOGICAL INNOVATION IN MEDICINE Ethan A. Halm and Annetine C. Gelijns   1  2.   THE DIFFUSION OF NEW TECHNOLOGY: COSTS AND BENEFITS TO HEALTH CARE Peter J. Neumann and Milton C. Weinstein   21  3.   THE CHANGING ECONOMICS OF PHARMACEUTICAL RESEARCH AND DEVELOPMENT Henry Grabowski   35  4.   PUBLIC POLICY AND ACCESS TO NEW DRUGS: THE CASE OF CANCER CHEMOTHERAPY Lee Mortenson   53  5.   THE IMPACT OF PUBLIC POLICY ON MEDICAL DEVICE INNOVATION: A CASE OF POLYINTERVENTION Susan Bartlett Foote   69

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The Changing Economics of Medical Technology  6.   THE DYNAMICS OF MEDICAL DEVICE INNOVATION: AN INNOVATOR'S PERSPECTIVE Alan Kahn   89  7.   REIMBURSEMENT AND THE DYNAMICS OF SURGICAL PROCEDURE INNOVATION Sophia W. Chang and Harold S. Luft   96  8.   EUROPEAN POLICIES INFLUENCING PHARMACEUTICAL INNOVATION Michael L. Burstall   123  9.   MEDICAL DEVICE INNOVATION AND PUBLIC POLICY IN THE EUROPEAN ECONOMIC COMMUNITY John Hutton   141  10.   JAPAN'S PHARMACEUTICAL INDUSTRY POSTWAR EVOLUTION Robert Neimeth   155     APPENDIXES    A.   THE IMPACT OF REGULATION AND REIMBURSEMENT ON PHARMACEUTICAL INNOVATION Commentary by Peter Barton Hutt   169  B.   THE ECONOMICS OF PHARMACEUTICAL RESEARCH AND DEVELOPMENT: AN INDUSTRY PERSPECTIVE Commentary by Francis H. Spiegel, Jr.   181  C.   CONTRIBUTORS   192     INDEX   199

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The Changing Economics of Medical Technology List of Tables and Figures TABLES  3.1   New drug products achieving $100 million sales in the U.S. market within the first 6 years of market life,   36  4.1   Out-of-package insert use for eight common chemotherapy agents,   60  7.1   Aspects of innovation in drugs, devices, and surgical procedures,   101  8.1   Pharmaceutical production and consumption in the European Community, 1987,   125  8.2   Measures of the innovatory strength in pharmaceuticals of various countries,   126  8.3   Trends in pure scientific spending and output,   127  8.4   General methods of controlling pharmaceutical expenditure in the European Community, 1989,   130  8.5   Price control systems in the European Community, 1989,   131  10.1   Pharmaceutical R&D spending, 1985,   163  10.2   Number of patents related to drugs, 1984,   163  10.3   Leading countries by new product launch,   166  10.4   Leading countries by new product originator: number of NCEs,   166 FIGURES  1.1   A linear model of the innovation chain,   3  1.2   A dynamic representation of the innovation chain,   4  3.1   Consensus new drug approvals by nationality of originating firm, 1970-1985,   38

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The Changing Economics of Medical Technology  3.2   Duration of IND and NDA phases, self-originated NCEs of U.S. firms,   38  3.3   FDA approvals versus R&D spending,   39  3.4   Effective U.S. patent life,   41  3.5   Waxman-Hatch Act: generic impact on sole-source product sales,   42  3.6   GNP versus PPPI,   43  3.7   Sales profile of 1970-1979 compounds,   44  3.8   Present value of cash flow versus R&D investment,   45  3.9   Present values by decile,   46  3.10   Medicaid formulary delays,   48  3.11   R&D expenditures: NIH versus PMA members,   48  4.1   Percentage and total annual sales of approved versus unlabeled usage of eight common chemotherapy drugs, 1986,   59  5.1   The stages of innovation,   71  5.2   The stages of innovation: impact of federal and state institutions and activities,   72  5.3   Public policies that promote or inhibit innovation,   74  5.4   Interaction of public policies that affect innovation,   84  8.1   How government actions may affect pharmaceutical innovation,   124  9.1   Social objectives,   144  9.2   Transfers of benefit,   144  9.3   Technology assessment model,   145  9.4   Diffusion model,   146

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The Changing Economics of Medical Technology List of Abbreviations ACCC Association of Community Cancer Centers AIDS Acquired Immune Deficiency Syndrome AMA American Medical Association ANDA Abbreviated New Drug Application BERC Bureau of Eligibility, Reimbursement and Coverage CABG Coronary Artery Bypass Graft CON Certificate of Need CPT Current Procedural Terminology DRGs Diagnosis-Related Groups EEC European Economic Community ESWL Extracorporeal Shock Wave Lithotripsy FDA Food and Drug Administration FD&CA Food, Drug, and Cosmetic Act GAO General Accounting Office GMP Good Manufacturing Practices GNP Gross National Product HCFA Health Care Financing Administration HMOs Health Maintenance Organizations IDE Investigational Device Exemption IND Investigational New Drug IOL Intraocular Lenses IOM Institute of Medicine IRB Institutional Review Board MRI Magnetic Resonance Imaging NCE New Chemical Entity

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The Changing Economics of Medical Technology NCI National Cancer Institute NDA New Drug Application NHLBI National Heart, Lung, and Blood Institute NIH National Institutes of Health NSAIDs Non-steroidal Anti-inflammatory Drugs PLA Product License Application PMA Pre-marketing Application for Devices PMS Post-marketing Surveillance PPOs Preferred Provider Organizations PPPI Pharmaceutical Producer Price Index PPRC Physician Payment Review Commission ProPAC Prospective Payment Assessment Commission PTCA Percutaneous Transluminal Coronary Angioplasty R&D Research and Development RBRVS Resource-based Relative Value Scale RCT Randomized Controlled Clinical Trial SBIR Small Business Innovation Research Program TURP Transurethral Resection of the Prostate